[Federal Register Volume 78, Number 212 (Friday, November 1, 2013)]
[Notices]
[Pages 65736-65739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26032]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70760; File No. SR-NYSEMKT-2013-85]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Rule 980NY to 
Specify That the Specialist Pool and Directed Order Market Makers 
Receive Execution Allocations of Incoming Electronic Complex Orders and 
Complex Order Auction Eligible Orders in Accordance With the Guaranteed 
Participation Provision of Rule 964NY(c)(2)(B), Without Any Exceptions

October 28, 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 October 24, 2013, NYSE MKT LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 Rule 980NY to specify that the 
Specialist Pool and Directed Order Market Makers receive execution 
allocations of incoming Electronic Complex Orders and Complex Order 
Auction (``COA'') eligible orders in accordance with the guaranteed 
participation provision of Rule 964NY(c)(2)(B), without any exceptions. 
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 is proposing to amend Rules 980NY(c)(i), (c)(iii), 
(e)(6)(A), and (e)(6)(D) to specify that the Specialist Pool and 
Directed Order Market Makers receive execution allocations of the 
individual components of a legged out incoming Electronic Complex Order 
or COA-eligible order in accordance with the guaranteed participation 
provision of Rule 964NY(c)(2)(B), without any exceptions. Exchange 
systems currently provide the Specialist Pool with such guaranteed 
participations when Electronic Complex Orders are legged out to trade 
with individual quotes and orders in the leg markets that include bids 
or offers from the Specialist Pool. Directed Order Market Makers, 
however, do not currently receive guaranteed participation with respect 
to Electronic Complex Orders. As proposed, an Electronic Complex Order 
that is marked as a Directed Order may execute against Directed Order 
Market Makers if it legs out to trade with individual quotes and orders 
in the leg markets and there is a Directed Order Market Maker quoting 
in one or more of the leg markets.
    Rule 980NY governs trading of ``Electronic Complex Orders,'' as 
that term is defined in Rule 900.3NY(e).\4\ Rule 980NY(c)(i) currently 
provides that Electronic Complex Orders accepted in the Exchange's 
Complex Matching Engine (``CME'') \5\ are executed automatically 
against other Electronic Complex Orders in the Consolidated Book,\6\ 
unless individual orders or quotes in the Consolidated Book can execute 
against incoming Electronic Complex Orders, subject to specified 
conditions, in which case such individual orders and quotes have 
priority. Rule 980NY(c)(iii) currently provides that ATP Holders can 
view Electronic Complex Orders in the Consolidated Book via an 
electronic interface and may submit Electronic Complex Orders to the 
CME to trade against orders in the Consolidated Book.
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    \4\ Rule 900.3NY(e) defines an Electronic Complex Order as ``any 
order involving the simultaneous purchase and/or sale of two or more 
different option series in the same underlying security, for the 
same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for 
the purpose of executing a particular investment strategy.''
    \5\ Rule 980NY(a) defines the CME as ``the mechanism in which 
Electronic Complex Orders are executed against each other or against 
individual quotes and orders in the Consolidated Book.''
    \6\ Rule 900.2NY(14) defines the Consolidated Book as ``the 
Exchange's electronic book of limit orders for the accounts of 
Customers and broker-dealers, and Quotes with Size. All orders and 
Quotes with Size that are entered into the Book will be ranked and 
maintained in accordance with the rules of priority as provided in 
Rule 964NY.''
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    Rule 980NY(e) governs the COA process, and specifically, Rule 
980(e)(6) governs the execution of COA-eligible orders.\7\ Upon 
receiving a COA-eligible order and a request by the ATP Holder 
representing the order that an auction be initiated, the Exchange sends 
an automated request for responses

[[Page 65737]]

