[Federal Register Volume 77, Number 232 (Monday, December 3, 2012)]
[Notices]
[Pages 71658-71665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29077]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68302; File No. SR-NYSE-2012-65]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Moving the Rule Text That Provides for Pegging on the Exchange From 
Supplementary Material .26 of NYSE Rule 70 to NYSE Rule 13 and Amending 
Such Text to (i) Permit Designated Market Maker Interest To Be Set as 
Pegging Interest; (ii) Change References From National Best Bid, 
National Best Offer and National Best Bid or Offer to Best Protected 
Bid, Best Protected Offer and Best Protected Bid or Offer, 
Respectively; (iii) Permit Pegging Interest To Peg to the Opposite Side 
of the Market; and (iv) Provide for An Offset Value To Be Specified for 
Pegging Interest

November 27, 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 13, 2012, New York Stock Exchange LLC (the 
``Exchange'' or ``NYSE'') 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 
Exchange. The Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to move the rule text that provides for 
pegging on the Exchange from Supplementary Material .26 of NYSE Rule 70 
(``Rule

[[Page 71659]]

70.26'') to NYSE Rule 13 (``Rule 13'') and amend such text to (i) 
permit Designated Market Maker (``DMM'') interest to be set as pegging 
interest; (ii) change references from national best bid (``NBB''), 
national best offer (``NBO'') and national best bid or offer (``NBBO'') 
to best protected bid (``PBB''), best protected offer (``PBO'') and 
best protected bid or offer (``PBBO''), respectively; (iii) permit 
pegging interest to peg to the opposite side of the market; and (iv) 
provide for an offset value to be specified for pegging interest. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to move the rule text that provides for 
pegging on the Exchange from Rule 70.26 (Pegging for d-Quotes and e-
Quotes) \5\ to Rule 13 and amend such text to (i) permit DMM interest 
to be set as pegging interest; (ii) change references from NBB, NBO and 
NBBO to PBB, PBO and PBBO, respectively; (iii) permit pegging interest 
to peg to the opposite side of the market; and (iv) provide for an 
offset value to be specified for pegging interest. In moving this text 
to Rule 13, the Exchange proposes to make several other changes to the 
rule text, so that the proposed substantive changes described above can 
be incorporated in a logical and transparent manner and to streamline 
the rule in a non-substantive manner.
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    \5\ E-Quotes are Floor broker agency interest files. D-Quotes 
are e-Quotes for which a Floor broker has entered discretionary 
instructions as to size and/or price.
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Background
    The Exchange adopted Rule 70.26 as part of its Hybrid Market 
initiative to provide the ability for Floor brokers to add pegging 
instructions to e-Quotes.\6\ Since its original adoption, the pegging 
functionality has been amended a number of times to, among other 
things, include d-Quotes and change the pegging functionality from 
pegging to the Exchange best bid or offer to pegging to the NBBO.\7\
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    \6\ See Securities Exchange Act Release No. 54577 (October 5, 
2006), 71 FR 60208 (October 12, 2006) (SR-NYSE-2006-36).
    \7\ See Securities Exchange Act Release No. 61072 (November 30, 
2009), 74 FR 64103 (December 7, 2009) (SR-NYSE-2009-106).
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    As set forth in Rule 70.26(i), e-Quotes, other than tick-sensitive 
e-Quotes, may be set to peg to the NBB (for pegging interest to buy) or 
to the NBO (for pegging interest to sell) as the NBBO changes, so long 
as the NBBO is at or within the limit price. Rule 70.26(ii) specifies 
that d-Quotes may also employ pegging. Rule 70.26(iii) provides that 
pegging is active only when auto-quoting is active and that Exchange 
systems will reject e-Quotes that employ pegging that are entered 10 
seconds or less before the scheduled close of trading. Rule 70.26(iv) 
provides that pegging e-Quotes and d-Quotes trade on parity with other 
interest at the NBBO after interest entitled to priority is executed, 
and Rule 70.26(vi) provides that a pegging e-Quote or d-Quote that sets 
the Exchange best bid or offer is entitled to priority.
    Rule 70.26(v) provides that pegging is reactive, and that an e-
Quote or d-Quote will not establish the NBBO as a result of pegging. 
Rule 70.26(vii) provides that pegging e-Quotes will only peg to non-
pegging interest that is within the pegging range selected by the Floor 
broker, and that such non-pegging interest may be available on the 
Exchange or be a protected bid or offer on an away market. Rule 
70.26(viii) provides that an e-Quote or d-Quote will not sustain the 
NBBO as a result of pegging if there is no other non-pegged interest at 
that price, and such price is not the e-Quote's or d-Quote's limit 
price. Rule 70.26(viii)(A) and (B) provide that if a buy (sell) pegging 
e-Quote reaches its lowest (highest) quotable price and it is the NBB 
(NBO), such interest will remain displayed at the NBB (NBO) even if all 
other interest at that price cancels. Rule 70.26(ix) further provides 
detail of definitions of the price range that a Floor broker may 
designate for pegging e-Quotes, which is a price range that a Floor 
broker can add that is in addition to the limit price for the pegging 
e-Quote, provided that it is not inconsistent with the order's limit 
price.
    Rule 70.26(x) provides that pegging interest will join the NBB or 
NBO provided that it is within the e-Quote's pegging range. As noted in 
Rule 70.26(x)(A), a pegging e-Quote will not join the NBBO if it is 
locking or crossing the Exchange best bid or offer, in which case the 
pegging e-Quote would peg to the next available best-priced non-pegging 
interest. Rule 70.26(x)(B) further provides that if the NBBO is not 
within the price range specified for the pegging e-Quote, it will peg 
to the next available best-priced non-pegging interest within the price 
range selected by the Floor broker.
    Rule 70.26(xi) also provides that if a pegging range has not been 
included, the pegging e-Quote will peg to the NBBO so long as the NBBO 
is within the limit price of the e-Quote. Rule 70.26(xii) provides that 
the discretionary price range of a d-Quote will move with a pegging d-
Quote, subject to any floor or ceiling set by the Floor broker. Rule 
70.26(xii)(A)-(C) then set forth that if the NBBO moves out of the 
range of the pegging e-Quote, the pegging e-Quote will remain at the 
best price to which there may be non-pegging interest to peg, and that 
once the NBBO returns to within the price range designated for the 
pegging e-Quote, it will once again peg to the NBBO. Finally, Rule 
70.26(xiii) provides that a Floor broker may establish a minimum size 
of same-side volume to which the e-Quote or d-Quote will peg.
Summary of Proposed Rule Changes
    As noted above, the Exchange proposes to permit DMM interest to be 
set as pegging interest. Because pegging for DMM interest would 
generally be the same as pegging for e-Quotes and d-Quotes, the 
Exchange proposes to amend the existing text, as described in more 
detail below, to define the term ``pegging interest'' to include e-
Quotes, d-Quotes, and DMM interest.\8\ The Exchange believes that it is 
appropriate to expand the availability of pegging interest to DMM 
interest because it will assist DMMs in meeting their obligations 
pursuant to NYSE Rule 104(a)(1) to maintain a continuous, two-sided 
quote at or near the NBBO throughout the trading day.
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    \8\ Trading interest that has been set to peg, i.e., e-Quotes, 
d-Quotes, and DMM interest, will be referred to collectively as 
``pegging interest.''
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    In particular, the Exchange notes that other markets have recently 
been approved to provide market makers with pegging order functionality 
so that

