[Federal Register Volume 77, Number 231 (Friday, November 30, 2012)]
[Notices]
[Pages 71469-71471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28987]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68290; File No. SR-NYSEArca-2012-126]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca 
Options Rule 6.64 (OX Trading Auctions) With Respect to Opening Trading 
in an Options Series

November 26, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on November 12, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Arca Options Rule 6.64 (OX 
Trading Auctions) with respect to opening trading in an options series. 
The text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 6.64 to provide for how the OX 
System \3\ may open an options series for trading when there are no 
executable orders and/or quotes and the bid-ask differential of the 
NBBO disseminated by Options Price Reporting Authority (``OPRA'') or a 
Market Maker quote does not exceed the bid-ask differential specified 
under Rule 6.37A(b)(4). The Exchange's Rules are currently silent on 
how the OX System opens an options series when it does not conduct an 
auction. The proposed rule change will clarify that the Exchange opens 
an option series when there are no executable orders and/or quotes to 
match up in the OX System, which is currently based on the bid-ask 
differentials that are within the acceptable range defined in Rule 
6.37(b)(1)(A)-(E) (``open a series on a quote''), and will also amend 
the current process to provide that the bid-ask differential to allow 
for the OX System to open a series on a quote would be based on the 
bid-ask differentials specified in Rule 6.37A(b)(4), which are wider 
than the bid-ask differential that allows for the OX System to open via 
an auction during the Auction Process.
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    \3\ The term ``OX'' refers to the Exchange's electronic order 
delivery, execution and reporting system through which orders and 
quotes for listed options are consolidated for execution and/or 
display. See NYSE Arca Options Rule 6.1A(a)(13).
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Current Opening Process
    Currently, Rule 6.64 describes the process pursuant to which the 
the [sic] OX System opens an option series. Pursuant to the procedures 
described in Rule 6.64(b) and (c), after the primary market for the 
underlying security disseminates the opening trade or opening quote, 
the OX System conducts an ``Auction Process'' to open a series whereby 
the OX System determines a single price at which a series may be opened 
by looking either to: (i) The midpoint of the initial uncrossed NBBO 
disseminated by the Options Price Reporting Authority (``OPRA''), or 
(ii) the midpoint of the best quotes or orders in the OX Book. If the 
bid-ask differential for a series is not within an acceptable range, 
the OX system will not open the series for trading. For purposes of 
this rule, the acceptable range means the bid-ask differential 
guidelines specified in Rule 6.37(b)(1)(A)-(E) (``narrow-width 
quotes'').\4\ Assuming the bid-ask differential is within the 
acceptable range, the OX System matches up orders and quotes in the 
system based on price-time priority and executes the orders that are 
matched at the midpoint pricing. Any orders in the OX Book that are not 
executed in the Auction Process become eligible for the Core Trading 
Session immediately after the conclusion of the Auction Process.
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    \4\ See NYSE Arca Options Rule 6.37(b)(1). The big-ask [sic] 
guidelines specified in Rule 6.37(b)(1)(A)-(E) that are required to 
open a series are narrower than the $5 wide bid-ask differential for 
options traded on OX during Core Trading Hours. See also NYSE Arca 
Options Rule 6.37A(b)(4). Rule 6.37A(b)(4) provides that options 
traded on OX during Core Trading Hours may be quoted with a 
difference not to exceed $5 between the bid and offer regardless of 
the price of the bid.
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    In addition, although not currently specified in the rule, if the 
bid-ask differential is within the acceptable range, but there are no 
orders or quotes to be matched up with one another, the OX System will 
open the series for trading on a disseminated quote, at which point any 
unexecuted orders in the OX Book during the Auction Process become 
eligible for the Core Trading Session. If the bid-ask differential is 
not within the acceptable range, the Exchange will not open that series 
for trading until the OX System either receives a narrow-width NBBO 
from OPRA or a Market Maker submits a narrow-width quote.
