[Federal Register Volume 78, Number 224 (Wednesday, November 20, 2013)]
[Notices]
[Pages 69734-69737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27761]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70881; File No. SR-NSX-2013-20]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending Exchange Rule 11.11 Regarding the Entry and Execution of Zero 
Display Reserve Orders Marked ``Sell Short''

November 14, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 4, 2013, National Stock Exchange, Inc. 
(``NSX[supreg]'' or 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 substantially 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange has filed the proposed rule change to amend 
subparagraph (c)(2)(E) of Rule 11.11 (Orders and Modifiers) regarding 
the manner in which the Exchange's Trading System (the ``System'') \3\ 
handles Zero Display Reserve Orders \4\ marked ``sell short'' entered 
by Exchange Users \5\ in a security that is the subject of a short sale 
price test restriction under Rule 201 of Regulation SHO \6\ pursuant to 
the Act. The proposed amendment removes a requirement that the System 
will reject all Zero Display Reserve Orders marked

[[Page 69735]]

``sell short'' entered by Users \7\ and describes the System 
functionality for handling sell short Zero Display Reserve Orders 
during a short sale price test restriction.
---------------------------------------------------------------------------

    \3\ NSX Rule 1.5 defines the term ``System'' to mean the 
electronic securities communications and trading facility designated 
by the Board through which orders of Users are consolidated for 
ranking and execution.
    \4\ Under Exchange Rule 11.11(c)(2), a Reserve Order is defined 
as a limit order with a portion of the quantity displayed (``display 
quantity'') and with a reserve portion of the quantity that is not 
displayed. Rule 11.11(c)(2)(A) provides, in relevant part, that a 
Reserve Order can be entered with a displayed quantity of zero, in 
which case the Reserve Order will be known as a ``Zero Display 
Reserve Order.''
    \5\ NSX Rule 1.5 defines the term ``User'' to mean any ETP 
Holder or Sponsored Participant who is authorized to obtain access 
to the System pursuant to Rule 11.9 (Access).
    \6\ 17 CFR 242.201. See Securities Exchange Act Release No. 
61595 (February 26, 2010), 75 FR 11232 (March 10, 2010) and 
Securities Exchange Act Release No. 63247 (Nov. 4, 2010), 75 FR 
68702 (Nov. 9, 2010).
    \7\ On June 27, 2013, the Exchange filed with the Commission, 
for immediate effectiveness, an amendment to Rule 11.11 to add 
subparagraph (c)(2)(E) and the Exchange implemented a System block 
to automatically reject all sell short Zero display Reserve Orders. 
The amendment to add subparagraph (c)(2)(E) to Rule 11.11, and the 
accompanying technology change, address a System limitation that 
could allow a sell short Zero Display Reserve Order to be executed 
at or below the national best bid during the period that the 
security is subject to the short sale price test restriction under 
Rule 201 of regulation SHO. See Exchange Act Release No. 34-69874 
(June 27, 2013); 78 FR 40248 (July 3, 2013); SR-NSX-2013-13.
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the Exchange's 
Web site at www.nsx.com, at the Exchange's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and statutory 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
    Rule 201(b)(1)(i) of Regulation SHO requires trading centers,\8\ 
including the Exchange, to establish, maintain and enforce written 
policies and procedures reasonably designed to prevent the execution or 
display of a short sale order of a covered security \9\ at a price that 
is less than or equal to the current national best bid if the price of 
that covered security decreases by 10% or more from such security's 
closing price on the listing market at the close of regular trading 
hours on the prior day. Rule 201(b)(1)(ii) of Regulation SHO requires 
trading centers to establish, maintain and enforce written policies and 
procedures reasonably designed to impose the short sale price test 
restriction for the remainder of the trading day and the following day, 
when a national best bid for the security is calculated and 
disseminated on a current and continuing basis by a plan processor 
pursuant to an effective national market system plan. Rule 
201(b)(1)(iii)(A) further requires that a trading center's written 
policies and procedures must be reasonably designed to permit the 
execution of a displayed short sale order of a covered security if, at 
the time of initial display of the short sale order, the order was at a 
price above the current national best bid.\10\
---------------------------------------------------------------------------

