[Federal Register Volume 81, Number 70 (Tuesday, April 12, 2016)]
[Notices]
[Pages 21639-21641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08303]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77539; File No. SR-NYSEARCA-2016-49]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change to Rule 6.64 With Respect to Opening Trading in 
an Options Series

April 6, 2016.
    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 March 23, 2016, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') 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 changes to Rule 6.64 (OX Opening Process) 
with respect to opening trading in an options series. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing changes to Rule 6.64 with respect to 
opening trading in an option series as described below.
Opening Process
    Rule 6.64 describes the process pursuant to which OX (``OX 
System'') \4\ opens an option series. Paragraphs (b) and (c) of Rule 
6.64 provide that, after the primary market for the underlying security 
disseminates the opening trade or opening quote, the OX System then 
conducts an ``Auction Process'' to open a series whereby the OX System 
determines a single price at which a series may be opened by looking 
to: (i) The midpoint of the initial uncrossed NBBO disseminated by the 
Options Price Reporting Authority (``OPRA''), if any, or (ii) the 
midpoint of the best quotes or orders in the OX Book. If the bid-ask 
differential for a series is not within an acceptable range, the OX 
System will not conduct an Auction Process.\5\ For purposes of this 
rule, the acceptable range means the bid-ask differential guidelines 
specified in Rule 6.37(b)(1)(A)-(E).\6\ Assuming the bid-ask 
differential is within the acceptable range, the OX System matches up 
orders and quotes based on price-time priority \7\ and executes the 
orders that are matched at the midpoint pricing.\8\
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    \4\ The term ``OX'' refers to the Exchange's electronic order 
delivery, execution and reporting system for designated option 
issues through which orders and quotes of Users are consolidated for 
execution and/or display. See Rule 6.1A(a)(13) (defining ``OX'').
    \5\ The Auction bid-ask differentials are known in common 
parlance as ``legal-width quotes.''
    \6\ Rule 6.37(b)(1). The bid-ask guidelines specified in Rule 
6.37(b)(1)(A)-(E) that are required to open a series are narrower 
than the $5 wide bid-ask differential for options traded on OX 
during Core Trading Hours.
    \7\ Orders will have priority over Market Maker quotes at the 
same price. See Rule 6.64(b)(B).
    \8\ See Rule 6.64(b)(B). The Exchange notes that the word Order 
appears capitalized in this paragraph and, because it is not a 
defined term, the Exchange proposes the non-substantive change of 
eliminating the capitalization.
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    Any orders in the OX System that are not executed in the Auction 
Process become eligible for the Core Trading Session immediately after 
the conclusion of the Auction Process. If the OX System does not open a 
series with an Auction Process, the OX System shall open the series for 
trading after receiving notification of an initial NBBO disseminated by 
OPRA for the series or on a Market Maker quote, provided that the bid-
ask differential does not exceed the bid-ask differential specified 
under Rule 6.37A(b)(4).\9\
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    \9\ See Rule 6.37A(b)(4). See Rule 6.37(b)(5) [sic] provides 
that options traded on OX during Core Trading Hours may be quoted 
with a difference not to exceed $5 between the bid and offer 
regardless of the price of the bid.
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Proposed Modifications to the Opening Process
    First, the Exchange proposes to change Rule 6.64(b) regarding how 
the OX System determines when to start the Auction Process. Current 
paragraph (b) of the Rule provides that ``[a]fter the primary market 
for the underlying security disseminates the opening trade or the 
opening quote, the related option series will be opened 
automatically.'' However, because it is possible that either an opening 
quote or opening trade alone may not accurately reflect the state of 
the market, the Exchange proposes to specify that an option series will 
be opened automatically, ``once the primary market for the underlying 
security disseminates a quote and a trade that is at or within the 
quote.'' \10\ The Exchange believes the proposed change makes clear 
that the Exchange would only open a series automatically after it 
receives a quote in the underlying security and a trade in that 
security at or between the disseminated quote rather than simply upon 
receipt of

