[Federal Register Volume 81, Number 247 (Friday, December 23, 2016)]
[Notices]
[Pages 94437-94440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30945]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-79599; File No. SR-NYSEMKT-2016-120]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Rule 971.1NY and To Make Permanent the 
Aspects of Customer Best Execution Auction That Are Subject to a Pilot

December 19, 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 December 16, 2016, NYSE MKT LLC (the ``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 971.1NY and to make permanent 
the aspects of Customer Best Execution Auction (``CUBE'') that are 
subject to a pilot, as amended. 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 971.1NY to make permanent the 
aspects of Customer Best Execution Auction (``CUBE'') that are subject 
to a pilot. Currently, the provisions of Rule 971.1NY that govern 
execution of CUBE Orders of fewer than 50 contracts are operating on a 
pilot basis.\4\ The Exchange proposes to make these provisions 
permanent and introduce an additional scenario when the Exchange would 
reject a CUBE Order for fewer than 50 contracts.
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    \4\ See Commentary .01 to Rule 971.1NY and Rules 
971.1NY(b)(1)(B) and (b)(8).
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Background
    Rule 971.1NY sets forth an electronic crossing mechanism for 
single-leg

[[Page 94438]]

orders with a price improvement auction on the Exchange, referred to as 
the CUBE (or the ``CUBE Auction'').\5\ The CUBE Auction, which was 
approved in April 2014, is designed to provide price improvement for 
paired orders of any size.\6\ Two aspects of the CUBE were approved on 
a pilot basis--Rule 971.1NY(b)(1)(B), which establishes the permissible 
range of executions for CUBE Auctions for fewer than 50 contracts; and 
Rule 971.1NY(b)(8), which establishes that the minimum size for a CUBE 
Auction is one contract (together, the ``CUBE Pilot'').
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    \5\ See generally Rule 971.1NY (Electronic Cross Transactions).
    \6\ See Securities Exchange Act Release No. 72025 (April 25, 
2014), 79 FR 24779 (May 1, 2014) (NYSEMKT-2014-17) (the ``CUBE 
Approval Order'').
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    To commence an Auction, an ATP Holder (``Initiating Participant'') 
may electronically submit for execution a limit order it represents as 
agent on behalf of a public customer, broker dealer, or any other 
entity (``CUBE Order''). The Initiating Participant would agree to 
guarantee the execution of the CUBE Order by submitting a contra-side 
order representing principal interest or interest it has solicited to 
trade with the CUBE Order at a specified price (the ``single stop 
price'') or by utilizing auto-match or auto-match limit.\7\
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    \7\ See Rule 971.1NY(c)(1)(A)-(C). In addition, CUBE provides 
for the automatic execution, under certain conditions, of a crossing 
transaction where there is a public customer order in the same 
options series on each side.
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    Rule 971.1NY(b)(1) sets forth the permissible range of executions 
for a CUBE Order.\8\ Pursuant to the CUBE Pilot, a CUBE Order for fewer 
than 50 contracts is subject to tighter ranges of execution than larger 
CUBE Orders to maximize price improvement.\9\ Specifically, if the CUBE 
Order is for fewer than 50 contracts, the range of permissible 
execution will be equal to or better than the National Best Bid/Offer 
(``NBBO''), provided that such price must be at least one cent better 
than any displayed interest in the Exchange's Consolidated Book.\10\
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    \8\ Subject to specified exceptions, a CUBE Order to buy (sell) 
may execute at prices equal to or between the initiating price as 
the upper (lower) bound and the National Best Bid (``NBB'') 
(National Best Offer (``NBO'')) as the lower (upper) bound. See Rule 
971.1NY(b).
    \9\ See Rule 971.1NY(b)(1)(B). See also Rule 971.1NY(b)(8) (also 
part of the CUBE Pilot, providing that the minimum size for a CUBE 
Auction is one contract).
    \10\ See Rule 971.1NY(b)(1)(B).
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    The CUBE Pilot was initially approved for a one-year pilot, and has 
since been extended for three subsequent years.\11\ Pursuant to 
Commentary .01 to Rule 971.1NY, the CUBE Pilot would, if not amended or 
made permanent, end on January 18, 2017.\12\
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    \11\ See CUBE Approval Order, supra, note 6. The CUBE Pilot was 
subsequently extended, most recently until January 18, 2017, to 
align the expiration of the pilot period with that of other 
competing options exchange that offer electronic price improvement 
auctions similar to the CUBE. See Securities Exchange Act Release 
Nos. 74695 (April 9, 2015), 80 FR 20274 (April 15, 2015) (SR-
NYSEMKT-2015-28); 75460 (July 15, 2015), 80 FR 43141 (July 21, 2015) 