(``RFR'') message to ATP Holders with an interface connection to the 
Exchange that have elected to receive such RFR messages. Market Makers 
with an appointment in the relevant options class, and ATP Holders 
acting as agent for orders resting at the top of the Consolidated Book 
in the relevant options series may electronically submit responses 
(``RFR Responses''), and modify, but not withdraw, the RFR response at 
anytime during the request response time interval (the ``Response Time 
Interval''). When the Response Time Interval expires, the COA-eligible 
order is executed and allocated to the extent it is marketable, or 
routed to the Consolidated Book to the extent it is not marketable.
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    \7\ Rule 980NY(e)(1) defines a COA-eligible order as ``an 
Electronic Complex Order that, as determined by the Exchange on a 
class-by-class basis, is eligible for a COA considering the order's 
marketability (defined as a number of ticks away from the current 
market), size, number of series, and complex order origin types 
(i.e., Customers, broker-dealers that are not Market-Makers or 
specialists on an options exchange, and/or Market-Makers or 
specialists on an options exchange).''
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    Rule 980NY(e)(6) provides that COA-eligible orders are executed 
against the best priced contra-side interest, and provides an 
allocation process for orders at the same net price. Rule 
980NY(e)(6)(A) currently provides that individual orders and quotes in 
the leg markets resting in the Consolidated Book prior to the 
initiation of a COA will have first priority to trade against a COA-
eligible order, provided the COA-eligible order can be executed in full 
(or in a permissible ratio) by the orders and quotes in the 
Consolidated Book.\8\ Rule 980NY(e)(6)(D) currently provides that 
individual orders and quotes in the leg markets that cause the derived 
Complex Best Bid/Offer to be improved during the COA and match the best 
RFR Response and/or Electronic Complex Orders received during the 
Response Time Interval will be filled after Electronic Complex Orders 
and RFR Responses at the same net price. Allocations to individual 
orders or quotes in the leg markets that cause the derived BBO to be 
improved occur on a Customer/order/size pro rata basis.
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    \8\ Allocations to individual orders and quotes in the leg 
markets in the Consolidated Book occur in time, with Customer orders 
having priority ahead of non-customer orders and quotes at the same 
price.
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    Under Rules 980NY(c)(i) and (c)(iii), incoming orders or quotes, or 
those residing in the Consolidated Book, that execute against 
Electronic Complex Orders are allocated pursuant to Rule 964NY.\9\ 
Additionally, under Rules 980NY(e)(6)(A) and (e)(6)(D), individual 
orders or quotes residing in the Consolidated Book that execute against 
a COA-eligible order are allocated pursuant to Rule 964NY. Rule 
964NY(c)(2)(B) grants the Specialist Pool and Directed Order Market 
Makers guaranteed participation after Customer interest is filled, 
which means that if the Specialist Pool or Directed Order Market Maker 
is quoting at a price equal to the National Best Bid or Offer 
(``NBBO'') in an option series that the Specialist Pool or Directed 
Order Market Maker is assigned, incoming bids and offers in that series 
will, depending on order ranking provisions of Rule 964NY, be matched 
against the Specialist Pool's or Directed Order Market Makers' quotes, 
up to specified thresholds.\10\ Currently, Rules 980NY(c)(i), (c)(iii), 
(e)(6)(A), and (e)(6)(D) provide that the Specialist Pool and Directed 
Order Market Maker guaranteed participation afforded in Rule 
964NY(c)(2)(B) will not apply to executions against an Electronic 
Complex Order or a COA-eligible order. However, Exchange systems do 
apply the Specialist Pool guaranteed participation afforded in Rule 
964NY(c)(2)(B) to Electronic Complex Orders and COA-eligible orders 
that execute against individual quotes and orders in the Consolidated 
Book.
