[Federal Register Volume 81, Number 108 (Monday, June 6, 2016)]
[Notices]
[Pages 36361-36367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13208]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77947; File No. SR-NYSEARCA-2016-76]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Implementing the 
Quoting and Trading Provisions of the Plan To Implement a Tick Size 
Pilot Program Submitted to the Commission Pursuant to Rule 608 of 
Regulation NMS Under the Act

May 31, 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 May 20, 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, II, 
and III 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 implement the quoting and trading 
provisions of the Plan to Implement a Tick Size Pilot Program submitted 
to the Commission pursuant to Rule 608 of Regulation NMS \4\ under the 
Act (the ``Plan''). The proposed rule change is substantially similar 
to proposed rule changes recently approved or published by the 
Commission by New York Stock Exchange LLC to adopt NYSE Rules 67(a) and 
67(c)-(e), which also implemented the quoting and trading provisions of 
the Plan.\5\ Therefore, the Exchange has designated this proposal as 
``non-controversial'' and provided the Commission with the notice 
required by Rule 19b-4(f)(6)(iii) under the Act.\6\ 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.
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    \4\ 17 CFR 242.608.
    \5\ See, Securities Exchange Act Release No. 76229 (October 22, 
2015), 80 FR 66065 (October 28, 2015) (SR-NYSE-2015-46), as amended 
by Partial Amendments No. 1 and No. 2 to the Quoting & Trading Rules 
Proposal. See, Securities Exchange Act Release No. 77703 (April 25, 
2016), 81 FR 25725 (April 29, 2016) (SR-NYSE-2015-46).
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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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 proposes to establish rules to require its ETP Holders 
\7\ to comply with the requirements of the Plan to Implement a Tick 
Size Pilot Program (the ``Plan''),\8\ which is designed to study and 
assess the impact of increment conventions on the liquidity and trading 
of the common stocks of small capitalization

[[Page 36362]]