(SR-NYSEMKT-2015-48); 78324 (July 14, 2016), 81 FR 47196 (July 20, 
2016) (SR-NYSEMKT-2016-69).
    \12\ In connection with the CUBE Pilot, the Exchange has 
provided specified data to the Commission to provide supporting 
evidence that, among other things, there is meaningful competition 
for all size orders and that there is an active and liquid market 
functioning on the Exchange outside of the CUBE Auction. See CUBE 
Approval Order, supra note 6, 79 FR at 24785-86, fn. 94-95; 
Commentary .01 to Rule 971.1NY. See also Securities Exchange Act 
Release No. 78324 (July 14, 2016), 81 FR 47196 (July 20, 2016) (SR-
NYSEMKT-2016-69).
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Proposal To Make CUBE Pilot Permanent
    The Exchange implemented the CUBE Auction to provide an electronic 
crossing mechanism for single-leg orders with a price improvement 
auction to create tighter markets and ensure that each order receives 
the best possible price. The Exchange believes that the CUBE Pilot 
attracts order flow and promotes competition and price improvement 
opportunities for CUBE Orders of fewer than 50 contracts. The Exchange 
therefore proposes to make permanent the CUBE Pilot before it expires 
on January 18, 2017.
    In connection with the proposal to make the CUBE Pilot permanent, 
the Exchange proposes to modify Rule 971.1NY to introduce an additional 
scenario when a CUBE Order for fewer than 50 contracts would either be 
rejected or require price improvement. Currently, Rule 971.1NY(b)(6) 
provides that CUBE Orders for fewer than 50 contracts that are 
submitted when the BBO is $0.01 wide will be rejected. The Exchange 
proposes to amend this rule to provide that CUBE Orders for fewer than 
50 contracts entered when the NBBO is $0.01 wide would be rejected 
unless they are guaranteed a penny of price improvement. To reflect 
this change, the Exchange proposes to amend Rule 971.NY(b)(6) to 
provide that CUBE Orders for fewer than 50 contracts would be rejected 
when (A) the BBO is $0.01 wide (i.e., the current requirement); or (B) 
the NBBO is $0.01 wide, unless the Initiating Participant guarantees 
the execution of the CUBE Order to buy (sell) at a price that is equal 
to the NBO minus one cent (NBB plus one cent), utilizing a single stop 
price, auto-match, or auto-match limit as specified in paragraphs 
(c)(1)(A)-(C) of Rule 971.1NY. Accordingly, as proposed, the Exchange 
would reject a CUBE Order for fewer than 50 contracts when the NBBO is 
$0.01 wide unless the Initiating Participant guarantees a penny of 
price improvement.\13\
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    \13\ The proposal would not alter the separate price improvement 
requirement set forth in Rule 971.1NY(b)(1)(B), which establishes 
the range of permissible execution prices for CUBE Orders of fewer 
than 50 contracts will be equal to or better than the NBBO and at 
least one cent better than any displayed interest in the Exchange's 
Consolidated Book. See also Rule 971.1NY(b)(2)-(9) (delineating 
reasons CUBE Orders would be rejected, none of which would be 
altered by this proposal).
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    The Exchange believes this proposal would further the goal of the 
CUBE Auction, as the CUBE Order would be ``guaranteed an execution 
price of at least NBBO at the time the CUBE Auction commences and, 
moreover, would be given an opportunity for price improvement beyond 
the NBBO by being exposed to ATP Holders during the CUBE Auction.'' 
\14\ The proposal would guarantee price improvement in penny-wide 
markets by requiring the Initiating Participant to guarantee to improve 
the contra-side NBBO when the spread is $0.01 wide at the time the CUBE 
Order for fewer than 50 contracts is submitted--such that the 
Initiating Participant would agree to buy at the bid or sell at the 
offer.
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    \14\ See CUBE Approval Order, supra note 6 at 79 FR 24779, at 
24787.
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    In connection with the proposal to make permanent the CUBE Pilot 
(i.e., Rules 971.1NY(b)(1)(B) and 971.1NY(b)(8)), the Exchange proposes 
to delete Commentary .01 to Rule 971.1NY, which describes the CUBE 
Pilot and the Exchange's associated obligation to produce data, to hold 
this paragraph as ``Reserved.'' \15\
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    \15\ See proposed Commentary .01 to Rule 971.1NY. The Exchange 
notes that it would retain the text of Rules 971.1NY(b)(1)(B) and 
971.1NY(b)(8).
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    The Exchange has analyzed the data gathered during the CUBE Pilot 
(the ``CUBE Data'') and believes the CUBE Data indicates that there is 
meaningful competition in CUBE Auctions for all size orders, regardless 
of the size of the order or the bid/ask differential of the NBBO.\16\ 
Specifically, between January and June 2015, a total of 4,493,429 
contracts were executed in CUBE Auctions. Market Makers and other 
participants submitted competitive bids and offers during the CUBE 
Auction's Response Time Interval, indicating interest in participating 
in CUBE

