[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Notices]
[Pages 3895-3897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01251]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71330; File No. SR-NYSE-2013-71]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change Amending NYSE Rules 13, 70.25, 107C and 
1000 To Adopt a New Order Type Called a Midpoint Passive Liquidity 
Order

January 16, 2014.

I. Introduction

    On November 18, 2013, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend: (1) NYSE Rule 13 to adopt a new order 
type called a Midpoint Passive Liquidity (``MPL'') Order; (2) NYSE Rule 
1000 to specify that the proposed MPL Orders may interact with Capital 
Commitment Schedule (``CCS'') interest; (3) NYSE Rule 70.25 to permit 
d-Quotes to be designated with a midpoint modifier in order to set the 
discretionary price to the midpoint of the protected best bid or best 
offer (``PBBO''); and (4) NYSE Rule 107C to incorporate the proposed 
MPL Order into the Retail Liquidity Program. The proposed rule change 
was published for comment in the Federal Register on December 4, 
2013.\3\ The Commission received no comment letters on the proposed 
rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70956 (November 27, 
2013), 78 FR 72968.
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II. Description of the Proposed Rule Change

A. Proposed MPL Order

    The Exchange proposes the MPL Order as an undisplayed limit order 
that would automatically execute at the mid-point of the protected best 
bid (``PBB'') and the protected best offer (``PBO''). An MPL Order 
could interact with any incoming order, including another MPL Order, 
and could execute at prices out to four decimal places.
    The proposed rule specifies certain limitations on the usage and 
execution of an MPL Order. First, an MPL Order would not be eligible to 
trade if it would trade at a price below $1.00 or if the execution 
price would be out to five decimal places above $1.00. Second, an MPL 
Order could not be designated as Good Till Cancelled. Finally, an MPL 
Order would not execute if the market were locked or crossed. When a 
market that had been locked or crossed becomes no longer locked or 
crossed, the Exchange would execute all eligible MPL Orders and other 
hidden interest eligible to execute at the midpoint of the PBBO.
    With regards to order allocation, MPL Orders would be allocated on 
a parity-by-agent basis, consistent with NYSE Rule 72. Moreover, an MPL 
Order's time priority would be based on its time of entry into Exchange 
systems and would not reset when an MPL Order's price shifted due to 
changes in the PBBO.
    Under the proposal, an MPL Order could also include a Minimum 
Triggering Volume (``MTV''), in which case the MPL Order would not be 
eligible to trade unless the aggregated contra-side quantity of all 
interest marketable at the midpoint of the PBBO were equal to or 
greater than the MPL Order's MTV. There would be no guaranteed trade 
size based on the MTV. Exchange systems would enforce an MTV 
restriction even if the unexecuted portion of an MPL Order with an MTV 
were less than the MTV.
    An MPL Order that included an MTV would be rejected if it also 
included a Self Trade Prevention (``STP'') Modifier. As proposed, STP 
Modifiers could be used with MPL Orders that do not include an MTV. An 
MPL Order with an STP Modifier, however, might be cancelled depending 
on the type of order on the contra-side. An MPL Order with an STP 
Modifier would not execute against another MPL Order or against a non-
MPL Order with an STP Modifier with the same market participant 
identifier (``MPID'').
    Further, under the proposal, users could designate an MPL Order 
with an add-liquidity-only (``ALO'') modifier (``MPL-ALO Order''). An 
MPL-ALO Order would not execute on arrival, even if marketable, but 
would remain non-displayed in the book until triggered to trade by 
arriving contra-side marketable interest. An incoming non-marketable 
MPL-ALO Order, however, could trigger a discretionary trade.\4\ An MPL-
ALO Order would only be eligible to trade against incoming contra-side 
interest and would not interact with contra-side interest resting in 
the book. A resting MPL-ALO Order would not be eligible to trade when 
arriving same-side interest triggered a trade with contra-side 
interest. An MPL-ALO Order would have to be at least one round lot.
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    \4\ Under the proposal, an MPL-ALO Order triggering a 
discretionary trade would be the ``liquidity provider,'' and the 
triggered discretionary order would be the ``liquidity taker.''
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    An MPL Order would not be eligible for manual executions, including 
openings, re-openings, or closing transactions. As such, MPL Orders 
would not be available to be designated as Limit ``On-the-Open'' 
(``LOO'') or Limit ``At-the-Close'' (``LOC'') Orders. As fully 
undisplayed interest, MPL Orders would not be visible to the DMM on the 
Floor under any circumstances.
    Additionally, MPL Orders would not be available to be entered for 
high-priced securities. High-priced securities are securities with a 
closing price--or, if the security did not trade, the closing bid 
price--on the Exchange of $10,000 or more on the previous trading 
day.\5\ Such securities are not available for automatic execution. 
Because MPL Orders are not eligible for manual executions, MPL Orders 
would not be available for these high-priced securities.
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    \5\ See NYSE Rule 1000(a)(vi).
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B. MPL Order Interaction With CCS Interest

