[Federal Register Volume 78, Number 82 (Monday, April 29, 2013)]
[Notices]
[Pages 25118-25128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10015]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69427; File No. SR-NYSE-2013-21]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending NYSE Rule 104 To 
Codify Certain Traditional Trading Floor Functions That May Be 
Performed by Designated Market Makers, To Make Exchange Systems 
Available to DMMs That Would Provide DMMs With Certain Market 
Information, To Amend the Exchange's Rules Governing the Ability of 
DMMs To Provide Market Information to Floor Brokers, and To Make 
Conforming Amendments to Other Rules

April 23, 2013.
    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 April 9, 2013, 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 self-
regulatory organization. On April 18, 2013, the Exchange filed Partial 
Amendment No. 1 to the proposal.\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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ In Partial Amendment No., 1, the Exchange filed the Exhibit 
3 which was not included in the April 9, 2013 filing.
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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 proposes to amend NYSE Rule 104 to 
codify certain traditional Trading Floor \5\ functions that may be 
performed by Designated Market Makers (``DMMs''),\6\ to make Exchange 
systems available to DMMs that would provide DMMs with certain market 
information, to amend the Exchange's rules governing the ability of 
DMMs to provide market

[[Page 25119]]

information to Floor brokers, and to make conforming amendments to 
other rules. 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.
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    \5\ NYSE Rule 6A defines the term ``Trading Floor'' to mean, in 
relevant part, ``the restricted-access physical areas designated by 
the Exchange for the trading of securities.''
    \6\ NYSE Rule 2(i) defines the term ``DMM'' to mean an 
individual member, officer, partner, employee or associated person 
of a DMM unit who is approved by the Exchange to act in the capacity 
of a DMM. NYSE Rule 2(j) defines the term ``DMM unit'' as a member 
organization or unit within a member organization that has been 
approved to act as a DMM unit under NYSE Rule 98.
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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 amend NYSE Rule 104 to codify certain 
traditional Trading Floor functions that may be performed by DMMs; 
these functions were previously described in the Exchange's Floor 
Official Manual. In addition, the Exchange proposes to amend its rules 
to make Exchange systems available to DMMs that would provide DMMs with 
certain market information about securities in which the DMM is 
registered. The Exchange also proposes to amend its rules governing the 
ability of DMMs to make available certain order and market information 
to Floor brokers provided that the market participant entering the 
order had not opted out of such availability. Finally, the Exchange 
proposes to make clarifying and conforming amendments to other 
rules.\7\ As described below, the Exchange believes that enabling DMMs 
to perform certain additional Trading Floor functions previously 
performed by specialists would improve the quality of certain 
interactions experienced by investors (specifically, by increasing the 
likelihood of transaction cost-reducing block transactions).
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    \7\ The Exchange's affiliate, NYSE Amex [sic] LLC, has submitted 
substantially the same proposed rule change to the Commission. See 
SR-NYSEMKT-2013-25.
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    Specifically, on October 31, 2011, NYSE and NYSE Amex LLC (``NYSE 
Amex'') each filed with the Commission, pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \8\ and Rule 19b-4 
thereunder,\9\ proposed rule changes to amend Rule 104. The proposals 
were published for comment in the Federal Register on November 17, 
2011.\10\ The Commission received no comment letters on the Proposals. 
On December 22, 2011, the Commission extended the time period to 
February 15, 2012, in which either to approve the Proposals, disapprove 
the Proposals, or to institute proceedings to determine whether to 
disapprove the Proposals.\11\ The Commission received no comment 
letters on the Proposals during the extension. On February 15, 2012, 
the Commission issued an order instituting proceedings to determine 
whether to disapprove the Proposals.\12\ The Commission received six 
comment letters supporting the Proposals after the Commission 
instituted proceedings to determine whether to disapprove the 
Proposals. After the Commission issued a notice of designation of 
longer period for Commission action on May 14, 2012,\13\ the Commission 
disapproved the proposed rule changes on July 13, 2012.\14\
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    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
    \10\ See Securities Exchange Act Release Nos. 65735 (November 
10, 2011), 76 FR 71405 (SR-NYSEAmex-2011-86) (``NYSE Amex Notice'') 
and 65736 (November 10, 2011), 76 FR 71399 (SR-NYSE-2011-56) (``NYSE 
Notice'').
    \11\ See Securities Exchange Act Release No. 66036, 76 FR 82011 
(December 29, 2011).
    \12\ See Securities Exchange Act Release No. 66397, 77 FR 10586 
(February 22, 2012).
    \13\ See Securities Exchange Act Release No. 66981, 77 FR 29730 
(May 18, 2012).
    \14\ See Securities Exchange Act Release No. 67437, 77 FR 42525 
(July 13, 2012) (``Disapproval Order'').
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    As discussed more fully below, the Commission's disapproval was 
based principally on concerns related to the fairness and competitive 
impact of providing certain order information to Floor participants. 
The Exchange is submitting the present filing to provide more detailed 
support demonstrating the consistency of the proposed rule change in 
general, and the provision of such order information in particular, 
with Section 6(b)(5) of the Act and to otherwise address the concerns 
raised by the Commission in its disapproval order. The Exchange 
believes that the Commission's application of the Act's fairness and 
competition-related standards must take specific account of the 
transformational competitive dynamics that have reshaped the role of 
the Floor over the last decade, particularly with the potential of the 
proposal to improve size interactions and reduce transaction costs for 
the public. Accordingly, this filing: (1) Explains the mechanics and 
operation of the proposal; (2) provides an overview of the reshaped 
competitive context within which the Floor operates; and (3) offers 
three detailed scenarios illustrating the potential benefits to the 
public of making the proposed order information available to Floor 
participants and a demonstration of how the proposed availability would 
improve error resolution. The improved order interactions illustrated 
in the scenarios and the demonstration of improved error resolution 
explain in detail why the proposed consensual availability of the order 
information in question should apply not only to orders entered on the 
Floor, but also to orders entered by off-Floor participants.
DMM Trading Floor Functions
    On October 24, 2008, the Commission approved, as a pilot program, 
certain core rules that govern the current operation of the 
Exchange.\15\ These rules embody the Exchange's ``New Market Model.'' 
The New Market Model pilot rules include NYSE Rule 104, which sets 
forth certain affirmative obligations of DMMs, the category of market 
participant that replaced specialists. DMMs have obligations with 
respect to the quality of the markets in securities to which they are 
assigned that are similar to certain obligations formerly held by 
specialists.
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    \15\ Securities Exchange Act Release No. 58845, 73 FR 64379 
(October 29, 2008) (``New Market Model Release'').
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    In addition to their trading-related functions and obligations, 
DMMs, under the New Market Model, provide support on the Trading Floor 
to assist in the efficient operation of the Exchange market and 
maintain fair and orderly markets. These Trading Floor functions were 
performed by specialists before the New Market Model was adopted, and 
described in the Exchange's Floor Official Manual.\16\ Under the New

[[Page 25120]]