Proposed Change to Opening Process
    The Exchange proposes to amend Rule 6.64 both to specify that the 
OX System may open a series on a quote when there are no executable 
orders and/or quotes and to amend the rule to provide a different bid-
ask differential for opening a series on a quote. As noted above, the 
Exchange currently uses the narrow-width quote bid-ask differential for 
determining both whether to open with an auction (when there are 
executable orders and/or quotes) or with a quote (when there are no 
executable orders and/or quotes). In codifying the process for opening 
a series on a quote, the Exchange proposes to adopt the bid-ask 
differential specified under Rule 6.37A(b)(4) instead of the narrow-
width quotes.\5\
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    \5\ Currently, if there are executable orders and/or quotes and 
the options series does not meet the narrow-width quote bid-ask 
differential, but does meet the standard-width quote differential, 
the Exchange will not open the options series for trading. See Rule 
6.64(b)(D).
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    Rule 6.37A(b)(4) provides that options traded on OX during Core 
Trading Hours may be quoted with a difference not to exceed $5 between 
the bid and offer regardless of the price of the bid (``standard-width 
quote''). As proposed,

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if there are no executable orders and/or quotes, but the OX System 
either receives a standard-width quote NBBO from OPRA in that series or 
a Market Maker submits a standard-width quote in the option series, the 
Exchange shall open the series on a quote. The proposed change will 
align the requirements to open the unopened series on a quote with the 
existing Market Marker quoting requirements during Core Trading Hours.
    While the Exchange believes that narrow-width quoting requirements 
are beneficial for opening auctions pursuant to the Auction Process in 
the OX System, the Exchange believes that the continued application of 
the narrow-width quoting requirement when there are no executable 
quotes and/or orders to conduct an auction has the opposite effect and 
prevents series from opening promptly and thus unnecessarily delays the 
execution of orders on the Exchange. The Exchange believes that setting 
a wider quote differential requirement for opening on a quote would 
expedite the opening of all options series on the Exchange promptly 
after the opening of the underlying security. The Exchange believes 
that market participants will benefit by having the ability to execute 
orders on the Exchange without unnecessary delay. In addition, applying 
the standard-width quote bid-ask differential for opening a series on a 
quote is consistent with the quoting requirements that are applicable 
during Core Trading Hours.
    The Exchange further believes that applying the standard-width 
quote for determining when to open a series on a quote is appropriate 
because it would more closely align the Exchange's rules with the rules 
of other option exchanges with respect to opening a series. Other 
options exchanges have the ability to open a series for trading when 
there are no executable orders and/or quotes to conduct an auction. 
Both BOX Options Exchange (``BOX'') and NASDAQ Options Market 
(``NOM''), allow for the opening of series without conducting an 
opening auction. Neither BOX nor NOM require any bid-ask differential 
to be met prior to opening series for trading on a quote. Specifically, 
on BOX, the BOX system attempts to conduct an opening match (similar to 
Auction Process) to determine a single price at which a particular 
option series will be opened.\6\ During, the ``Pre-Opening Phase'' on 
BOX, narrow bid-ask differentials are required in a similar manner to 
the Exchange. However, if the BOX system is not able to determine an 
opening price, the option series will nevertheless move from the ``Pre-
Opening Phase'' to the continuous trading phase and the option series 
will be open for trading. When the option series move from Pre-Opening 
Phase to the continuous trading phase, there is no requirement for a 
bid-ask differential to be met. Market makers on BOX would only be 
required to meet the $5 bid-ask differential in the option series if 
and when they ever decided to quote.\7\ Similarly, NOM has no bid-ask 
differential requirements to open a series if an ``Opening Cross'' 
(similar to Trading Auction) cannot be initiated because there are no 
opening quotes or orders that lock or cross each other.\8\ 
Specifically, if an Opening Cross cannot be initiated because there are 
no opening quotes or orders that lock or cross each other, the option 
series will open for trading on NOM.\9\ Market makers on NOM would only 
be required to meet the $5 bid-ask differentials in the option series 
if and when they ever decided to quote.\10\ Both, BOX and NOM could 
open options series and disseminate a protected quotation without the 
benefit of Market Maker quotation to facilitate price discovery.
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    \6\ See BOX Rule 7070(e).
