[Federal Register Volume 83, Number 242 (Tuesday, December 18, 2018)]
[Notices]
[Pages 64913-64922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27280]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84806; File No. SR-NYSE-2018-52]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change To Amend Rule 7.31 Relating to
Discretionary Orders, Auction-Only Orders, Discretionary Modifier, and
Yielding Modifier and Related Amendments to Rules 7.16, 7.34, 7.36, and
7.37
December 12, 2018.
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 November 29, 2018, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') 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 7.31 (Orders and Modifiers) to:
(i) Add a new order type, Discretionary Orders; (ii) add two new order
type modifiers, the Last Sale Peg Modifier and the Yielding Modifier;
and (iii) make related changes to Rules 7.16, 7.34, 7.36, and 7.37. The
proposed rule change is available on the Exchange's website 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 7.31 (Orders and Modifiers) to:
(i) Add a new order type, Discretionary Orders; (ii) add two new order
type modifiers, the Last Sale Peg Modifier and the Yielding Modifier;
and (iii) make related changes to Rules 7.16, 7.34, 7.36, and 7.37.
Each of these proposed changes is designed to introduce on Pillar
order types and modifiers that are currently available for trading
securities listed on the Exchange. First, the proposed new order type,
Discretionary Orders, or ``D Orders,'' is based on current d-Quote
functionality.\4\ Second, the proposed Last Sale Peg Modifier is based
on the Buy Minus Zero Plus Instruction.\5\ Finally, the proposed
Yielding Modifier is based on e-Quotes that yield (``g-Quotes'').\6\
The Exchange also proposes to make related changes to Rules 7.16 (Short
Sales), 7.34 (Trading Sessions), 7.36 (Order Ranking and Display), and
7.37 (Order Execution and Routing).
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\4\ See Supplementary Material .25 to Rule 70 (``Rule 70.25'').
\5\ See Rule 13(f)(4).
\6\ See Rule 70(a)(ii) and (iii).
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Currently, only UTP Securities are traded on the Exchange's Pillar
trading platform.\7\ Accordingly, at this time, the
[[Page 64914]]
proposed D Order, Last Sale Peg Modifier, and Yielding Modifier would
be available only for UTP Securities. When the Exchange transitions
Exchange-listed securities to Pillar, these order types and modifiers
would be available for those securities as well.\8\
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\7\ ``UTP Security'' is defined as a security that is listed on
a national securities exchange other than the Exchange and that
trades on the Exchange pursuant to unlisted trading privileges. See
Rule 1.1(x).
\8\ The proposed D Order, Last Sale Peg Modifier, and Yielding
Modifier would function in an identical manner as proposed herein
when made available for Exchange-listed securities.
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Proposed Discretionary Order
The Exchange proposes a new order type, a Discretionary Order or
``D Order'', under paragraph (d)(4) of Rule 7.31 for securities trading
on Pillar. Today, the Exchange offers d-Quotes \9\ for trading in
Exchange-listed securities only, which operate in a similar manner as
the proposed D Order, including that such order type is available to
Floor brokers only.
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\9\ See Rule 70.25. See also Securities Exchange Act Release
Nos. 54577 (October 5, 2006), 71 FR 60208 (October 12, 2006) (SR-
NYSE-2006-25) (``d-Quote Approval Order''); 60251 (July 7, 2009), 74
FR 34068 (July 14, 2009) (SR-NYSE-2009-55); 61072 (November 30,
2009), 74 FR 64103 (December 7, 2009) (SR-NYSE-2009-106); and 75444
(July 13, 2015), 80 FR 42575 (July 17, 2015) (SR-NYSE-2015-15).
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Under Rule 70.25, a d-Quote is a quotation entered by a Floor
broker that includes discretionary instructions as to size and/or
price.\10\ Such discretionary instructions are active during the
trading day, unless the PBBO is crossed.\11\ A Floor broker can also
include an instruction for the discretionary instructions to
participate in the opening or closing transaction only.\12\
Discretionary instructions are not displayed and such instructions
apply to both displayed and reserve interest.\13\ Currently, price
discretion can apply to all or a portion of a d-Quote and a d-Quote
with a midpoint modifier has a discretionary price range to the
midpoint of the PBBO.\14\
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\10\ See Rule 70.25(a)(i).
\11\ See Rule 70.25(a)(ii).
\12\ See id.
\13\ See Rule 70.25(a)(vi) and (vjj).
\14\ See Rule 70.25(b).
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With respect to discretionary size, a Floor broker may designate
the amount of d-Quote volume to which the discretionary price
instructions shall apply, and can also designate that a minimum size of
contra-side volume with which it is willing to trade using
discretionary size instructions.\15\ A Floor broker may also designate
a minimum trade size (``MTS'') that must be met before the d-Quote is
executed.\16\ A resting d-Quote will be triggered to exercise
discretion so long as the contra-side interest's price is within the
discretionary price range and meets the MTS that has been set for the
d-Quote.\17\
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\15\ See Rule 70.25(c).
\16\ See Rule 70.25(d).
\17\ See Rule 70.25(e)(ii).
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On Pillar, the Exchange proposes to offer Floor brokers
functionality similar to d-Quotes in the form of D Orders. However, the
Exchange proposes to simplify and streamline D Order functionality on
Pillar as compared to how d-Quotes function. Among other things, the
Exchange would not offer discretionary size instructions for D Orders
that are available to d-Quotes. Also unlike d-Quotes, the discretionary
price instructions would be applicable to the entirety of the D Order.
In addition, all D Orders would have a discretionary price range capped
at the midpoint of the PBBO, which is currently optional functionality
for d-Quotes.
Overview. Proposed Rule 7.31(d)(4) would set forth the general
requirements for D Orders and would provide that a D Order is a Limit
Order that may trade at an undisplayed discretionary price. As further
proposed, a D Order must be designated Day, may be designated as
routable or non-routable,\18\ and on entry, must have a minimum of one
round lot displayed. This proposed rule text is based in part on how d-
Quotes currently function, with a proposed difference that on Pillar, D
Orders would be required to have a display quantity.\19\ The Exchange
proposes that, as currently available for d-Quotes, D Orders could be
combined with a Reserve Order, which would be addressed in an amendment
to Rule 7.31(d)(1)(C).
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\18\ A d-Quote can be combined with a Do Not Ship ``DNS'' Order,
which is an order that would be cancelled if it were required to be
routed. See Rule 13(e)(2). Accordingly, a d-Quote combined with DNS
is a non-routable d-Quote.
\19\ Currently, Reserve Orders available to Floor brokers do not
require a display quantity. See Rule 70(f).
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Proposed Rule 7.31(d)(4) would further provide that a D Order is
available only to Floor brokers and is eligible to be traded in the
Core Trading Session \20\ only. This proposed rule text is based on
current rules that d-Quotes are available only to Floor brokers. The
requirement that D Orders would be eligible to trade in the Core
Trading Session only is consistent with current d-Quote functionality,
which trade during ``regular trading hours'' only. The Exchange
proposes to apply this same time frame when making D Orders available
to all securities that trade on Pillar, including UTP Securities
because, as discussed below, D Order functionality would operate
similarly to Pegged Orders, which are also only available during Core
Trading Hours. The Exchange also proposes to amend Rule 7.34(c)(1)(A)
to specify when a D Order may be entered and be eligible for execution.