Market Model, there is a continued need for DMMs to perform these 
Trading Floor functions. The Exchange proposes to add new subparagraph 
(j)(i) to Rule 104 to codify these historic functions.\17\
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    \16\ See 2004 Floor Official Manual, Market Surveillance June 
2004 Edition, Chapter Two, Section I.A. at 7 (``specialist helps 
ensure that such markets are fair, orderly, operationally efficient 
and competitive with all other markets in those securities''), 
Section I.B.3. at 10-11 (``[i]n opening and reopening trading in a 
listed security, a specialist should * * * [s]erve as the market 
coordinator for the securities in which the specialist is registered 
by exercising leadership and managing trading crowd activity and 
promptly identifying unusual market conditions that may affect 
orderly trading in those securities, seeking the advice and 
assistance of Floor Officials when appropriate'' and ``[a]ct as a 
catalyst in the markets for the securities in which the specialist 
is registered, making all reasonable efforts to bring buyers and 
sellers together to facilitate the public pricing of orders, without 
acting as principal unless reasonably necessary''), Section I.B.4. 
at 11 (``In view of the specialist's central position in the 
Exchange's continuous two-way agency auction market, a specialist 
should proceed as follows * * * [e]qually and impartially provide 
accurate and timely market information to all inquiring members in a 
professional and courteous manner.''), and Section I.B.5. at 12 (A 
specialist should ``[p]romptly provide information when necessary to 
research the status of an order or a questioned trade and cooperate 
with other members in resolving and adjusting errors.''). Relevant 
excerpts of the 2004 Floor Official Manual are attached as Exhibit 3 
of this filing.
    \17\ The Exchange proposes to redesignate the rule text 
currently set forth in section (j) as section (k) of Rule 104.
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    In particular, DMMs perform four categories of Trading Floor 
functions: (1) Maintaining order among Floor brokers manually trading 
at the DMM's assigned panel, including managing trading crowd activity 
and facilitating Floor broker executions at the post; (2) facilitating 
Floor broker interactions, including either participating as a buyer or 
seller, and appropriately communicating to Floor brokers the 
availability of other Floor broker contra-side interest; (3) assisting 
Floor brokers with respect to their orders, including resolving errors 
and, for example, inputting Floor interest into Exchange systems in the 
event of handheld technology outages; and (4) researching the status of 
orders or questioned trades. The current performance of these four 
functions can be illustrated as follows:

    First, a DMM may maintain order among Floor brokers manually 
trading at the DMM's assigned panel. For example, where there is 
significant agency interest in a security, the DMM may help Floor 
Officials maintain order by managing trading crowd activity and 
facilitating the execution of one or more Floor broker's orders 
trading at the post.
    Second, a DMM may bring Floor brokers together to facilitate 
trading, which may include the DMM acting as a buyer or seller. This 
function is consistent with the floor-based nature of the Exchange's 
hybrid market. For example, if a DMM is aware that a Floor broker 
representing buying interest inquired about selling interest in one 
of his or her assigned securities and later a Floor broker 
representing selling interest makes an inquiry about buying 
interest, the assigned DMM may inform the Floor broker representing 
the buying interest of the other Floor broker's selling interest. In 
addition, the DMM itself may provide contra-side interest to a Floor 
broker representing interest at the post.
    Third, DMMs may assist Floor brokers with respect to their 
orders by providing information regarding the status of a Floor 
broker's orders, helping to resolve errors or questioned trades, 
adjusting errors, and cancelling or inputting Floor broker agency 
interest on behalf of a Floor broker. For example, if a Floor 
broker's handheld device is not operational, the DMM may assist the 
Floor broker by entering or canceling broker interest on the Floor 
broker's behalf.\18\
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    \18\ The Exchange maintains a full audit trail of all Floor 
broker orders, including information reflecting entry, modification, 
cancellation, and execution of such orders.
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    Fourth, DMMs may research the status of orders or questioned 
trades. DMMs may do so on their own initiative or at the request of 
the Exchange or a Floor broker when a Floor broker's hand-held 
device is not operational, when there is activity indicating that a 
potentially erroneous order was entered or a potentially erroneous 
trade was executed, or when there otherwise is an indication that 
improper activity may be occurring.
DMM Access to Exchange Systems
    The Exchange proposes to amend Rule 104 to add new subparagraph 
(j)(ii), which would state that the Exchange may make systems available 
to a DMM at the post that display the following types of information 
about securities in which the DMM is registered: (a) Aggregated 
information about buying and selling interest; \19\ (b) disaggregated 
information about the price and size of any individual order or Floor 
broker agency interest file, also known as ``e-Quotes,'' except that 
Exchange systems would not make available to DMMs information about any 
order or e-Quote, or portion thereof, that a market participant has 
elected not to display to a DMM; and (c) post-trade information. For 
the latter two categories, the DMM would have access to entering and 
clearing firm information and, as applicable, the badge number of the 
Floor broker representing the order. The systems would not contain any 
information about the ultimate customer (i.e., the name of the member 
or member organization's customer) in a transaction. Importantly, 
aggregated information at each price level about buying and selling 
interest that is not marked dark is already visible to DMMs. Similarly, 
aggregated information for interest not marked dark is visible to any 
market participant beyond the Floor via OpenBook.\20\
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    \19\ Exchange systems make available to DMMs aggregate 
information about the following interest in securities in which the 
DMM is registered: (a) All displayable interest submitted by off-
Floor participants; (b) all Minimum Display Reserve Orders, 
including the reserve portion; (c) all displayable Floor broker 
agency interest files (``e-Quotes''); (d) all Minimum Display 
Reserve e-Quotes, including the reserve portion; and (e) the reserve 
quantity of Non-Display Reserve e-Quotes, unless the Floor broker 
elects to exclude that reserve quantity from availability to the 
DMM.
    \20\ Floor brokers currently have the ability to make an order 
visible to the DMM but not in OpenBook. They would maintain that 
ability under the proposed rule.
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    Under the proposed rule change, Exchange systems would make 
available to DMMs disaggregated information about the following 
interest in securities in which the DMM is registered: (a) The price 
and size of all displayable interest submitted by off-Floor 
participants; and (b) all e-Quotes, including reserve e-Quotes, that 
the Floor broker has not elected to exclude from availability to the 
DMM.\21\ Importantly, both Floor brokers and off-Floor participants 
would have the continued ability to enter partially or completely 
``dark'' orders that are not visible to the DMM, which would prevent 
any communication about such interest between the DMM and Floor 
brokers. The Exchange believes that it is appropriate to provide DMMs 
with this disaggregated order information because the information will 
assist DMMs in carrying out their Trading Floor functions. In addition 
to the potential for improved interaction of larger-sized orders 
illustrated by the three scenarios and related information below, 
providing DMMs with access to the disaggregated order information will 
contribute to the DMMs' ability to carry out their responsibility for 
managing the auction market process at the Exchange, which includes the 
function of bringing buyers and sellers together to facilitate trading. 
The proposed rule change would specifically prohibit DMMs from using 
any trading information available to them in Exchange systems, 
including disaggregated order information, in a manner that would 
violate the Exchange rules or federal securities laws or regulations.
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    \21\ The Exchange previously permitted DMMs to have access to 
Exchange systems that contained the disaggregated order information 
described above. The Exchange stopped making such information 
available to DMMs on January 19, 2011. See Information Memo 11-03.
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    The Exchange believes that the proposed rule change would 
contribute substantially to the fair and orderly operation of the 
Exchange Trading Floor. As illustrated in detail below, the proposed 
consensual availability of the order information in question offers the 
potential for improved error resolution. DMM assistance at the post 
through the performance of the Trading Floor functions continues to be 
an invaluable resource to minimize any disruption to the market, 
particularly if the Exchange or a customer is experiencing a systems 
issue; the Exchange systems that provide disaggregated order 
information play a pivotal role in that assistance. Allowing DMMs to 
have access to those Exchange systems to perform the Trading Floor 
functions is more efficient

