[Federal Register Volume 80, Number 46 (Tuesday, March 10, 2015)]
[Notices]
[Pages 12687-12689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-05496]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74440; File No. SR-NYSEMKT-2014-116]
Self-Regulatory Organizations; NYSE MKT LLC; Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Amend Rule 967NY and To Adopt Rule 967.1NY To Provide Price Protection
for Market Maker Quotes
March 4, 2015.
I. Introduction
On December 29, 2014, NYSE MKT LLC (``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 Exchange
Rule 967NY (Price Protection) and to adopt Exchange Rule 967.1NY to
provide price protection for Market Maker quotes. The proposed rule
change was published for comment in the Federal Register on January 14,
2015.\3\ The Commission received no comment letters on the proposal. On
March 2, 2015, the Exchange filed Amendment No. 1 to the proposed rule
change.\4\ This order approves the proposed rule change, as modified by
Amendment No. 1 thereto.
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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. 74017 (January 8,
2015), 80 FR 1979 (``Notice'').
\4\ In Amendment No. 1, the Exchange clarified that it believes
that Market Maker bids should not be priced the same as or higher
than the corresponding benchmark, which would be the price of the
underlying security for call options and the strike price for put
options. Amendment No. 1 does not change any of the proposed rule
text that was submitted in the original filing. Amendment No. 1 is
technical in nature and, therefore, the Commission is not publishing
it for comment.
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II. Description of the Proposal
The Exchange proposed to amend Exchange Rule 967NY and to adopt
Exchange Rule 967.1NY to provide price protection for Market Maker
quotes. Exchange Rule 967NY currently applies
[[Page 12688]]
and will continue to apply solely to orders. Exchange Rule 967NY(b),
provides a price protection filter for incoming limit orders, pursuant
to which the Exchange rejects limit orders priced a specified
percentage \5\ through the National Best Bid (``NBB'') or National Best
Offer (``NBO'') (``Limit Order Filter''). To clarify that Exchange Rule
967NY applies only to orders, the Exchange proposed to append the word
``Orders'' to the Exchange Rule 967NY header to provide ``Rule 967NY.
Price Protection--Orders.''\6\
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\5\ Pursuant to Exchange Rule 967NY(b), unless determined
otherwise by the Exchange and announced to ATP Holders via Trader
Update, the specified percentage is 100% for the contra-side NBB or
NBO priced at or below $1.00 and 50% for contra-side NBB or NBO
priced above $1.00. See Notice, supra note 3, at 1979.
\6\ See Notice, supra note 3, at 1979.
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A. Proposed Market Maker Quote Price Protection
The Exchange proposed to adopt new Exchange Rule 967.1NY to provide
for a price protection mechanism for quotes entered by a Market Maker.
Exchange Rule 967.1NY(a) will provide price protection filters
applicable only for quotes entered by a Market Maker pursuant to Rule
925.1NY and will not be applicable to orders entered by a Market Maker.
The Exchange proposed to provide for two layers of price protection
that will be applicable to all incoming Market Maker quotes.\7\ The
first layer of price protection will assess incoming sell quotes
against the NBB and incoming buy quotes against the NBO.\8\ The second
layer of price protection will assess the price of call or put bids
against a specified benchmark.
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\7\ The Exchange states that the proposal will assist with the
maintenance of fair and orderly markets by averting the risk of
Market Maker quotes sweeping through multiple price points resulting
in executions at prices that are through the last sale price or
National Best Bid or Best Offer (``NBBO''). See Notice, supra note
3, at 1979.
\8\ The Exchange represents that this proposed price protection
mechanism is similar to the Exchange's Limit Order Filter. See
Notice, supra note 3, at 1979.
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1. NBBO Price Reasonability Check
Proposed Exchange Rule 967.1NY(a)(1) sets forth the Exchange's
proposed NBBO price reasonability check, which will compare Market
Maker bids with the NBO and Market Maker offers with the NBB.
Specifically, provided that an NBBO is available, a Market Maker quote
will be rejected if it is priced a specified dollar amount or
percentage through the contra-side NBBO as follows:
(A) $1.00 for Market Maker bids when the contra-side NBO is priced
at or below $1.00; or
(B) 50% for Market Maker bids (offers) when the contra-side NBO
(NBB) is priced above $1.00.