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\20\ The Core Trading Session begins at 9:30 a.m. Eastern Time
and ends at the conclusion of Core Trading Hours. See Rule
7.34(a)(2). The term ``Core Trading Hours'' means ``the hours of
9:30 a.m. Eastern Time through 4:00 p.m. Eastern Time or such other
hours as may be determined by the Exchange from time to time.'' See
Rule 1.1(d).
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Upon Arrival. Proposed Rule 7.31(d)(4)(A) would provide that the
Floor broker would be required to specify one of the following
instructions for a D Order: (i) Limit Price D Order; or (ii) Midpoint
Price D Order.
Proposed Rule 7.31(d)(4)(A)(i) would provide that on
arrival, a Limit Price D Order to buy (sell) would trade with sell
(buy) orders on the Exchange Book, or, if designated as routable, route
to an Away Market up (down) to the limit price of the order. If after
trading or routing the PBBO is locked or crossed or there is no PBB
(PBO), a Limit Price D Order would be cancelled. For a Limit Price D
Order that is partially routed to an Away Market on arrival, any
returned quantity of such D Order would join the working price of the
resting odd-lot quantity of the D Order. Because the limit price of a D
Order would function similarly to the upper (lower) discretionary price
range of a d-Quote, this proposed operation of a Limit Price D Order on
arrival is similar to how d-Quotes currently function.\21\
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\21\ See Rule 70.25(e)(vii) (a d-Quote may initiate a sweep to
the extent of their price and volume discretion).
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Proposed Rule 7.31(d)(4)(A)(ii) would provide that on
arrival, a Midpoint Price D Order to buy (sell) would trade with sell
(buy) orders on the Exchange Book up (down) to the lower (higher) of
the midpoint of the PBBO (``Midpoint Price'') or the order's limit
price. The rule would further provide that a Midpoint Price D Order
would not route on arrival, even if designated as routable. If
designated as routable, a Midpoint D Order combined with a Reserve
Order would be evaluated for routing each time the display quantity is
replenished as provided for in Rule 7.31(d)(1)(D).\22\ The rule would
further provide that if the PBBO is locked or crossed or if the
Midpoint Price is unavailable, the Midpoint Price D Order would be
rejected. The Midpoint Price D Order is based on current functionality
that a d-Quote may be designated with a
[[Page 64915]]
midpoint modifier and the discretionary price range of such d-Quote is
the midpoint of the PBBO.\23\
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\22\ Rule 7.31(d)(1)(D) provides that a routable Reserve Order
will be evaluated for routing both on arrival and each time the
display quantity is replenished.
\23\ See Rule 70.25(b)(v).
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The Exchange notes that the proposed functionality to either cancel
or reject a D Order when the PBBO is locked or crossed is based on how
Primary Pegged Orders \24\ currently function.\25\ As discussed below,
the Exchange proposes that D Orders would function similarly to Primary
Pegged Orders because they would be pegged to the same-side PBBO. The
Exchange therefore believes that a D Order should be rejected or
cancelled under the same circumstances when a Primary Pegged Order
would be cancelled or rejected.\26\ In addition, this is consistent
with current d-Quote functionality that provides that discretionary
instructions are not active when the PBBO is crossed.\27\
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\24\ See Rule 7.31(h) for a description of Pegged Orders.
\25\ See Rule 7.31(h)(2) and (h)(2)(B) (``A Primary Pegged Order
will be rejected if the PBBO is locked or crossed.'').
\26\ See Rule 7.31(h)(2) (``A Primary Pegged Order to buy (sell)
will be rejected on arrival, or cancelled when resting, if there is
no PBB (PBO) against which to peg.'')
\27\ See Rule 70.25(a)(ii).
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Display Price. Proposed Rule 7.31(d)(4)(B) would set forth how a D
Order would be displayed when resting on the Exchange Book and would
provide that the working \28\ and display price of a D Order to buy
(sell) would be pegged to the PBB (PBO). If the PBB (PBO) is higher
(lower) than the limit price of a D Order to buy (sell), the working
and display price would be the limit price of the order. The rule would
further provide that a D Order to buy (sell) would be cancelled if
there is no PBB (PBO) against which to peg. At its display price,\29\ a
D Order would be ranked Priority 2--Display Orders.\30\ This proposed
functionality for D Orders would be new for Pillar and is based on how
Primary Pegged Orders function, including that a D Order would be
cancelled if there is nothing against which to peg. The Exchange
believes this proposed difference would streamline and simplify the
operation of D Orders as compared to d-Quotes.\31\
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\28\ ``Working price'' means the price at which an order is
eligible to trade at any given time, which may be different from the
limit price or display price of the order. See Rule 7.36(a)(3).
\29\ ``Display price'' means the price at which a Limit Order is
displayed, which may be different from the limit price or working
price of the order. See Rule 7.36(a)(1).
\30\ Rule 7.36(e) governs execution priority for orders resting
on the Exchange Book and currently sets forth three priority
categories: Priority 1--Market Orders, Priority 2--Display Orders,
and Priority 3--Non-Display Orders. If a D Order is combined with a
Reserve Order, the reserve interest of such order would be ranked
Priority 3--Non-Display Orders. See Rule 7.31(d)(1).
\31\ Currently, d-Quotes resting at the depth of book can
exercise discretion. See Rule 70.25(e)(i)(A).
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Exercising Discretion. Proposed Rule 7.31(d)(4)(C) would provide
that a resting D Order to buy (sell) would be eligible to exercise
discretion up (down) to the limit price of the order. This proposed
rule text is new for Pillar and reflects that the limit price of the D
Order would function as the ceiling or floor of the discretionary price
range for such order. As noted above, the display price of a D Order
would be pegged to the same-side PBBO and would not be based on the
limit price.
The proposed rule would further provide that such D Order would not
exercise discretion if the PBBO is locked or crossed or if there is no
Midpoint Price. This functionality is based in part on how d-Quotes
currently function and adds that D Orders would not exercise discretion
if the market is locked (because a D Order would be pegged to the same-
side PBBO and there is no midpoint) or if there is no Midpoint Price
(meaning there is no price available for a D Order to extend its
discretion to).\32\
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\32\ See Rule 70.25(a)(ii).
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Proposed Rule 7.31(d)(4)(C)(i) would provide that a D Order to buy
(sell) would be triggered to exercise discretion if the price of an
Aggressing Order \33\ to sell (buy) is above (below) the PBB (PBO) and
at or below the Midpoint Price (the ``discretionary price range'').
This would be new functionality for D Orders. Currently, any contra-
side order that is within the discretionary price range of a d-Quote
would trigger a d-Quote to trade.\34\ The Exchange believes the
proposed difference for D Orders would streamline and simplify the
function of D Orders. More specifically, because the discretionary
price range for a D Order would be one minimum price variation
(``MPV'') better than the same-side PBBO capped by the Midpoint Price,
the Exchange believes that only contra-side orders with a limit price
within that same discretionary price range should trigger a D Order to
exercise discretion.