[[Page 25121]]

than diverting Exchange resources to attend to individual Floor broker 
issues, particularly when the DMMs are ready and able to perform the 
same functions.
Ability of DMMs To Provide Market Information on the Trading Floor
    The Exchange proposes to modify the terms under which DMMs would be 
permitted to provide market information to Floor brokers and visitors 
on the Trading Floor. Specifically, Rule 104(j)(iii) would permit a DMM 
to provide the market information to which he or she has access under 
proposed Rule 104(j)(ii) to: (1) A Floor broker in response to an 
inquiry in the normal course of business; or (2) a visitor to the 
Trading Floor for the purpose of demonstrating methods of trading. This 
aspect of the proposal builds on and modifies current NYSE Rule 115, 
and the Exchange therefore proposes to delete NYSE Rule 115, which 
covers the same subject.\22\
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    \22\ Rule 115 will be redesignated as ``Reserved.'' The Exchange 
further proposes to make conforming amendments to Rules 13, 98 
Former, and 104(a)(6).
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    Currently, NYSE Rule 115 provides that a DMM may disclose market 
information for three purposes. First, a DMM may disclose market 
information for the purpose of demonstrating the methods of trading to 
visitors on the Trading Floor. This aspect of current Rule 115 would be 
replicated in proposed Rule 104(j)(iii)(B). Second, a DMM may disclose 
market information to other market centers in order to facilitate the 
operation of the Intermarket Trading System (``ITS''). This text is 
obsolete as the ITS Plan has been eliminated and therefore would not be 
included in amended Rule 104.\23\ Third, a DMM may, while acting in a 
market making capacity, provide information about buying or selling 
interest in the market, including: (a) Aggregated buying or selling 
interest contained in Floor broker agency interest files other than 
interest the broker has chosen to exclude from the aggregated buying 
and selling interest; (b) aggregated interest of Minimum Display 
Reserve Orders; and (c) the interest included in DMM interest files, 
excluding Capital Commitment Schedule (``CCS'') interest as described 
in Rule 1000(c), in response to an inquiry from a member conducting a 
market probe \24\ in the normal course of business.
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    \23\ See Securities Exchange Act Release No. 55397 (March 5, 
2007), 72 FR 11066 (March 12, 2007) (Intermarket Trading System; 
Notice of Filing and Immediate Effectiveness of the Twenty Fourth 
Amendment to the ITS Plan Relating to the Elimination of the ITS 
Plan).
    \24\ Generally, a market probe refers to when a Floor broker is 
seeking to ascertain the depth of the market in a security to 
determine at what price point a security may trade. However, it is a 
term of art whose meaning is not codified.
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    Proposed Rule 104(j)(iii) would permit DMMs also to provide 
disaggregated and post-trade order information to Floor brokers.\25\ 
Broadening the scope of information that DMMs can provide Floor brokers 
will assist DMMs with carrying out their historical function of 
bringing Floor brokers together to facilitate block and other large 
transactions, as demonstrated by the scenarios illustrated herein. The 
Exchange notes that the proposed visibility is not without precedent--
Rule 115 previously allowed Exchange specialists to provide 
disaggregated order information to Floor brokers prior to adoption of 
the Hybrid Market.\26\ And, as noted above, both Floor brokers and off-
Floor participants currently have and will continue to have the ability 
to enter partially or completely ``dark'' orders that are not visible 
to the DMM. DMMs, in other words, would be unable to see or disseminate 
information about such ``dark'' orders or the dark portion of the 
orders in response to an inquiry from a Floor broker. When providing 
information, the individual DMM is responsible for fairly and 
impartially providing accurate and timely information to all inquiring 
Floor brokers about buying and selling interest in his or her assigned 
security.
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    \25\ Because DMMs on the Trading Floor do not have access to CCS 
interest information, the proposed rule does not specify that DMMs 
would not be disseminating such information.
    \26\ See NYSE Regulation Information Memo 05-5 (stating that, 
under Rule 115, specialists may disclose the identity of the members 
or member organizations representing any orders entrusted to the 
specialist). The Exchange amended Rule 115 in connection with the 
Hybrid Market because at that time, there was no way for Floor 
brokers to enter fully dark electronic interest. Now that Exchange 
systems can accept fully dark electronic interest from both Floor 
brokers and off-Floor participants, the Hybrid Market change to Rule 
115 has been obviated and the rule can return to its former status.
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    Proposed Rule 104(j)(iii) also would permit a DMM to provide market 
information to a Floor broker in response to a specific request by the 
Floor broker to the DMM at the post, rather than specifying that the 
information must be provided ``in response to an inquiry from a member 
conducting a market probe in the normal course of business,'' as 
currently provided in Rule 115. The Exchange believes that the term 
``market probe'' no longer accurately reflects the manner in which DMMs 
and Floor brokers interact on the Trading Floor. Rather, the Exchange 
believes that the Floor broker's normal course of business, as an agent 
for customers, includes both seeking market probes into the depth of 
the market as well as seeking out willing contra-side buyers and 
sellers in a particular security. In addition, the rule would specify 
that a Floor broker may not submit an inquiry to the DMM by electronic 
means and that the DMM may not use electronic means to transmit market 
information to a Floor broker in response to an inquiry. Under the 
proposed rule change, Floor brokers would not have access to Exchange 
systems that provide disaggregated order information, and they would 
only be able to access such market information through a direct 
interaction with a DMM at the post.
    The Exchange believes that providing Floor brokers with access to 
the disaggregated order information would serve a valuable function by 
increasing the ability of Floor brokers to source liquidity and provide 
price discovery for block transactions, as demonstrated in the three 
detailed scenarios below. In particular, the ability of Floor brokers 
to receive the disaggregated order information should, in turn, enhance 
their ability to facilitate transactions for their customers by 
identifying market participants with trading interest that could trade 
with the Floor brokers' customers. Floor brokers have historically 
served this role on behalf of their customers, which include 
institutional clients and block-trading desks, and they continue to 
perform this agency function today.
Effect of Market Structural Changes on the Exchange and the Floor
    Before illustrating in detail how the proposed changes will 
facilitate block trades and expedite error resolution, the Exchange 
believes it is essential to take into account the structural and 
competitive changes the Exchange and the Floor have experienced in 
recent years. Indeed, the Act's fairness and competition-related 
standards cannot appropriately guide the Commission's review absent a 
concrete recognition of the reshaped competition of the Exchange and 
the Floor and the array of execution choices available to market 
participants today. Toward that end, it must be recognized that the 
Exchange has undergone fundamental, structural changes since 2006 and 
has been reshaped by the competitive dynamics that have accompanied 
these changes. The reforms and the intensely competitive environment 
within which they have taken place have their roots in the Commission's 
effort to modernize and strengthen the national market system for 
equity securities through

[[Page 25122]]