companies. The Exchange proposes changes to its rules for a two-year 
pilot period that coincides with the pilot period for the Plan, which 
is currently scheduled as a two year pilot to begin on October 3, 2016.
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    \7\ The term ETP Holder is defined in NYSE Arca Equities Rule 
1.1(n) to mean a sole proprietorship, partnership, corporation, 
limited liability company or other organization in good standing 
that has been issued an ETP. An ETP Holder must be a registered 
broker or dealer pursuant to Section 15 of the Act. An ETP Holder 
shall agree to be bound by the Certificate of Incorporation, Bylaws 
and Rules of NYSE Arca Equities, and by all applicable rules and 
regulations of the Commission.
     The term ETP is defined in NYSE Arca Equities Rule 1.1(m) to 
mean an equity trading permit issued by NYSE Arca Equities for 
effecting approved securities transactions on NYSE Arca Equities' 
trading facilities.
    \8\ See Securities and Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (File No. 4-657) (``Tick Plan Approval Order''). 
See, also, Securities and Exchange Act Release No. 76382 (November 
6, 2015) (File No. 4-657), 80 FR 70284 (File No. 4-657) (November 
13, 2015), which extended the pilot period commencement date from 
May 6, 2015 to October 3, 2016.
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Background
    On August 25, 2014, NYSE Group, Inc., on behalf of Bats BZX 
Exchange, Inc. (f/k/a BATS Exchange, Inc.), Bats BYX Exchange, Inc. (f/
k/a BATS Y-Exchange, Inc.), Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc. (``FINRA''), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, 
the Nasdaq Stock Market LLC, New York Stock Exchange LLC, the Exchange 
and NYSE MKT LLC (collectively ``Participants''), filed with the 
Commission, pursuant to Section 11A of the Act \9\ and Rule 608 of 
Regulation NMS thereunder, the Plan to Implement a Tick Size Pilot 
Program.\10\ The Participants filed the Plan to comply with an order 
issued by the Commission on June 24, 2014 (the ``June 2014 
Order'').\11\ The Plan\12\ was published for comment in the Federal 
Register on November 7, 2014,\13\ and approved by the Commission, as 
modified, on May 6, 2015.\14\
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    \9\ 15 U.S.C. 78k-1.
    \10\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \11\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \12\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \13\ See Securities and Exchange Act Release No. 73511 (November 
3, 2014), 79 FR 66423 (File No. 4-657) (Tick Plan Filing).
    \14\ See Tick Plan Approval Order, supra note 8. See, also, 
Securities Exchange Act Release No. 77277 (March 3, 2016), 81 FR 
12162 (March 8, 2016) (File No. 4-657), which amended the Plan to 
add National Stock Exchange, Inc. as a Participant.
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small 
capitalization companies. The Commission plans to use the Tick Size 
Pilot Program to assess whether wider tick sizes enhance the market 
quality of Pilot Securities for the benefit of issuers and investors. 
Each Participant is required to comply with, and to enforce compliance 
by its ETP Holders, as applicable, with the provisions of the Plan.
    On October 9, 2015, the Operating Committee approved the Exchange's 
proposed rules as model Participant rules that would require compliance 
by a Participant's members with the provisions of the Plan, as 
applicable, and would establish written policies and procedures 
reasonably designed to comply with applicable quoting and trading 
requirements specified in the Plan.\15\ As described more fully below, 
the proposed rules would require ETP Holders to comply with the Plan 
and provide for the widening of quoting and trading increments for 
Pilot Securities, consistent with the Plan.
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    \15\ The Operating Committee is required under Section III(C)(2) 
of the Plan to ``monitor the procedures established pursuant to the 
Plan and advise Participants with respect to any deficiencies, 
problems, or recommendations as the Operating Committee may deem 
appropriate.'' The Operating Committee is also required to 
``establish specifications and procedures for the implementation and 
operation of the Plan that are consistent with the provisions of the 
Plan.''
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    The Tick Size Pilot Program will include stocks of companies with 
$3 billion or less in market capitalization, an average daily trading 
volume of one million shares or less, and a volume weighted average 
price of at least $2.00 for every trading day. The Tick Pilot Program 
will consist of a control group of approximately 1,400 Pilot Securities 
and three test groups with 400 Pilot Securities in each selected by a 