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\33\ An Aggressing Order is a buy (sell) order that is or
becomes marketable against sell (buy) interest on the Exchange Book.
See Rule 7.36(a)(6). A resting order may become an Aggressing Order
if its working price changes, if the PBBO or NBBO is updated,
because of changes to other orders on the Exchange Book, or when
processing inbound messages. Id.
\34\ See Rule 70.25(e)(ii).
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Proposed Rule 7.31(d)(4)(C)(ii) would provide that the
discretionary price at which a D Order to buy (sell) would trade would
be the price of the sell (buy) order. This proposed functionality would
be new for Pillar and is to be read together with proposed Rule
7.31(d)(4)(C)(i), which defines the price range of the contra-side
order that could trigger the D Order to exercise discretion. In
addition, the Exchange proposes to define the term ``discretionary
price'' in new Rule 7.36(a)(7) to mean the undisplayed price at which a
D Order would trade if it exercises discretion.
Proposed Rule 7.31(d)(4)(C)(ii) would further provide that if there
is other interest to buy (sell) on the Exchange Book priced equal to or
higher (lower) than the price of the sell (buy) order, the
discretionary price would be one MPV higher (lower) than the highest
(lowest) priced resting order to buy (sell), capped by the Midpoint
Price.\35\ This would be new functionality for Pillar and is based in
part on current functionality that requires a d-Quote to exercise the
least amount of price discretion.\36\ The following example illustrates
this behavior:
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\35\ The MPV for securities is defined in Rule 7.6.
\36\ See Rule 70.25(e)(i)(A).
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If the PBBO is $10.00 by $10.10 with a Midpoint Price of
$10.05 and a Floor broker enters a D Order to buy 100 shares with a
limit price of $10.08 (``Order 1''), Order 1 would be pegged to and
displayed at $10.00, the PBB, with a discretionary price range up to
the $10.05 Midpoint Price. If a non-displayed Limit Order to buy 100
shares at $10.03 is placed on the Exchange Book (``Order 2'') and next,
a Limit Order to sell 200 shares at $10.01 is entered (``Order 3''),
because Order 3 is marketable against Order 2 at $10.03, Order 1's
discretionary price range would extend to $10.04, one MPV higher than
Order 2's limit price. Order 3 would execute 100 shares against Order 1
at $10.04, providing Order 3 with $0.03 of price improvement relative
to its limit price. The remaining 100 shares of Order 3 would execute
against Order 2 at $10.03.
Ranking and Working Time. As provided for in Rule 7.36(f)(1), an
order is assigned its working time based on its original entry time,
which is the time when an order is placed on the Exchange Book. Rule
7.36(f)(2) further provides that an order is assigned a new working
time any time its working price changes.\37\ Because a D Order can
trade at more than one price--its display price or its discretionary
price, the Exchange proposes to address the working time associated
with each such
[[Page 64916]]
price in proposed Rule 7.31(d)(4)(D). As proposed, the trigger to
exercise discretion would not change the working time of a D Order's
display and working price.
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\37\ Pursuant to Rule 7.36(f)(2), each time a D Order is
assigned a new working and display price, i.e., with each change to
the same-side PBBO pursuant to proposed Rule 7.31(d)(4)(B)(i), such
D Order would be assigned a new working time.
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Proposed Rule 7.31(d)(4)(D)(i) would provide that at its
discretionary price, a D Order would be assigned a new temporary
working time that is later than any same-side resting interest at that
price. This temporary working time is distinct from the working time
associated with the display and working price of the D Order, which are
pegged to the same-side PBBO.
Proposed Rule 7.31(d)(4)(D)(ii) would provide that multiple D
Orders eligible to trade at the same discretionary price would be
ranked by limit price and time. This is new functionality for Pillar.
Current Rule 70.25(e)(iii) and (iv) describe how competing d-Quotes
from more than one Floor broker trade. The Exchange does not propose to
replicate this functionality on Pillar and believes that ranking
multiple same-side D Orders based on limit price and time would
simplify the process for allocation among competing D Orders. Finally,
proposed Rule 7.31(d)(4)(D)(iii) would provide that any quantity of a D
Order that does not execute at a discretionary price would return to
the working time associated with its working and display price.
The Exchange believes that the proposed temporary working time
associated with the discretionary price would respect the priority of
the working times of orders that may have a working price equal to the
D Order's discretionary price. By assigning a temporary working time,
the D Order would be ranked behind other orders at that price. In
addition, because the D Order would continue to be displayed at its
display price, even if it were triggered to exercise discretion, the
proposal would honor such D Order's original working time if it were to
trade at its display price.
Resting D Order that Becomes Marketable. Proposed Rule
7.31(d)(4)(E) would provide that after the PBBO unlocks or uncrosses or
a Midpoint Price becomes accessible, resting D Orders to buy (sell)
would be ranked based on the lower (higher) of the Midpoint Price or
limit price of the order to determine whether a D Order is marketable
within the discretionary price range with contra-side orders on the
Exchange Book. This proposed rule text is new and reflects the
difference in Pillar that D Orders would not exercise discretion when
the PBBO is locked or crossed or if a Midpoint Price is unavailable.
This proposed rule text addresses how a resting D Order would be ranked
for trading when the PBBO unlocks or uncrosses or if a Midpoint Price
becomes accessible.
D Orders Rejected and Modifiers. Proposed Rule 7.31(d)(4)(F) would
provide that a D Order may be designated with a Self Trade Prevention
Modifier (``STP'') and would be rejected if combined with any other
modifiers or if the same-side PBBO is zero. This proposed functionality
is new, as d-Quotes cannot currently be designated with an STP
Modifier.\38\ The Exchange believes that making STP Modifiers available
for D Orders would provide Floor brokers with more tools to reduce the
potential for two orders to interact if they are from the same
customer. By specifying that D Orders cannot be combined with other
modifiers, the rule provides transparency that a D Order cannot be
combined with other modifiers defined in Rule 7.31(i).
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\38\ See Rule 13(f)(3)(B).
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Regarding STP, Rule 7.31(i)(2) describes the Exchange's STP
Modifier. Generally, if two orders from the same Client ID both have an
STP Modifier, the Exchange will cancel one of the two orders, based on
instruction from the member organization. For D Orders, because the
discretionary price is temporary, the Exchange proposes that if a D
Order exercising discretion would trade with another order with an STP
Modifier from the same Client ID, the two orders would not trade, but
nor would either order be cancelled. The Exchange does not believe it
would be appropriate to cancel the D Order in such scenario because if
the D Order is not cancelled, it would be eligible to trade with
another order at either its display price or a different discretionary
price at a later time. To effect this change, the Exchange proposes to
amend Rule 7.31(i)(2) to add new subparagraph (C) that would provide
that a resting D Order with an STP Modifier that is triggered to
exercise discretion and is not an Aggressing Order will not trade at a
discretionary price against a contra-side order that is also designated
with an STP Modifier and from the same Client ID and that in such case,
the D Order would not be cancelled.