Regulation NMS.\27\ In particular, in March 2006, the Commission 
approved the beginning of NYSE's historic shift ``from a floor-based 
auction market with limited automated order interaction to a more 
automated market with limited floor-based auction market 
availability.'' \28\ With the approval of the ``Hybrid Market,'' the 
NYSE began the substantial expansion of automatic execution and the 
ability of its Floor members to participate in its automated market 
electronically.\29\ At the time of approval, automatic executions on 
the NYSE represented approximately 11% of its market share volume, and 
the bulk of executions occurred manually in its floor-based 
auction.\30\ The average speed of execution was over ten seconds.\31\ 
In 2005, the average trade size in NYSE-listed securities was 724 
shares.\32\ NYSE's share of consolidated volume in NYSE-listed names 
for the year preceding the approval of the Hybrid Market was 79.1%.\33\
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    \27\ See Securities Exchange Act Release No. 51808, 70 FR 37496 
(June 29, 2005) (``NMS Adopting Release'').
    \28\ See Securities Exchange Act Release No. 53539, 71 FR 16353 
(March 31, 2006).
    \29\ Id.
    \30\ Id.
    \31\ See Securities Exchange Act Release No. 61358, FR 3594, 
3595 (January 21, 2010) (``Equity Market Structure Release'').
    \32\ Id.
    \33\ Id. at 3595.
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    Roughly two years later, the NYSE proposed further and substantial 
structural reforms with its New Market Model.\34\ Foremost in 
significance were: (1) The phasing out of the specialist system and the 
concurrent creation of the DMM; (2) the alteration of the NYSE's 
longstanding priority and parity rules to allow DMMs to trade on equal 
footing with other market participants where the specialist previously 
had been obligated to yield to public customer orders in the book; and 
(3) the elimination of the advance electronic ``look'' at incoming 
orders that had been a historical feature of the specialist system.\35\ 
By 2009, the average speed of execution was less than a second, and the 
average trade size in NYSE-listed securities had fallen to 268 
shares.\36\ In 2009, the year following the adoption of the New Market 
Model, NYSE's share of consolidated volume in NYSE-listed names was 
25.1%.\37\ At the risk of stating the obvious, these transformative 
changes have had the effect of reducing substantially the scope and 
utility of market information accessible to DMMs and Floor brokers--a 
perspective from a point of sale with roughly 80% market share differs 
starkly from one with less than 25%. Such changes demonstrate the 
flexibility that the market has with respect to utilizing different 
venues and various market models that best suit their needs.
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    \34\ See New Market Model Release.
    \35\ Id. at 64380, 64387-88.
    \36\ Id.
    \37\ Equity Market Structure Release at 3595.
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    Today, the Exchange continues to operate a limited Floor-based 
auction model. Not surprisingly, the Floor itself reflects directly the 
transformation recounted above. The current Floor broker community is 
distinguished in significant part by its embrace of technology, as 
reflected by the introduction of Floor broker algorithms in 2009. 
Though competitive dynamics have reduced the Floor's numbers, 
significant demand remains among the most informed market participants 
for the technology-enabled services of today's Floor brokers.
    The Exchange seeks to compete by offering market participants a 
product that is entirely distinct from the trading venues of its 
competitors in one essential respect--the integration of human judgment 
into the price discovery process at a single, physical point of sale 
for each security.\38\ This product stands more or less alone among a 
diverse array of completely automated execution venues available to 
investors today. It is important to note that the nature and extent of 
the integration of human judgment, delivered through DMMs and Floor 
brokers, is driven by the demands of informed consumers--there is no 
shortage of competing execution venues that have no DMMs, Floor brokers 
or substantial equivalents. Moreover, those market participants who 
choose to trade on the Exchange have no obligation to utilize the 
services of a Floor broker, or to use those services in a particular 
way. Whether and how Floor brokers are used today reflects directly, in 
other words, the judgment of market participants as to the value the 
Floor adds.
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    \38\ See S. Rept. 94-75 (1975) (``This is not to say that it is 
the goal of [the 1975 Amendments] to ignore or eliminate 
distinctions between exchange markets and over-the-counter markets 
or other inherent differences or variations in components of a 
national market system. Some present distinctions may tend to 
disappear in a national market system, but it is not the intention 
of the bill to force all markets for all securities into a single 
mold.'')
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    As demonstrated below, this wholly consensual integration of human 
judgment at the point of sale, and in particular the visibility of 
certain limited order information discussed herein to DMMs and Floor 
brokers, serve legitimate Floor functions (as well as broader market 
structure goals) in three important respects. They: (1) Increase the 
possibility that buyers and sellers of size positions can meet, thereby 
enhancing opportunities to reduce transaction costs; (2) expedite the 
discovery and resolution of errors, thereby reducing disruptive impacts 
and promoting fair and orderly markets; and (3) leverage the informed 
choices of users, allowing the interplay of competitive forces to 
determine the scope and nature of human interaction in the price 
discovery process.\39\ Acute concerns with respect to the potential 
benefits of the referenced order information in the hands of DMMs and 
Floor brokers, the Exchange respectfully submits, are misplaced. The 
information in question would add only a view of the components and the 
entering and clearing firm (not the customer) for trading interest that 
is already visible in the aggregate to DMMs today. Given the clear 
obligations of DMMs and the strictly agency capacity of Floor brokers, 
the benefit attributable to the proposed visibility would enure to the 
benefit of the customer or member placing the order, not the DMM or 
Floor broker. The utility of the information, therefore, lies in its 
potential to bring buyers and sellers of size together, not to 
advantage intermediaries.
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    \39\ See H.R. Rept. 94-229 (1975).
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Benefits of Proposed Rule to Trading Floor and Investors
    The Commission's Disapproval Order focused on the availability to 
DMMs and communication by DMMs to Floor brokers of disaggregated order 
information (specifically, the price and size of individual orders and 
the identity of the entering and clearing firms for such orders). 
Before turning to the particulars of the Disapproval Order, the 
Exchange would respectfully underscore its contention that the acute 
concern with respect to the availability of disaggregated order 
information to DMMs and Floor brokers is misplaced. The incremental 
information to be made available is demonstrably useful to DMMs, as 
illustrated in the scenarios and situations below, in bringing together 
buyers and sellers of block positions and in expediting the resolution 
of errors and would thereby promote both order interaction and orderly 
markets. However, the information simply does not add to a DMMs trading 
view in any meaningful way. It does no more than make visible to the 
DMM and available to Floor brokers the component orders of trading 
interest that is already visible to the DMM in the aggregate (and to 
off-Floor market participants via OpenBook) and the entering and 
clearing firm and Floor

[[Page 25123]]