    The CCS is a liquidity schedule setting forth various price points 
at which the DMM is willing to interact with incoming orders. CCS 
interest will either execute at the price at which the full size of the 
order can be satisfied (``completion price'') or at the next price that 
is one minimum price variation (``MPV'') higher (in the case of an 
order to sell) or lower (in the case of an order to buy). The Exchange 
has stated that it believes that CCS interest cannot be designated as 
an MPL Order because MPL Orders are priced at the midpoint of the PBBO 
and could be priced less than one MPV above or below the completion 
price.
    While, under the proposal, CCS interest cannot be designated as an 
MPL Order, CCS interest would be eligible to interact with MPL Orders. 
Currently, CCS interest is eligible to trade inside the Exchange BBO at 
a price representing (1) the non-displayable reserve interest of 
Reserve Orders \6\ or (2) the reserve interest of Floor broker agency 
interest files. The Exchange is

[[Page 3896]]

proposing to expand this list by amending NYSE Rule 1000(f)(1)(B) to 
include MPL Orders.
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    \6\ A Reserve Order means a limit order entered into Exchange 
systems that may contain displayable and non displayable interest. 
See NYSE Rule 13.
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C. Proposed MPL Order Interaction With d-Quotes

    MPL Orders would not be available for d-Quotes \7\ since the 
Exchange proposes to allow d-Quotes with a mid-point modifier as 
described below. MPL Orders would not be available for pegging interest 
since pegging interest is set to track the PBB or the PBO as the PBBO 
changes, while MPL Orders would always be priced at the midpoint of the 
PBBO.
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    \7\ See NYSE Rule 70.25 (defining d-Quotes as discretionary 
instructions with respect to a Floor broker's agency interest file 
(e-Quotes)).
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    The Exchange proposes to make a midpoint modifier available for d-
Quotes that would have a discretionary range up to the midpoint of the 
PBBO.\8\
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    \8\ The Exchange notes that the MPL Order and the midpoint 
modifier are distinct functionalities. An MPL Order would always be 
priced at the midpoint of the PBBO and would execute at that price. 
A d-Quote designated with a midpoint modifier would use its 
discretion to execute up to the midpoint but could execute at a 
less-aggressive price. As such, a d-Quote with a midpoint modifier 
would operate as a d-Quote that updated with changes in the PBBO to 
set the discretionary price range to the midpoint of the PBBO.
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    In order to accommodate the use of a midpoint modifier, the 
Exchange is proposing to amend Rule 70.25(b)(ii), which states that the 
minimum price range for a d-Quote is the minimum price variation set 
forth in Exchange Rule 62. Rule 62 sets the minimum price variation at 
$0.01 for stocks priced greater than $1.00. However, with the midpoint 
modifier, a d-Quote can have a minimum price variation of $0.005. 
Therefore, the Exchange is proposing to amend this restriction by 
excepting d-Quotes with a midpoint modifier.

