[Federal Register Volume 81, Number 222 (Thursday, November 17, 2016)]
[Notices]
[Pages 81210-81213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27593]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79283; File No. SR-NYSEMKT-2016-99]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Rule 104--Equities To Delete Subsection 
(g)(i)(A)(III) Prohibiting Designated Market Makers From Establishing a 
New High (Low) Price on the Exchange in a Security the DMM Has a Long 
(Short) Position During the Last Ten Minutes Prior to the Close of 
Trading

November 10, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on October 27, 2016, NYSE MKT LLC (``Exchange'' or ``NYSE MKT'') 
filed with the Securities and Exchange Commission (``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 amend Rule 104--Equities to delete 
subsection (g)(i)(A)(III) prohibiting Designated Market Makers 
(``DMM'') from establishing a new high (low) price on the Exchange in a 
security the DMM has a long (short) position during the last ten 
minutes prior to the close of trading. 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 proposes to amend Rule 104--Equities (``Rule 104'') to 
delete subsection (g)(i)(A)(III), which prohibits DMMs with a long 
(short) position in a security from making a purchase (sale) in such 
security during the last ten minutes prior to the close of trading that 
results in a new high (low) price on the Exchange in that security for 
that day.
Background
    Rule 104 sets forth the obligations of Exchange DMMs. Under Rule 
104(a), DMMs registered in one or more securities traded on the 
Exchange are required to engage in a course of dealings for their own 
account to assist in the maintenance of a fair and orderly market 
insofar as reasonably practicable. Rule 104(a) also enumerates the 
specific responsibilities and duties of a DMM, including: (1) 
Maintenance of a continuous two-sided quote, which mandates that each 
DMM maintain a bid or an offer at the National Best Bid (``NBB'') and 
National Best Offer (``NBO,'' together the ``NBBO'') for a certain 
percentage of the trading day,\4\ and (2) the facilitation of, among 
other things, openings, re-openings, and the close of trading for the 
DMM's assigned securities, all of which may include supplying liquidity 
as needed.\5\ Rule 104(f) imposes an affirmative obligation on DMMs to 
maintain, insofar as reasonably practicable, a fair and orderly market 
on the Exchange in assigned securities, including maintaining price 
continuity with reasonable depth and trading for the DMM's own account 
when lack of price continuity, lack of depth, or disparity between 
supply and demand exists or is reasonably to be anticipated.
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    \4\ See Rule 104(a)(1).
    \5\ See id. at (2)-(3). Rule 104(e) further provides that DMM 
units must provide contra-side liquidity as needed for the execution 
of odd-lot quantities eligible to be executed as part of the 
opening, reopening, and closing transactions but that remain 
unpaired after the DMM has paired all other eligible round lot sized 
interest.
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    Rule 104(g) governs transactions by DMMs. NYSE Rule 104(g) provides 
that transactions on the Exchange by a DMM for the DMM's account must 
be effected in a reasonable and orderly manner in relation to the 
condition of the general market and the market in the particular stock. 
Rule 104(g) describes certain permitted transactions, including neutral 
transactions and Non-Conditional Transactions, as defined therein. Rule 
104(g)(i)(A)(III) provides that, except as otherwise permitted by Rule 
104, during the last ten minutes prior to the close of trading, a DMM 
with a long or short position in a security is prohibited from making a 
purchase or sale in such security that results in a new high or low 
price, respectively, on the Exchange for the day at the time of the 
DMM's transaction (``Prohibited Transactions''). Finally, Rule 104(h) 
addresses DMM transactions in securities that establish or increase the 
DMM's position. Rule 104(h)(ii) permits certain ``Conditional 
Transactions'' \6\ without restriction as to price if they are followed 
by appropriate re-entry on the opposite side of the market commensurate 
with the size of the DMM's transaction.\7\ This requirement assures 
that if a DMM establishes or increases a long position by buying from 
the Exchange best offer, which would likely be the new high price, or 
establishes or increases a short position by selling to the Exchange 
best bid, which would likely be the new low price, such transaction 
would be followed by the DMM quoting on the opposite side of the last 
transaction in order to dampen the impact of that transaction on the 
market.