[[Page 21640]]

either an ``opening trade or opening quote.'' The Exchange believes 
that waiting to open trading in an option series until there has been 
both a disseminated quote and trade in the underlying security would 
help to augment the Auction Process by ensuring that an underlying 
security has been opened pursuant to a robust price discovery process 
before opening the overlying options for trading. The Exchange believes 
that the proposed change would provide market participants with greater 
certainty as to the true state of the market at the opening of the 
trading day and should lead to more accurate prices on the 
Exchange.\11\
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    \10\ See proposed Rule 6.64 (b). The Exchange also proposes to 
clarify that ``[a]t or after 9:30 a.m. Eastern Time,'' i.e., when 
the market opens, the Exchange would initiate the Opening Process 
for all series associated with the underlying security. See id.
    \11\ The Exchange notes that it would not open, for example if 
the first disseminated quote in the underlying security is $50.50 
bid, $50.75 ask, and the first trade in the underlying had been 
executed for $50.00. The Exchange would, however open if the first 
trade in the underlying was $50.50.
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    Next, the Exchange proposes to modify Rule 6.64(b)(E), which 
currently provides, in relevant part, that ``[i]f the OX System does 
not open a series with an Auction Process, the OX System shall open the 
series for trading after receiving notification of an initial NBBO 
disseminated by OPRA for the series or on a Market Maker quote.'' \12\ 
However, the Exchange has determined that it would no longer open on a 
local Market Maker quote but would require that Market Maker quotes, 
like the NBBO, come from OPRA. Thus, the Exchange proposes to open 
after receiving an ``initial uncrossed NBBO from ORRA'' and to delete 
rule text related to opening on a Market Maker quote.\13\ The Exchange 
notes that OPRA disseminates to each exchange the NBBO as well as the 
top of book for each exchange, such that the Exchange's market maker 
quote would be disseminated back to the Exchange as the BBO--and could 
be, but is not necessarily, the NBBO. Because OPRA disseminates this 
information to all exchanges at the same time, the Exchange believes 
the proposal to open only after receiving an uncrossed NBBO from OPRA 
would eliminate any ambiguity as to the source of the information used 
to open each series and should lead to more accurate prices on the 
Exchange.
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    \12\ See Rule 6.64(b)(E).
    \13\ See proposed Rule 6.64(b)(E) (providing that ``[i]f the OX 
System does not open a series with an Auction Process, the OX System 
shall open the series for trading after receiving notification of an 
initial uncrossed NBBO disseminated by OPRA for the series, provided 
that the bid-ask differential does not exceed the bid-ask 
differential specified under Rule 6.37A(b)(4).''
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    In connection with the proposed changes to Rule 6.64(b), the 
Exchange likewise proposes to strike from Rule 6.64(c) reference to 
``the midpoint of the best quote bids and quote offers in the OX Book'' 
as it relates to the Exchange determining the opening price for options 
issues designated for trading on the OX System.\14\ The Exchange 
believes this conforming change is necessary given that the Exchange 
would no longer open solely on a Market Maker quote and therefore this 
information would not form the basis of the opening price of a series. 
As proposed, the opening price of a series would be the price ``at 
which the greatest number of contracts will trade at or nearest to the 
midpoint of the initial uncrossed NBBO disseminated by OPRA.'' \15\ The 
Exchange believes this change adds transparency and internal 
consistency to the rule text.
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    \14\ Current Rule 6.64(c) provides, in relevant part, that the 
opening price of a series will be the price ``at which the greatest 
number of contracts will trade at or nearest to the midpoint of the 
initial uncrossed NBBO disseminated by OPRA, if any, or the midpoint 
of the best quote bids and quote offers in the OX Book.''
    \15\ See proposed Rule 6.64(c).
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    Finally, the Exchange proposes new paragraph (F) to Rule 6.64(b) to 
provide the Exchange with discretion to deviate from the standard 
Opening Process where it is necessary in the interests of a fair and 
orderly market.\16\ This proposed rule change is based on the rules of 
other options exchanges.\17\ Similar to how other markets operate, the 
Exchange believes it may be appropriate, in the interest of a fair and 
orderly market, to open trading even if the conditions specified in 
Rule 6.64 are not met. For example, if the primary market is unable to 
open due to a systems or technical issue, but trading in the underlying 
security is otherwise unaffected, the Exchange believes it would be 
appropriate to open trading in any options series overlying such 
securities. Further, proposed Rule 6.64(b)(F) would provide the 
Exchange with discretion to manage the Opening Process in the event of 
unanticipated circumstances occurring around 9:30 a.m. Eastern Time or 
a halt being lifted.
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    \16\ See proposed Rule 6.64(b)(F) (providing that ``[t]he 
Exchange may deviate from the standard manner of the Auction 
Process, including adjusting the timing of the Auction Process in 
any option class, when it believes it is necessary in the interests 
of a fair and orderly market'').
    \17\ See e.g., BATS Exchange, Inc. (``BATS'') Rule 21.7(c) 
(Market Opening Procedures) (``The Exchange may deviate from the 
standard manner of the Opening Process, including adjusting the 
timing of the Opening Process in any option class, when it believes 
it is necessary in the interests of a fair and orderly market'').
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \18\ of the Securities Exchange Act of 1934 (the ``Act''), 
in general, and furthers the objectives of Section 6(b)(5),\19\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    Specifically, the proposed change to Rule 6.64(b) would clarify 
that the Exchange would only open a series automatically after it 
receives a quote in the underlying security and a trade in that 
security at or between the disseminated quote--as opposed to 
automatically opening on either an opening quote or an opening trade 
alone per the current rule text, which may not always accurately 
reflect the state of the market. The Exchange believes this added 
transparency would promote just and equitable principles of trade and 
remove impediments to, and perfect the mechanism of, a free and open 
market and a national market system to the benefit of market 
participants. Further, the Exchange believes that waiting to open 
trading in an option series until there has been both a disseminated 
quote and trade in the underlying security would protect investors and 
the public interest because it would help to augment the Auction 
Process by ensuring that an underlying security has been opened 
pursuant to a robust price discovery process before opening the 
overlying options for trading. Moreover, this proposed change would 
promote just and equitable principles of trade to the benefit of 
investors and the public interest because it would provide market 
participants with greater certainty as to the true state of the market 
at the opening of the trading day and should lead to more accurate 
prices on the Exchange.
    The Exchange also believes that specifying that, to open a series, 
the Exchange would require an initial uncrossed NBBO disseminated by 
OPRA would promote just and equitable principles of trade as the change 
is designed to protect investors and the public interest. The Exchange 
notes that OPRA disseminates to each exchange the NBBO as well as the 
top of book for each exchange, such that the Exchange's market maker 
quote would be disseminated back to the Exchange as the BBO--and could 
be, but is not necessarily, the NBBO. Because OPRA disseminates this 
information to all