[[Page 71660]]

market makers may automatically track the NBBO in compliance with the 
market-wide market maker quoting requirements.\9\ The rules adopted or 
proposed by those markets set the pegging functionality to 
automatically track the designated percentages set forth in the market-
wide quoting rule (i.e., NYSE Rule 104(a)(1)(B)(iii) designated 
percentages). While the Exchange's expansion of pegging functionality 
to DMMs would not include those set percentages, the Exchange believes 
that providing DMMs with the flexibility to engage in same-side or 
opposite-side pegging with offset values of their own choosing, as 
discussed in more detail below, will enable DMMs to set their market-
making quoting interest to automatically track the PBBO at a tighter 
ratio than the quoting requirements contemplated by NYSE Rule 
104(a)(1)(B).\10\
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    \9\ See, e.g., Securities Exchange Act Release Nos. 67584 (Aug. 
2, 2012), 77 FR 47472 (Aug. 8, 2012) (SR-NASDAQ-2012-066) (approving 
The NASDAQ Stock Market LLC (``Nasdaq'') Rule 4751(f)(15), which 
establishes a ``Market Maker Peg Order''); 67756 (Aug. 29, 2012), 77 
FR 54633 (Sept. 5, 2012) (SR-BATS-2012-026) (approving The BATS 
Exchange, Inc. (``BATS'') Rule 11.8(e), which establishes a ``Market 
Maker Peg Order''); and 67755 (Aug. 29, 2012), 77 FR 54630 (Sept. 5, 
2012) (SR-BYX-2012-012) (approving BATS-Y Exchange, Inc. (``BYX'') 
Rule 11.8(e), which establishes a Market Maker Peg Order).
    \10\ Member organizations are responsible for determining 
whether their trading activity qualifies as bona fide market making 
for purposes of the ``locate'' exception and close-out requirements 
of Regulation SHO under the Exchange Act. Compliance with the 
quoting requirements of NYSE Rule 104(a)(1)(B), or any other rules 
of the Exchange, does not necessarily mean that the DMM, or other 
form of Exchange-registered market maker, is engaged in bona fide 
market making for purposes of Regulation SHO. See 17 CFR 
242.203(b)(2)(iii); 17 CFR 242.204(a)(3). The Commission adopted a 
narrow exception to Regulation SHO's ``locate'' requirement for 
market makers that may need to facilitate customer orders in a fast 
moving market without possible delays associated with complying with 
such requirement. Only market makers engaged in bona fide market 
making in the security at the time they effect the short sale are 
excepted from the ``locate'' requirement. See Exchange Act Release 
No. 50103 (July 28, 2004), 69 FR 48008, 48015 (August 6, 2004) 
(providing guidance as to what does not constitute bona fide market 
making for purposes of claiming the exception to Regulation SHO's 
``locate'' requirement). See also Exchange Act Release No. 58775 
(October 14, 2008), 73 FR 61690, 61698-9 (October 17, 2008) 
(providing guidance regarding what is bona fide market making for 
purposes of complying with the market maker exception to Regulation 
SHO's ``locate'' requirement including without limitation whether 
the market maker incurs any economic or market risk with respect to 
the securities, continuous quotations that are at or near the market 
on both sides and that are communicated and represented in a way 
that makes them widely accessible to investors and other broker-
dealers and a pattern of trading that includes both purchases and 
sales in roughly comparable amounts to provide liquidity to 
customers or other broker-dealers).
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    The Exchange also proposes to change references to NBB, NBO and 
NBBO throughout Rule 70.26 to PBB, PBO and PBBO, respectively. The 
Exchange believes that these changes are more consistent with the 
requirements of the Regulation NMS Order Protection Rule \11\ and the 
related definition of protected bid and offer, as set forth in 
Regulation NMS Rule 600(b)(57),\12\ which defines a protected bid or 
protected offer as a quote in an NMS stock that is (i) displayed by an 
automated trading center; (ii) disseminated pursuant to an effective 
national market system plan; and (iii) an automated quotation that is 
the best bid or best offer of a national stock exchange or a national 
securities association. Exchange systems monitor the PBBO for purposes 
of the Order Protection Rule and, in this respect, Exchange systems 
also move pegging interest based on moves to the PBBO, not the 
NBBO.\13\
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    \11\ 17 CFR 242.611.
    \12\ 17 CFR 242.600(b)(57).
    \13\ In most instances, the PBBO and the NBBO are the same. 
However, if the NBBO is based on a quote that is no longer 
protected, i.e., a stale quote, the PBBO may change before the NBBO 
changes. In this regard, the Exchange notes that current Rule 
70.26(vii) already specifies that pegging interest may peg to 
interest available on the Exchange or a protected bid or offer on an 
away market.
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    The Exchange further proposes to expand the pegging functionality 