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    \6\ Rule 104(h)(i) defines a Conditional Transaction as a DMM 
transaction in a security that establishes or increases a position 
and reaches across the market to trade as the contra-side to the 
Exchange published bid or offer. A DMM reaches across the market 
when the DMM buys from the Exchange offer or sells to the Exchange 
bid.
    \7\ The Exchange's re-entry obligations for Conditional 
Transactions are set forth in Rule 104(h)(iii). However, Rule 
104(h)(iv) permits certain other Conditional Transactions without 
restriction as to price, and Rule 104(i) provides that re-entry 
obligations following such Conditional Transactions would be the 
same as the re-entry obligations for Non-Conditional Transactions 
pursuant to Rule 104(g).
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Proposed Rule Change
    The Exchange proposes to delete subsection (g)(i)(A)(III) of Rule 
104.\8\ As discussed below, in today's electronic

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marketplace where specialists have become DMMs and control of pricing 
decisions has moved away from market participants on the Exchange 
trading Floor,\9\ retaining a prohibition designed to prevent 
specialists from setting a price in the final ten minutes of trading in 
a security in which the specialist had a position is no longer 
necessary. Eliminating the prohibition would not weaken existing 
safeguards against DMMs inappropriately influencing or manipulating the 
close because existing DMM obligations, including the obligation not to 
destabilize the market when buying or selling to increase a position or 
reaching across the market, would govern DMM trading during the final 
ten minutes of trading. Specifically, to the extent a Prohibited 
Transaction is also a Conditional Transaction, with the elimination of 
Prohibited Transactions, the obligation to re-enter the market 
following a Conditional Transaction, which is designed to ensure that 
DMMs do not inappropriately influence or manipulate the close, would 
become applicable in the last ten minutes of trading for such 
transactions,\10\ thereby achieving the same goal without an outright 
prohibition.
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    \8\ The principles embodied in Rule 104 are based on New York 
Stock Exchange LLC (``NYSE'') Rule 104. On October 1, 2008, the 
Commission approved the Exchange's rule proposal to establish new 
membership, member firm conduct, and equity trading rules that were 
based on the existing NYSE rules to reflect that equities trading on 
the Exchange would be supported by the NYSE's trading system. See 
Securities Exchange Act Release Nos. 58705 (Oct. 1, 2008), 73 FR 
58995 (Oct. 8. 2008) (SR-Amex-2008-63) (approval order) and 59022 
(Nov. 26, 2008), 73 FR 73683 (Dec. 3, 2008) (SR-NYSEALTR-2008-10) 
(amending equity rules to conform to NYSE New Market Model Pilot 
rules) (``Release No. 59022''). Because the Exchange's rules are 
based on existing NYSE rules, the Exchange believes that pre-October 
1, 2008 NYSE rule filings provide relevant guidance concerning 
Exchange equity rules.
    \9\ See, e.g., Securities Exchange Act Release No. 56209 (August 
6, 2007), 72 FR 45290, 45291 (August 13, 2007) (SR-NYSE-2007-65) 
(noting in connection with the NYSE trading Floor that changes in 
the marketplace have included, among other things, ``the 
decentralization of control of pricing decisions away from the 
specialist and Floor broker'').
    \10\ Currently, Conditional Transactions by DMMs during the last 
ten minutes of trading that establish a new high or low price on the 
Exchange are prohibited under Rule 104 (g)(i)(A)(III).