stratified sampling.\16\ During the pilot, Pilot Securities in the 
control group will be quoted at the current tick size increment of 
$0.01 per share and will trade at the currently permitted increments. 
Pilot Securities in the first test group (``Test Group One'') will be 
quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\17\ Pilot Securities in 
the second test group (``Test Group Two'') will be quoted in $0.05 
minimum increments and will trade at $0.05 minimum increments subject 
to a midpoint exception, a retail investor exception, and a negotiated 
trade exception.\18\ Pilot Securities in the third test group (``Test 
Group Three'') will be subject to the same terms as Test Group Two and 
also will be subject to the ``Trade-at'' requirement to prevent price 
matching by a person not displaying at a price of a Trading Center's 
``Best Protected Bid'' or ``Best Protected Offer,'' unless an 
enumerated exception applies.\19\ In addition to the exceptions 
provided under Test Group Two, an exception for Block Size orders and 
exceptions that closely resemble those under Rule 611 of Regulation NMS 
\20\ will apply to the Trade-at requirement.
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    \16\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \17\ See Section VI(B) of the Plan. Pilot Securities in Test 
Group One will be subject to a midpoint exception and a retail 
investor exception.
    \18\ See Section VI(C) of the Plan.
    \19\ See Section VI(D) of the Plan.
    \20\ 17 CFR 242.611.
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    The Tick Pilot Program also contains requirements for the 
collection and transmission of data to the Commission and the public. A 
variety of data generated during the Tick Pilot Program will be 
released publicly on an aggregated basis to assist in analyzing the 
impact of wider tick sizes on smaller capitalization stocks.\21\
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    \21\ See Section VII of the Plan.
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Proposed NYSE Arca Equities Rule 7.46 (``Rule 7.46'')
    The Plan requires the Exchange to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to comply 
with applicable quoting and trading requirements specified in the 
Plan.\22\ Accordingly, the Exchange is proposing new Rule 7.46 to 
require its ETP Holders to comply with the quoting and trading 
provisions of the Plan. The proposed Rule is also designed to ensure 
the Exchange's compliance with the Plan.
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    \22\ The Exchange was also required by the Plan to develop 
appropriate policies and procedures that provide for data collection 
and reporting to the Commission of data described in Appendixes B 
and C of the Plan. See, Securities Exchange Act Release No. 77484 
(March 31, 2016), 81 FR 20024 (April 6, 2016) (SR-NYSEArca-2016-52).
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    Proposed paragraph (a)(1) of new Rule 7.46 would establish the 
following defined terms:
     ``Plan'' means the Tick Size Pilot Plan submitted to the 
Commission pursuant to Rule 608(a)(3) of Regulation NMS under the Act;
     ``Pilot Test Groups'' means the three test groups 
established under the Plan, consisting of 400 Pilot Securities each, 
which satisfy the respective criteria established by the Plan for each 
such test group.
     ``Retail Investor Order'' would mean an agency order or a 
riskless principal order that meets the criteria of FINRA Rule 5320.03 
that originates from a natural person and is submitted to the Exchange 
by a retail ETP Holder, provided that no change is made to the terms of 
the order with respect to price or side of market and the order does 
not originate from a trading algorithm or any other computerized 
methodology. A Retail Investor Order may be an odd lot, round lot, or 
partial round lot.\23\
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    \23\ This definition is the approved definition for ``Retail 
Investor Order'' as contemplated by the Plan. It is also the same 
definition as given to ``Retail Orders'' pursuant to the approved 
rules of other national securities exchanges. See, NYSE Arca 
Equities Rule 7.44(a)(3). See, also NYSE MKT Rule 107C(a)(3), NYSE 
Rule 107C(a)(3), BATS Y-Exchange, Inc. Rule 11.24(a)(2) and NASDAQ 
Stock Market LLC Rule 4780(a)(2). The Retail Investor Order 
definition includes any order originating from a natural person and 
is not limited to orders submitted to the Exchange under the 
Exchange's retail liquidity program rule (NYSE Arca Equities Rule 
7.44). Therefore, any ETP Holder that operates a Trading Center may 
execute against a Retail Investor Order otherwise than on an 
exchange to satisfy the retail investor order exception proposed in 
Rule 7.46.

