[Federal Register Volume 79, Number 8 (Monday, January 13, 2014)]
[Notices]
[Pages 2234-2237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00344]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71245; File No. SR-NYSEMKT-2013-107]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Rule 
123C(7)(b)--Equities To Provide That G Orders With a Price Equal to the 
Closing Price Are the Last Interest Eligible To Be Used to Offset A 
Closing Imbalance

January 7, 2014.
    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 December 26, 2013, NYSE MKT LLC (the ``Exchange'' or 
``NYSE MKT'') filed with the Securities and Exchange Commission (the 
``SEC'' or ``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 123C(7)(b)--Equities to provide 
that G orders with a price equal to the closing price are the last 
interest eligible to be used to offset a closing imbalance. 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,

[[Page 2235]]

and basis for, the proposed rule change and discussed any comments it 
received on the proposed rule change. The text of those statements may 
be examined at the places specified in Item IV below. The Exchange has 
prepared summaries, set forth in sections A, B, and C below, of the 
most significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend Rule 123C(7)(b)--Equities to modify 
the hierarchy of pending interests that may be used to offset a closing 
imbalance, specifically by switching the priority in the execution of 
CO orders with G orders with a price equal to the closing price.
Background
    Rule 123C--Equities (``Rule 123C'') sets forth the closing 
procedures for trading in stock on the Exchange. Rule 123C(7) sets 
forth the order of execution of pending interest on the close. Rule 
123C(7)(a) lists the pending interest that must be executed or 
cancelled as part of the closing transaction. Rule 123C(7)(b) sets 
forth the execution hierarchy of the pending interest that may be used 
to offset a closing imbalance. Currently, Rule 123C(7)(b) provides that 
the following order of execution for pending interest may be used to 
offset a closing imbalance:
    (i) Limit orders represented in the Display Book with a price equal 
to the closing price and DMM interest;
    (ii) LOC orders with a price equal to the closing price;
    (iii) MOC orders that have tick restrictions that limit the 
execution of the MOC to the price of the closing transaction;
    (iv) LOC orders that have tick restrictions that are capable of 
being executed based on the closing price and the price of such limit 
order is equal to the price of the closing transaction;
    (v) G orders with a price equal to the closing price; and
    (vi) CO orders.
    A ``G order'' is an order entered for a member's own account or an 
account in which the member has an interest, as permitted under Section 
11(a)(1)(G) of the Act.\4\ A ``CO order'' is a conditional-instruction 
limit-type order that is eligible to participate in the closing 
transaction only when there is an imbalance of orders to be executed on 
the opposite side of the market from the CO order. A CO order may be 
used in the closing transaction only to offset an imbalance and may not 
add to or flip an imbalance. The CO order is defined in Rule 13--
Equities. The creation of the CO order was approved by the SEC in 
2009.\5\ An ``LOC order'' is a limit at-the-close order, and an ``MOC 
order'' is a market at-the-close order.
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    \4\ 15 U.S.C. 78k(a)(1)(G). See also Rule 13--Equities (defining 
a ``G order'' as an order entered pursuant to Subsection (G) of 
Section 11(a)(1) of the Act).
    \5\ See Securities Exchange Act Release No. 61244 (Dec. 28, 
2009), 75 FR 479 (January 5, 2010) (File No. SR-NYSEAmex-2009-81).
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Exchange's Approval Request
    The current execution hierarchy of pending interest that may be 
used to offset a closing imbalance was approved by the SEC in 2009.\6\ 
In November 2009, the Exchange filed proposed amendments with the SEC 
to modify its closing procedures as well as to make conforming changes 
to other rules.\7\ In the filing, the Exchange proposed, among other 
things, to add subsection (b)(vi) to Rule 123C(7) that would include a 
new type of customer order, called a CO order, to the list of orders 
that may be executed when there is an imbalance at the close of the 
market.\8\ In proposed Rule 123C(7)(b), CO orders were listed as the 
final order type in the sequence of transactions that may be executed 
to offset an imbalance.\9\ G orders were expressly identified as taking 
priority over CO orders in the closing rotation.\10\
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    \6\ See id.
    \7\ See Securities Exchange Act Release No. 60973 (Nov. 9, 
2009), 74 FR 59308 (Nov. 17, 2009) (File No. SR-NYSEAmex-2009-81).
    \8\ See id.
    \9\ See id. at 59314.
    \10\ Id.
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    The proposal described in detail the mechanics of how the CO order 
type would operate.\11\ It proposed that CO orders would be contingent 
on an imbalance on the opposite side of the market when the market 
closed.\12\ If no imbalance existed, these orders would not be 
activated and would be cancelled.\13\ The Exchange further stated that 
the execution of CO orders would never add to, or result in, a flip of 
the imbalance to the other side of the market.\14\ Rather, if the 
aggregate number of shares comprising outstanding CO orders was larger 
than the number of shares required to offset the imbalance, only the 
amount of shares necessary to correct any actual imbalance in full 
would be triggered and executed.\15\
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    \11\ See id.
    \12\ See id.
    \13\ See id.
    \14\ See id.
    \15\ See id.
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    Significantly, the Exchange explained that, until all other orders 
have been considered and until an imbalance can be calculated, CO 
orders are not active orders.\16\ Because of the contingent nature of 
the order type, CO orders were to be executed after all other types of 
orders have been executed, including G orders.\17\ The CO orders were 
meant to supplement, not supplant, any existing orders on the book to 
provide additional liquidity in the event of an imbalance.\18\ As the 
Exchange explicitly stated in it proposal:
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    \16\ See id.
    \17\ See id.
    \18\ See id.

