[Federal Register Volume 84, Number 74 (Wednesday, April 17, 2019)]
[Notices]
[Pages 16079-16086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07707]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85637; File No. SR-NYSE-2018-34]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of Proposed Rule Change, as Modified by Amendment No. 1, to
Amend NYSE Rule 104
April 12, 2019.
I. Introduction
On July 31, 2018, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend NYSE Rule 104 governing transactions by
Designated Market Makers (``DMMs''). The proposed rule change was
published for comment in the Federal Register on August 16, 2018.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 83821 (Aug. 10,
2018), 83 FR 40808 (Aug. 16, 2018) (``Notice'').
---------------------------------------------------------------------------
On September 24, 2018, pursuant to Section 19(b)(2) of the Act,\4\
the Commission extended to November 14, 2018, the time period in which
to approve, disapprove, or institute proceedings to determine whether
to approve or disapprove, the proposed
[[Page 16080]]
rule change.\5\ On November 1, 2018, the Commission issued an order
instituting proceedings, pursuant to Section 19(b)(2)(B) of the Act,\6\
to determine whether to approve or disapprove the proposed rule
change.\7\ On February 11, 2019, the Commission extended to April 13,
2019, the period for Commission action on proceedings to determine
whether to approve or disapprove the proposed rule change.\8\ The
Commission has received one comment letter on the proposal.\9\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 84276 (Sep. 24,
2018), 83 FR 49143 (Sep. 28, 2018).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 84515 (Nov. 1,
2018), 83 FR 55763 (Nov. 7, 2018) (``Order Instituting
Proceedings'').
\8\ See Securities Exchange Act Release No. 85096 (Feb. 11,
2019), 84 FR 4553 (Feb. 15, 2019).
\9\ See Letter from Stephen John Berger, Managing Director,
Government and Regulatory Policy, Citadel Securities, to Assistant
Secretary, Commission (Nov. 28, 2018) (``Citadel Letter'').
---------------------------------------------------------------------------
On April 9, 2019, the Exchange filed Amendment No. 1 to the
proposal, which supersedes the original filing in its entirety. The
Commission is publishing this notice to solicit comments on Amendment
No. 1 from interested persons, and is approving the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
II. Self-Regulatory Organization's Description of the Proposal, as
Modified by Amendment No. 1
In its filing with the Commission, the Exchange 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 V 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 consolidate and restructure subsections
(g), (h) and (i) of Rule 104 governing DMM transactions and make a
related change to Rule 98(c)(5) (Operation of a DMM Unit). This
Amendment No. 1 supersedes the original filing its entirety.\10\
---------------------------------------------------------------------------
\10\ In this Amendment No. 1, the Exchange proposes to amend the
original filing by modifying proposed Rule 104(g)(1)(B) relating to
Aggressing Transactions prior to the close. In the original filing,
the Exchange proposed that Aggressing Transactions in the last ten
seconds of trading would be prohibited if they would result in a new
consolidated high or low price of the day unless such transaction
would bring the price of that security into parity with an
underlying or related security or asset. As amended, the Exchange
proposes that Aggressing Transactions in the last ten minutes of
trading would be prohibited if they would result in a new Exchange
high or low price of the day, with three exceptions for matching
another market's better bid or offer, bringing the price of that
security into parity with an underlying or related security or
asset, or liquidating or decreasing the DMM unit's position. This
Amendment No. 1 also proposes to amend Rule 98(c)(5).
---------------------------------------------------------------------------
Background
Rule 104 sets forth the obligations of Exchange DMMs. Under Rule
104(a), DMMs registered in one or more securities traded on the
Exchange are required to engage in a course of dealings for their own
account to assist in the maintenance of a fair and orderly market
insofar as reasonably practicable. Rule 104(a) also enumerates the
specific responsibilities and duties of a DMM, including: (1)
Maintenance of a continuous two-sided quote, which mandates that each
DMM maintain a bid or an offer at the National Best Bid (``NBB'') and
National Best Offer (``NBO,'' together the ``NBBO'') for a certain
percentage of the trading day,\11\ and (2) the facilitation of, among
other things, openings, re-openings, and the close of trading for the
DMM's assigned securities, all of which may include supplying liquidity
as needed.\12\ Rule 104(f) imposes an affirmative obligation on DMMs to
maintain, insofar as reasonably practicable, a fair and orderly market
on the Exchange in assigned securities, including maintaining price
continuity with reasonable depth and trading for the DMM's own account
when lack of price continuity, lack of depth, or disparity between
supply and demand exists or is reasonably to be anticipated.