broker, if any. Importantly, the benefit attributable to the 
availability of such information would accrue as a practical matter to 
the customer or member organization behind a trade and not to the DMM 
or Floor broker involved in the trade.
    In finding that the proposed rule changes were not consistent with 
the requirements of the Act, the Commission stated that: (1) The 
Exchange and commenters had not explained how the particular 
information proposed to be provided would further legitimate Floor 
functions; (2) the Exchange was ``not proposing to require any 
additional obligations from DMMs and Floor brokers in exchange for the 
additional information''; (3) the Commission was concerned that the 
benefit to Floor members of receiving disaggregated order information 
may be more than slight, ``particularly with respect to less liquid 
securities where order information is less likely to become rapidly 
stale''; and (4) the provision of disaggregated order information to 
Floor Members and, by extension exclusively to Floor broker customers 
``could have a detrimental effect on competition between on-Floor and 
off-Floor members of the Exchanges.'' This revised proposed rule change 
addresses these concerns.
Scenarios Illustrating How the Particular Information Proposed To Be 
Provided Would Further Legitimate Floor Functions
    The Commission stated in the Disapproval Order that neither the 
Exchange nor the commenters have explained how making available 
``disaggregated information about public orders on the Exchange books 
as well as Floor broker e-Quotes'' to DMMs and Floor brokers would 
further legitimate Floor functions. The scenarios below illustrate how 
the particular information proposed to be provided--the price and size 
of individual orders, the identity of the entering and clearing firm, 
and Floor broker badge number for such orders--would serve the goals of 
facilitating block trades and expediting error resolution. Importantly, 
each of the scenarios makes clear that the benefits to the public flow 
from not only the proposed consensual availability of the information 
in question for orders entered on the Floor, but also those entered by 
off-Floor participants.
Scenario 1: DMM Facilitates Block Trade Between Floor Broker and 
Upstairs Seller by Sharing Price, Size, and Entering Firm
    Assume a pension fund customer gives Floor broker a 20,000 share 
order to buy ABC, a mid-cap stock, at up to $10.08 at 11:00 a.m. when 
the PBBO for the stock is $10.03 by $10.06 with 500 shares on displayed 
on each side. There is no crowd at the ABC post at the time the order 
is received, but Floor broker can see from the tape that the stock is 
trading electronically on the Exchange. On the book a penny away from 
the inside offer at $10.07, there is a sell order for 10,000 that has 
been entered by Member Organization. There is no Floor broker 
representing the sell order, and there are no Floor broker e-Quotes on 
the book. Floor broker tells DMM for ABC that he or she represents a 
buyer of size beyond the displayed market. Currently, the DMM is 
permitted to inform the Floor broker of the aggregate selling interest 
at different price points on the book, but may not access or provide 
the identity of the Member Organization--an off-floor participant--that 
entered such selling interest. Under the proposed rule, the DMM could 
inform Floor broker that the off-Floor Member Organization is an 
entering firm for an order to sell 10,000 shares at $10.07. Floor 
broker could then contact the upstairs desk of Member Organization or 
Member Organization's on-floor representative, if any, who could then 
contact his or her upstairs desk, to explore a possible transaction.
    Assume that the 10,000 share sell order that Member Organization 
sent to the Exchange is a child of a 30,000 order entered 
electronically by a mutual fund customer into Member Organization's 
customer-facing execution management system with non-displayed price 
discretion to $10.05. (The parent order size and price discretion 
obviously would not be visible to the DMM or Floor broker.) Knowing 
Member Organization's identity and the size and price of the trading 
interest Member Organization has entered into Exchange systems, the 
Floor broker may now contact Member Organization or Member 
Organization's on-floor representative and the Floor broker can 
indicate the size of the buying interest he or she is representing. In 
this respect, the Floor broker now can enter into negotiations 
directly, similar to how off-Floor participants, particularly broker 
dealers that internalize flow from their customers, can reach out 
directly to other broker dealers to negotiate block-sized trades. By 
making contact, Member Organization and Floor broker may agree to do a 
larger transaction at a more aggressive price. Assume Floor Broker and 
Member Organization agree to 20,000 shares at $10.05.
    Both sides of the trade would have secured a size transaction 
within the parameters of their stated limit. More importantly, both 
would have avoided the potential market impact that a series of smaller 
size transactions might have produced. The transaction in all 
likelihood would not have occurred without the Floor broker's knowledge 
of the price and size of the order and the identity of the Member 
Organization entering it. The Floor broker, in other words, would have 
had no incentive to reveal that he or she represented a buyer without 
the meaningful possibility of an interaction that was indicated by the 
size and price of the trading interest and the identity of the Member 
Organization representing it.
    The Disapproval Order notes that the Commission can envision an 
argument whereby enabling DMMs to see Floor broker e-Quotes or the 
identity of Floor brokers would facilitate the bringing together of 
buyers and sellers of large orders, apparently suggesting that limiting 
DMM visibility to this Floor broker interest would serve this end of 
order interaction effectively. The above scenario illustrates why 
limiting access only to other Floor broker interest would ignore a 
large segment of the trading population, and limit the ability of 
buyers and sellers to negotiate directly, regardless of their location. 
Specifically, allowing DMMs to access the disaggregated information of 
off-Floor participants permits DMMs to facilitate block transactions 
between Floor brokers and those same off-Floor participants. In the 
above scenario, the member organization that has not elected to utilize 
a Floor broker is still able to benefit from the proposed rule changes 
by permitting his order information to be relayed to Floor brokers on a 
disaggregated basis. And importantly, the member organization has 
permitted the order information to be relayed on a disaggregate basis: 
If the member organization determines that the cost of exposing an 
order on a disaggregated basis outweighs any potential benefit, then 
the member organization can enter the order dark. Thus, the member 
organization can determine--on an individual basis--the benefits and 
costs of the permitting its own information disclosed on a 
disaggregated basis. Visibility of price, size, and entering firm opens 
up a wider range of wholly consensual channels of communication that 
more fully and effectively enhance the potential for order interaction. 
Put another way,

[[Page 25124]]

Member Organization remains at all time in full control of the 
information he or she is duty-bound to protect as agent for the mutual 
fund seller--when entering the order on the Exchange and making it 
visible to the DMM and Floor brokers (i.e., Member Organization could 
have decided to enter the order dark), and when he engages with Floor 
broker following Floor broker's initiation of contact (i.e., Member 
Organization could have declined to engage with the Floor broker when 
he or she initiated contact). Moreover, with Floor broker share of 
Exchange volume currently at approximately 9%, the contra-side interest 
represented by a Floor broker in any given situation will likely be 
only a small subset of total available interest.
Scenario 2: DMM Facilitates Block Trade by Sharing Post-Trade 
Information With Floor Broker
    An interaction similar to Scenario 1 could be facilitated by a DMM 
sharing post-trade information with a Floor broker pursuant to the 
proposed rule. Assume Floor broker has the same 20,000 share order to 
buy ABC from his or her pension fund customer. Assume in this scenario 
that Member Organization has no current interest entered in Exchange 
systems, but was a seller on the Exchange earlier in the day. Assume 
the upstairs desk of Member Organization has the same parent order of 
30,000 shares of ABC as in Scenario 1. Floor broker approaches the DMM 
and asks if there is enough sell-side interest to accommodate. DMM 
tells Floor broker that there is no interest to accommodate, but that 
Member Organization was a seller earlier in the day. As in Scenario 1, 
assume there is no Floor broker representing the seller. Floor Broker 
approaches the upstairs desk of Member Organization or Member 
Organization's on-floor representative, if any, who could then contact 
his or her upstairs desk, and achieves the same result as in Scenario 
1. As with Scenario 1, the benefit of the interaction illustrated here 
stems from the consensual availability of information related to orders 
entered by an off-Floor participant.
Scenario 3: DMM Facilitates Block Issuer Repurchase Transaction by 
Sharing Price, Size, and Entering Firm
    Assume an Exchange-listed issuer engages a Floor broker to handle a 
Rule 10b-18 repurchase with a goal of repurchasing 500,000 shares at a 
maximum price of $10.15. Assume the highest current independent 
published bid is $10.03, the last independent transaction price 
reported was $10.08, and the offer is quoted at $10.07. The issuer 
wishes to make a block purchase of up to 100,000 at $10.07 or 
better.\40\ The Floor broker approaches the DMM and asks about selling 
interest at the $10.07 price level. Under the proposed rule, the DMM 
could inform Floor broker that Member Organization is a seller of 
10,000 shares at $10.07. Assume as in the prior scenarios that there is 
no Floor broker representing the selling interest and that the Floor 
broker initiates contact with the upstairs desk of Member Organization 
or Member Organization's on-floor representative, if any, who could 
then contact his or her upstairs desk, and finds additional selling 
interest upstairs as in Scenario 1. Assume the Floor broker and Member 
Organization agree upon a transaction of 100,000 shares at $10.07.
---------------------------------------------------------------------------

    \40\ Rule 10b-18 provides an issuer with a safe harbor from 
liability under Section 9(a)(2) of the Act and Rule 10b-5 under the 
Act based on the manner, timing, price, and volume of their 
repurchased when in accordance with Rule 10b-18's conditions. Rule 
10b-18(b)(4) provides the condition that the total volume of the 
purchases cannot exceed 25 percent of the average daily total volume 
for that security; however, once per week the issuer may make one 
block purchase without regards to the volume limit if no other Rule 
10b-18 purchase takes place on the same day and the block purchase 
is not included when calculating a security's four week average 
daily total volume.
---------------------------------------------------------------------------

    In this scenario, the issuer receives a large fill at better than 
the last independent transaction price, and both sides have minimized 
the impact of their transaction. As the Commission has previously 
stated in considering block purchases by issuers, ``the market impact 
of a block purchase is likely to be less than that of a series of 
purchases of smaller amount that in the aggregate are equal in size to 
the block but are accomplished over a period of time.'' \41\ As with 
Scenarios 1 and 2, the benefit to the repurchasing issuer and the 
seller illustrated here stems from the consensual availability of 
information related to orders entered by an off-Floor participant.
---------------------------------------------------------------------------

    \41\ See Exchange Act Release No. 17222 (October 17, 1980) 
(``10b-18 Proposing Release''). Rule 10b-18 was originally proposed 
as Rule 13e-2.
---------------------------------------------------------------------------