Last 10 Seconds of Trading. Proposed Rule 7.31(d)(4)(G) would
provide that a request to enter a D Order in any security 10 seconds or
less before the scheduled close of trading would be rejected. This
proposed rule text is based in part on the second sentence of current
Rule 70.25(a)(ii), which provides that the Exchange will reject any d-
Quotes that are entered 10 seconds or less before the scheduled end of
trading. The proposed functionality for UTP Securities would be
identical to Rule 70.25(a)(ii).
Allocation of D Orders. Rule 7.37(b) describes how an Aggressing
Order is allocated among contra-side orders at each price. The Exchange
maintains separate allocation wheels on each side of the market for
displayed and non-displayed orders at each price. The Exchange proposes
to amend Rule 7.37(b) to set forth how D Orders would participate in
the allocation process.
Rule 7.37(b)(1) sets forth the following allocation sequence: (1)
Market Orders trade first based on time; (2) orders with Setter
Priority as described in Exchange Rule 7.36(h) receive an allocation;
(3) orders ranked Priority 2--Displayed Orders are allocated on parity
by Participant; (4) orders ranked Priority 3--Non-Display Orders, other
than Mid-Point Liquidity (``MPL'') Orders \39\ with an MTS Modifier,
are allocated on parity by Participant; \40\ and then (5) MPL Orders
with an MTS Modifier are allocated based on MTS size (smallest to
largest) and time.
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\39\ See Rule 7.31(d)(3) for a description of MPL Orders.
\40\ In sum, an order with an MTS Modifier would only trade with
contra-side orders that, either individually or in the aggregate,
satisfy the order's minimum trade size condition. See Rule
7.31(i)(3) for a full description of the MTS Modifier.
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As proposed, D Orders trading at a discretionary price would be
allocated next on parity by Floor Broker Participant.\41\ Accordingly,
at their discretionary price, D Orders would be allocated after all
other orders at that price, except, as described below, Yielding
Orders. To effect this change, the Exchange proposes to amend Rule
7.37(b)(1) to add new sub-paragraph (F) to provide that next, D Orders
trading at a discretionary price would be allocated on parity by Floor
Broker Participant. This proposed functionality is based in part on
current Rule 70.25(a)(ii), which provides that executions of d-Quotes
within the discretionary price range are considered non-displayable for
purposes of Rule 72.
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\41\ See Rule 7.36(a)(5) for the definition of the term ``Floor
Broker Participant.''
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Rule 7.37(b)(2) describes the process for the parity allocation
wheel. Currently, the Exchange creates separate allocation wheels for
orders ranked Priority 2--Display Orders and orders ranked Priority 3--
Non-Display Orders. The Exchange proposes to create a third allocation
wheel if there is more than one D Order eligible to trade at a
discretionary price. In such case, the Exchange would create an
allocation
[[Page 64917]]
wheel for D Orders at that discretionary price.\42\
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\42\ See proposed amendment to Rule 7.37(b)(2).
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The Exchange proposes that an allocation wheel for D Orders trading
at a discretionary price would function the same as allocation wheels
for display and non-display orders, with one proposed difference.
Because the discretionary price at which a D Order would trade is a
temporary price established based on whether a contra-side order
triggers a D Order to exercise discretion, the Exchange proposes to
amend Rule 7.37(b)(2)(A) to provide that for each D Order parity
allocation wheel, a D Order to buy (sell) with the highest (lowest)
limit price would establish the first position on that allocation
wheel. This proposed rule text is consistent with the proposed ranking
of D Orders as set forth in proposed Rule 7.31(d)(4)(D)(ii), which
would require multiple D Orders eligible to trade at the same
discretionary price to be ranked by limit price and time as described
above.
The following example illustrates how the parity allocation wheel
for D Orders would be established:
If the PBBO is $10.00 by $10.10 with a Midpoint Price of
$10.05 and a Floor broker enters a D Order to buy 1,000 shares with a
limit price of $10.06 (``Order 1''), Order 1 would be pegged to and
displayed at $10.00, the PBB, with discretion to the $10.05, the
Midpoint Price. If another Floor broker enters a separate D Order to
buy 1,000 shares with a limit price of $10.07 (``Order 2''), like Order
1, Order 2 would be pegged to and displayed at $10.00, the PBB, with
discretion to $10.05, the Midpoint Price.
If a Limit Order to sell 100 shares at $10.05 is entered
(``Order 3''), Order 3 would trigger both Order 1 and 2 to exercise
discretion at the Midpoint Price. Because Order 2 has the more
aggressive limit price, it would establish the first position on the D
Order parity wheel. In this example, Order 3 would trade 100 shares
with Order 2 at $10.05. Because there is no remaining quantity of Order
3, Order 1 would not receive an allocation.
Re-pricing of D Orders during a Short Sale Period. Rule 7.16(f)(5)
sets forth how the Exchange processes short sale orders during a Short
Sale Period.\43\ The Exchange proposes to amend Rule 7.16(f)(5)(C) to
address how the Exchange would process D Orders marked ``short'' during
a Short Sale Period. As proposed, during a Short Sale Period, the
Exchange proposes to process sell short D Orders like Pegged Orders and
MPL Orders. To effect this change, the Exchange proposes to amend Rule
7.16(f)(5)(C) to add that D Orders, like Pegged Orders and MPL Orders
today, including orders marked buy, sell long and sell short exempt,
would use the National Best Bid and Offer (``NBBO'') instead of the
PBBO as the reference price. Because the Exchange has defined the term
``Midpoint Price'' for D Orders, the Exchange further proposes to amend
that rule to provide that the Midpoint Price of D Orders would be the
midpoint price of the NBBO, including situations where the midpoint is
less than one minimum price increment above the National Best Bid
(``NBB''). This functionality would be new for D Orders on Pillar as
compared to how d-Quotes function and is based on applying existing
Pillar logic for orders that peg to the PBBO to D Orders.
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\43\ A ``Short Sale Period'' is defined in Rule 7.16(f)(4) to
mean the period when a Short Sale Price Test is in effect. A ``Short
Sale Price Test'' is defined in Rule 7.16(f)(3) to mean the period
during which Exchange systems will not execute or display a short
sale order with respect to a covered security at a price that is
less than or equal to the current NBB in compliance with Rule 201 of
Regulation SHO. 17 CFR 242.201.
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Proposed Last Sale Peg Modifier
The Exchange proposes to add a new order type modifier, Last Sale
Peg, which would be set forth in proposed paragraph (i)(4) of Rule
7.31. Today, the Exchange offers the Buy Minus Zero Plus (``BMZP'')
\44\ instruction for trading in Exchange-listed securities. The Last
Sale Peg Modifier is designed to achieve the same purpose as the BMZP
instruction for securities trading on Pillar, with specified
differences to reflect Pillar functions and terminology.
---------------------------------------------------------------------------
\44\ See Rule 13(f)(4).
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Under Rule 13(f)(4), for Exchange-listed securities, an order with
a BMZP instruction will not trade at a price that is higher than the
last sale, subject to the limit price of an order, if applicable.\45\
Odd-lot sized transactions are not considered the last sale for
purposes of executing BMZP orders.