to permit pegging to the opposite side of the market. The existing 
functionality, for which pegging interest to buy (sell) pegs to the PBB 
(PBO), would be renamed in the rule as a ``Primary Pegging Interest.'' 
\14\ The proposed new functionality, whereby pegging interest would peg 
to the opposite side of the market (buy (sell) pegs to the PBO (PBB)) 
would be referred to in the proposed rule as a ``Market Pegging 
Interest.'' \15\ The Exchange believes that adding Market Pegging 
Interest functionality would contribute to narrower spreads for 
securities and is consistent with approved rules of other markets.\16\
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    \14\ See proposed paragraph (c) of the pegging interest text of 
Rule 13.
    \15\ See proposed paragraph (d) of the pegging interest text of 
Rule 13.
    \16\ See, e.g., Nasdaq Rule 4751(f) and BATS Rule 11.9(c)(8).
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    The Exchange also proposes to provide for an offset value, which 
would be a specified amount by which the price of pegging interest 
would differ from the price of the interest to which it pegs.\17\ The 
Exchange proposes to specify that an offset value would be optional for 
Primary Pegging Interest,\18\ but would be required for Market Pegging 
Interest.\19\ As proposed, when applying an offset value to Primary 
Pegging Interest, the adjusted price for buy (sell) pegging interest 
would be the PBB (PBO) minus (plus) the offset value. When applying the 
offset value to Market Pegging Interest, the adjusted price for buy 
(sell) pegging interest would be the PBO (PBB) minus (plus) the offset 
value.\20\ If the offset value of pegging interest to buy (sell) would 
result in a price that is greater than $1.00 in an increment smaller 
than $0.01, the price of the pegging interest to buy (sell) would be 
rounded down (up) to the nearest permissible minimum price variation, 
consistent with NYSE Rule 61.\21\
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    \17\ See proposed paragraph (b) of the pegging interest text of 
Rule 13.
    \18\ See proposed paragraph (c)(4) of the pegging interest text 
of Rule 13.
    \19\ See proposed paragraph (d)(4) of the pegging interest text 
of Rule 13. Because an offset value would be required for Market 
Pegging Interest, Exchange systems would reject Market Pegging 
Interest that does not include an offset value.
    \20\ For example, if the PBB is $2.00 and the PBO is $2.05, 
pegging interest to buy that is set to peg to the same side of the 
market with an offset of $0.01 would be priced at $1.99 (i.e., $2.00 
PBB minus $0.01 offset). Pegging interest to sell that is set to peg 
to the same side of the market with an offset of $0.01 would be 
priced at $2.06 (i.e., $2.05 PBO plus $0.01 offset). In contrast, 
pegging interest to buy that is set to peg to the opposite side of 
the market with an offset of $0.05 would be priced at $2.00 (i.e., 
$2.05 PBO minus $0.05 offset). Pegging interest to sell that is set 
to peg to the opposite side of the market with an offset of $0.05 
would be priced at $2.05 (i.e., $2.00 PBB plus $0.05 offset).
    \21\ Continuing with the example above, if the PBB is $2.00 and 
the PBO is $2.05, pegging interest to buy that is set to peg to the 
same side of the market with an offset of $0.015 would be priced at 
$1.98 (i.e., $2.00 PBB minus $0.015 offset equals $1.985 and rounded 
down to nearest permissible minimum price variation). Pegging 
interest to sell that is set to peg to the same side of the market 
with an offset of $0.015 it would be priced at $2.07 (i.e., $2.05 
PBO plus $0.015 offset equals $2.065 and rounded up to nearest 
permissible minimum price variation). In contrast, pegging interest 
to buy that is set to peg to the opposite side of the market with an 
offset of $0.015 would be priced at $2.03 (i.e., $2.05 PBO minus 
$0.015 offset equals $2.035 and rounded down to nearest permissible 
minimum price variation). Pegging interest to sell that is set to 
peg to the opposite side of the market with an offset of $0.015 
would be priced at $2.02 (i.e., $2.00 PBB plus $0.015 offset equals 
$2.015 and rounded up to nearest permissible minimum price 
variation).
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    The Exchange believes that adding Market Pegging functionality 
would enable pegging interest to potentially establish a better price 
than is currently available, thereby reducing the size of the spread 
for a security. For example, if the PBBO in a security is $10.05-
$10.07, and the buy pegging interest is pegged to the PBO with an 
offset of $0.01, the buy pegging interest would post on the Exchange as 
a $10.06 bid, which would be a new PBB that reduces the spread and 
creates a tighter market. The Exchange notes that unlike Primary 
Pegging Interest, which currently cannot establish or sustain the PBBO 
as a result of pegging, Market Pegging Interest can establish or 
sustain a PBB or PBO.