Situations Where DMM Access to Entering Firm's Identity Would Prevent 
Errors or Expedite Resolution Thereof
    In addition to promoting the interaction of buyers and sellers in 
size transactions, DMM access to the identity of firms entering 
individual orders would improve a DMM's ability to identify erroneous 
trades and to intervene where entering firms, whether a Floor broker or 
off-Floor participant, are experiencing technology problems. The 
proposed visibility would expedite the identification and possible 
prevention of such errors. Moreover, the Exchange's recent experience 
in identifying the source of millions of unintended trades in more than 
150 symbols attributable to a member's software malfunction \42\ 
confirms the potential contribution of the proposed visibility to the 
diagnosis and resolution of problems and the maintenance of orderly 
markets. Specifically, in that situation, the DMMs were the first to 
identify the anomalous trades and report the trades to Exchange 
officials. The Exchange believes that had DMMs also been able to see 
the commonality of the entering firm in the spike of incoming orders, 
the source of the disruption may have been identified more quickly, 
potentially avoiding millions of dollars in firm losses. Finally, 
entering firm information can serve to mitigate the effect of less 
severe but still important technology problems, such as Floor broker 
handheld outages. DMMs currently are unable to identify individual 
Floor broker orders and cancel them during handheld outages; the 
proposed rule would enable them to perform this important function.
---------------------------------------------------------------------------

    \42\ Loss Swamps Trading Firm, Wall Street Journal, August 2, 
2012.
---------------------------------------------------------------------------

Burdens Placed on DMMs and Floor Brokers
    The Disapproval Order notes that the Exchange was ``not proposing 
to require any additional obligations from DMMs and Floor brokers in 
exchange for the additional information.'' \43\ As noted above, the 
Exchange does not believe the additional information adds

[[Page 25125]]

meaningfully to the trading view of the DMM, and that any such addition 
would benefit customers, not DMMs and Floor brokers. Indeed, the 
function of providing disaggregated order information to Floor brokers 
upon request would be an administrative burden to DMMs rather than a 
benefit. Additionally, as noted above, Floor brokers, as agents, would 
receive no benefit attributable to the information, as such benefit 
would flow directly and entirely to the customer whose order they are 
representing and the contra side to it. Moreover, the Exchange 
believes, based on fundamental changes in the competitive context since 
the approval of the New Market Model and the continuing and significant 
obligations of DMMs and Floor brokers, that the proposed availability 
of disaggregated order information would not constitute a 
disproportionate benefit. In other words, the potential value of the 
information in question has been substantially diminished since 2006 in 
that that DMMs only have information about orders at the Exchange, 
which represent approximately 22% of market-wide volume in Exchange-
listed stocks across the market.
---------------------------------------------------------------------------

    \43\ See Disapproval Order at 10. The Exchange believes that a 
close reading of the precedent indicates that this level of scrutiny 
of the incremental obligations associated with a proposal such as 
this one is not required. The source of the scrutiny stems from New 
Market Model Order in which the NYSE proposed fundamental structural 
changes, including phasing out the specialist system and a wholesale 
alteration of the NYSE's historic priority and parity rules. See 
Securities Exchange Act Release No. 58845, 73 FR 64379 (October 29, 
2008) (``New Market Model Release''). What was proposed in the New 
Market Model, in other words, called for a review by the Commission 
that was necessarily intense, in stark contrast with the modest 
changes proposed here. Additionally, in support of what would be 
regarded as ``special advantages'' and ``rewards that are not 
disproportionate to the services provided,'' the Commission 
previously cited a series of orders approving proposals that 
generally involve the creation or registration of a new class of 
market maker or participation of an existing class in a new market. 
Those proposals, similar to the New Market Model, were structural in 
nature and in stark contrast to the limited nature of this proposed 
rule change. Furthermore, the principal market participant impacted 
by the present proceeding, Floor brokers, is not a market maker at 
all, but an agent, rendering much of the referenced precedent 
factually distinct. Accordingly, the Exchange respectfully suggests 
that the level of scrutiny associated with the precedents cited is 
not required here.
---------------------------------------------------------------------------

    Notwithstanding the DMM's evolving role in the overall trading of 
Exchange-listed securities, the obligations and restrictions placed on 
DMMs and Floor brokers have remained unchanged. In addition, the manual 
process by which disaggregated order information is accessed reduces to 
a minimum any potential benefit. As demonstrated by the scenarios 
above, perhaps its principal value is the opportunity it offers to open 
a consensual dialogue with a counterparty--an opportunity aligned with 
both the interests of other Floor and non-Floor members as well as 
investors. The disaggregated order information, while inconsequential 
from a trading perspective, is thus important administratively in 
clearing the way to size interactions, reducing transaction costs, and 
enhancing the quality of the Exchange's market.
    Specifically, with respect to the continuing and significant 
burdens on DMMs, pursuant to NYSE Rule 104, a function of a DMM is:

    [T]he maintenance, in so far as reasonably practicable, of a 
fair and orderly market on the Exchange in the stocks in which he or 
she is so acting. The maintenance of a fair and orderly market 
implies the maintenance of price continuity with reasonable depth, 
to the extent possible consistent with the ability of participants 
to use reserve orders, and the minimizing of the effects of 
temporary disparity between supply and demand. In connection with 
the maintenance of a fair and orderly market, it is commonly 
desirable that a member acting as DMM engage to a reasonable degree 
under existing circumstances in dealings for the DMM's own account 
when lack of price continuity, lack of depth, or disparity between 
supply and demand exists or is reasonably to be anticipated.\44\
---------------------------------------------------------------------------

    \44\ See NYSE Rule 104(a)(1).

    Additionally, any transaction by a DMM for the DMM's account must 
``be effected in a reasonable and orderly manner in relation to the 
condition of the general market and the market in the particular 
stock.'' \45\
---------------------------------------------------------------------------

    \45\ See NYSE Rule 104(g).
---------------------------------------------------------------------------

    Furthermore, the Exchange notes that any non-public market 
information that a DMM receives through Exchange systems would be 
subject to specific restrictions as ``non-public order information'' 
\46\ under Exchange Rule 98. For example, Exchange Rule 98(c)(2)(A) 
would require DMMs to maintain the confidentiality of any such non-
public market information and would prohibit the DMM member 
organization's departments, divisions, or aggregation units that are 
not part of the DMM unit, including investment banking, research, and 
customer-facing departments, from having access to that information. In 
addition, Rule 98 sets forth restrictions on access to non-public order 
information by the off-Floor locations of a DMM unit, including 
restrictions on the ability of a DMM located on the Trading Floor from 
communicating directly with off-Floor individuals or systems 
responsible for making off-Floor trading decisions.\47\
---------------------------------------------------------------------------

    \46\ NYSE Rule 98(b)(7) defines the term ``non-public order'' to 
mean ``any order, whether expressed electronically or verbally, or 
any information regarding a reasonably imminent non-public 
transaction or series of transactions entered or intended for entry 
or execution on the Exchange and which is not publicly available on 
a real-time basis via an Exchange-provided datafeed, such as NYSE 
OpenBook[supreg] or otherwise not publicly available. Non-public 
orders include order information at the opening, re-openings, the 
close, when the security is trading in slow mode, and order 
information in the NYSE Display Book[supreg] that is not available 
via NYSE OpenBook[supreg].''
    \47\ See Rules 98(d)(2)(B)(i)-(iii), (f)(1)(A)(i)-(ii), and 
(f)(3)(C)(ii). In addition, Rule 98(c)(2)(A)(ii) provides that a DMM 
may make available to a Floor broker associated with an approved 
person or member organization any information that the DMM would be 
permitted to provide under Exchange rules to an unaffiliated Floor 
broker.
---------------------------------------------------------------------------