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[[Page 36363]]

     Trade-at Intermarket Sweep Order'' \24\ would mean a limit 
order for a Pilot Security that meets the following requirements:
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    \24\ The Plan defines a Trade-at Intermarket Sweep Order 
(``ISO'') as a limit order for a Pilot Security that, when routed to 
a Trading Center, is identified as an ISO, and simultaneous with the 
routing of the limit order identified as an ISO, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid (in the case of a limit 
order to sell) or the full displayed size of any protected offer (in 
the case of a limit order to buy) for the Pilot Security with a 
price that is equal to the limit price of the limit order identified 
as an ISO. These additional routed orders also must be marked as 
ISOs. See Plan, Section I(MM). Since the Plan allows (i) an order 
that is identified as an ISO to be executed at the price of a 
Protected Quotation (see, Plan, Section VI(D)(8) and proposed Rule 
7.46(a)(e)(4)(C)(ix)) and (ii) an order to execute at the price of a 
Protected Quotation that ``is executed by a trading center that 
simultaneously routed Trade-at ISO to execute against the full 
displayed size of the Protected Quotation that was trade at'' (see, 
Plan, Section VI(D)(9) and proposed Rule 7.46(a)(e)(4)(C)(x)), the 
Exchange proposes to clarify the use of an ISO in connection with 
the Trade-at requirement by adopting, as part of proposed Rule 
7.46(a)(1), a comprehensive definition of ``Trade-at ISO.'' As set 
forth in the Plan and as noted above, the definition of a Trade-at 
ISO used in the Plan does not distinguish ISOs that are compliant 
with Rule 611 or Regulation NMS from ISOs that are compliant with 
Trade-at. The Exchange therefore proposes the separate definition of 
Trade-at ISO contained in proposed Rule 7.46(a). The Exchange 
believes that this proposed definition will further clarify to 
recipients of ISOs in Test Group Three securities whether the ISO 
satisfies the requirements of Rule 611 of Regulation NMS or Trade-
at.
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    (i) When routed to a Trading Center, the limit order is identified 
as a Trade-at Intermarket Sweep Order; and
    (ii) Simultaneously with the routing of the limit order identified 
as a Trade-at Intermarket Sweep Order, one or more additional limit 
orders, as necessary, are routed to execute against the full size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order to 
buy, for the Pilot Security with a price that is better than or equal 
to the limit price of the limit order identified as a Trade-at 
Intermarket Sweep Order. These additional routed orders also must be 
marked as Trade-at Intermarket Sweep Orders.
     Paragraph (a)(1)(E) would provide that all capitalized 
terms not otherwise defined in this rule shall have the meanings set 
forth in the Plan, Regulation NMS under the Act, or Exchange rules, as 
applicable.
    Proposed Paragraph (a)(2) would state that the Exchange is a 
Participant in, and subject to the applicable requirements of, the 
Plan; proposed Paragraph (a)(3) would require ETP Holders to establish, 
maintain and enforce written policies and procedures that are 
reasonably designed to comply with the applicable requirements of the 
Plan, which would allow the Exchange to enforce compliance by its ETP 
Holders with the provisions of the Plan, as required pursuant to 
Section II(B) of the Plan.
    In addition, Paragraph (a)(4) would provide that Exchange systems 
would not display, quote or trade in violation of the applicable 
quoting and trading requirements for a Pilot Security specified in the 
Plan and this proposed rule, unless such quotation or transaction is 
specifically exempted under the Plan.\25\
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    \25\ The Exchange is still evaluating its internal policies and 
procedures to ensure compliance with the Plan, and plans to 
separately propose rules that would address violations of the Plan.
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    The Exchange also proposes to add Rule 7.46(a)(5) to provide for 
the treatment of Pilot Securities that drop below a $1.00 value during 
the Pilot Period.\26\ The Exchange proposes that if the price of a 
Pilot Security drops below $1.00 during regular trading on any given 
business day, such Pilot Security would continue to be subject to the 
Plan and the requirements described below that necessitate ETP Holders 
to comply with the specific quoting and trading obligations for each 
respective Pilot Test Group under the Plan, and would continue to trade 
in accordance with the proposed rules below as if the price of the 
Pilot Security had not dropped below $1.00. However, if the Closing 
Price of a Pilot Security on any given business day is below $1.00, 
such Pilot Security would be moved out of its respective Pilot Test 
Group into the control group (which consists of Pilot Securities not 
placed into a Pilot Test Group), and may then be quoted and traded at 
any price increment that is currently permitted by Exchange rules for 
the remainder of the Pilot Period. Notwithstanding anything contained 
herein to the contrary, the Exchange proposes that, at all times during 
the Pilot Period, Pilot Securities (whether in the control group or any 
Pilot Test Group) would continue to be subject to the data collection 
rules, which are enumerated in Rule 7.46(b).
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    \26\ New York Stock Exchange LLC, on behalf of the Participants, 
submitted a letter to Commission requesting exemption from certain 
provisions of the Plan related to quoting and trading. See letter 
from Elizabeth K. King, NYSE, to Brent J. Fields, Secretary, 
Commission, dated October 14, 2015 (the ``October Exemption 
Request''). FINRA, also on behalf of the Plan Participants, 
submitted a separate letter to Commission requesting additional 
exemptions from certain provisions of the Plan related to quoting 
and trading. See letter from Marcia E. Asquith, Senior Vice 
President and Corporate Secretary, FINRA, to Robert W. Errett, 
Deputy Secretary, Commission, dated February 23, 2016 (the 
``February Exemption Request,'' and together with the October 
Exemption Request, the ``Exemption Request Letters''). The 
Commission, pursuant to its authority under Rule 608(e) of 
Regulation NMS, granted New York Stock Exchange LLC a limited 
exemption from the requirement to comply with certain provisions of 
the Plan as specified in the Exemption Request Letters and noted 
herein. See letter from David Shillman, Associate Director, Division 
of Trading and Markets, Commission to Sherry Sandler, Associate 
General Counsel, New York Stock Exchange LLC, dated April 25, 2016 
(the ``Exemption Letter''). The Exchange is seeking the same 
exemptions as requested in the Exemption Request Letters, including 
without limitation, an exemption relating to proposed Rule 
7.46(a)(5).
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    The Exchange proposes Rules 7.46(c)-(e), which would require ETP 
Holders to comply with the specific quoting and trading obligations for 
each Pilot Test Group under the Plan. With regard to Pilot Securities 
in Test Group One, proposed Rule 7.46(c) would provide that no ETP 
Holder may display, rank, or accept from any person any displayable or 
non-displayable bids or offers, orders, or indications of interest in 
increments other than $0.05. However, orders priced to trade at the 
midpoint of the National Best Bid and National Best Offer (``NBBO'') or 
Best Protected Bid and Best Protect Offer (``PBBO'') and orders entered 
in the Exchange's Retail Liquidity Program as Retail Price Improvement 
Orders (``Retail Price Improvement Order'') \27\ may be ranked and 
accepted in increments of less than $0.05. Pilot Securities in Test 
Group One may continue to trade at any price increment that is 
currently permitted by NYSE Arca Equities Rule 7.6.\28\
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    \27\ A Retail Price Improvement Order consists of non-displayed 
interest in NYSE Arca, Inc.-listed securities that is priced better 
than the Best Protected Bid or Best Protected Offer, as such terms 
are defined in Regulation NMS Rule 600(b)(57), by at least $0.001 
and that is identified as such. See NYSE Arca Equities Rule 
7.44(a)(4).
    \28\ NYSE Arca Equities Rule 7.6 describes the minimum price 
variation for quoting and entry of orders in equity securities 
admitted to dealings on the Exchange.
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    With regard to Pilot Securities in Test Group Two, proposed Rule 
7.46(d)(1) would provide that such Pilot Securities would be subject to 
all of the same quoting requirements as described above for Pilot 
Securities in Test Group One, along with the applicable quoting 
exceptions. In addition, proposed Rule 7.46(d)(2) would provide that, 
absent one of the listed exceptions in proposed Rule 7.46(d)(3) 
enumerated below, no ETP Holder may execute orders in any Pilot 
Security in Test Group Two in