    \8\ For purposes of Regulation SHO, the term ``trading center'' 
has the same meaning as in Rule 600(b)(78) of Regulation NMS, which 
defines a ``trading center'' as ``. . . a national securities 
exchange or national securities association that operates an SRO 
trading facility, an alternative trading system, an exchange market 
maker, an OTC market maker, or any other broker or dealer that 
executes orders internally by trading as principal or crossing 
orders as agent.'' 17 CFR 242.201(a)(9).
    \9\ Rule 201(a)(1) defines a ``covered security'' as any NMS 
stock as defined in Rule 600(b)(47) of Regulation NMS under the Act. 
17 CFR 242.201(a)(1).
    \10\ Rule 201(b)(1)(iii)(B) further provides that a trading 
center's written policies and procedures must be reasonably designed 
to permit the execution or display of a short sale order of a 
covered security marked ``short exempt'' without regard to whether 
the order is at a price that is less than or equal to the current 
national best bid. This provision of Rule 201 is not relevant here. 
17 CFR 242.201(b)(1)(iii)(B).
---------------------------------------------------------------------------

    The Exchange amended Rule 11.11 to add subparagraph (c)(2)(E) to 
comply with the requirement of Rule 201(b)(1) that it establish, 
maintain and enforce written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid during the short sale price test restriction. 
Subparagraph (c)(2)(E) and accompanying changes to the System operate 
to automatically prevent the entry of all sell short Zero Display 
Reserve Orders and thereby prevent a subsequent execution of a sell 
short Zero Display Reserve Order at a price equal to or below the 
current national best bid during a short sale price test restriction in 
the subject security. These changes were implemented as temporary 
measures to address a System limitation that permitted the execution of 
a sell short Zero Display Reserve Order during a short sale price test 
restriction at a price equal to or below the current national best bid. 
No order or part of an order designated by a User as a Zero Display 
Reserve Order ever becomes displayed and, accordingly, a Zero Display 
Reserve Order marked ``sell short'' does not qualify for the exception 
under Rule 201(b)(1)(iii)(A) that would permit its execution at a price 
equal to or below the current national best bid if, at the time of 
initial display of the short sale order, the order was at a price above 
the current national best bid.
    The Exchange has completed the development of new System 
functionality that will ensure that a sell short Zero Display Reserve 
Order will not be executed at a price at or below the current national 
best bid during the short sale price test restriction.\11\ The Exchange 
proposes to amend subparagraph (c)(2)(E) of Rule 11.11 to describe the 
manner in which the System will handle sell short Zero Display Reserve 
Orders during the period in which the short sale price test restriction 
of Rule 201 of Regulation SHO is in effect with respect to a security 
traded on the Exchange. Proposed new subparagraph (c)(2)(E)(i) provides 
that a Zero Display Reserve Order, other than a Market Peg Zero Display 
Reserve Order (one of three types of ``pegging'' instructions that can 
be added to a Zero Display Reserve Order, the others being a Midpoint 
Peg and a Primary Peg),\12\ entered by a User in such security and 
marked ``sell short'' will be matched for execution at a price above 
the current national best bid to the extent possible and any remaining 
unexecuted portion will be canceled by the System if at a price at or 
below the current national best bid.
---------------------------------------------------------------------------

    \11\ The new System functionality was not released into 
production pending the filing of the proposed rule amendment to 
eliminate the requirement of Rule 11.11(c)(2)(E) that the System 
automatically block the entry of all sell short Zero Display Reserve 
Orders.
    \12\ Under Exchange Rule 11.11(c)(2)(A), a Zero Display Reserve 
Order may be set or ``pegged'' to: Track the buy side of the 
Protected Best Bid or Offer (``PBBO''), which is defined in Exchange 
Rule 1.5 as the better of the protected national best bid or offer 
(``NBBO'') or the displayed Top of Book on the NSX; or the sell side 
of the PBBO, or the midpoint of the PBBO. A pegged Zero Display 
Reserve Order which tracks the inside quote on the opposite side of 
the market is defined as a Market Peg; a pegged Zero Display Reserve 
Order that tracks the midpoint is defined as a Midpoint Peg; and a 
pegged Zero Display Reserve Order that tracks the inside quote of 
the same side of the market is called a Primary Peg.
---------------------------------------------------------------------------