    The manner by which the DMM would access disaggregated order 
information aligns precisely with the information's relative lack of 
trading utility and its administrative significance in facilitating 
size interactions. A DMM can access the disaggregated order information 
only while located at the post on the Trading Floor, and a DMM's 
ability to access the disaggregated order information is largely 
manual. The DMM must query the specific information about a particular 
security, which limits the number of securities about which 
disaggregated order information can be accessed at any given time. 
Importantly, Exchange systems would not provide disaggregated order 
information to the algorithmic trading systems of any DMM unit,\48\ and 
would not support any electronic dissemination of the disaggregated 
order information to other market participants. As noted above, 
participants who do not want the DMM to have access to disaggregated 
order information have the option to enter dark interest that is not 
visible to the DMM in disaggregated form. The Exchange also notes that 
the proposed rule change would specifically prohibit DMMs from using 
any trading information available to them in Exchange systems, 
including disaggregated order information, in a manner that would 
violate the Exchange rules or federal securities laws or 
regulations.\49\
---------------------------------------------------------------------------

    \48\ The order information in these systems would be available 
for a DMM to view manually at the post and as such is different from 
the advance order-by-order information that DMM trading algorithms 
previously received before implementation of the New Market Model 
pilot (sometimes referred to as ``the look''). Under the proposed 
rule change, as is the case today, DMM trading algorithms would have 
the same information with respect to orders entered on the Exchange, 
Floor broker agency interest files or reserve interest as is 
disseminated to the public by the Exchange. See Rule 104(b)(iii).
    \49\ See Proposed NYSE Rule 104(j)(ii).
---------------------------------------------------------------------------

Benefit to Floor of the Proposed Availability of Disaggregated Order 
Information
    The Disapproval Order also raised concerns about the possible 
benefit to Floor members of the proposed availability of order 
information, stating that the benefit to Floor members may be more than 
slight, ``particularly with respect to less liquid securities where 
order information is less likely to become rapidly stale.'' 
Respectfully, the Commission's concern about the possible benefit to 
Floor members is misplaced, irrespective of whether the security is 
highly liquid or less liquid.
    It has been noted above, but is worth stressing, that DMMs 
currently have access to aggregated order information that fully 
reflects the size of trading interest for a particular security on the 
Exchange that has not been designated as dark by the entering firm. 
Similarly, such aggregated information for interest not marked dark is 
visible to any market participant beyond the Floor via OpenBook. What 
is proposed, therefore, is not making a new segment of trading interest 
visible to DMMs, but rather

[[Page 25126]]

making the components of already visible trading interest available, 
along with the entering firm, clearing firm, and badge number of the 
Floor broker, if any. Since the proposal would not increase the 
visibility of trading interest in less liquid securities, the question 
of whether such information is more or less likely to remain fresh or 
become stale is not at issue in a meaningful way. The point of the 
proposed availability of order information is to enable Floor brokers 
to search more effectively for size counterparties for their customers 
and to expedite the ability of DMMs to resolve errors, not to improve 
the trading position of DMMs.
    Moreover, the question of staleness is further beside the point 
when one remembers that DMM trading today is predominantly automated 
and algorithmic. Even if the proposed visibility included trading 
interest that was not currently visible--it does not--DMMs as a 
practical matter would need to integrate such information into their 
automated trading models to use it. Exchange systems, however, would 
specifically prevent such use.
    To the extent that the Commission is concerned that a DMM could 
otherwise use the proposed incremental information for trading 
purposes, it is useful to consider the premise apparently underlying 
the concern. The premise is presumably that learning the component 
sizes of trading interest that is already visible in the aggregate, or 
that learning the identity of the entering firm, clearing firm, or the 
Floor broker for a component order, could somehow add sufficiently to 
the DMMs view of the market to induce the DMM to trade on the same side 
or opposite side of a component order. The Exchange is aware of no 
facts, data or analyisis that would support such a premise. 
Additionally, firms already advertise many of these particulars of 
their trading interest on both a pre- and post-trade basis (IOIs and 
other forms) through a variety of electronic vendor solutions, such as 
Bloomberg \50\ and Autex.\51\ Therefore, the ability and willingness of 
firms to advertise their interest is hardly a new concept in today's 
marketplace. The proposal would simply restore within the Exchange 
environment features and services previously available on the Floor and 
currently offered beyond the Floor by multiple market data vendors.
---------------------------------------------------------------------------

    \50\ Bloomberg allows brokers to disseminate IOIs to the buy-
side via Bloomberg's Execution Management Solutions.
    \51\ Autex is an electronic platform from Thomson Financial that 
allows potential buyers and sellers to identify other large traders 
by showing ``trade advertisements'' in a stock. The interface 
presents indicators of interest among traders, permitting buy-side 
clients to identify optimum trading partners.
---------------------------------------------------------------------------

    Moreover, the balance of benefits and potential costs would favor 
unambiguously a choice on the part of a member or customer to make 
disaggregated order information visible to the DMM and available to 
Floor brokers. As illustrated in detail by Scenarios 1 and 2 above, the 
potential benefits to a customer of sharing disaggregated order 
information (again, by choosing not to enter the order dark) would be 
both significant and concrete. A member's sharing of a customer's order 
information, for example, would make it possible for contra side 
interest to initiate contact with the member and for the customer to 
experience a size transaction that avoids market impact and reduces 
transaction costs. In contrast, the potential cost of sharing the 
information would be de minimis because the component order information 
would add nothing meaningful to the information reflected in the 
aggregate trading interest already visible to DMM and to the market via 
OpenBook. More fundamentally, members today can choose from an array of 
alternatives to the Exchange's integration of human judgment into the 
price discovery process at a single, physical point of sale. That 
choice represents the ultimate check on any imbalance in the allocation 
of benefits to DMMs or Floor brokers.
    It is also worth noting that the utility of disaggregated order to 
the Floor is largely independent from its freshness or staleness as 
trading information. Information that is stale in trading terms, for 
example, may nonetheless be enormously helpful to an agent like a Floor 
broker in the search for a size counterparty. Assume, for instance, 
that there is no live interest expressed in the Display Book at or near 
a particular price point. It may nonetheless be useful for a Floor 
broker to know that a particular firm had entered an order in the 
security at a particular level a day or two before. Knowing the 
identity of the entering firm could allow a Floor broker to identify a 
counterparty in much the same way as Scenario 1 above, producing the 
same size interaction and reduced transaction costs for both sides of 
the trade. Notably, this utility is also distinct from how actively 
traded a particular security is.
    Moreover, Section 11(a) obligations on Floor brokers ensure that 
investors, not Floor brokers, will reap the benefits of access to the 
disaggregated order information, providing that Floor brokers will not 
``effect any transaction on [the] exchange for its own account * * *.'' 
\52\ This trading restriction has been in place since 1978, when Floor 
brokers regularly had access to disaggregated order information on the 
Floor. The Exchange amended Rule 115 regarding what information could 
be provided in connection with a market look because, at the time, the 
Exchange did not have the technology to replicate the ability of Floor 
brokers to maintain certain interest as ``dark.'' Although the Exchange 
reduced the access to information available to Floor brokers--which was 
always via the specialist, and now, DMM--the trading restrictions were 
not lessened. Now that the Exchange has enabled market participants to 
replicate electronically the type of dark interest formerly maintained 
manually by Floor brokers, the Exchange can restore the access to 
disaggregated order information without any need to adjust the 
applicable trading restrictions. These applicable trading restrictions 
provide assurance that the Floor brokers will not be reaping the 
benefits of access to disaggregated order information; the benefits 
will directly flow to investors.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78k(a) (2012).
---------------------------------------------------------------------------

    Existing trading restrictions and the additional affirmative 
obligations required by the New Market Model provide appropriate 
controls, ensuring that the adoption of Rule 104(j) meets the 
requirements of Section 6(b)(5) of the Act. As previously enumerated, 
DMMs are subject to a number of restrictions governing access to non-
public order information that remains unchanged since before the 
adoption of the New Market Model, and which were put in place when DMMs 
still had an agency role. Even though they no longer act as agents, 
DMMs are still subject to those trading restrictions. The rules of the 
Exchange are designed such that any additional access by DMMs and Floor 
brokers to information not available generally to off-Floor traders 
carries with it restrictive obligations regarding the permitted use of 
such information.
Floor Competition With Off-Floor Members
    The Disapproval Order expresses concern about the provision of 
disaggregated order information to Floor Members and, by extension, 
exclusively to Floor broker customers and the potential ``detrimental 
effect on competition between on-Floor and off-Floor members of the 
Exchanges.'' Several points bear emphasis here. The Floor broker's 
ability to share information in this way aligns with the agency 
relationship between the Floor broker and his or her customer, and is