[[Page 94439]]

Auction trades. In addition, the Exchange believes the allocation of 
orders executed in CUBE Auctions--either at a single price or multiple 
prices--supports competitive bidding and offering.
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    \16\ See Exhibit 3 (summary of the CUBE Data from January--June 
2015).
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    The Exchange also believes that the CUBE Data reveals that there is 
an active and liquid market functioning on the Exchange outside of the 
CUBE Auction,\17\ Competitive bidding and offering occurs outside of 
CUBE Auction and participants can submit bids/offers at improved prices 
or join a bid or offer (thus improving liquidity at that price) 
regardless of the bid/ask differential of the NBBO.
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    \17\ From January 2015 through June 2015, the Exchange executed 
a total of 152,193,516 contracts outside of CUBE Auctions, which the 
Exchange believes is indicative of an active and liquid market 
functioning on the Exchange outside of the CUBE Auctions.
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    Although the Exchange continues to believe that the CUBE Auction 
provides opportunities for price improvement of CUBE Orders (i.e., the 
agency order) with a size of less than 50 contracts when the NBBO has a 
bid/ask differential of $0.01 (e.g.because the market conditions may 
change during the CUBE Auction), the data have not demonstrated 
significant price improvement in this narrow circumstance. Between 
January and June 2015, a total of 171,822 contracts were executed in 
CUBE Auctions for fewer than 50 contracts when the NBBO had a bid/ask 
differential of $0.01. Only 1,660 of those contracts received price 
improvement of $0.01. Thus, consistent with the Exchange's view that 
price improvement auctions should provide improvement, particularly for 
small orders, the Exchange is proposing to require that Initiating 
Participants guarantee price improvement for CUBE Orders for 50 or 
fewer contracts in such market conditions.
    Further, the Exchange notes that CUBE Auctions for fewer than 50 
contracts have served as a valuable tool in providing price improvement 
when the NBBO has a bid/ask differential of greater than $0.01. For 
example, for CUBE Auctions of this size, the CUBE Data indicates that 
when the NBBO has a bid/ask differential between $0.02 and $0.05, 
contracts executed in CUBE Auctions received on average a price 
improvement of $0.0114. In wider markets (i.e., bid/ask differentials 
greater than $0.05), contracts executed in CUBE Auctions received, on 
average, price improvement of more than $0.0759.
    In the CUBE Approval Order, the Commission stated that ``the 
Exchange's proposal [for the CUBE Pilot] should provide small customer 
orders with the opportunity for price improvement in a manner that is 
consistent with the Act.'' \18\
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    \18\ See CUBE Approval Order, supra note 6, 79 FR at 24787.
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    Based on a review of the CUBE Data, the Exchange believes that the 
CUBE Auction, as modified herein, would allow the Exchange to continue 
to provide meaningful competition for all size orders--including small 
orders--as well as to continue to offer an active and liquid market 
outside of the CUBE Auction. Thus, the Exchange believes it would be 
beneficial to customers and to the options market to make the CUBE 
Pilot permanent, as amended. Once permanent, the CUBE Auction would 
continue to accept orders of fewer than 50 contracts, provided such 
Orders comply with the modified CUBE rules, which should continue to 
attract small orders and promote competition and price improvement 
opportunities for such CUBE Orders.
Implementation
    Because of the technology changes associated with the proposed 
amendment to Rule 971.1NY(b)(6), the Exchange proposes to announce the 
implementation of the proposed change to the CUBE rules as well as the 
change to make the CUBE Pilot permanent, via Trader Update. Pending 