    \7\ See BOX Rule 7070(f). See also BOX Rule 8040, which sets 
forth BOX market maker quoting obligations.
    \8\ See NOM Chapter VI, Section 8(c)(1).
    \9\ See id.
    \10\ See NOM Chapter VII, Section 6(d).
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    By contrast, currently, if the options series does not meet the 
narrow-width quotes, the series will not open at all on the Exchange, 
which differs from BOX and NOM. As noted above, neither BOX nor NOM 
require any bid-ask differential to be met prior to opening series for 
trading on a quote. The current inability of the Exchange to open a 
series without executable quotes and/or orders subject to a standard-
width quote requirement puts the Exchange at a competitive disadvantage 
to other options exchanges that do not have that similar restriction. 
By not opening the option series, the Exchange cannot display orders on 
its Consolidated Book and thus has no protected quotation in the 
options series. Until the options series officially opens for trading, 
the Exchange cannot route out orders on its Consolidated Book pursuant 
to Linkage, nor can it have a protected quote that draws trading 
interest from other options markets. The Exchange believes that the 
delay in execution of orders on the Exchange in this situation is 
unnecessary and harmful to market participants. The Exchange's proposal 
would provide for the ability to open a option series on a quote in a 
similar fashion as both BOX and NOM, but in a more prudent and 
conservative manner that the Exchange believes better protects 
investors and other market participants. The Exchange believes that 
having a bid-ask differential requirement to open a series is 
beneficial for opening series and helps ensure there is a sufficient 
quoted market in the options series, whether it is via NBBO from OPRA 
or Market Maker generated quote, prior to opening of the series on the 
Exchange to facilitate transactions in securities on the Exchange.
    To clarify that Rule 6.64 governs the opening process, which 
includes both trading auctions and opening on a quote, the Exchange 
also proposes to amend the title of the rule by deleting the phrase 
``Trading Auction'' and replacing it with ``Opening Process.'' In 
addition, the Exchange proposes to clarify that the term ``Auction 
Process'' refers to the opening procedures set forth in Rule 
6.64(b)(A)-(D), when the Exchange opens an options series for trading 
when there are orders and/or quotes that can be matched at a single 
price point.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\12\ in particular, because it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change is designed to remove impediments to, and 
perfect the mechanism of, a free and open market and a national market 
system because it would permit the Exchange to open a series when there 
are not sufficient orders or quotes to conduct an auction after 
receiving notification from OPRA that an NBBO has been established for 
the series or on a Market Maker quote, provided that the bid-ask 
differential of the NBBO does not exceed the standard-quote width bid-
ask differential. The wider quote differential requirement for openings 
when an Auction Process is not conducted will expedite the opening of 
all options series on the Exchange promptly after the opening of the 
underlying security, and thus remove impediments to and

[[Page 71471]]

perfect the mechanism of a free and open market in a way that benefits 
market participants and enables them to execute their orders on the 
Exchange.
    The proposed rule change contributes to the protection of investors 
and the public interest by maintaining the narrow-width quote bid-ask 
differentials for the Auction Process, which provides price protection 
for customers and other market participants when they have executable 
orders and quotes prior to the opening of a series on the Exchange.
    The proposal would provide fair and orderly means to open a series 
when the Exchange does not have sufficient executable quotes and/or 
orders to conduct an Auction Process and would reasonably ensure that 
the Exchange does not open the series at a price that is beyond the 
price at which Market Makers are permitted to quote for the series 
during the Core Trading Session, which also contributes to the 
protection of investors and the public interest, generally. The 
proposed rule change is also designed to promote just and equitable 
principles of trade because it would permit the Exchange to open a 
series in a manner that is more consistent with the opening of 
individual series on other option exchanges.\13\
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    \13\ See supra notes 6 and 8.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6)(iii) thereunder.\15\ At any time within 60 days of the filing 
of such proposed rule change, the Commission summarily may temporarily 
suspend such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2012-126 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2012-126. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2012-126 and should 
be submitted on or before December 21, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28987 Filed 11-29-12; 8:45 am]
BILLING CODE 8011-01-P