---------------------------------------------------------------------------
\11\ See Rule 104(a)(1).
\12\ See Rule 104(a)(2)-(3). Rule 104(e) further provides that
DMM units must provide contra-side liquidity as needed for the
execution of odd-lot quantities eligible to be executed as part of
the opening, reopening, and closing transactions but that remain
unpaired after the DMM has paired all other eligible round lot sized
interest.
---------------------------------------------------------------------------
Rule 104(g) provides that transactions on the Exchange by a DMM for
the DMM's account must be effected in a reasonable and orderly manner
in relation to the condition of the general market and the market in
the particular stock. More particularly, Rule 104(g) describes certain
transactions that are permitted to render the DMM's position adequate
to the market's needs, including Neutral and Non-Conditional
Transactions, and certain DMM transactions that are prohibited.
Rule 104(g)(i)(A)(I) defines Neutral Transactions as a purchase or
sale by which a DMM liquidates or decreases a position. Neutral
Transactions may be made without restriction as to price. However, the
DMM's obligation to maintain a fair and orderly market may require re-
entry on the opposite side of the market trend after effecting one or
more Neutral Transactions. Such re-entry transactions should be in
accordance with the immediate and anticipated needs of the market.
Rule 104(g)(i)(A)(II) defines Non-Conditional Transactions as a
DMM's bid or purchase and offer or sale that establishes or increases a
position, other than a transaction that reaches across the market to
trade with the Exchange BBO. Non-Conditional Transactions may be made
without restriction as to price in order to (i) match another market's
better bid or offer price; (ii) bring the price of a security into
parity with an underlying or related security or asset; (iii) add size
to an independently established bid or offer on the Exchange; (iv)
purchase at the published bid price on the Exchange; (v) sell at the
published offer price on the Exchange; (vi) purchase or sell at a price
between the Exchange BBO; and (vii) purchase below the published bid or
sell above the published offer on the Exchange. As with Neutral
Transactions, the DMM's obligation to maintain a fair and orderly
market may also require re-entry on the opposite side of the market
trend after effecting one or more Non-Conditional Transactions. Such
re-entry transactions should be commensurate with the size of the Non-
Conditional Transactions and the immediate and anticipated needs of the
market.
Rule 104(g)(i)(A)(III) provides that, except as otherwise permitted
by Rule 104, during the last ten minutes prior to the close of trading,
a DMM with a long or short position in a security is prohibited from
making a purchase or sale in such security that results in a new high
or low price, respectively, on the Exchange for the day at the time of
the DMM's transaction (``Prohibited Transactions'').\13\
---------------------------------------------------------------------------
\13\ Rule 104(g)(i)(A)(III) contains two exceptions to
Prohibited Transactions: (1) Matching another market's better bid or
offer price, and (2) bringing the price of a security into parity
with an underlying or related security or asset.
---------------------------------------------------------------------------
Finally, Rule 104(h) addresses DMM transactions in securities that
establish or increase the DMM's position. Rule 104(h)(i) defines a
Conditional Transaction as a DMM transaction in a security that
establishes or increases a position and reaches across the market
[[Page 16081]]
to trade as the contra-side to the Exchange published bid or offer.\14\
---------------------------------------------------------------------------
\14\ A DMM reaches across the market when the DMM buys from the
NYSE offer or sells to the NYSE bid.
---------------------------------------------------------------------------
Rule 104(h)(ii) permits ``Conditional Transactions'' without
restriction as to price if they are followed by appropriate re-entry on
the opposite side of the market commensurate with the size of the DMM's
transaction. Thus, if a DMM establishes or increases a long position by
buying from the Exchange best offer, or establishes or increases a
short position by selling to the Exchange best bid, such transaction
would be followed by the DMM quoting on the opposite side of the last
transaction in order to dampen the impact of that transaction on the
market.