approval of this proposal by the Commission, the changes would be 
implemented prior to the expiration of the CUBE Pilot (i.e., before 
January 18, 2017).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \20\ 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.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposal to make permanent the CUBE Pilot 
would remove impediments to and perfect the mechanism of a free and 
open market and a national market system because the CUBE Pilot, 
together with the proposal to amend CUBE herein, are reasonably 
designed to create tighter markets and ensure that each order receives 
the best possible price, which benefits investors by increasing 
competition thereby maximizing opportunities for price improvement. In 
particular, the proposal to require that Initiating Participants 
guarantee improvement of $0.01 (by buying at the bid or selling at the 
offer) on CUBE Orders for fewer than 50 contracts that are submitted 
when the NBBO is $0.01 wide in order to participate in the CUBE 
promotes just and equitable principles of trade as it would ensure that 
small orders receive at least minimal price improvement, which may 
encourage the submission and execution of more orders of fewer than 50 
contracts in CUBE, thus providing an increased probability of price 
improvement for smaller orders.
    The proposal to make permanent the CUBE Pilot would also allow the 
applicable rules (Rules 971.1NY(b)(1)(B) and 971.1NY(b)(8) to remain in 
effect, which would add certainty to Exchange rules and avoid any 
potential investor confusion that could result from a suspension or 
temporary interruption in the CUBE Pilot. Because the CUBE Pilot is 
applicable to all CUBE Orders for fewer than 50 contracts, and the 
requirement that the minimum size of the CUBE Auction is one contract, 
the proposal to make the Pilot permanent merely acts to maintain status 
quo on the Exchange, which promotes just and equitable principles of 
trade and removes impediments to, and perfects the mechanism of, a free 
and open market and a national market system.
    The Exchange believes the proposed rule changes 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 
because price improvement auctions are widely recognized by market 
participants as invaluable, both as a tool to access liquidity and a 
mechanism to help meet their best execution obligations. The Exchange 
believes the proposed rule changes would further the ability of market 
participants to carry out these strategies.
    Finally, the Exchange believes that it is subject to significant 
competitive forces, as described below in the Exchange's statement 
regarding the burden on competition. For these 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 not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that 
making the

[[Page 94440]]

CUBE Pilot permanent would continue to foster competition among 
liquidity providers and maintain execution quality on the Exchange. The 
CUBE Auction for small orders, as modified herein, would continue to 
operate to create tighter markets and ensure that each order receives 
the best possible price, which benefits investors by increasing 
competition thereby maximizing opportunities for price improvement.
    The Exchange notes that it operates in a highly competitive market 
in which market participants can easily direct their orders to 
competing venues. In such an environment, the Exchange must continually 
review, and consider adjusting the services it offers and the 
requirements it imposes to remain competitive with other exchanges. For 
the reasons described above, the Exchange believes that the proposed 
rule change reflects this competitive environment.

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-2016-120 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-2016-120. 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-2016-120 and should 
be submitted on or before January 13, 2017.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30945 Filed 12-22-16; 8:45 am]
 BILLING CODE 8011-01-P