[[Page 36364]]

price increments other than $0.05. The $0.05 trading increment would 
apply to all trades, including Brokered Cross Trades.
    Paragraph (d)(3) would set forth further requirements for Pilot 
Securities in Test Group Two. Specifically, ETP Holders trading Pilot 
Securities in Test Group Two would be allowed to trade in increments 
less than $0.05 under the following circumstances:
    (A) Trading may occur at the midpoint between the NBBO or PBBO;
    (B) Retail Investor Orders may be provided with price improvement 
that is at least $0.005 better than the Best Protected Bid or the Best 
Protected Offer;
    (C) Negotiated Trades may trade in increments less than $0.05; and
    (D) Execution of a customer order to comply with NYSE Arca Equities 
Rule 5320 \29\ following the execution of a proprietary trade by the 
ETP Holder at an increment other than $0.05, where such proprietary 
trade was permissible pursuant to an exception under the Plan.\30\
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    \29\ NYSE Arca Equities Rule 5320 is the Exchange's Prohibition 
Against Trading Ahead of Customer Orders rule and states:
    (a) Except as provided herein, an ETP Holder that accepts and 
holds an order in an equity security from its own customer or a 
customer of another broker-dealer without immediately executing the 
order is prohibited from trading that security on the same side of 
the market for its own account at a price that would satisfy the 
customer order, unless it immediately thereafter executes the 
customer order up to the size and at the same or better price at 
which it traded for its own account.
    (b) An ETP Holder must have a written methodology in place 
governing the execution and priority of all pending orders that is 
consistent with the requirements of this Rule and NASD Rule 2320. An 
ETP Holder also must ensure that this methodology is consistently 
applied.
    \30\ The Exchange proposes to add this exemption to permit ETP 
Holders to fill a customer order in a Pilot Security at a non-nickel 
increment to comply with NYSE Arca Equities Rule 5320 under limited 
circumstances. Specifically, the exception would allow the execution 
of a customer order following a proprietary trade by the ETP Holder 
at an increment other than $0.05 in the same security, on the same 
side and at the same price as (or within the prescribed amount of) a 
customer order owed a fill pursuant to NYSE Arca Equities Rule 5320, 
where the triggering proprietary trade was permissible pursuant to 
an exception under the Plan. The Commission granted New York Stock 
Exchange LLC an exemption from Rule 608(c) related to this 
provision. See, the Exemption Letter, supra note 26. The Exchange is 
seeking the same exemptions as requested in the Exemption Request 
Letters. The Exchange believes such an exception best facilitates 
the ability of ETP Holders to continue to protect customer orders 
while retaining the flexibility to engage in proprietary trades that 
comply with an exception to the Plan.
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    Paragraph (e)(1)-(e)(3) would set forth the requirements for Pilot 
Securities in Test Group Three. ETP Holders quoting or trading such 
Pilot Securities would be subject to all of the same quoting and 
trading requirements as described above for Pilot Securities in Test 
Group Two, including the quoting and trading exceptions applicable to 
Test Group Two Pilot Securities. In addition, proposed Paragraph (e)(4) 
would provide for an additional prohibition on Pilot Securities in Test 
Group Three referred to as the ``Trade-at Prohibition.'' \31\ Paragraph 
(e)(4)(B) would provide that, absent one of the listed exceptions in 
proposed Rule 7.46(e)(4)(C) enumerated below, no ETP Holder may execute 
a sell order for a Pilot Security in Test Group Three at the price of a 
Protected Bid or execute a buy order for a Pilot Security in Test Group 
Three at the price of a Protected Offer.
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    \31\ Proposed Rule 7.46(e)(4)(A) would define the ``Trade-at 
Prohibition'' to mean the prohibition against executions by a 
Trading Center of a sell order for a Pilot Security at the price of 
a Protected Bid or the execution of a buy order for a Pilot Security 
at the price of a Protected Offer during regular trading hours.
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    Proposed Rule 7.46(e)(4)(C) would allow ETP Holders to execute a 
sell order for a Pilot Security in Test Group Three at the price of a 
Protected Bid or execute a buy order for a Pilot Security in Test Group 
Three at the price of a Protected Offer if any of the following 
circumstances exist:
    (i) The order is executed as agent or riskless principal by an 
independent trading unit, as defined under Rule 200(f) of Regulation 
SHO,\32\ of a Trading Center within an ETP Holder that has a displayed 
quotation as agent or riskless principal, via either a processor or an 
SRO Quotation Feed, at a price equal to the traded-at Protected 
Quotation, that was displayed before the order was received,\33\ but 
only up to the full displayed size of that independent trading unit's 
previously displayed quote; \34\
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    \32\ The Exchange is proposing that, for proposed Rules 
