[Federal Register Volume 77, Number 241 (Friday, December 14, 2012)]
[Notices]
[Pages 74528-74529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30163]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68385; File No. SR-NYSEARCA-2012-133]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Amending NYSE Arca Equities Rule 7.31(h)(7) To 
Permit PL Select Orders To Interact With Incoming Orders Larger Than 
the Size of the PL Select Order

December 7, 2012.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 27, 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, II, 
and III 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\ 15 U.S.C. 78a.
    \3\ 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 Equities Rule 7.31(h)(7) 
to permit PL Select Orders to interact with incoming orders larger than 
the size of the PL Select Order. 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 NYSE Arca Equities Rule 7.31(h)(7) 
to permit PL Select Orders to interact with incoming orders larger than 
the size of the PL Select Order.
    On September 5, 2012, the Exchange received Commission approval for 
the PL Select Order type, which is a form of a PL Order that does not 
interact with an incoming order that: (i) Has an immediate-or-cancel 
(``IOC'') time in force condition,\4\ (ii) is an ISO,\5\ or (iii) is 
larger than the size of the PL Select Order.\6\ The Exchange 
implemented the new PL Select Order functionality on September 21, 
2012.\7\
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    \4\ See NYSE Arca Equities Rule 7.31(e).
    \5\ See NYSE Arca Equities Rule 7.31(jj).
    \6\ See Securities Exchange Act Release No. 67785 (Sept. 5, 
2012), 77 FR 55888 (Sept. 11, 2012) (SR-NYSEArca-2012-48).
    \7\ See http://www.nyse.com/pdfs/Reminder_NYSE_Arca_Introduces_New_PL_Select_Order_Type.pdf.
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    Based on the few weeks of experience with the new order type, the 
Exchange has identified an unintended business consequence in 
connection with the fact that PL Select Orders do not interact with 
incoming orders that are larger than the size of the PL Select Order. 
Specifically, in limited situations, the existence of a PL Select Order 
may prevent certain incoming opposite side interest from posting to the 
Arca Book. For example, assume that an ETP Holder has entered a PL 
Select Order to sell priced at $10.10 for 100 shares. Assume further 
that the Exchange receives an incoming buy order for 200 shares priced 
at $10.10, which becomes both the Exchange best bid and the National 
Best Bid. Because the arriving buy order is larger than the resting PL 
Select Order, as required by current Rule 7.31(h)(7), the PL Select 
Order would not execute against the arriving $10.10 buy order. By 
contrast, a regular PL Order to sell at $10.10 would have executed 
against the incoming buy order. Because the PL Select Order would not 
execute in this scenario, it remains undisplayed on the Arca Book.
    Assume further that there is now an incoming Add Liquidity Only 
Order (``ALO Order'') to buy priced at $10.10, which is seeking to add 
to the existing bid of $10.10 for 200 shares. As required by NYSE Arca 
Equities Rule 7.31(nn)(3), because there is a resting sell PL Select 
Order at that price, the incoming ALO Order would be rejected. In such 
scenario, both the PL Select Order and the ALO order are operating 
consistently with the rules, but because of the operation of the rules, 
an ETP Holder seeking to add liquidity to the Arca Book with an ALO 
order would be unable to do so, even though there is resting interest 
posted at the same price. The Exchange believes it is appropriate to 
allow ALO orders to be entered in such scenario. By removing the 
requirement that PL Select Orders not interact with larger-sized 
interest, such ALO interest would not need to be rejected, as required 
by Rule 7.31(nn), because the PL Select Order would have executed 
against the larger-sized incoming interest and would no longer be 
resting on the Book.
    The Exchange continues to believe that the rationale initially 
presented for why PL Select Orders should not interact with incoming 
orders larger in size remains valid. Namely, by not interacting with 
incoming orders larger in size, the PL Select Order remains on the Arca 
Book as a mechanism to provide price improvement, rather than be 
executed in a series of inferior prices as a large incoming order 
sweeps the Arca Book. However, while the above-described scenario is 
rare, the Exchange believes that the potential for liquidity-posting 
interest to be rejected outweighs the benefits of having the PL Select 
Order not interact with incoming orders that are larger in size than 
the PL Select Order.

[[Page 74529]]

    In addition, the Exchange notes that some institutional investors 
have raised concerns that by not executing against larger-sized 
interest, PL Select Orders may be bypassing legitimate interest entered 
on behalf of institutional investors. While the Exchange continues to 
believe that the purpose of the PL Select Order not to execute against 
larger-sized interest is consistent with its original intent to 
interact with less impactful orders, the Exchange also recognizes that 
the goal is not to bypass executions with legitimate trading interest, 
and to the extent there is a perception that this may be the case, the 
Exchange believes that the restriction should be lifted.
    Accordingly, the Exchange proposes to amend Rule 7.31(h)(7) to 
delete that PL Select Orders would not interact with incoming orders 
that are larger in size than the PL Select Order.
    Because of the related technology changes that this proposed rule 
change would require, the Exchange proposes to announce the initial 
implementation date via Trader Update.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\8\ in general, and 
furthers the objectives of Section 6(b)(5),\9\ 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange continues to believe that skipping executions with 
larger-sized incoming interest would incentivize Users to route PL 
Orders to the Exchange because such orders would remain available to 
provide price improvement and would not be swept up by such larger-
sized incoming orders. Similarly, because such PL Select Orders would 
remain available to provide price improvement, it could similarly 
incentivize Users to route displayable interest to the Exchange because 
the likelihood of receiving price improvement could increase. However, 
the Exchange believes that the costs associated with rejecting certain 
interest that would otherwise be posting liquidity in the Arca Book 
outweighs the initial rationale for PL Select Orders not to interact 
with incoming interest that is larger than the size of the PL Select 
Order. Accordingly, the Exchange believes that amending Rule 7.41(h)(7) 
to delete that PL Select Orders would not interact with incoming 
interest that is larger in size that the PL Select Order would remove 
impediments to and perfect the mechanism of a free and open market 
because it would eliminate the potential that liquidity adding interest 
would be rejected. Moreover, the Exchange believes that the proposed 
change promotes just and equitable principles of trade to the extent 
that it eliminates any perception that the PL Select Order could be 
bypassing executions with legitimate trading interest entered on behalf 
of institutional investors.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2012-133 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-2012-133. 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 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-NYSEARCA-2012-133, and should be submitted on or before 
January 4, 2013.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30163 Filed 12-13-12; 8:45 am]
BILLING CODE 8011-01-P