[[Page 25127]]

complementary to other affected market participants. That is, the 
agent-Floor broker is enabled to make full disclosure to his or her 
principal-customer. The customer, given his or her own trading 
interest, has an interest in not disseminating the information learned 
from the Floor broker. The member organization and the member 
organization's customer benefit in that the Floor broker's customer 
potentially could initiate direct contact with the member organization. 
In this way, the Floor broker's sharing of this type of information 
with the customer provides a sort of check of the principal on the 
agent and ensures that the agent adds value. The Exchange's integration 
of human judgment into a point of sale occurs, in other words, within a 
competitive landscape filled with customer choice among both exchange 
and off-exchange venues. The modest increase in visibility offered by 
the proposed rules, especially in light of increasing dispersal of 
liquidity, in no way upsets that competitive balance.
    In addition, extending the proposed visibility to other off-Floor 
participants presents obvious dangers. NYSE Rules 98 and 104(b) are not 
applicable to other proprietary traders, for example. Accordingly, if 
disaggregated information were provided electronically to all market 
participants, there would be no mechanism or informational barrier 
ensuring that the disaggregated information could only be used for the 
benefit of investors. Rule 104(j)'s success in protecting investors and 
the public interest is directly tied to its limited access.
    Finally, any off-Floor member is free to utilize the services of a 
Floor broker, in which case, the benefits of the proposed rule change 
would flow entirely to the off-Floor member (or the customer entering 
the order). Additionally, the benefits of the proposed rule change 
still inure to those participants who choose not to utilize Floor 
brokers because Floor brokers may source liquidity from those 
participants. The proposed rule change is not a zero-sum game: The 
benefits of the proposal are spread across market participants, not 
limited to a select few at the expense of others.
Conforming Amendments
    To reflect the information that would be available to DMMs through 
Exchange systems, the Exchange proposes amendments to Rules 70(e), (f) 
and (i) and 70.25(a)(vii) to specify which information is available to 
a DMM through Exchange systems. The Exchange also proposes changes to 
Rule 70 to specify what information about e-Quotes is available to the 
DMM. The Exchange notes that the proposed amendments to Rule 70 do not 
change the operation of the existing rule, other than to specify which 
interest may be available to the DMM on a disaggregated basis, as 
discussed above. Rather, the amendments are proposed as clarifying 
changes with respect to the manner that Floor broker agency interest 
currently operates and how such interest may be available to the DMM. 
For example, current Rule 70(e) states that a Floor broker has 
discretion to exclude all of his or her agency interest, subject to the 
provisions in the rule, from the aggregated agency interest information 
available to the DMM consistent with Exchange rules governing Reserve 
Orders. Because ``excluding'' interest from the information available 
to the DMM is similar to how Reserve Orders operate pursuant to Rule 
13, the Exchange proposes to harmonize the terms and use term ``e-
Quote'' to replace the term ``Floor broker agency interest,'' use the 
term ``Minimum Display Reserve e-Quote'' to replace the concept in 
current Rule 70(f)(ii), and use the term ``Non-Display Reserve e-
Quotes'' to replace the concept in current Rule 70(f)(i). The Exchange 
also proposes to provide more specificity in amended Rule 70 of how 
such interest would be made available to the DMM, consistent with the 
current operation of the Rule.
    In addition, the Exchange proposes to delete Rule 104(a)(6), which 
currently provides that DMMs, trading assistants and anyone acting on 
their behalf are prohibited from using the Display Book[supreg] system 
to access information about Floor broker agency interest excluded from 
the aggregated agency interest and Minimum Display Reserve Order 
information other than for the purpose of effecting transactions that 
are reasonably imminent where such Floor broker agency and Minimum 
Display Reserve Order interest information is necessary to effect such 
transaction.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Act,\53\ in general, and 
Section 6(b)(5) of the Act,\54\ in particular, in that it is designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \53\ 15 U.S.C. 78f(b).
    \54\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposed change 
promotes just and equitable principles of trade because the proposed 
change is an integration of human judgment into the price discovery 
process at a single, physical point of sale, whose nature and extent is 
driven by the demands of informed consumers. With no shortage of 
competing execution venues and the lack of an obligation on the part of 
market participants to utilize the services of a Floor broker, whether 
and how Floor brokers are used reflect the value placed by market 
participants on what the Floor adds. The wholly consensual integration 
of human judgment will serve legitimate Floor functions in three 
respects: (1) It increases the possibility that buyers and sellers of 
size positions can meet, thereby enhancing their opportunities to 
reduce transaction costs; (2) it expedites the discovery and resolution 
of errors, thereby reducing disruptive impacts and promoting fair and 
orderly markets; and (3) it leverages the informed choices of users, 
allowing the interplay of competitive forces to determine the scope and 
nature of human interaction in the price discovery process.
    Similarly, the Exchange believes that the proposed change will 
protect investors and the public interest because existing trading 
restrictions and additional affirmative obligations required by the New 
Market Model provide appropriate controls. As previously stated, DMMs 
are subject to a number of restrictions governing access to non-public 
order information. Additionally, the rules of the Exchange are designed 
such that any additional access by DMMs and Floor brokers to 
information not available generally to off-Floor traders carries with 
it restrictive obligations regarding the permitted use of such 
information.
    Additionally, the Exchange believes that the proposed change will 
remove impediments to, and perfect the mechanisms of, a free and open 
market and a national market system because the proposed change 
clarifies that DMMs may perform certain defined Trading Floor 
functions, which were previously performed by specialists, in 
furtherance of the efficient, fair, and orderly operation of the 
Exchange. Increasing the amount of information, including disaggregated 
order information, that a DMM is permitted to view and provide to Floor 
brokers would further the ability of DMMs to carry out the defined 
Trading Floor functions and, as a result is designed to remove 
impediments to and perfect the mechanism of a free and open market 
through the efficient operation of the

[[Page 25128]]

Exchange, in particular by facilitating the bringing of buyers and 
sellers together.
    The Exchange also believes that the proposed change is equitable 
and not unfairly discriminatory because extending the proposed 
visibility to other off-Floor participants presents obvious dangers: 
NYSE Rules 98 and 104(b) are not applicable to other proprietary 
traders, and if disaggregated information were provided electronically 
to all participants, there would be no mechanism or informational 
barrier ensuring that the disaggregated information could only be used 
for the benefit of 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. The Exchange believes that 
the proposed rule change will facilitate the execution of block trades, 
and as a result, will reduce the market impact and associated 
transactions costs for members wishing to take advantage of the rule 
proposal. The reduction of transaction costs, along with the proposal's 
other purpose of expediting error resolution, will improve the 
efficiency of the market and remove barriers to order execution, thus 
increasing the level of participation and competition in the 
marketplace.
    The Exchange operates in a highly competitive market in which 
market participants can easily and readily direct order flow to 
competing venues. The Exchange's integration of human judgment into a 
point of sale occurs within that competitive landscape filled with 
customer choice among both exchange and off-exchange venues. The modest 
increase in visibility offered by the proposed rules, especially in 
light of increasing dispersal of liquidity, in no way upsets that 
competitive balance.

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-NYSE-2013-21 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-NYSE-2013-21. 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 
a.m. and 3 p.m. Copies of the filing will also 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-2013-21 and should be 
submitted on or before May 20, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
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    \55\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-10015 Filed 4-26-13; 8:45 am]
BILLING CODE 8011-01-P