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\45\ See Rule 13(f)(4). Limit Orders with a BMZP instruction
that are systemically delivered to Exchange systems are eligible to
be automatically executed in accordance with, and to the extent
provided by, Rules 1000-1004, consistent with the order's
instructions. Id. Odd-lot sized transactions are not be considered
the last sale for purposes of executing an order with a BMZP
instruction. Id.
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The BMZP instruction is available to buy Limit Orders only and is
designed to assist member organizations in their compliance with the
``safe harbor'' provisions of Rule 10b-18 under the Act (``Rule 10b-
18'') for issuer repurchases.\46\ One of the four provisions required
to fall under Rule 10b-18's safe harbor is that the purchase price of a
security may not exceed the highest independent bid or the last
independent transaction price for the security.\47\ Because an order
with a BMZP instruction will not trade at a price that is higher than
the last sale, member organizations can use this instruction to
facilitate their compliance with at least one of the conditions of the
safe harbor provision of Rule 10b-18.\48\
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\46\ See 17 CFR 240.10b-18. See also Securities Exchange Act
Release No. 78679 (August 25, 2016), 81 FR 60080 (August 31, 2016)
(SR-NYSE-2016-59).
\47\ See 17 CFR 240.10b-18(b)(3). The other three conditions
relate to time of purchases, volume of purchases, and a requirement
that only one broker or dealer be involved in such repurchases on a
single day.
\48\ The Exchange does not represent that an order with a BMZP
instruction or the proposed Last Sale Peg Modifier are guaranteed to
meet the requirements of the safe harbor provision of Rule 10b-18;
rather, these instruction are available to member organizations to
facilitate their own compliance with Rule 10b-18.
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On Pillar, the Exchange proposes to offer functionality that is
based on the BMZP instruction and rename it the Last Sale Peg Modifier.
Proposed 7.31(i)(4) would set forth the general requirements for the
Last Sale Peg Modifier. As proposed, a Non-Routable Limit Order to buy
may be designated with a Last Sale Peg Modifier, which would be
referred to as a ``Last Sale Peg Order.'' Proposed 7.31(i)(4) would
also provide that a Last Sale Peg Order would not trade or be displayed
at a price higher than the later of the most recent last-sale eligible
trade \49\ executed on the Exchange or the most recent consolidated
last-sale eligible trade \50\ which would be defined for purposes of
this Rule as the ``last-sale price.'' This rule text is based on Rule
13(f)(4)(A), but with greater specificity of what it means to be a last
sale price for purposes of a Last Sale Peg Order.
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\49\ A last-sale eligible trade must be of at least one round
lot.
\50\ A consolidated last-sale eligible trade is the last-sale
eligible trade reported to the responsible single plan processor.
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The proposed functionality to restrict Last Sale Peg Orders to Non-
Routable Limit Orders would be new because currently, the BMZP
instruction can be included on both routable and non-routable buy
orders. The Exchange believes that limiting the availability of this
modifier to Non-Routable Limit Orders would simplify the operation of
this modifier, while at the same time achieving the goal of the
modifier, which is to provide an instruction to facilitate compliance
with the safe harbor provisions of Rule 10b-18. Like the BMZP
instruction, the proposed Last Sale Peg Order would be available only
for buy orders.
[[Page 64918]]
Proposed Rule 7.31(i)(4)(A) would provide that the working price of
a Last Sale Peg Order would be pegged to the lower of the last-sale
price, the limit price of the order, or the PBO. To reflect which last-
sale price would be applicable, proposed Rule 7.31(i)(4)(A) would
further provide that the working price of a resting Last Sale Peg Order
would not be adjusted until an Aggressing Order is fully processed. In
other words, if an Aggressing Order trades at multiple prices, the
Exchange would wait for the last price at which such order trades to
determine the last-sale price for purposes of re-pricing the working
price of a resting Last Sale Peg Order.
The rule would further provide that if the last-sale price is not
at a permissible MPV, the working price of the order would be rounded
down to the nearest MPV. This last provision would be applicable, for
example, if the last-sale price were at the midpoint of a penny-spread
security, which would not be in two decimals. In such case, the
Exchange would round the working price of the Last Sale Peg Order down
to the MPV for the security. This proposed rule text would be new for
Pillar and the Exchange believes that it would promote transparency
regarding how a Last Sale Peg Order would be displayed on the Exchange
Book in a manner to facilitate compliance with the safe-harbor
provisions of Rule 10b-18.
Proposed Rule 7.31(i)(4)(B) would provide that the display price of
a Last Sale Peg Order would be the same as the working price, unless
the working price is pegged to the PBO, in which case, the display
price would be determined under paragraph (e)(1) of Rule 7.31. Rule
7.31(e)(1) describes how a Non-Routable Limit Order to buy that, at the
time of entry and after trading with any sell orders in the Exchange
Book priced at or below the PBO is priced.\51\ Because a Last Sale Peg
Order would be a Non-Routable Limit Order, it would follow the pricing
instructions of such order.
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\51\ Under Rule 7.31(e)(1), Non-Routable Limit Orders would be
re-priced as follows: (i) It will have a working price of the PBO
(PBB) of an Away Market and a display price one MPV below (above)
that PBO (PBB); (ii) if the PBO (PBB) of an Away Market re-prices
higher (lower), it will be assigned a new working price of the
updated PBO (PBB) and a new display price of one MPV below (above)
that updated PBO (PBB); (iii) if the PBO (PBB) of an Away Market re-
prices to be equal to or lower (higher) than its last display price,
its display price will not change, but the working price will be
adjusted to be equal to its display price; or (iv) if its limit
price no longer locks or crosses the PBO (PBB) of an Away Market, it
will be assigned a working price and display price equal to its
limit price and will not be assigned a new working price or display
price based on changes to the PBO (PBB).
---------------------------------------------------------------------------
Proposed Rule 7.31(i)(4)(C) would provide that a Last Sale Peg
Order may be designated with an STP Modifier and would be rejected if
combined with any other modifiers or if there is no last-sale price.
This proposed rule text promotes transparency that a Non-Routable Limit
Order with a Last Sale Peg Modifier can include an STP, but could not
be combined with any other modifiers described in Rule 7.31.
The Exchange proposes that Last Sale Peg Orders would be eligible
for execution only during the Core Trading Session. As further
proposed, similar to Primary Pegged Orders, the Exchange proposes that
Last Sale Peg Orders would be accepted prior to the commencement of the
Core Trading Session, but would not be eligible for execution until the
Core Trading Session begins. To effect this change, the Exchange
proposes to amend Rule 7.34(c)(1)(A) to add Last Sale Peg Orders to the
description of orders that may be accepted but not eligible to trade
during the Early Trading Session.
Proposed Yielding Modifier
The Exchange proposes to add a second new order type modifier, the
Yielding Modifier, under paragraph (i)(5) of Rule 7.31, for trading on
Pillar. Today, the Exchange offers Floor brokers g-Quotes \52\ for
trading in Exchange-listed securities only. The proposed Yielding
Modifier is based on how g-Quotes currently function and as with g-
Quotes, would be available only to Floor brokers.