    The CO order will not be guaranteed to participate in the 
closing transaction. CO orders will be eligible to participate in 
the closing transaction when there is an imbalance of orders to be 
executed on the opposite side of the market from the CO order and 
there is no other interest remaining to trade at the closing price. 
This order type must yield to all other eligible interest (emphasis 
added).\19\
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    \19\ Id.

    The Exchange proposal also detailed the benefits of this new order 
type. The proposal explained how the addition of CO orders would 
provide an added opportunity for investors to take advantage of closing 
prices and would encourage greater customer participation in the 
market.\20\ Specifically, the Exchange noted that CO orders:
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    \20\ See id. at 59317.

    [W]ill add greater efficiency to the closing process by 
providing an additional source of liquidity to offset an imbalance 
going into the closing transaction. The proposed modifications will 
provide investors with a more accurate depiction of the market 
interest prior to the closing transaction thereby allowing them to 
make better informed trading decisions.\21\
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    \21\ Id.
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SEC's Approval Order
    In December 2009, the SEC issued an order approving amended Rule 
123C(7)(b) in the form proposed by the Exchange.\22\ In its approval 
order, the SEC reiterated the mechanics of CO orders as described by 
the Exchange in its proposal.\23\ More significantly, however, the SEC 
explicitly acknowledged and approved the timing and priority of 
execution of CO orders.\24\

[[Page 2236]]

The SEC explicitly stated that CO orders would be executed after all 
other orders, including G orders.\25\ The SEC approval order stated:
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    \22\ See Securities Exchange Act Release No. 61244 (Dec. 28, 
2009), 75 FR 479 (January 5, 2010) (File No. SR-NYSEAmex-2009-81).
    \23\ See id. at 481.
    \24\ See id. at 481-482.
    \25\ See id. at 481.

    The Exchange further proposes to create a CO order type, which 
would provide all market participants an additional method to offset 
an order imbalance at the close. The CO order would not be 
guaranteed to participate in the closing transaction. CO orders 
would only be eligible to participate in the closing transaction 
when there is an imbalance of orders to be executed on the opposite 
side of the market from the CO order and there is no other interest 
remaining to trade at the closing price. CO orders must yield to all 
other eligible interest (emphasis added).\26\
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    \26\ Id. at 481.

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    The SEC approval order further stated:

    If there is an imbalance at the close and the price of the 
closing transaction is at or within the limit of the CO order, the 
CO order would be eligible to participate in the closing 
transaction, subject to strict time priority of receipt in Exchange 
systems among such eligible CO orders and after yielding to all 
other interest in the closing execution, including MOCs, marketable 
LOCs, ``G'' orders, DMM interest, and at-priced LOCs (emphasis 
added).\27\
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    \27\ Id. at 481.

    The SEC endorsed the Exchange's assertion that CO orders are 
beneficial to investors and to the marketplace.\28\ The SEC stated in 
the approval order, ``[t]he creation of the CO order provides an 
additional source of liquidity to offset an imbalance going into the 
closing transaction, and thus should increase the greater efficiency of 
the closing process.'' \29\
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    \28\ See id. at 482.
    \29\ Id.
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    The SEC found the amendments to Rule 123C, including the addition 
of CO orders and the execution priority, to be ``consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.'' \30\ In support of this 
determination, the Commission stated that it:
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    \30\ Id.

    [B]elieves that these proposed modifications are consistent with 
the Act because, taken as a whole, they should enhance the 
efficiency and transparency of the closing transaction and provide 
customers with a more accurate depiction of market conditions prior 
to the closing transaction, and therefore allow them to make better-
informed trading decisions.\31\
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    \31\ Id.