[[Page 71661]]

Proposed Specific Rule Changes
    As noted above, the Exchange proposes to delete Rule 70.26 in its 
entirety and move the text that provides for pegging to Rule 13. 
Because pegging interest is being expanded to include DMM interest, the 
Exchange believes that Rule 70, which concerns Floor broker interest 
only, is no longer the proper rule within which to provide for pegging. 
Rather, because pegging is a type of modifier, the Exchange believes it 
is more appropriate to provide for pegging within Rule 13 as a defined 
term referred to as ``pegging interest.'' The Exchange notes that Rule 
13 is currently titled ``Definition of Orders.'' However, Rule 13 
currently provides for orders and order modifiers.\22\ Accordingly, the 
Exchange proposes to change the title of Rule 13 to ``Orders and 
Modifiers.''
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    \22\ For example, a sell ``plus'' or buy ``minus'' order is not 
an order type per se, but is instead an order modifier.
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    As proposed, the new pegging interest section of Rule 13 would 
replace the existing text of Rule 70.26, with numerous non-substantive 
changes, as well as add new rule text to incorporate the elements 
proposed above, i.e., permitting DMM interest to be set as pegging 
interest, changing NBBO to PBBO, adding the Market Pegging Interest 
functionality, and providing for an offset value to be specified. The 
Exchange believes that the proposed changes to the rule text, as 
incorporated in Rule 13, result in a more streamlined rule that 
eliminates redundancy in the current rule while also incorporating the 
new elements in a logical and comprehensive manner. For example, rather 
than referring to ``pegging e-Quotes'' or ``pegging d-Quotes'' 
throughout the rule, the Exchange proposes to use the term ``pegging 
interest,'' unless the rule is specific only to a particular type of 
interest. In addition, the Exchange proposes to combine concepts that 
are currently addressed separately or in multiple locations within Rule 
70.26, but that can be logically combined into streamlined rule text 
(e.g., the text discussing the permissible price range and how it 
impacts pegging).
    The following sets forth the proposed rule changes (all references 
to proposed paragraphs are to the proposed new pegging interest text of 
Rule 13):
     Proposed paragraph (a) provides that ``pegging interest'' 
means displayable or non-displayable interest to buy or sell at a price 
set to track the PBB or PBO as the PBBO changes. The proposed rule text 
would replace the general description of pegging in Rule 70.26(i), with 
certain changes. As discussed above, from a substantive perspective, 
the Exchange proposes to replace references to the NBB, NBO, and NBBO 
with references to the PBB, PBO, and PBBO. The Exchange proposes to 
delete the reference to the limit price of an e-Quote as that concept 
will now be part of proposed paragraph (a)(4), relating to the 
specified price range of pegging interest. In addition, the Exchange 
proposes a clarifying rule change to add that pegging interest may be 
for displayable or non-displayable interest. The current pegging 
functionality is available for all e-Quotes and d-Quotes, whether 
intended for display or not, and the Exchange proposes a clarifying 
rule change to make clear that pegging interest is available for both 
displayable and non-displayable interest.
     Proposed paragraph (a)(1) provides that pegging interest 
can be an e-Quote, d-Quote, or DMM Interest. The proposed rule text 
would replace without any substantive change rule text from Rule 
70.26(i) referencing e-Quotes and Rule 70.26(ii), which references d-
Quotes. The proposal to add DMM interest is new rule text, as described 
in more detail above.
     Proposed paragraph (a)(1)(A) provides that pegging 
interest may not include a sell ``plus'' or buy ``minus'' instruction, 
which replaces without any substantive change the current text in Rule 
70.26(i) that a tick-sensitive e-Quote is not permitted to peg. A 
``tick sensitive'' e-Quote is one that includes a sell ``plus'' or buy 
``minus'' instruction, which are existing defined terms in Rule 13. 
Therefore, the Exchange proposes to use the sell ``plus'' or buy 
``minus'' terminology instead of the current ``tick sensitive'' 
language, which is not a defined term in Exchange rules.\23\
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    \23\ This change does not alter the meaning of the current rule 
text.
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     Proposed paragraph (a)(1)(B) would replace without any 
substantive change the second sentence of Rule 70.26(iii), which 
provides that Exchange systems shall reject a pegging e-Quote or d-
Quote that is entered 10 seconds or less before the scheduled close of 
trading.\24\ The Exchange notes that the rationale for excluding 
pegging e-Quotes and d-Quotes 10 seconds prior to the close is to 
assist the DMM with arranging the close, and because the DMM is aware 
of DMM interest, this prohibition is not necessary for DMM interest. 
The Exchange notes that this does not confer any additional benefit to 
the DMM because the DMM may be required to supply additional liquidity 
as needed as part of the closing transaction in order to meet the 
obligation set forth in Rule 104(a)(3) to facilitate the close of 
trading for each of the securities in which the DMM is registered.
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    \24\ The current rule text only refers to e-Quotes, but since d-
Quotes are a subset of e-Quotes, Exchange systems currently reject 
both pegging e-Quotes and d-Quotes that are entered 10 seconds or 
less before the scheduled close of trading.
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     Proposed paragraph (a)(1)(C) would replace without any 
substantive change Rule 70.26(xii) by specifying that discretionary 
instructions associated with a pegging d-Quote would move as the d-
Quote pegs to the PBBO, subject to any price range and limit price that 
may be specified. The Exchange does not propose to include the 
reference to e-Quote that is currently in Rule 70.26(xii) because a d-
Quote is an e-Quote with discretionary instructions.\25\ Also, the 
Exchange proposes to refer to the specified price range instead of the 
current reference to floor or ceiling price in Rule 70.26(xii). 
Finally, the Exchange proposes to include a reference to the pegging 
interest's limit price. The Exchange notes that the textual differences 
between proposed paragraph (a)(1)(C) and current Rule 70.26(xii) do not 
make any substantive changes to the rule.
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    \25\ See supra note 5.
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     Proposed paragraph (a)(2) would replace without any 
substantive change the first sentence of Rule 70.26(iii), by specifying 
that pegging is only active when auto-quoting is active.
     Proposed paragraph (a)(3) would replace the rule text in 
Rule 70.26(vii) by specifying that pegging interest shall peg to a 
price that is based on either (A) a protected bid or offer, which may 
be available on the Exchange or an away market, or (B) interest that 
establishes a price on the Exchange, which may include Primary or 
Market Pegging Interest that has established a price as a result of an 
offset value. The current rule provides that pegging interest only pegs 
to other non-pegging interest, which may be available on the Exchange 
or a protected bid or offer on an away market. The proposed rule text 
modifies the existing rule text to take into consideration the 
possibility that either Primary Pegging Interest or Market Pegging 
Interest may establish a price on the Exchange and therefore pegging 
interest may peg to other pegging interest.\26\ The circumstances where 
pegging interest may establish a price is as a result of the proposed 
new offset function, which is why the Exchange