7.46(e)(4)(C)(i) and (ii), a Trading Center operated by a broker-
dealer would mean an independent trading unit, as defined under Rule 
200(f) of Regulation SHO, within such broker-dealer. See, 17 CFR 
242.200.
    Independent trading unit aggregation is available if traders in 
an aggregation unit pursue only the particular trading objective(s) 
or strategy(s) of that aggregation unit and do not coordinate that 
strategy with any other aggregation unit. Therefore, a Trading 
Center cannot rely on quotations displayed by that broker dealer 
from a different independent trading unit. As an example, an agency 
desk of a broker-dealer cannot rely on the quotation of a 
proprietary desk in a separate independent trading unit at that same 
broker-dealer.
    \33\ The Exchange is proposing to adopt this limitation to 
ensure that a Trading Center does not display a quotation after the 
time of order receipt solely for the purpose of trading at the price 
of a protected quotation without routing to that protected 
quotation.
    \34\ This proposed exception to Trade-at would allow a Trading 
Center to execute an order at the Protected Quotation in the same 
capacity in which it has displayed a quotation at a price equal to 
the Protected Quotation and up to the displayed size of such 
displayed quotation.
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    (ii) The order is executed by an independent trading unit, as 
defined under Rule 200(f) of Regulation SHO, of a Trading Center within 
an ETP Holder that has a displayed quotation for the account of that 
Trading Center on a principal (excluding riskless principal \35\) 
basis, via either a processor or an SRO Quotation Feed, at a price 
equal to the traded-at Protected Quotation, that was displayed before 
the order was received, but only up to the full displayed size of that 
independent unit's previously displayed quote; \36\
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    \35\ As described above, proposed Rule 7.46(e)(4)(C)(i) would 
establish the circumstances in which a Trading Center displaying an 
order as riskless principal would be permitted to Trade-at the 
Protected Quotation. Accordingly, the Exchange proposes that 
proposed Rule 7.46(e)(4)(C)(ii) would exclude such circumstances.
    \36\ The display exceptions to Trade-at set forth in proposed 
Rules 7.46(e)(4)(C)(i) and (ii) would not permit a broker-dealer to 
trade on the basis of interest it is not responsible for displaying. 
In particular, a broker-dealer that matches orders in the over-the-
counter market shall be deemed to have ``executed'' such orders as a 
Trading Center for purposes of proposed Rule 7.46. Accordingly, if a 
broker-dealer is not displaying a quotation at a price equal to the 
Protected Quotation, it could not submit matched trades to an 
alternative trading center (``ATS'') that was displaying on an 
agency basis the quotation of another ATS subscriber. However, a 
broker-dealer that is displaying, as principal, via either a 
processor or an SRO Quotation Feed, a buy order at the protected 
bid, could internalize a customer sell order up to its displayed 
size. The display exceptions would not permit a non-displayed 
Trading Center to submit matched trades to an ATS that was 
displaying on an agency basis the quotation of another ATS 
subscriber and confirmed [sic] that a broker-dealer would not be 
permitted to trade on the basis of interest that it is not 
responsible for displaying.
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    (iii) The order is of Block Size \37\ at the time of origin and may 
not be:
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    \37\ ``Block Size'' is defined in the Plan as an order (1) of at 
least 5,000 shares or (2) for a quantity of stock having a market 
value of at least $100,000.
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    A. an aggregation of non-block orders;
    B. broken into orders smaller than Block Size prior to submitting 
the order to a Trading Center for execution; or
    C. executed on multiple Trading Centers; \38\
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    \38\ Once a Block Size order or portion of such Block Size order 
is routed from one Trading Center to another Trading Center in 
compliance with Rule 611 of Regulation NMS, the Block Size order 
would lose the Trade-at exemption provided under proposed Rule 
7.46(e)(4)(C)(iii), unless the Block Size remaining after the first 
route and execution meets the Block Size definition under the Plan 
(see footnote 36). For example, if an exchange has a Protected Bid 
of 3,000 shares, with 2,000 shares in reserve, and receives a 5,000 
share order to sell, the exchange would be able to execute the 
entire 5,000 share order without having to route to an away market 
at any other Protected Bid at the same price. If, however, that 
exchange only has 1,000 shares in reserve, the entire order would 
not be able to be executed on that exchange, and the exchange would 
only be able to execute 3,000 shares and route the rest to away 
markets at other Protected Bids at the same price, before executing 
the 1,000 shares in reserve. The same analysis would hold true at 
the next price point, if the size of the incoming order would exceed 
all available shares at the first price, and the remaining shares to 
be executed would be 5,000 shares or more.