[[Page 21641]]

exchanges at the same time, the Exchange believes the proposal to open 
only after receiving an uncrossed NBBO from OPRA would eliminate any 
ambiguity as to the source of the information for each series and 
should lead to more accurate prices on the Exchange.
    Similarly, the Exchange believes the conforming change to Rule 
6.64(c), which strikes reference to quote bids and quote offers in the 
OX Book for purposes of determining an opening price, likewise would 
promote just and equitable principles of trade as it would add 
transparency and internal consistency to Exchange rules, which would 
make them easier for market participants to navigate.
    Finally, the Exchange believes the proposal to permit the Exchange 
to open options trading when such opening is in the interests of a fair 
and orderly market (even if the conditions set forth in the rule are 
not met), is consistent with the protection of investors and the public 
interest because the proposed changes would allow the Exchange to open 
trading in options contracts in a fair and orderly manner. 
Specifically, the Exchange believes that the proposed changes would 
reduce potential delays in opening an option series that may prevent 
the Exchange from displaying and/or routing orders on its Consolidated 
Book and may also prevent the Exchange from disseminating a protected 
quote that draws trading interest from other options markets. Thus, the 
Exchange believes that the proposed changes would allow the Exchange to 
open options series faster and more efficiently, thereby reducing any 
delay in execution of orders on the Exchange that may be unnecessary 
and harmful to market participants. The Exchange also notes that this 
proposed rule change is based on the rules of other options 
exchanges.\20\
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    \20\ See supra n. 17.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed change is not 
designed to address any competitive issue but rather to add specificity 
and transparency to Exchange rules, thereby reducing confusion and 
making the Exchange's rules easier to understand and navigate. The 
Exchange believes that the proposed rule change would serve to promote 
regulatory clarity and consistency, thereby reducing burdens on the 
marketplace and facilitating investor protection.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be 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-NYSEARCA-2016-49 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEARCA-2016-49. 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-NYSEARCA-2016-49 and should 
be submitted on or before May 3, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08303 Filed 4-11-16; 8:45 am]
 BILLING CODE 8011-01-P