    Subsequently, the SEC staff questioned whether the priority of 
execution of orders at the close was consistent with Section 11(a) of 
the Act and the rules promulgated thereunder. In particular, the SEC 
staff questioned whether G orders should take priority over CO orders. 
The Exchange began discussions with the SEC staff regarding a potential 
exemption from Section 11(a) of the Act or no-action relief for the 
limited purposes of priority of the CO order type on the close. After 
significant discussion with the SEC staff, the Exchange determined that 
rather than seek such an exemption or no-action relief, it would file a 
proposed rule change to change the order of execution in the closing 
rotation.
Proposed Rule Change
    The Exchange now proposes to modify the hierarchy of interests that 
may be used to offset a closing imbalance, specifically by switching 
the positions in the hierarchy of G orders with a price equal to the 
closing price and CO orders. Accordingly, under the Exchange's proposed 
amendment to Rule 123C(7)(b), CO orders will be moved up in the 
execution hierarchy and G orders would give up execution priority to 
all other order types. The amended rule would allow execution in the 
following execution hierarchy to offset a closing imbalance:
    (i) Limit orders represented in the Display Book with a price equal 
to the closing price and DMM interest;
    (ii) LOC orders with a price equal to the closing price;
    (iii) MOC orders that have tick restrictions that limit the 
execution of the MOC to the price of the closing transaction;
    (iv) LOC orders that have tick restrictions that are capable of 
being executed based on the closing price and the price of such limit 
order is equal to the price of the closing transaction;
    (v) CO orders; and
    (vi) G orders with a price equal to the closing price.
    The Exchange believes that Rule 123C(7)(b), as proposed, would 
continue to provide Exchange participants with control of and 
flexibility with respect to the handling of their orders to be executed 
in the closing transaction. The Exchange also believes that the 
proposed change to the hierarchy of interest that may be used to offset 
a closing imbalance would help ensure that G orders yield priority, 
parity and precedence to CO orders. The Exchange also notes its 
continued belief that the CO order type provides an important source of 
liquidity to offset an imbalance going into the closing transaction, 
and thus increases the efficiency of the closing process. The Exchange 
believes that the proposed modification to the hierarchy balances the 
requirement that G orders yield priority, parity and precedence to all 
non-G orders, with the important goal of preserving the role that CO 
orders play in increasing the efficiency of the closing process.
    Because of the technology changes associated with this proposed 
rule change, the Exchange will announce by Trader Update when it will 
implement the proposed change.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\32\ in general, and furthers the objectives of Section 6(b)(5) of 
the Act,\33\ in particular, in that it is designed to ``prevent 
fraudulent and manipulative acts and practices,'' ``promote just and 
equitable principals of trade,'' ``remove impediments to and perfect 
the mechanism of a free and open market and a national market system'' 
and ``protect investors and the public interest.''
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed modification to the 
execution hierarchy of pending interest that may be used to offset a 
closing imbalance would continue to advance the efficiency and 
transparency of the closing transaction and continue to provide 
customers with information regarding the hierarchy of interest that may 
be used to offset a closing imbalance, which would continue to allow 
customers to make better informed decisions. In addition, the Exchange 
believes that the proposed reordering is consistent with the Act as it 
would help ensure that G orders yield priority, parity and precedence 
in execution to CO orders, consistent with Section 11(a)(1)(G) of the 
Act.\34\
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    \34\ 15 U.S.C. 78k(a)(1)(G).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change would not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the Act 
because the proposal to modify the hierarchy of interest that may be 
used to offset a closing imbalance would help ensure that G orders 
yield priority, parity and precedence in execution to CO orders, 
consistent with Section 11(a)(1)(G) of the Act.\35\ At the same time, 
the proposal would preserve the important benefits that CO orders 
provide as an additional source of liquidity to offset

[[Page 2237]]

an imbalance going into the closing transaction.
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    \35\ 15 U.S.C. 78k(a)(1)(G).
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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 19(b)(3)(A) of the Act \36\ and Rule 19b-4(f)(6) \37\ 
thereunder.
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    \36\ 15 U.S.C. 78s(b)(3)(A).
    \37\ 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 to 
determine whether the proposed rule should be approved or 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-NYSEMKT-2013-107 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-2013-107. 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-2013-107 and should 
be submitted on or before February 3, 2014. For the Commission, by the 
Division of Trading and Markets, pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00344 Filed 1-10-14; 8:45 am]
BILLING CODE 8011-01-P