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[[Page 36365]]

    (iv) The order is a Retail Investor Order executed with at least 
$0.005 price improvement;
    (v) The order is executed when the Trading Center displaying the 
Protected Quotation that was traded at was experiencing a failure, 
material delay, or malfunction of its systems or equipment;
    (vi) The order is executed as part of a transaction that was not a 
``regular way'' contract;
    (vii) The order is executed as part of a single-priced opening, 
reopening, or closing transaction on the Exchange;
    (viii) The order is executed when a Protected Bid was priced higher 
than a Protected Offer in the Pilot Security in Test Group Three;
    (ix) The order is identified as a Trade-at Intermarket Sweep Order; 
\39\
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    \39\ In connection with the definition of a Trade-at ISO 
proposed in Rule 7.46(a)(1)(D), this exception refers to the ISO 
that is received by a Trading Center.
    The Exchange proposed an exemption to the Trade-at Prohibition 
for Trade-at ISOs to clarify that an ISO that is received by a 
Trading Center (and which could form the basis of an execution at 
the price of a Protected Quotation pursuant to Section VI(D)(8) of 
the Plan), is identified as a Trade-at ISO. Depending on whether 
Rule 611 of Regulation NMS or the Trade-at requirement applies, an 
ISO may mean that the sender of the ISO has swept better-priced 
Protected Quotations, so that the recipient of that ISO may trade 
through the price of the Protected Quotation (Rule 611 of Regulation 
NMS), or it could mean that the sender of the ISO has swept 
Protected Quotations at the same price that it wishes to execute at 
(in addition to any better-priced quotations), so the recipient of 
that ISO may trade at the price of the Protected Quotation (Trade-
at). Given that the meaning of an ISO may differ under Rule 611 of 
Regulation NMS and Trade-at, the Exchange proposed an exemption to 
the Trade-at Prohibition for Trade-at ISOs so that the recipient of 
an ISO in a Test Group Three security would know, upon receipt of 
that ISO, that the Trading Center that sent the ISO had already 
executed against the full size of displayed quotations at that 
price, e.g., the recipient of that ISO could permissibly trade at 
the price of the Protected Quotation.
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    (x) The order is executed by a Trading Center that simultaneously 
routed Trade-at Intermarket Sweep Orders to execute against the full 
displayed size of the Protected Quotation that was traded at; \40\
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    \40\ In connection with the definition of a Trade-at ISO 
proposed in Rule 7.46(a)(1)(D), this exception refers to the Trading 
Center that routed the ISO.
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    (xi) The order is executed as part of a Negotiated Trade;
    (xii) The order is executed when the Trading Center displaying the 
Protected Quotation that was traded at had displayed, within one second 
prior to execution of the transaction that constituted the Trade-at, a 
Best Protected Bid or Best Protected Offer, as applicable, for the 
Pilot Security in Test Group Three with a price that was inferior to 
the price of the Trade-at transaction;
    (xiii) The order is executed by a Trading Center which, at the time 
of order receipt, the Trading Center had guaranteed an execution at no 
worse than a specified price (a ``stopped order''), where:
    A. The stopped order was for the account of a customer;
    B. The customer agreed to the specified price on an order-by-order 
basis; and
    C. The price of the Trade-at transaction was, for a stopped buy 
order, equal to or less than the National Best Bid in the Pilot 
Security in Test Group Three at the time of execution or, for a stopped 
sell order, equal to or greater than the National Best Offer in the 
Pilot Security in Test Group Three at the time of execution, as long as 
such order is priced at an acceptable increment; \41\
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    \41\ The stopped order exemption in Rule 611 of Regulation NMS 
applies where ``[t]he price of the trade-through transaction was, 
for a stopped buy order, lower than the national best bid in the NMS 
stock at the time of execution or, for a stopped sell order, higher 
than the national best offer in the NMS stock at the time of 
execution'' (see, 17 CFR 242.611(b)(9)). The Trade-at stopped order 
exception applies where ``the price of the Trade-at transaction was, 
for a stopped buy order, equal to the national best bid in the Pilot 
Security at the time of execution or, for a stopped sell order, 
equal to the national best offer in the Pilot Security at the time 
of execution'' (see, Plan, Section VI(D)(12)).
    To illustrate the application of the stopped order exemption as 
it currently operates under Rule 611 of Regulation NMS and as it is 
currently proposed for Trade-at, assume the National Best Bid is 
$10.00 and another protected quote is at $9.95. Under Rule 611 of 
Regulation NMS, a stopped order to buy can be filled at $9.95 and 
the firm does not have to send an ISO to access the protected quote 
at $10.00 since the price of the stopped order must be lower than 
the National Best Bid. For the stopped order to also be executed at 
$9.95 and satisfy the Trade-at requirements, the Trade-at exception 
would have to be revised to allow an order to execute at the price 
of a protected quote which, in this case, could be $9.95.
    Based on the fact that a stopped order would be treated 
differently under the Rule 611 of Regulation NMS exception than 
under the Trade-at exception in the Plan, the Exchange believes that 
it is appropriate to amend the Trade-at stopped order exception in 
the Plan to ensure that the application of this exception would 
produce a consistent result under both Regulation NMS and the Plan. 
Therefore, the Exchange proposes in this proposed Rule 
7.46(e)(4)(C)(xiii) to allow a transaction to satisfy the Trade-at 
requirement if the stopped order price, for a stopped buy order, is 
equal to or less than the National Best Bid, and for a stopped sell 
order, is equal to or greater than the National Best Offer, as long 
as such order is priced at an acceptable increment. The Commission 
granted New York Stock Exchange LLC an exemption from Rule 608(c) 
related to this provision. See, the Exemption Letter, supra note 26. 
The Exchange is seeking the same exemptions as requested in the 
Exemption Request Letters.
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    (xiv) The order is for a fractional share of a Pilot Security in 
Test Group Three, provided that such fractional share order was not the 
result of breaking an order for one or more whole shares of a Pilot 
Security in Test Group Three into orders for fractional shares or was 
not otherwise effected to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan; or
    (xv) The order is to correct a bona fide error, which is recorded 
by the Trading Center in its error account.\42\ A bond fide error is 
defined as:
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    \42\ The exceptions to the Trade-at requirement set forth in the 
Plan and in the Exchange's proposed Rule 7.46(e)(4)(C) are, in part, 
based on the exceptions to the trade-through requirement set forth 
in Rule 611 of Regulation NMS, including exceptions for an order 
that is executed as part of a transaction that was not a ``regular 
way'' contract, and an order that is executed as part of a single-
priced opening, reopening, or closing transaction by the Trading 
Center (see, 17 CFR 242.611(b)(2) and (b)(3)). Following the 
adoption of Rule 611 of Regulation NMS and its exceptions, the 
Commission issued exemptive relief that created exceptions from Rule 
611 of Regulation NMS for certain error correction transactions. 
See, Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR 
32926 (June 14, 2007); Securities Exchange Act Release No. 55883 
(June 8, 2007), 72 FR 32927 (June 14, 2007). The Exchange has 
determined that it is appropriate to incorporate this additional 
exception to the Trade-at Prohibition, as this exception is equally 
applicable in the Trade-at context.
    Accordingly, the Exchange is proposing to exempt certain 
transactions to correct bona fide errors in the execution of 
customer orders from the Trade-at Prohibition, subject to the 
conditions set forth by the SEC's order exempting these transactions 
from Rule 611 of Regulation NMS. The Commission granted New York 
Stock Exchange LLC an exemption from Rule 608(c) related to this 
provision. See, the Exemption Letter, supra note 26. The Exchange is 
seeking the same exemptions as requested in the Exemption Request 
Letters.
    As with the corresponding exception under Rule 611 of Regulation 
NMS, the bona fide error would have to be evidenced by objective 
facts and circumstances, the Trading Center would have to maintain 
documentation of such facts and circumstances and record the 
transaction in its error account. To avail itself of the exemption, 
the Trading Center would have to establish, maintain, and enforce 
written policies and procedures reasonably designed to address the 
occurrence of errors and, in the event of an error, the use and 
terms of a transaction to correct the error in compliance with this 
exemption. Finally, the Trading Center would have to regularly 
surveil to ascertain the effectiveness of its policies and 
procedures to address errors and transactions to correct errors and 
take prompt action to remedy deficiencies in such policies and 
procedures. See, Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007).
---------------------------------------------------------------------------