[[Page 71662]]

proposes to change this aspect of the rule.
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    \26\ See proposed paragraph (d)(2) of the pegging interest text 
of Rule 13.

    Example 1: Assume that the Exchange best bid and offer, which is 
also the PBBO, is $10.05-$10.07, and there is buy Market Pegging 
Interest pegged to the PBO with an offset value of $0.01, such 
Market Pegging Interest would establish a new PBB and Exchange best 
bid of $10.06. Because the Market Pegging Interest established a new 
PBB, Primary Pegging Interest to buy could peg to that $10.06 price 
and therefore would be pegging to pegging interest.
    Example 2: Assume again that the Exchange best bid or offer, 
which is also the PBBO, is $10.05-$10.07, with 100 shares at the 
bid, and there is buy Primary Pegging Interest ``A'' of 500 shares 
with an offset of $0.01, which would be at a priced at $10.04, and 
that is the only Exchange interest priced at $10.04. Assume further 
there is buy Primary Pegging Interest ``B'' that will only peg if 
there is minimum same-side volume of 500 shares.\27\ Because the 
Exchange best bid is only 100 shares, Primary Pegging Interest ``B'' 
would peg to the price that meets the minimum size requirement, 
which in this case would be the price established by the Primary 
Pegging Interest ``A'' at $10.04. In this scenario, because of the 
offset value associated with Primary Pegging Interest ``A'', that 
interest has established a price and as a result, Primary Pegging 
Interest ``B'' is pegging to pegging interest.

    \27\ See proposed paragraph (c)(5) of the pegging interest text 
of Rule 13.
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     Proposed paragraph (a)(4) provides that pegging interest 
shall peg only within the specified price range for the pegging 
interest. The Exchange notes that while the proposed language is new 
rule text, the proposed paragraph does not make any substantive changes 
to the current rule, but rather consolidates rule text from separate 
parts of the existing rule in a streamlined format. In particular, the 
proposed rule would replace the remaining text in Rules 70.26(i) (that 
pegging interest must be within the e-Quote's limit price), 70.26(vii) 
(that pegging interest pegs to interest within the price range selected 
by the Floor broker), and 70.26(ix), including (A) through (D) of that 
subsection, by replacing the detailed ``price range'' discussion within 
current Rule 70.26(ix) by specifying instead that pegging interest 
shall peg only within the specified price range for the pegging 
interest. For example, Rule 70.26(ix)(D) currently specifies that the 
price to which pegging interest pegs cannot be higher (lower) than the 
limit price of the buy (sell) pegging interest, which is also currently 
covered in Rule 70.26(i).\28\ In this regard, the Exchange proposes not 
to include the text of current Rule 70.26(ix)(A), (B) and (C), which 
refer to the ``quote price,'' ``ceiling price'' and ``floor price,'' 
respectively, of pegging interest. The Exchange does not consider these 
terms necessary and believes that proposed paragraph (a)(4) is clearer 
and more streamlined without their inclusion.\29\
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    \28\ This addition would not result in a substantive change to 
pegging. Also, the Exchange notes that Rule 70.26(ix) currently says 
that the price may not be ``inconsistent with'' the limit price. The 
Exchange believes that using ''specified price range'' would be 
clearer than the current ``inconsistent with'' text because the 
specified price range concept is broad enough to include the limit 
price of the order as well as any other pricing instructions that 
may be included with the pegging interest.
    \29\ The Exchange considers it inherent that a price ``range'' 
will have upper and lower bounds and therefore does not consider 
these terms necessary.
---------------------------------------------------------------------------