---------------------------------------------------------------------------
\52\ See Rule 70(a)(ii) and (iii).
---------------------------------------------------------------------------
Currently, g-Quotes are designed to assist Floor brokers with
compliance with Section 11(a)(1) of the Act,\53\ which generally
prohibits a member of a national securities exchange from effecting
transactions on that exchange for its own account, the account of an
associated person, or any account over which it or an associated person
exercises discretion. Subsection (G) of Section 11(a)(1) provides an
exemption from this prohibition, allowing an exchange member to have
its own floor broker execute a proprietary order, also known as a ``G
order,'' provided such order yields priority, parity, and precedence
(the ``G Rule''). For Exchange-listed securities, the Exchange offers
g-Quotes, which are an electronic method for Floor brokers to represent
orders that yield priority, parity and precedence based on size to all
other displayed and non-displayed orders on the Exchange Book, in
compliance with the G Rule.\54\
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78k(a)(1).
\54\ Under the G Rule, G orders are not required to yield to
other orders that are for the account of a member, e.g., Designated
Market Maker (``DMM'') interest or other g-Quotes.
---------------------------------------------------------------------------
Like g-Quotes, the proposed Yielding Modifier would aid Floor
brokers in complying with the G Rule when trading on Pillar. Proposed
Rule 7.31(i)(5) would set forth the general requirements for the
Yielding Modifier and would provide that a Limit Order, Non-Routable
Limit Order, or Reserve Order may be designated with a Yielding
Modifier, which for purposes of this Rule, would be referred to as a
``Yielding Order.'' This proposed rule text is based on how the
Exchange currently functions, because a g-Quote is a form of an e-
Quote, and pursuant to Rule 70.25, e-Quotes may be displayed or non-
displayed and routable or non-routable. The proposed rule text uses
Pillar terminology to reflect these functions. Proposed Rule 7.31(i)(5)
would also provide that a Yielding Order would yield priority to all
other displayed and non-displayed orders at the same price, and,
similar to g-Quotes, may be entered by a Floor broker only.
Proposed Rule 7.31(i)(5) would also provide that a Yielding Order
would be ranked Priority 4--Yielding Orders. The Exchange would make a
related amendment to Rule 7.36(e) to add this additional priority
category. Proposed Rule 7.36(e)(4) would provide that Priority 4--
Yielding Orders would have fourth priority. The Exchange believes that
these proposed priority categories are consistent with current g-Quote
functionality because Yielding Orders would be ranked behind all other
displayed and non-displayed orders.
Proposed Rule 7.31(i)(5)(A) and (B) would describe how an
Aggressing Yielding Order would trade. Proposed Rule 7.31(i)(5)(A)
would provide that an Aggressing Yielding Order to buy (sell) with a
limit price higher (lower) than the limit price of a resting order to
buy (sell) would trade ahead of such resting order. This proposed rule
text is consistent with how g-Quotes are ranked and traded in an
auction; a better-priced g-Quote will trade ahead of an at-priced limit
order because it has price priority.\55\ The Exchange proposes to make
this explicit in the rules for all executions of a Yielding Order. For
example, if the Exchange has a Non-Displayed Limit Order to buy with a
limit price of 10.00 (``Order 1'') that is locked by an ALO Order to
sell at 10.00 (``Order 2''), an arriving Yielding Order to buy with a
limit price of 10.03
[[Page 64919]]
(``Order 3'') would trade with Order 2 at 10.00. Because Order 3 is
willing to trade at a more aggressive price than Order 1 and therefore
has price priority, the Exchange believes that Order 3 would not need
to yield to Order 1 when trading at 10.00. The Exchange therefore
believes that this proposed execution would be consistent with the G
Rule.\56\
---------------------------------------------------------------------------
\55\ See Rule 115A(a)(1) and Rule 123C(7)(a)(vii).
\56\ See, e.g., Securities Exchange Act Release No. 67686
(August 17, 2012), 77 FR 51596, 51599 (August 24, 2012) (SR-NYSE-
2012-19) (Approval Order) (approving the Exchange's proposal that
better-priced G Orders would be guaranteed to participate in a
closing auction and would have priority over same-side limit orders
on the Exchange Book that are at the same price as the closing
auction).
---------------------------------------------------------------------------
Proposed Rule 7.31(i)(5)(B) would provide that an Aggressing
Yielding Order to buy (sell) with a limit price equal to the limit
price of a resting order to buy (sell) would either: (i) Trigger the
resting order to become an Aggressing Order, unless the order to sell
(buy) is an MPL-ALO Order,\57\ or an MPL Order with an MTS Modifier, in
which case neither the Yielding Order nor the same-side resting order
would trade; or (ii) trade ahead of such resting order if such resting
order is not eligible to trade (e.g., an ALO Order or an order with an
MTS Modifier).
---------------------------------------------------------------------------
\57\ See Rule 7.31(e)(2) for a description of the ALO Order. An
MPL Order may be designated with the ALO modifier. See Rule
7.31(d)(3)(E).
---------------------------------------------------------------------------
In the first scenario, the Exchange believes that triggering the
resting order to trade ahead of the Yielding Order would respect the
priority of the resting order at that price. Neither order would trade
if the contra-side order is either an MPL ALO or MPL Order with an MTS
Modifier and has a conditional instruction that does not allow it to
trade at that price. The Exchange believes that not permitting either
order to trade in this circumstance would ensure that the Yielding
Order does not trade ahead of a same-priced resting order in accordance
with the G Rule.
In the second scenario, the Exchange believes that if a resting
order has a condition that has not been met and is therefore not
eligible to trade, such order cedes execution priority to a same-side
Yielding Order at the same price, and therefore, the Yielding Order
would not be trading ahead of such order in violation of the G Rule.
The execution of both an ALO Order and an order with an MTS Modifier
are both contingent on a pre-condition being met. The ALO Order
requires that the contra-side order be a liquidity remover and the
order with a MTS Modifier requires that the contra-side order be of a
certain size to meet its minimum quantity condition. Because the
condition of either resting order has not been met and such order
cannot participate in an execution, the Exchange believes this order
cedes execution priority to the Yielding Order and the Yielding Order
would not be required to yield to it under the G Rule.
The following example illustrates how an order with a Yielding
Modifier would interact with conditional orders, such as ALO orders,
MPL ALO orders, or MPL orders with an MTS Modifier.
If the PBBO is $10.00 by $10.20 resulting in a Midpoint
Price of $10.10, a Limit Order to buy 40 shares at $10.10 is entered
and is placed on the Exchange Book (``Order 1''), and an MPL ALO order
to sell 100 shares at 10.00 is then entered (``Order 2'') and placed on
the Exchange Book at the Midpoint Price, the Exchange Book would become
internally locked because Order 2 cannot trade with Order 1.\58\ Next,
a Floor broker enters a Yielding Order to buy 50 shares at $10.10
(``Order 3''). Order 3 would not execute against Order 2 because Order
3 is priced equal to Order 1 and must yield priority, parity and
precedence to Order 1. Order 3 would be placed on the Exchange Book at
$10.10.