    A. The inaccurate conveyance or execution of any term of an order 
including, but not limited to, price, number of shares or other unit of 
trading; identification of the security; identification of the account 
for which securities are purchased or sold; lost or otherwise misplaced 
order tickets; short sales that were instead sold long or vice versa; 
or the execution of an order on the wrong side of a market;
    B. The unauthorized or unintended purchase, sale, or allocation of

[[Page 36366]]

securities, or the failure to follow specific client instructions;
    C. The incorrect entry of data into relevant systems, including 
reliance on incorrect cash positions, withdrawals, or securities 
positions reflected in an account; or
    D. A delay, outage, or failure of a communication system used to 
transmit market data prices or to facilitate the delivery or execution 
of an order.
    Finally, Proposed Rule 7.46(e)(4)(D) would prevent ETP Holders from 
breaking an order into smaller orders or otherwise effecting or 
executing an order to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\43\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\44\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, 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. The 
Exchange believes that the proposed rule change is consistent with the 
Act because it ensures that the Exchange and its ETP Holders would be 
in compliance with a Plan approved by the Commission pursuant to an 
order issued by the Commission in reliance on Section 11A of the 
Act.\45\ Such approved Plan gives the Exchange authority to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with applicable quoting and trading 
requirements specified in the Plan. The Exchange believes that the 
proposed rule change is consistent with the authority granted to it by 
the Plan to establish specifications and procedures for the 
implementation and operation of the Plan that are consistent with the 
provisions of the Plan. Likewise, the Exchange believes that the 
proposed rule change provides interpretations of the Plan that are 
consistent with the Act, in general, and furthers the objectives of the 
Act, in particular.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78f(b).
    \44\ 15 U.S.C. 78f(b)(5).
    \45\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    Furthermore, the Exchange is a Participant under the Plan and 
subject, itself, to the provisions of the Plan. The proposed rule 
change ensures that the Exchange's systems would not display or execute 
trading interests outside the requirements specified in such Plan. The 
proposal would also help allow market participants to continue to trade 
NMS Stocks within quoting and trading requirements that are in 
compliance with the Plan, with certainty on how certain orders and 
trading interests would be treated. This, in turn, will help encourage 
market participants to continue to provide liquidity in the 
marketplace.
    Because the Plan supports further examination and analysis on the 
impact of tick sizes on the trading and liquidity of the securities of 
small capitalization companies, and the Commission believes that 
altering tick sizes could result in significant market-wide benefits 
and improvements to liquidity and capital formation, adopting rules 
that enforce compliance by its ETP Holders with the provisions of the 
Plan would help promote liquidity in the marketplace and perfect the 
mechanism of a free and open market and national market system.

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 
in furtherance of the purposes of the Act. The proposed changes are 
being made to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to comply with the trading and 
quoting requirements specified in the Plan, of which other equities 
exchanges are also Participants. Other competing national securities 
exchanges are subject to the same trading and quoting requirements 
specified in the Plan. Therefore, the proposed changes would not impose 
any burden on competition, while providing certainty of treatment and 
execution of trading interests on the Exchange to market participants 
in NMS Stocks that are acting in compliance with the requirements 
specified in the Plan.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \46\ and Rule 19b-4(f)(6) thereunder.\47\ 
Because the 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 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, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \47\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \48\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\49\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
---------------------------------------------------------------------------

    \48\ 17 CFR 240.19b-4(f)(6).
    \49\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    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 purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \50\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \50\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-2016-76 on the subject line.

Paper Comments

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


[[Page 36367]]


All submissions should refer to File Number SR-NYSEARCA-2016-76. 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-2016-76 and should 
be submitted on or before June 27, 2016.
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    \51\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
Brent J. Fields,
Secretary.
[FR Doc. 2016-13208 Filed 6-3-16; 8:45 am]
 BILLING CODE 8011-01-P