     Proposed paragraph (a)(4)(A) specifies that if the PBBO, 
combined with any offset value, is not within the specified price 
range, the pegging interest would instead peg to the next available 
best-priced interest that is within the specified price range. Other 
than addressing how the offset value impacts the pegging interest, the 
reference to NBBO changing to PBBO, replacing the phrase ``the price 
range selected by the Floor broker'' with ``the specified price 
range,'' this text is substantively the same and replaces current Rule 
70.26(x)(B).\30\
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    \30\ The Exchange notes that Rule 70.26(x)(B) provides that 
pegging interest will ``join'' the interest to which it pegs. The 
Exchange believes that using ``peg to'' terminology would be more 
precise than the current ``join'' language.
---------------------------------------------------------------------------

     Proposed paragraph (a)(4)(B) would replace without any 
substantive change the current Rule 70.26(xii)(A), (B) and (C) by 
specifying that pegging interest that has reached its specified price 
range will remain at that price if the PBBO goes beyond such price 
range and that if the PBBO returns to a price within the specified 
price range, it shall resume pegging. The Exchange notes that this text 
is substantively the same as in current Rule 70.26(xii)(A), (B), and 
(C), albeit in a streamlined format. The Exchange further notes that 
the proposed rule text replaces without any substantive change concepts 
set forth in Rule 70.26(x) (that pegging interest will peg to the NBBO 
so long as it is in the specified price range) and 70.26(xi) (pegging 
interest without a specified price range will peg based on the limit 
price of the order).
     Proposed paragraph (b) defines the ``offset value,'' as 
discussed in more detail above.
     Proposed paragraph (c) defines the term ``Primary Pegging 
Interest,'' as discussed in more detail above.
     Proposed paragraph (c)(1) would replace Rule 70.26(x)(A) 
by specifying that Primary Pegging Interest shall not peg to a price 
that is locking or crossing the Exchange best offer (bid), but instead 
would peg to the next available best-priced interest that would not 
lock or cross the Exchange best offer (bid). In moving the text from 
Rule 70.26(x)(A), the Exchange proposes two minor changes: to change 
the reference from the NBB (NBO) to the term ``price'' and to delete 
the term ``non-pegging interest.'' The Exchange proposes these 
modifications because, as discussed above in connection with proposed 
paragraph (a)(3), there may be circumstances where because of the 
offset value, pegging interest may peg to a price established by 
pegging interest, which in some cases, may not be the PBBO.
     Proposed paragraph (c)(2) would replace without 
substantive change Rules 70.26(v), (viii), (viii)(A), and (viii)(B) by 
specifying that Primary Pegging Interest will not establish a PBB (PBO) 
or sustain a PBB (PBO) as a result of pegging.\31\
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    \31\ The Exchange believes that the proposed rule text ``as a 
result of pegging'' clarifies that the only time that Primary 
Pegging Interest will not establish or sustain the PBBO is if it is 
following its pegging instructions. When a Primary Pegging Interest 
is at a price because it is the limit price of the Primary Pegging 
Interest, such interest will not have established or sustained the 
PBBO ``as a result of pegging'' and the Exchange believes that it is 
no longer necessary to specifically state that pegging interest at 
its limit price may remain displayed at the PBBO, as currently set 
forth in Rules 70.26(viii)(A) and (B). In addition, the Exchange 
proposes not to replace the statement in Rule 70.26(v) that pegging 
is reactive because that concept was intended to mean that pegging 
interest cannot create a PBB or PBO. However, because proposed 
Market Pegging Interest can establish a new PBB or PBO, the 
limitation to ``reactive'' is no longer relevant and the Exchange 
believes that the proposed rule text that Primary Pegging Interest 
cannot establish or sustain the PBBO obviates the need to separately 
say that pegging is reactive. The Exchange also proposes to delete 
the term ``new'' as being redundant of the concept of establishing a 
PBB or PBO.
---------------------------------------------------------------------------

     Proposed paragraph (c)(3) would replace without any 
substantive change Rule 70.26(vi) by specifying that Primary Pegging 
Interest may establish an Exchange best bid or offer. The Exchange 
proposes to replace the rule text set forth in Rule 70.26(vi) that 
pegging interest that sets the Exchange best bid or offer is entitled 
to priority by adding to Rule 72 that pegging interest may have 
priority interest.\32\
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    \32\ The Exchange proposes to further amend Rule 72 to change a 
reference to current Rule 70.26 to the proposed new pegging interest 
text within Rule 13 and change a reference to e-Quotes to ``pegging 
interest,'' generally.
---------------------------------------------------------------------------

     Proposed paragraph (c)(4) provides that Primary Pegging 
Interest may include an offset value for which the adjusted price for 
buy (sell) pegging interest shall be the PBB (PBO) minus (plus) the 
offset value, which is new rule text, as discussed in greater detail 
above.