---------------------------------------------------------------------------
\58\ See Rule 7.31(d)(3)(E)(i) (providing that ``[a]n Aggressing
MPL-ALO Order to buy (sell) will trade with resting orders to sell
(buy) with a working price below (above) the midpoint of the PBBO at
the working price of the resting orders, but will not trade with
resting orders to sell (buy) priced at the midpoint of the PBBO.'').
---------------------------------------------------------------------------
If the Away Market PBB is $10.00, a Non-Displayed Limit
Order to sell 1,000 shares at $10.00 is entered (``Order 1''), and an
ALO order to buy 100 shares at $10.00 is entered (``Order 2''), Order 2
would not trade with Order 1 because it cannot act as a liquidity
remover. Order 2 would be placed on the Exchange Book at $10.00. Next,
a Yielding Order to buy 1,000 shares at $10.00 is entered (``Order
3''), which would execute 1,000 shares against Order 1 at $10.00. Order
3 would not be required to yield to Order 2 because Order 2 was an ALO
order that chose to forgo the execution in favor of being placed on the
Exchange Book and acting as a liquidity provider.
Similar to the Last Sale Peg Order, proposed Rule 7.31(i)(5)(C)
would provide that a Yielding Order may be designated with an STP
Modifier and would be rejected if combined with any other modifiers.
The Exchange also proposes to amend Rule 7.37(b) to describe how
orders with a Yielding Modifier would participate in the allocation
process. As described above, the Exchange proposes that after all other
displayed and non-displayed orders are allocated, D Orders would be
allocated on parity. The Exchange proposes to amend Rule 7.37(b)(1) to
add subparagraph (G) to provide that after D Orders have been
allocated, the display quantity of orders ranked Priority 4--Yielding
Orders would be allocated based on time. The Exchange would further add
subparagraph (H) to provide that next, the non-display quantity of
orders ranked Priority 4--Yielding Orders would be allocated on time.
This proposed allocation process is based in part on how g-Quotes are
allocated after all other displayed and non-displayed orders in
Exchange-listed securities. The Exchange proposes new functionality for
Pillar that within each Yielding Order priority ranking, orders would
be allocated on time rather than on parity. The Exchange believes that
this proposed difference would streamline and simplify the allocation
of Yielding Orders and is consistent with their intended compliance
with the G Rule.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\59\ in general, and furthers the objectives of
Sections 6(b)(5) of the Act,\60\ in particular, because it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to, and perfect the mechanisms of,
a free and open market and a national market system and, in general, to
protect investors and the public interest and because it is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78f(b).
\60\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The proposed rule change extends the availability of orders and
modifiers currently available for trading of Exchange-listed securities
to trading of UTP Securities on Pillar. Specifically, the proposed D
Order, Last Sale Peg Modifier, and Yielding Modifier that the Exchange
proposes for Pillar would operate in a similar manner as d-Quotes,
BMZP, and g-Quotes, respectively, which are currently available for
trading in Exchange-listed securities. The proposed rule changes are
all based on existing functionality with differences in rule text only
to reflect Pillar terminology.
D Orders. The Exchange believes that the proposed D Order would
remove
[[Page 64920]]
impediments to, and perfect the mechanisms of, a free and open market
and a national market system and, in general, protect investors and the
public interest because it would expand existing functionality
available to trading of Exchange-listed securities to trading of UTP
Securities on Pillar. This proposed rule change would also ensure that
this functionality would continue to be available to Floor brokers when
the Exchange transitions trading of Exchange-listed securities to
Pillar. The Exchange notes that D Orders would operate in a manner
similar to d-Quotes. For example, a D Order would be eligible to trade
at an undisplayed, discretionary price. In addition, D Orders could
still be designated as routable or non-routable and could be combined
with a Reserve Order. However, the Exchange proposes to simplify and
streamline D Order functionality as compared to how d-Quotes function.
More specifically, the Exchange proposes to cap the discretionary price
range to the midpoint of the PBBO, define the discretionary price range
of such order based on the limit price, limit the circumstances when a
D Order would be triggered to exercise discretion, and peg the display
price of a D Order to the same-side PBBO.
The Exchange believes that these proposed differences would
simplify the operation of D Orders as compared to d-Quotes, while at
the same time allow such orders to both contribute to the display of
liquidity at the Exchange and offer price improvement opportunities to
contra-side orders. Accordingly, the Exchange believes that the
proposed D Order would remove impediments to and perfect the mechanism
of a free and open market and a national market system by promoting
price improvement to incoming orders, thereby improving execution
opportunities for market participants. These increased price
improvement opportunities are designed to attract additional order flow
to the Exchange.
The Exchange believes that making the proposed D Order available to
Floor brokers only is not designed to permit unfair discrimination
among customers, issuers, brokers, or dealers. First, D Orders are
based on current d-Quote functionality, which is available only to
Floor brokers and is designed to replicate electronically the Floor
broker's agency role to exercise price discretion on an order on behalf
of a customer.\61\ Floor brokers fulfill an agency broker role on
behalf of their customers without conflicts and fill a void for firms
that have chosen to allocate resources away from trading desks. In
addition to this role, Floor brokers provide services for more illiquid
securities, which upstairs trading desks may not be staffed to manage.
Importantly, when providing such agency trading services, a Floor
broker is unconflicted because a Floor broker is not trading for the
member's own account and does not sell research to customers. Floor
brokers therefore can focus on price discovery and volume discovery on
behalf of their customers, while at the same time managing their
customers' order flow to ensure that it does not impact pricing on the
market (e.g., executing large positions on behalf of a customer). Use
of the D Order would facilitate this agency function by allowing Floor
brokers to enter orders on behalf of their customers without pricing
impact because the discretionary price range would be undisplayed. When
managing such customer order flow, Floor brokers trading in UTP
Securities would continue to be subject to Exchange rules that are
unique to Floor brokers, including Rules 95, 122, 123, and paragraphs
(d)-(j) of Rule 134. In addition, any member organization can choose to
have a Floor broker operation and thus have direct access to D Orders
on behalf of its customers.
---------------------------------------------------------------------------
\61\ See, e.g., Securities Exchange Act Release No. 34-60251
(July 7, 2009), 74 FR 34068 (July 14, 2009) (Approval Order) (noting
that d-Quotes provide Floor brokers with similar functionality that
was previously available to Floor brokers).
---------------------------------------------------------------------------
In addition, the Exchange notes that while D Orders would be
available only to Floor brokers, such orders would not receive any
execution priority or benefit when trading at a discretionary price. To
the contrary, as proposed, if a D Order were to exercise discretion and
trade at an undisplayed, discretionary price, such D Order would be
ranked behind all other same-side orders at that price, except for a
Yielding Order, which by definition yields to all other orders and can
only be entered by another Floor broker. The Exchange therefore
believes that the proposed changes to Rule 7.37, which sets forth the
allocation process for D Orders, would remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system by providing transparency regarding the priority of such orders.