The Exchange will reject inbound Market Maker quotes that exceed
the parameters set forth in proposed Exchange Rule 967.1NY(a)(1)(A)-
(B).\9\ The Exchange states that it has proposed a specific dollar
threshold for when the NBO is priced at or below $1.00 because, for
such low-priced NBOs, the Exchange believes it is appropriate to
provide Market Makers with the ability to enter quotes at least $1.00
higher than the prevailing NBO.\10\ For example, if the NBO were $0.06,
when using a 100% filter, the Exchange would be required to reject any
bids priced $0.12 or more. In addition, the Exchange proposed that
pursuant to proposed Exchange Rule 967.1NY(a)(1)(A), Market Maker
offers that arrive when the NBB is priced at or below $1.00 will not be
subject to this filter. The Exchange notes that when the NBB is priced
at or below $1.00, the price of an offer will be bound by $0.00, and
therefore an offer will always be less than $1.00 away from the
NBB.\11\
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\9\ The Exchange states that the proposed percentages are
appropriate because they are based on the percentages established
for the Limit Order Filter. See Notice, supra note 3, at 1979.
\10\ See Notice, supra note 3, at 1979.
\11\ The Exchange states that such offer prices would likely not
be erroneous and therefore the Exchange does not believe it
necessary to reject such Market Maker offers. See Notice, supra note
3, at 1980.
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Because there may be market scenarios that require the proposed
parameters to be adjusted, for example, during periods of extreme price
volatility, the Exchange has further proposed that the Exchange may
revise these parameters, provided such revised parameters are announced
to ATP Holders via a Trader Update.\12\
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\12\ See proposed Exchange Rule 967.1NY(a)(1)(A)-(B) (setting
forth the specified dollar amount or percentages ``unless determined
otherwise by the Exchange and announced to ATP Holders via Trader
Update'').
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The Exchange also proposed that if a Market Maker quote is rejected
pursuant to paragraph (a)(1) of the proposed rule, the Exchange will
also cancel any resting same-side quote in the affected series from
that Market Maker.\13\ According to the Exchange, even if the new quote
is rejected because it is priced a specified dollar amount or
percentage through the contra-side NBBO, in violation of proposed
Exchange Rule 967.1NY(a)(1), the Market Maker's implicit instruction to
cancel the resting quote remains valid nonetheless.\14\
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\13\ See proposed Exchange Rule 967.1NY(b). The Exchange states
that it believes it is appropriate to reject any resting same-side
quote because when a Market Maker submits a new quote, that Market
Maker is implicitly instructing the Exchange to cancel any resting
quote in that same series. See Notice, supra note 3, at 1980.
\14\ See Notice, supra note 3, at 1980 for examples illustrating
how proposed Exchange Rule 967.1NY(a) will operate.
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2. Underlying Stock Price/Strike Price Check
The Exchange also has proposed new Exchange Rule 967.1NY(a)(2) and
(3) which will set forth the Exchange's proposed second layer of price
protection filters for Market Maker quotes. These price protection
mechanisms will be applicable when either there is no NBBO available,
for example, during pre-opening or prior to conducting a re-opening
after a trading halt, or if the NBBO is so wide as to not to reflect an
appropriate price for the respective options series. Proposed Exchange
Rule 967.1NY(a)(2) will also provide price protection for Market Maker
bids in call options. As proposed, if such bids equal or exceed the
price of the underlying security, the Market Maker bid will be
rejected.\15\
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\15\ See proposed Exchange Rule 967.1NY(a)(2). With a call bid,
a Market Maker is bidding to buy an option that would be exercised
into the right to acquire the underlying security. The Exchange
states that it does not believe that a derivative product, which
conveys the right to purchase a security underlying the derivative,
should ever be priced the same as or higher than the prevailing
price of the underlying security itself. Accordingly, the Exchange
believes it is appropriate to reject Market Maker bids for call
options that are equal to or in excess of the price of the
underlying security. See Notice, supra note 3, at 1980. See also
Amendment No. 1, supra note 4.