[[Page 71663]]

     Proposed paragraph (c)(5) would replace without any 
substantive change Rule 70.26(xiii) by specifying that Primary Pegging 
Interest may be designated with a minimum size of same-side volume to 
which such pegging interest shall peg. Other than the references to NBB 
and NBO changing to PBB and PBO, respectively, this text is 
substantively the same as in current Rule 70.26(xiii).
     Proposed paragraph (d) provides for new rule text related 
to the new Market Pegging Interest, which is discussed in greater 
detail above. More specifically, proposed paragraph (d)(1) would 
provide that Market Pegging Interest shall not peg to a price that is 
locking or crossing the Exchange best offer (bid), but instead shall 
peg to a price one minimum price variation lower (higher) than the 
Exchange best bid or offer. This proposed functionality is intended to 
prevent Market Pegging Interest from locking or crossing the Exchange 
best bid or offer.\33\ Proposed paragraph (d)(2) would provide that 
Market Pegging Interest to buy (sell) may establish or sustain a PBB 
(PBO). Proposed paragraph (d)(3) would mirror paragraph (c)(3) by 
specifying that Market Pegging Interest may establish an Exchange best 
bid or offer. Finally, proposed paragraph (d)(4), would require Market 
Pegging Interest to include an offset value, as discussed in more 
detail above.
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    \33\ A potential scenario when Market Pegging Interest could 
lock or cross the Exchange best bid or offer could be if a liquidity 
replenishment point (``LRP'') is reached pursuant to NYSE Rule 1000, 
and automatic executions on one side of the market are suspended at 
the Exchange. In such scenario, assume that the Exchange best bid is 
$10.04, an LRP is reached and the Exchange is slow on the buy side, 
a new PBB is published at $10.03, and there is Market Pegging 
Interest to sell with a $0.01 offset. Because the Market Pegging 
Interest to sell would peg to the PBB priced at $10.03, with a penny 
offset, and lock the Exchange's best bid at $10.04, the Exchange 
proposes to reprice the Market Pegging Interest to sell to $10.05 so 
that it does not lock the Exchange best bid.
---------------------------------------------------------------------------

    The Exchange proposes to delete without replacing Rule 70.26(iv), 
which provides that pegging interest trades on parity with other 
interest at the NBBO after interest entitled to priority is executed. 
The Exchange believes that this text is superfluous, in that pegging 
interest is not treated differently than non-pegging interest for 
purposes of determining parity, as set forth in Rule 72, and Rule 72 
governs the allocation of executions and priority.\34\ The Exchange 
therefore is not proposing to address this concept in new pegging 
interest section of Rule 13.
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    \34\ The Exchange proposes to amend Rule 72(a)(i) and (ii) to 
specify that displayable interest may include pegging interest. 
Because pegging interest would be included as ``displayable 
interest,'' the description of allocation of orders would not 
include pegging interest with any reference to displayable interest. 
The Exchange also proposes conforming edits to Rule 72(a)(ii)(G) to 
replace references to Rule 70.26 and e-Quotes with references to 
Rule 13 and ``pegging interest.''
---------------------------------------------------------------------------

    The Exchange further proposes to add new subsection (xii) to Rule 
72(c) to codify how Exchange systems treat modifications to orders for 
purposes of time sequencing. Specifically, if an order is modified 
solely to reduce the size of the order, Exchange systems accept such a 
modification without changing the time stamp of original order 
entry.\35\ Accordingly, the Exchange proposes to codify in Rule 
72(c)(xii) that an order that is modified to reduce the size of the 
order shall retain the time stamp of original order entry.
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    \35\ The manner by which a member organization may reduce the 
size of an order without impacting the time stamp is to submit a 
partial cancellation message. For example, if a member organization 
has entered an order for 400 shares to buy at $10.00 and wants to 
reduce it to 200 shares to buy at $10.00, the member organization 
would submit a cancel message for 200 shares to buy at $10.00, which 
would leave the remaining 200 shares of the buy order with the time 
stamp of original order entry.
---------------------------------------------------------------------------

    Currently, any other modification to an order, including increasing 
the size of the order or changing the price of the order, results in 
the order receiving a new time stamp. Accordingly, the Exchange 
proposes to codify that any other modification of an order, such as 
increasing the size or changing the price of an order, shall receive a 
new time stamp. The Exchange notes that the proposed rule language 
covers any modification of an order, whether directed by a member 
organization that entered the order or entered by Exchange systems 
pursuant to rule.\36\ For example, Exchange systems may re-price an 
order if the interest is being re-priced because it is pegging 
interest, pursuant to Rule 13, or because it is a short sale order 
during a Short Sale Period, pursuant to Rule 440B(e).
---------------------------------------------------------------------------

    \36\ To change the price of an order or increase the size of an 
order, a member organization would need to enter a ``cancel/
replace'' message, which serves to cancel the original order and 
replace it with a new order. The replacement order receives a new 
time stamp. The ``cancel/replace'' message can also be used to 
change the order marking under Regulation SHO of a pending sell 
order (i.e., from ``long'' to ``short''). For example, if a seller 
increases the size of a pending sell order, the resulting modified 
order is considered a new order and must be marked by the broker-
dealer to reflect the seller's net position at the time of order 
modification pursuant to Rule 200 of Regulation SHO. The Exchange 
notes that if a member organization uses a ``cancel/replace'' 
message to reduce the size of the order, rather than a partial 
cancellation, because the ``cancel/replace'' message cancels the 
original order in its entirety, the replacement order would receive 
a new time stamp, even if the replacement order represents only a 
reduction in size of the order.
---------------------------------------------------------------------------