    A sell short Market Peg Zero Display Reserve Order tracks the 
Protected Best Bid, which is the better of the national best bid or the 
best bid on the NSX Book.\13\ If executed at a price equal to or below 
the current national best bid during the short sale price test 
restriction, such an execution would violate Rule 201 of Regulation SHO 
which requires an execution to occur at

[[Page 69736]]

a price above the current national best bid. Proposed subparagraph 
(c)(2)(E)(ii) states that a Market Peg Zero Display Reserve Order 
marked ``sell short'' entered in a security for which the short sale 
price test restriction is in effect will be rejected by the System. The 
Exchange has determined that it will not accept new sell short Market 
Peg Zero Display Reserve Orders in a security for which the short sale 
price test restriction of Rule 201 of Regulation SHO is in effect.
---------------------------------------------------------------------------

    \13\ Exchange Rule 1.5 defines the term ``Protected NBBO'' as 
``. . . the national best bid or offer that is a protected 
quotation.'' The term ``Protected BBO'' is defined as ``the better 
of . . . [t]he Protected NBBO or . . . [t]he Displayed Top of 
Book.'' Thus, the Protected Best Bid to which a sell short Market 
Peg Zero Display Reserve Order tracks is the current protected 
national best bid or the best-ranked buy order on the NSX Book.
---------------------------------------------------------------------------

    Proposed subparagraph (c)(2)(E)(iii) explains that a sell short 
Market Peg Zero Display Reserve Order resting on the NSX Book tracks 
the Protected Best Bid and, if matched for execution during a short 
sale price test restriction in that security, it will be executed only 
to the extent that the Protected Best Bid is above the current national 
best bid and the sell short order can be executed, in whole or in part, 
at a price above the current national best bid in compliance with Rule 
201 of Regulation SHO. Any such order or portion of such order will be 
canceled by the System if at a price at or below the current national 
best bid.
    Accordingly, upon this proposed rule amendment becoming effective, 
the Exchange will discontinue the automatic block to the entry of all 
Zero Display Reserve Orders marked ``sell short'' and release the 
System modifications that will enforce the Exchange's written policies 
and procedures regarding the handling of sell short Zero Display 
Reserve Orders during the short sale price test restriction.
2. Statutory Basis
    The Exchange believes that the proposed amendment to Rule 
11.11(c)(2)(E) to eliminate the requirement that the System will reject 
the entry of Zero Display Reserve Orders marked ``sell short,'' thereby 
allowing the removal of the automated block preventing the entry of 
such orders, and describe the manner in which the System will process 
sell short Zero Display Reserve Orders, is consistent with the 
provisions of Section 6(b) \14\ of the Act, with Section 6(b)(5) \15\ 
thereunder, and with Rule 201.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C.78f(b)(5).
---------------------------------------------------------------------------

    The Exchange submits that these amendments further the purposes of 
Section 6(b)(5) of the Act in that they promote just and equitable 
principles of trade and operate to remove impediments to and perfect 
the mechanism of a free and open market and national market system. As 
a trading center, the Exchange is required by Rule 201 to establish, 
maintain and enforce written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on the prior day; and to impose this requirement for the 
remainder of the day and the following day when a national best bid for 
the covered security is calculated and disseminated on a current and 
continuing basis by a plan processor pursuant to an effective national 
market system plan.
    The Exchange submits that the permanent modifications it will make 
to the System upon this filing becoming effective will provide that, 
during a short sale price test restriction, sell short Zero Display 
Reserve Orders will be accepted and executed only to the extent that 
such orders can be executed at a price above the current national best 
bid, and will be rejected by the System if at a price at or below the 
current national best bid. The Exchange, however, has determined to 
reject any new Market Peg Zero Display Reserve Orders marked ``sell 
short'' entered in a security for which the short sale price test 
restriction is in effect.
    The Exchange's proposal further provides that any sell short Zero 
Display Reserve Orders resting on the NSX Book, if matched for 
execution at a price at or below the current national best bid during 
the short sale price test restriction in that security, will only 
execute in whole or in part to the extent possible at a price or prices 
above the current national best bid and any remaining unexecuted 
portion will be canceled by the System if at a price at or below the 
current national best bid. The proposed amendment specifically states 
that, with respect to a sell short Market Peg Zero Display Reserve 
Order resting on the NSX Book, which tracks to the Protected Best Bid, 
such an order or portion of an order will be executed during a short 
sale price test restriction only to the extent that the Protected Best 
Bid is above the current national best bid and the sell short order can 
be fully or partially executed at a price above the current national 
best bid in compliance with Rule 201 of Regulation SHO.
    The Exchange believes that this System functionality will assure 
that sell short Zero Display Reserve Orders, which are not displayed, 
will only be executed at a price above the current national best bid. 
The Exchange submits that the proposed amendment and the new System 
functionality are consistent with its obligations as a trading center 
pursuant to Rule 201 and that, in this regard, the proposed rule 
amendment will further the purposes of the Act and specifically Rule 
201.