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Under new Exchange Rule 967.1NY(a)(2)(A), before the underlying
security is open, the Exchange will use the previous day's closing
price to determine the price of the underlying security.\16\ Under new
Exchange Rule 967.1NY(a)(2)(B), once the underlying security has
opened, the Exchange will use the consolidated last sale price to
determine the price of the underlying security. Under new Exchange Rule
967.1NY(a)(2)(C), during a trading halt of the underlying security, the
Exchange will use the consolidated last sale reported immediately prior
to the trading halt to determine the price of the underlying
security.\17\ New Exchange
[[Page 12689]]
Rule 967.1NY(a)(3) will provide for price protection for Market Maker
bids in put options. In particular, any Market Maker bid for put
options will be rejected if the price of the bid is equal to or greater
than the strike price of the option.\18\
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\16\ According to the Exchange, although the underlying
securities may trade in the equities markets outside of 9:30 a.m. ET
to 4:00 p.m. ET, the equities market is generally not as liquid
during this time and equity market makers generally do not have
quoting obligations in after-hours trading. Therefore, the Exchange
believes that using the previous day's closing price--based on
trading during Core Trading Hours, when the market is most liquid--
provides a more accurate benchmark and thus a more precise price
protection filter for underlying securities that have not yet
opened. See Notice, supra note 3, at 1980.
\17\ The Exchange believes that the consolidated last sale price
for an underlying security that has already opened will provide the
most accurate benchmark because the market is most liquid during
Core Trading Hours. See Notice, supra note 3, at 1981.
\18\ The Exchange states that the value of a put can never
exceed the strike price of the option, even if the stock goes to
zero. For example, a put with a strike price of $50 gives the holder
the right to sell the underlying security for $50 (no more, or no
less), therefore the Exchange states that it would be illogical to
pay $50 or more for the right to sell that underlying security, no
matter what the price of the underlying security. See Notice, supra
note 3, at 1981. See also Amendment No. 1, supra note 4.
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The Exchange also has proposed that when a Market Maker quote is
rejected pursuant to paragraph (a)(2) or (a)(3) of the proposed rule,
the Exchange will also cancel all resting quote(s) in the affected
class(es) from that Market Maker and will not accept new quote(s) in
the affected class(es) until the Market Maker submits a message (which
may be automated) to the Exchange to enable the entry of new
quotes.\19\
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\19\ See proposed Exchange Rule 967.1NY(b). The Exchange
believes that this temporary suspension from quoting in the affected
option class(es) would operate as a safety valve that forces Market
Makers to re-evaluate their positions before requesting to re-enter
the market. See Notice, supra note 3, at 1981. See also Notice,
supra note 3, at 1981 for examples illustrating how proposed
Exchange Rule 967.1NY(a)(2) and (a)(3) would operate.
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B. Implementation
The Exchange stated that it would announce the implementation date
of the proposed rule change in a Trader Update and publish such
announcement at least 30 days prior to implementation.
III. Discussion and Commission 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
and, in particular, with section 6(b) of the Act.\20\ In particular,
the Commission finds that the proposed rule change is consistent with
sections 6(b)(5) of the Act,\21\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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.
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\20\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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The proposed rule change provides a price protection mechanism for
quotes entered by a Market Maker when an NBBO is available that are
priced a specified dollar amount or percentage through the last sale or
prevailing contra-side market, which the Exchange believes is evidence
of error. The Commission believes that the proposed price protection
mechanism is reasonably designed to promote just and equitable
principles of trade by preventing potential price dislocation that
could result from erroneous Market Maker quotes sweeping through
multiple price points resulting in executions at prices that are
through the last sale price or NBBO.\22\
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\22\ See Notice, supra note 3, at 1981.
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The Exchange's proposed use of benchmarks to check the
reasonability of Market Maker bids for call and put options affords a
second layer of price protection to Market Maker quotes. The Commission
believes that the additional price reasonability check on Market Maker
bids that are priced equal to or greater than the price of the
underlying security for call options, and equal to or greater than the
strike price for put options, is reasonably designed to operate in
manner that would remove impediments to and perfect the mechanism of a
free and open market and protect investors and the public interest.
Further, the Commission notes the Exchange's belief that the additional
risk controls that result in the cancellation of a Market Maker's
resting same side quote and/or the temporary suspension a Market
Maker's quoting activity in the affected option class(es), as
applicable, provide market participants with additional protection from
anomalous executions.\23\
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\23\ See Notice, supra note 3, at 1982.
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Accordingly, the Commission believes that the proposed price
protection for Market Maker quotes is reasonably designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-NYSEMKT-2014-116), as
modified by Amendment No. 1, be, and hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-05496 Filed 3-9-15; 8:45 am]
BILLING CODE 8011-01-P