D. Incorporation of MPL Orders Into Retail Liquidity Program

    Retail Orders or Retail Price Improvement Interest, as defined in 
NYSE Rule 107C, could not be designated as MPL Orders. MPL Orders, 
however, could interact with incoming Retail Orders.
    The Exchange proposed that MPL Orders be available to interact with 
Retail Orders within the Retail Liquidity Program (``Retail Program''), 
a pilot program.\9\ The Exchange proposes to permit all Retail Orders 
to interact with, in addition to available contra-side RPIs, available 
contra-side MPL Orders. When determining the price to execute a Retail 
Order, Exchange systems would consider all eligible RPIs and MPL 
Orders. If the only interest were MPL Orders, the Retail Order would 
execute against one or more MPL Orders at the midpoint of the PBBO. If 
the only interest were RPIs, then the execution would occur against one 
or more RPIs at the price level that completes the incoming order's 
execution. If both RPIs and MPL Orders were present on the book, then 
Exchange systems would determine the price level at which the incoming 
Retail Order could be executed in full (``clean-up price''). If the 
clean-up price were equal to the midpoint of the PBBO, RPIs would 
receive priority over MPL Orders, and Retail Orders would execute 
against both RPIs and MPL Orders at the midpoint. If the clean-up price 
were worse than the midpoint of the PBBO, the Retail Order would 
execute first with the MPL Orders at the midpoint of the PBBO, and any 
remaining quantity of the Retail Order would execute with the RPIs at 
the clean-up price. If the clean-up price were better than the midpoint 
of the PBBO, then the Retail Order would execute against the RPIs at 
the clean-up price and would ignore the MPL Orders.
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    \9\ Under the Retail Program, retail liquidity providers 
(``Providers'') are able to provide potential price improvement in 
the form of a non-displayed order that is priced better than the 
PBBO, called a Retail Price Improvement Order (``RPI''). Retail 
Member Organizations (``RMOs'') can submit a Retail Order to the 
Exchange, which interacts, to the extent possible, with available 
contra-side RPIs. Retail Orders may be designated as Type 1, Type 2, 
or Type 3. A Type 1 Retail Order interacts with available contra-
side RPIs and does not interact with other available contra-side 
interest in Exchange systems or route to other markets. A Type 2 
Retail Order interacts with available contra-side RPIs and any 
remaining portion of the Retail Order is executed as a Regulation 
NMS-compliant Immediate or Cancel Order pursuant to NYSE Rule 13. A 
Type 3 Retail Order interacts first with available contra-side RPIs 
and any remaining portion of the Retail Order is executed as an NYSE 
Immediate or Cancel Order pursuant to Rule 13.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest and that the rules of a national 
securities exchange not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \10\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act. The Commission believes that the 
proposed MPL Order is designed to enhance order execution opportunities 
on the Exchange by providing market participants with an additional 
order type to interact with other trading interests. The Commission 
also believes that the proposed MPL Orders is designed to allow for 
additional opportunities for investors to trade at the midpoint of the 
PBBO, which may provide price improvement to incoming orders. 
Additionally, the Commission believes that the proposed introduction of 
the MPL Order could provide market participants with better control 
over their execution costs and with a means to offer price improvement 
opportunities. The Commission notes that other exchanges offer similar 
functions as the MPL Order.\12\
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    \12\ See e.g., NYSE Arca Equities Rule 7.31(h)(5). See also EDGA 
Exchange, Inc. Rule 11.5(c)(7); BATS Exchange, Inc. Rule 11.9(c)(9); 
and NASDAQ Stock Market LLC Rule 4751(f)(4).
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    The Commission believes that it is appropriate for the Exchange not 
to allow DMMs to enter MPL Orders through CCS, because CCS interest 
must observe the MPV in certain circumstances, but MPL Orders would be 
tied to the midpoint of the protected NBBO and could therefore have 
prices that do not observe the MPV. Further, the Commission believes 
that it is appropriate not to allow d-Quotes to enter MPL Orders, as d-
Quotes would have a mid-point modifier that would provide a 
functionality similar to MPL Orders.\13\ Finally, the Commission 
believes that allowing MPL Orders to interact with retail orders in the 
Retail Program is designed to expand the potential for price 
improvement to retail investors.
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    \13\ The Commission notes that pegging interests would also 
conflict with the nature of MPL Order, since pegging interests are 
orders that are pegged to the PBB or PBO as the PBBO changes. See 
NYSE Rule 13.
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    Therefore, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-2013-71) be, and it 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).


[[Page 3897]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01251 Filed 1-22-14; 8:45 am]
BILLING CODE 8011-01-P