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    In 2006, the Commission approved the NYSE's ``hybrid market'' under 
which Exchange systems assumed the function of matching and executing 
electronically-entered orders, but specialists remained the responsible 
broker-dealer for orders on the Exchange's limit order book.\11\ Rule 
104(g)(III), adopted at the same time, was intended to prevent NYSE 
specialists from setting the closing price.\12\ However, specialists 
were permitted to effect transactions during the last ten minutes of 
trading that resulted in a new high or low for the day in order to 
match another market's better bid or offer or to bring the price of the 
security into parity with an underlying or related security or 
asset.\13\ This exception was considered appropriate because in those 
situations an independent party and not the specialist had set the 
price.\14\
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    \11\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05).
    \12\ See Securities Exchange Act Release No. 54860 (December 1, 
2006), 71 FR 71221 (December 8, 2006) (SR-NYSE-2006-76) (``Release 
No. 54860''). At the time, Prohibited Transactions were set forth in 
Supplementary Material .10 of NYSE Rule 104.
    \13\ See id., 71 FR at 71223.
    \14\ See id. at 71229.
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    With the increasing automation of trading and the accompanying 
decentralization of pricing decisions away from specialists, in 2008, 
the NYSE and the Exchange proposed and the Commission approved its New 
Market Model, which transformed specialists into DMMs, who are no 
longer agents for the Exchange's limit order book and whose trading 
activity on the Exchange is limited to proprietary trading.\15\ 
Nevertheless, the Exchange retained the obligations set forth in Rule 
104(g) and (h), even though Regulation NMS was implemented prior to the 
Exchange proposing the New Market Model.
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    \15\ See Securities Exchange Act Release No. 58845(October 24, 
2008), 73 FR 64379, 64381 (October 29, 2008) (SR-NYSE-2008-46). See 
also Release No. 59022, supra note 8.
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    In light of these developments, Rule 104(g)(i)(A)(III) has lost its 
original purpose and utility. The rationale behind preventing 
specialists from setting the price of a security on the Exchange in the 
final ten minutes of trading was to prevent specialists from 
inappropriately influencing the price of a security at the close to 
advantage a specialist's proprietary position.\16\ In today's 
fragmented marketplace, a new high or low price for a security on the 
Exchange in the last ten minutes of trading does not have a significant 
effect on the market price for such security. For example, a new high 
or low price on the Exchange may not be the new high or low for a 
security because prices may be higher or lower in away markets, where 
the majority of intra-day trading in NYSEMKT-listed securities takes 
place. Indeed, any advantage to a DMM by establishing a new high or low 
on the Exchange during the last ten minutes can rapidly evaporate 
following trades in away markets, which happen very quickly and over 
which the DMM has no control. In short, since DMMs do not have the 
ability to direct or influence trading or control intra-day prices as 
specialists had before the implementation of Regulation NMS, Prohibited 
Transactions are anachronistic.
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    \16\ See Release No. 54860, 71 FR at 71229.
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    Moreover, although Prohibited Transactions would be eliminated, 
DMMs would still have the obligation under Rule 104 to ensure that they 
do not destabilize the market when they are buying or selling to 
increase a position or reaching across the market during the final ten 
minutes of trading.
    As noted, DMMs have affirmative obligations under Rule 104(a) to 
engage in a course of dealings for their own account to assist in the 
maintenance of a fair and orderly market insofar as reasonably 
practicable. Specifically, Rule 104(f)(ii) sets forth the DMM's 
obligation to act as reasonably necessary to ensure appropriate depth 
and maintain reasonable price variations between transactions (also 
known as price continuity) and prevent unexpected variations in 
trading. Further, under Rule 123D(a), openings and reopenings must be 
fair and orderly, reflecting the DMM's professional assessment of 
market conditions at the time, and appropriate consideration of the 
balance of supply and demand as reflected by orders represented in the 
market. The Exchange supplies DMMs with suggested Depth Guidelines for 
each security in which a DMM is registered, and DMMs are expected to 
quote and trade with reference to the Depth Guidelines.\17\
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    \17\ See Rule 104(f)(iii).