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    \9\ The Exchange proposes a technical, non-substantive amendment 
to Rule 964NY(c)(2)(B) to change the cross-reference from Rule 
964NY(a) to Rule 964NY(b).
    \10\ Rule 900.3NY(s) defines a ``Directed Order'' as ``any 
marketable order to buy or sell which has been directed to a 
particular Market Maker by an Order Flow Provider. To qualify as a 
Directed Order, an order must be delivered electronically to the 
System.'' An incoming order marked as a ``Directed Order'' is 
matched against the quotes of ``Directed Order Market Makers'' under 
Rule 964NY(b)(2)(B).
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    The Exchange is proposing to amend Rules 980NY(c)(i), (c)(iii), 
(e)(6)(A), and (e)(6)(D) to specify that both the Specialist Pool and 
Directed Order Market Makers receive execution allocations of incoming 
Electronic Complex Orders and COA-eligible orders in accordance with 
the guaranteed participation provision of Rule 964NY(c)(2)(B), without 
any exceptions. The proposed change would codify existing processing of 
Electronic Complex Orders that leg out to the individual markets and 
how they may interact with the Specialist Pool in the individual 
markets. In addition, the proposed change would add the ability to 
designate an Electronic Complex Orders as a Directed Order. As 
proposed, the Directed Order instructions for an Electronic Complex 
Order would only be applicable if the Electronic Complex Order legs out 
to the individual markets and a Directed Order Market Maker is quoting 
in one or more of those markets. The proposed change does not provide 
for a Direct Order program for Electronic Complex Orders that trade 
with other Electronic Complex Orders.\11\
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    \11\ The Exchange will announce, via Trader Update, the 
allocation process that applies when an Electronic Complex Order 
legs out to the individual markets and the implementation date of 
the proposed change to designate an Electronic Complex Order as a 
Directed Order.
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    The Exchange notes that under the proposed amendment to Rule 
980NY(c)(iii), the execution of an Electronic Complex Order against 
another Electronic Complex Order in the Consolidated Book would not 
result in a guaranteed participation for a Specialist or Directed Order 
Market Maker. Rather, the guaranteed participation provision of that 
rule is only applicable if an Electronic Complex Order legs out 
individual components to trade with the quotes of a Specialist or 
Directed Order Market Maker. Consequently, the individual options 
components of an Electronic Complex Order, and not the Electronic 
Complex Order itself, may be designated as Directed Orders. The 
guaranteed participation associated with the allocation of Directed 
Orders will, therefore, only be available where the Electronic Complex 
Order legs out individual components to trade with the quotes of a 
Directed Order Market Maker that meets its quoting obligations, as 
discussed in more detail below.
    The Exchange believes that it is appropriate to provide Specialists 
and Directed Order Market Makers with guaranteed participation in 
relation to execution allocations of the individual components of an 
Electronic Complex Order. The guaranteed participation strikes a 
reasonable balance between rewarding certain participants for making 
markets (in the case of Specialists) or bringing liquidity to the 
Exchange (in the case of Directed Order Market Makers), and providing 
other market participants an incentive to quote aggressively.\12\ 
Although Exchange rules did not originally afford the Specialist Pool 
and Directed Order Market Makers any guaranteed participation when an 
Electronic Complex Order executes against the individual leg markets, 
the Exchange believes that permitting such guaranteed participation 
will further incentivize the provision of liquidity that is 
aggressively priced. Therefore, the Exchange believes it is reasonable 
to provide the Specialist Pool and Directed Order Market Makers with 
guaranteed participations whether the contra-side