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 
for the furtherance of the Act. The proposed amendment will remove a 
System block to the entry of all Zero Display Reserve Orders marked 
``sell short.'' The implementation of the automatic block was 
necessitated by a limitation in the System that did allow the execution 
of a sell short Zero Display Reserve Order in a covered security at a 
price at or below the current national best bid during the short sale 
price test restriction. This System limitation was not consistent with 
the Exchange's obligations as a trading center to establish, maintain 
and enforce written policies and procedures reasonably designed to 
prevent the execution of a short sale order of a covered security at a 
price that is less than or equal to the current national best bid 
during the short sale price restriction.
    By determining to automatically block the entry of all sell short 
Zero Display Reserve Orders until permanent modifications to the System 
could be made, the Exchange was limiting the use of an approved order 
type to fulfill its obligations as a trading center under Rule 201 of 
Regulation SHO.
    In its proposal to amend subparagraph (c)(2)(E) of Rule 11.11 to 
permit the removal of the automatic block, the Exchange submits that it 
is restoring the ability of Users to fully use the Zero Display Reserve 
Order, including entering such orders marked ``sell short.'' Moreover, 
the Exchange's proposed amendment to subparagraph (c)(2)(E) to describe 
the new System functionality with respect to sell short Zero Display 
Reserve Orders provides transparency to Users, their customers and the 
investing public as to how these orders will be processed by the 
System. The Exchange believes that these factors do not represent any 
burden on competition that is not necessary or appropriate for purposes 
of the Act and, in fact, can operate to enhance competition by 
restoring full functionality to the use of Zero Display Reserve Orders.

[[Page 69737]]

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder \17\ 
to be immediately effective because the proposed rule change (i) does 
not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative prior to 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate, if consistent with the protection of investors and the 
public interest; provided that the self-regulatory organization has 
given the Commission written notice of its intent to file the proposed 
rule change at least five business days prior to the filing date of the 
proposed rule change.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative prior to 30 days from the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\20\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay so that the 
proposed rule change may become effective and operative upon filing 
with the Commission pursuant to Section 19(b)(3)(A)(iii) of the Act and 
Rule 19b-4(f)(6) thereunder.
---------------------------------------------------------------------------

    \19\ Id.
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    In support of its request, the Exchange has stated that, as a 
trading center, it is required under Regulation SHO to establish, 
maintain and enforce written policies and procedures reasonably 
designed to prevent the execution or display of sell short orders of 
covered securities at prices at or below the current national best bid 
if the short sale price restriction is in effect for the covered 
security. A waiver of the 30-day operative delay period will enable the 
Exchange to immediately deploy the System changes to ensure that a sell 
short Zero Display Reserve Order will be not be executed at a price at 
or below the current national best bid during the short sale price test 
restriction. The Exchange submits that, under these circumstances, the 
waiver of the 30-day operative delay is consistent with the protection 
of investors and the public interest.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the Exchange, as a trading center, to comply with its 
requirements under Rule 201 of Regulation SHO. For this reason, the 
Commission waives the 30-day operative delay and designates the 
proposal effective upon filing.\21\
---------------------------------------------------------------------------

    \21\ For purposes of only waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
     Send an email to [email protected]. Please include 
File Number SR-NSX-2013-20 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 No. SR-NSX-2013-20. This file 
number should be included in the subject line if email is used. To help 
the Commission process and review 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 such filings 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-NSX-2013-20 and should be submitted on 
or before December 11, 2013.
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to the delegated authority.\22\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27761 Filed 11-19-13; 8:45 am]
BILLING CODE 8011-01-P