    The proposed changes to Rule 72(c)(xii) will be effective on the 
operative date of this filing. The Exchange will announce the 
implementation date of the proposed rule change as it relates to 
pegging interest changes in a Trader Update to be published no later 
than 90 days publication of the notice in the Federal Register. The 
implementation date will be no later than 90 days following publication 
of the Trader Update announcing publication of the notice in the 
Federal Register.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\37\ in general, and 
furthers the objectives of Section 6(b)(5),\38\ in particular, because 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system and, 
in general, to protect investors and the public interest. The proposed 
rule change is also not designed to permit unfair discrimination.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b).
    \38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that expanding the pegging functionality to 
DMM interest is consistent with the Act because it will remove 
impediments to, and perfect the mechanism of a free and open market and 
national market system and, in general, protect investors and the 
public interest by providing a mechanism for DMMs to assist them with 
meeting their market-making obligations to maintain quoting interest at 
or near the NBBO. The Exchange notes that two other markets have been 
approved to offer pegging functionality expressly for market markers 
for a similar purpose.\39\ The Exchange's proposal differs because as 
proposed, the DMM would be able to select whether to enter Primary 
Pegging Interest or Market Pegging Interest, and would be able to 
select the offset value, thereby providing the DMM with flexibility to 
track the PBBO at a tighter ratio than contemplated by the rules of 
other exchanges that offer a market maker pegging functionality.
---------------------------------------------------------------------------

    \39\ See supra note 9.
---------------------------------------------------------------------------

    The Exchange further notes that expanding pegging functionality to 
DMM interest is not designed to permit unfair discrimination. The 
Exchange believes that expanding the functionality to DMMs is 
consistent

[[Page 71664]]

with the existing approved rules, as well as consistent with the Act 
because the expansion is narrowly tailored to offer the functionality 
to a class of participants that has an affirmative obligation to 
maintain a quote at or near the NBBO.\40\ The Exchange notes that 
another class of member organizations, Supplemental Liquidity Providers 
(``SLP''), provide liquidity to the Exchange, and certain SLPs can 
register as market makers at the Exchange.\41\ While the Market Pegging 
Interest functionality will not be available to SLPs at this time, the 
Exchange does not believe that this is discriminatory because there is 
no requirement that a security be assigned to an SLP, and a member 
organization's participation in the SLP program is voluntary. By 
contrast, all securities traded at the Exchange must be assigned to a 
DMM, and a DMM unit cannot withdraw from registration in securities 
assigned to it.
---------------------------------------------------------------------------

    \40\ See NYSE Rule 104(a)(1)(A).
    \41\ See NYSE Rule 107B.
---------------------------------------------------------------------------

    As discussed above, rather than adding the concepts for the Market 
Peg functionality, the offset value, and expansion to DMM interest in 
Rule 70.26, the Exchange proposes to restructure the text of Rule 70.26 
and move it to Rule 13. The Exchange believes that this will more 
appropriately address how pegging operates and consolidates rule text 
relating to orders and modifiers in single location in the rules. In 
this regard, the proposal to change references to NBB, NBO and NBBO to 
PBB, PBO and PBBO, respectively, would add greater specificity 
regarding the interest to which pegging interest may peg. The Exchange 
also believes that these changes are more consistent with the 
requirements of the Regulation NMS Order Protection Rule \42\ and the 
related definition of protected bid and offer, as set forth in 
Regulation NMS Rule 600(b)(57).\43\ As noted above, Exchange systems 
monitor the PBBO for purposes of the Order Protection Rule and, in this 
respect, Exchange systems also move pegging interest based on moves to 
the PBBO, not the NBBO.\44\ The Exchange believes that this increased 
specificity would perfect the mechanism of a free and open market and a 
national market system and, in general, would protect investors and the 
public interest.
---------------------------------------------------------------------------

    \42\ See supra note 10.
    \43\ See supra note 11.
    \44\ See supra note 12.
---------------------------------------------------------------------------

    Additionally, use of the proposed Market Pegging Interest with an 
offset value, as well as the proposed offset functionality for Primary 
Pegging Interest, would provide greater flexibility with respect to the 
price to which pegging interest may peg and would encourage tighter 
spreads that move as the PBBO moves. The Exchange believes that this 
would remove impediments to, and perfect the mechanism of, a free and 
open market and a national market system. Additionally, requiring an 
offset value to be specified for pegging interest that pegs to the 
opposite side of the market would prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, and 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities by preventing pegging interest 
from locking or crossing the opposite side of the market. The Exchange 
further believes that the proposal fosters competition as other markets 
already offer similar functionality.
    The Exchange also believes that the proposed rule change would 
promote clarity and transparency by adding greater specificity with 
respect to the interest to which pegging interest may peg. In this 
regard, the proposed realignment and consolidation of existing rule 
text would result in a clearer rule, which would benefit all member 
organizations as well as others that read the rule.
    The Exchange further believes that the proposed rule change would 
promote clarity and transparency by removing superfluous rule text that 
merely describes the manner in which all trading interest is treated, 
regardless of whether it is pegging interest. For example, removing the 
text within current Rule 70.26(iv), which provides that pegging 
interest trades on parity with non-pegging interest, would eliminate 
potential confusion regarding whether pegging interest is treated 
differently than non-pegging interest with respect to determining 
parity.
    Finally, the Exchange believes that the proposed change to Rule 72 
to codify which modifications to an order that Exchange systems accept 
and time stamp treatment for such modified orders would promote clarity 
and transparency and therefore remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system 
because the proposed rule change makes clear when a modification to an 
order results in a new time stamp for that order.

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 foregoing proposed rule 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, provided that the self-regulatory 
organization has given the Commission written notice of its intent to 
file 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, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \45\ and Rule 19b-
4(f)(6) thereunder.\46\
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78s(b)(3)(A).
    \46\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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.

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-NYSE-2012-65 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary,

[[Page 71665]]

Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number SR-NYSE-2012-65. 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 such 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-NYSE-2012-65 and should be 
submitted on or before December 24, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29077 Filed 11-30-12; 8:45 am]
BILLING CODE 8011-01-P