[[Page 65738]]

order is a leg of an Electronic Complex Order or an individual order. 
The Exchange notes that the proposed rule change is consistent with the 
allocation process for executing Complex Orders against individual 
orders and quotes on the Chicago Board Options Exchange (``CBOE'') and 
NASDAQ OMX PHLX LLC (``PHLX'').\13\
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    \12\ See Exchange Act Release No. 59472 (Feb. 27, 2009), 74 FR 
9843, 9847 (Mar. 6, 2009) (SR-NYSEALTR-2008-14) (approving 
guaranteed participation for the Specialist Pool and Directed Order 
Market Makers) (``The Commission believes that these guarantees 
strike a reasonable balance between rewarding certain participants 
for making markets (in the case of Specialists and e-Specialists) or 
bringing liquidity to the exchange (in the case of Directed Order 
Market Makers), with providing other market participants an 
incentive to quote aggressively.'').
    \13\ See CBOE Rules 6.53C(c)(ii)(2), 6.53C(d)(v)(1), 
6.45A(a)(i)(C), and 6.45B(a)(ii)(C). The CBOE's rules governing 
priority and allocation include cross references to the CBOE's 
participation entitlement programs: CBOE Rules 8.13 (Preferred 
Market-Maker Program), 8.15B (Participation Entitlement of LMMs), 
and 8.87 (Participation Entitled of DPMs and e-DPMs). See also 
Commentaries .08(e)(vi)(A)(1) and .08(f)(iii) to PHLX Rule 1080 and 
PHLX Rule 1014(g)(vii) (setting forth PHLX's guaranteed 
participation program, including the Enhanced Specialist 
Participation program).
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    The Exchange notes, moreover, that to receive a guaranteed 
participation, the Specialist and Directed Order Market Maker are 
subject to heightened quoting obligations. A Specialist must provide 
continuous two-side quotations throughout the trading day in its 
appointed issues for 90% of the time the Exchange is open for trading 
in each issue.\14\ Further, a Directed Order Market Maker must provide 
continuous two-sided quotations throughout the trading day in issues 
for which it receives Directed Orders for 90% of the time the Exchange 
is open for trading in each issue.\15\
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    \14\ See Rule 925.1NY(b).
    \15\ See Rule 964.1NY(iv).
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    Finally, the Exchange also believes that eliminating the 
inconsistency between Rule 964NY and Rule 980NY with respect to the 
guarantee will eliminate potential confusion as to whether the 
Specialist Pool and Directed Order Market Makers are receiving their 
guaranteed participation when they quote at a price equal to the NBBO.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5),\17\ in particular, in that it is designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest. The Exchange believes that providing 
the guaranteed participation allocation for the Specialist Pool and 
Directed Order Market Makers for the execution of incoming Electronic 
Complex Orders and COA-eligible orders removes impediments to and 
perfects the mechanism of a free and open market by (1) promoting 
liquidity on the Exchange because the Specialist Pool's and Directed 
Order Market Markers' quotes interact with incoming Electronic Complex 
Orders and COA-eligible orders, (2) providing consistency among 
Exchange rules by applying the same allocation logic to the execution 
of incoming Electronic Complex Orders/COA-eligible orders and single-
leg orders, and (3) eliminating potential confusion with respect to 
guaranteed participation for such participants trading in Electronic 
Complex Orders. Additionally, the Exchange believes that the proposal 
is designed to protect investors and the public interest because the 
proposed rule change is consistent with the allocation process for 
executing Complex Orders against individual orders and quotes on CBOE 
and PHLX. The Exchange further believes that the proposal will promote 
liquidity on the Exchange because the Specialist Pool and Directed 
Order Market Maker guaranteed participation strike a reasonable balance 
between rewarding certain participants for making markets or bringing 
liquidity to the Exchange and providing other market participants an 
incentive to quote aggressively.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will not impose a 
significant burden on competition; instead, the Exchange believes the 
proposed rule change will enhance competition by increasing liquidity 
in the options market. By permitting the guaranteed participation 
allocation with respect to Electronic Complex Orders and COA-eligible 
orders, the Specialist Pool and Directed Order Market Makers are 
encouraged to quote at the NBBO in their assigned options series, which 
increases the level of liquidity in the options market. While 
allocations due to guaranteed participations may direct order flow to 
particular participants, the Commission has previously approved such 
allocations as a reasonable balance between rewarding such participants 
for making markets or bringing liquidity to the exchange, and providing 
other market participants an incentive to quote aggressively.\18\ By 
allocating 40 percent of the order to the Specialist Pool or Directed 
Order Market Maker, the Exchange believes that it properly incentivizes 
the provision of liquidity from the Specialist Pool or Directed Order 
Market Makers, while still ensuring that other market participants are 
able to participate and receive allocations.
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    \18\ See 74 FR at 9847.
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    In addition, eliminating the current exception from the guaranteed 
participation allocation will also provide consistency and eliminate 
potential confusion concerning guaranteed participation allocation for 
such participants with respect to Electronic Complex Orders and COA-
eligible orders. Further, the Exchange does not believe the proposal 
will impose a significant burden on competition since the proposal is 
consistent with the allocation process on CBOE and PHLX.

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

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

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) 
\20\ thereunder.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \21\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \21\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule

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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-NYSEMKT-2013-85 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-NYSEMKT-2013-85. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEMKT-2013-85 and should 
be submitted on or before November 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26032 Filed 10-31-13; 8:45 am]
BILLING CODE 8011-01-P