More specifically, the Exchange believes it would remove
impediments to and perfect the mechanism of a free and open market and
a national market system for a D Order trading at a discretionary price
to yield to other orders at that price because any such resting order,
whether displayed (which could only be an odd-lot sized order) or non-
displayed, would have time priority over the D Order trading at a
discretionary price. To reflect this time priority, the Exchange
proposes to assign a D Order a temporary working time associated with
the discretionary price, which the Exchange believes would respect the
priority of the working times of orders that may have a working price
equal to the D Order's discretionary price. By assigning a temporary
working time, the D Order would be ranked behind other orders at that
price. The Exchange further believes that maintaining the working time
of a D Order if it trades at its displayed price would reflect that
even if triggered to exercise discretion, it would remain displayed at
the same-side PBBO until it is executed. If a D Order that is triggered
to exercise discretion is not fully executed, it would remain available
for execution at its displayed price. Because that display price would
not be changing, the Exchange believes it is reasonable to maintain
time priority for that D Order if it were to execute at that displayed
price.
The Exchange believes that the manner by which the discretionary
price for a D Order would be determined would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because the principles are the same as how d-Quotes function,
which is to provide price improvement while exercising the least amount
of price discretion. Consistent with that current behavior, a proposed
D Order would be able to trade at a discretionary price that provides
price improvement over resting orders on the Exchange Book, subject to
a cap at the Midpoint Price.
The Exchange also believes it is reasonable for D Orders to be
allocated among multiple Floor brokers at a price based on parity as
such model is consistent with the Exchange's current parity allocation
for Floor brokers. As noted above, this parity allocation is only among
the Floor broker D Orders--other resting orders at that price, whether
displayed or undisplayed, would have first priority. The Exchange
further believes that with this parity allocation, it would be
appropriate to create a separate allocation wheel for D Orders when
more than one D Order is eligible to trade at the same discretionary
price. The Exchange further believes that it is appropriate for the
most aggressively-priced D Order to establish the first position on any
such allocation wheel as it would encourage the entry of aggressively-
priced orders
[[Page 64921]]
available to provide price improvement to contra-side orders.
Last Sale Peg Modifier. The Exchange believes that the proposed
Last Sale Peg Modifier would remove impediments to, and perfect the
mechanisms of, a free and open market and a national market system and,
in general, protect investors and the public interest because it would
expand existing functionality available to trading of Exchange-listed
securities to trading on Pillar, which would aid member organizations
in their compliance with provision of Rule 10b-18. Today, the Exchange
offers the BMZP instruction, which prevents a buy order from trading at
a price higher than the last sale. As proposed, the Last Sale Peg
Modifier would offer functionality based on the BMZP instruction for
all orders that trade on the Exchange. Similar to the BMZP instruction,
the proposed Last Sale Peg Modifier would be available to buy orders
and is designed to facilitate compliance with one of the conditions of
the safe harbor provision of Rule 10b-18. The Exchange believes that
the proposed differences between the proposed Last Sale Peg Modifier
and the BMZP instruction are designed to streamline the operation of
the order modifier and promote transparency, while at the same time
maintaining the core purpose of such modifier. For example, the
Exchange believes that limiting this modifier to Non-Routable Limit
Orders would simplify its operation because the Exchange would not be
able to assist a member organization to comply with Rule 10b-18 if such
order were routed to an Away Market.
Yielding Modifier. The Exchange believes that the proposed Yielding
Modifier would remove impediments to, and perfect the mechanisms of, a
free and open market and a national market system and, in general,
protect investors and the public interest because it would expand
functionality currently available on the Exchange to Floor brokers in
Exchange-listed securities to all securities trading on Pillar by
providing Floor brokers an electronic method to represent orders on
Pillar that yield priority, parity and precedence to displayed and non-
displayed orders on the Exchange's book in compliance with the G
Rule.\62\ Today, the Exchange offers g-Quotes \63\ for trading in
Exchange-listed securities. The proposed Yielding Modifier is based on
current g-Quote functionality, including that it would only be
available to Floor brokers. The Exchange notes that there is no need to
offer this modifier to non-Floor brokers because the only members with
the specified G Rule obligations today are Floor brokers--the
electronic, off-Floor entry of orders is subject to an exception to the
G Rule.\64\
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\62\ See Section 11(a)(1) of the Act, 15 U.S.C. 78k(a)(1).
\63\ See Rule 70(a)(ii) and (iii).
\64\ See Securities Exchange Act Release No. 82945 (March 26,
2018), 83 FR 13553, 13568 (March 29, 2018) (SR-NYSE-2018-36)
(``Approval Order'').
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The Exchange believes the proposed rule for the Yielding Modifier
is designed to provide transparency of how the proposed modifier would
function if there are resting orders on both sides of the Exchange book
locking each other at the same price. The Exchange believes that the
proposed functionality to allow an arriving Yielding Order that is
priced better than a resting order that is locked with a contra-side
order to trade ahead of such same-side resting order is consistent with
the G Rule because in such scenario, the Yielding Order is willing to
trade at a better price than the resting order, and therefore has price
priority over such resting order. Likewise, the Exchange believes it
would be appropriate to trigger a resting order eligible to trade ahead
of a same-priced, same-side Yielding Order because if such resting
order is eligible to be executed and the Yielding Order does not have
price priority, the resting order should have an opportunity to trade
first. If it cannot trade, then neither it nor the Yielding Order would
trade. Finally, the Exchange believes it would be consistent with the G
Rule for a Yielding Order to trade ahead of a same-priced resting order
that is unable to trade because one or more conditions cannot be met
for such resting order. The Exchange believes this trading scenario
would be consistent with the G Rule because the resting order is not
eligible to trade, and therefore it would yield priority to the
Yielding Order; the Yielding Order would not trade ahead of any orders
in that execution.
Lastly, the Exchange believes the proposed changes to Rules 7.36
and 7.37 regarding the priority and parity allocation process for
orders with a Yielding Modifier would remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system. The Exchange believes it is reasonable to prioritize for
execution and parity purposes orders with a Yielding Modifier behind
all other orders at the same price because doing so is consistent with
the modifier's purpose, which is to yield priority and parity to all
other displayed and non-displayed orders at the same price, in
compliance with the G Rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\65\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The proposed change extends the availability of
order types that are currently available for Exchange-listed securities
to trading on Pillar. The Exchange operates in a highly competitive
environment in which its unaffiliated exchange competitors operate
under common rules for the trading of securities listed on their
markets as well as those that they trade pursuant to unlisted trading
privileges. By extending the availability of order types that are
currently available for Exchange-listed securities to trading on
Pillar, the Exchange would provide its members with consistency across
trading of all securities in the Exchange. Doing so would also enable
the Exchange to further compete with unaffiliated exchange competitors
that also trade UTP securities.
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\65\ 15 U.S.C. 78f(b)(8).
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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:
[[Page 64922]]
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-NYSE-2018-52 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2018-52. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions.
You should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-NYSE-2018-52
and should be submitted on or before January 8, 2019.
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\66\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\66\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27280 Filed 12-17-18; 8:45 am]
BILLING CODE 8011-01-P