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    Further, the DMM's affirmative obligation includes obligations to 
re-enter the market when reaching across to execute against available 
interest. Under Rule 104(h), DMMs that engage in Conditional 
Transactions must follow up with appropriate re-entry on the opposite 
side of the market commensurate with the size of the DMM's 
transaction.\18\ The Exchange issues guidelines, called price 
participation points (``PPP''), that identify the price at or before 
which a DMM is expected to re-enter the market after effecting a 
conditional transaction.\19\ Currently, a Conditional Transaction that 
is also a Prohibited Transaction would not be permitted in the last ten 
minutes of trading. With the proposed deletion of Rule 
104(g)(i)(A)(III), what is currently defined as a Prohibited 
Transaction would be permitted, however, such transactions would be 
subject to re-entry obligations associated with Conditional 
Transactions. As such, in lieu of Rule 104(g)(i)(A)(III), in the last 
ten minutes of trading, DMMs would instead be subject to affirmative 
obligations specified under Rule 104(h).
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    \18\ See Rule 104(h)(iii). Immediate re-entry is required after 
certain Conditional Transactions.
    \19\ See NYSE Rule 104(h)(iii)(A).
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    Finally, DMM pricing decisions at the close would remain subject to 
specific DMM obligations with respect to the quality of the markets in 
securities to which they are assigned. In general, as noted above, 
transactions on the

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Exchange by a DMM for the DMM's account must be effected in a 
reasonable and orderly manner in relation to the condition of the 
general market and the market in the particular stock, and DMMs must 
refrain from causing or exacerbating excessive price movements.
    DMM trading activity on the Exchange is actively surveiled for 
compliance with each of these obligations. The Exchange currently 
employs a suite of surveillances for trading by DMMs and other market 
participants in and around the close of trading. The Exchange believes 
that the existing DMM obligations and the Exchange's regulatory program 
for reviewing DMM trading provides an appropriate framework in today's 
market structure for ensuring that DMMs are not establishing a price to 
benefit their own account.
    For all of the foregoing reasons, the Exchange believes that 
retaining Prohibited Transactions is no longer necessary.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\20\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\21\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that eliminating Rule 
104(g)(III) would remove impediments to and perfect the mechanism of a 
free and open market and a national market system by permitting DMMs to 
enter trades in the last ten minutes of trading that establish a new 
high or low in a security even though the DMM has a position in that 
security. As proprietary traders without the ability to direct or 
influence trading or control the quote, restricting DMM trading in the 
final ten minutes of trading is no longer necessary.
    The Exchange believes that eliminating Prohibited Transactions 
would not be inconsistent with the public interest and the protection 
of investors because DMM trading decisions going into the closing trade 
would continue to be evaluated from the perspective of their 
obligations to the marketplace, including the obligation to arrange a 
fair and orderly close, as set forth in Exchange rules. Further, the 
Exchange believes that eliminating Rule 104(g)(i)(A)(III) would not be 
inconsistent with the public interest and the protection of investors 
because existing safeguards would remain in place to ensure that DMMs 
do not inappropriately influence or manipulate the close, thereby 
establishing substantially the same result without an outright 
prohibition. As noted above, DMM trading would remain subject to 
Exchange rules, including the obligation to maintain a fair and orderly 
market under Rule 104. More specifically, in lieu of the obligations 
associated with Rule 104(g)(i)(A)(III), in the last ten minutes of 
trading the DMMs would be subject to the reentry obligations associated 
with Conditional Transactions. Accordingly, during that period, DMMs 
would have an obligation to reenter the market if their trading both 
reaches across the market and increases or establishes a position.
    For the foregoing reasons, the Exchange believes that the proposal 
is consistent with the Act.

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 rule change is 
not intended to address competitive issues but rather to eliminate 
redundant approvals of manual trades on its trading Floor.

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 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-NYSEMKT-2016-99 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.

All submissions should refer to File Number SR-NYSEMKT-2016-99. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions.
    You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSEMKT-2016-
99 and should be submitted on or before December 8, 2016.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27593 Filed 11-16-16; 8:45 am]
 BILLING CODE 8011-01-P