The re-entry obligations for Conditional Transactions are set forth
in Rule 104(h)(iii). Under Rule 104(h)(iii)(A), DMMs must re-enter
within certain Exchange issued guidelines, called price participation
points (``PPP''), that identify the price at or before which a DMM is
expected to re-enter the market after effecting a Conditional
Transaction. PPPs are only minimum guidelines and compliance with them
does not guarantee that a DMM is meeting its obligations.
Notwithstanding that a security may not have reached the PPP, the
DMM may be required to re-enter the market immediately after a
Conditional Transaction based on the price and/or volume of the DMM's
trading in reference to the market in the security at the time of such
trading. In such situations DMMs may or may not rely on the fact and
circumstance that there may have been one or more independent trades
following the DMM's trading to justify a failure to re-enter the
market. As set forth in Rule 104(h)(iii)(C)(I) and (II), immediate re-
entry is required after the following Conditional Transactions:
a purchase that (1) reaches across the market to trade
with an Exchange published offer that is above the last differently
priced trade on the Exchange and above the last differently priced
published offer on the Exchange, (2) is 10,000 shares or more or has a
market value of $200,000 or more, and (3) exceeds 50% of the published
offer size; and
a sale that (1) reaches across the market to trade with an
Exchange published bid that is below the last differently priced trade
on the Exchange and below the last differently priced published bid on
the Exchange, (2) is 10,000 shares or more or has a market value of
$200,000 or more, and (3) exceeds 50% of the published bid size.\15\
---------------------------------------------------------------------------
\15\ For purposes of subsections (h)(iii)(C)(I) and
(h)(iii)(C)(II), a Sweep is viewed as a transaction with the
published bid or offer.
---------------------------------------------------------------------------
Rule 104(h)(iv) permits certain other Conditional Transactions
without restriction as to price. Specifically, under subsection
(h)(iv)(A), a DMM's purchase from the Exchange published offer that is
priced above the last differently-priced trade on the Exchange or above
the last differently-priced published offer on the Exchange. Similarly,
under subsection (h)(iv)(B), a DMM's sale to the Exchange published bid
that is priced below the last differently-priced trade on the Exchange
or below the last differently-priced published bid on the Exchange.
Rule 104(i) provides that re-entry obligations following such
Conditional Transactions would be the same as the re-entry obligations
for Non-Conditional Transactions pursuant to Rule 104(g).
Finally, paragraph (c)(5) of Rule 98 provides that the member
organization operating a DMM unit must provide the Exchange with real-
time net position information in DMM securities by the DMM unit and any
independent trading unit of which it is part at such times and in the
manner prescribed by the Exchange.
Proposed Rule Change
The Exchange proposes to consolidate and restructure current Rules
104(g), (h) and (i), which would be deleted and incorporated as
modified into a new subsection (g) titled ``Transactions by DMMs.''
As discussed below, proposed Rule 104(g) would revise the
requirements for DMM transactions based on the type of trading by the
DMM, rather than by reference to the DMM's position. Rule 98(c)(5)
would be amended to require DMMs to provide net position information to
the Exchange daily. The Exchange also proposes certain technical and
conforming changes.\16\
---------------------------------------------------------------------------
\16\ The Exchange proposes the following technical and
conforming changes: (1) romanettes (i) through (vi) in Rule 104(b)
and (i) through (iv) in Rule 104(f) would be replaced with numbers 1
through 6 and 1 through 4, respectively; (2) current subsection (j)
would become new subsection (h); and (3) current subsection (k)
would become new subsection (i).
---------------------------------------------------------------------------
As restructured, proposed Rule 104 would replace the four current
types of DMM transactions based on the DMM's position (Neutral, Non-
conditional, Conditional and Prohibited) with a single, enhanced DMM
transaction called an ``Aggressing Transaction'' that would retain
existing re-entry requirements. During the ten minutes before the
scheduled close of trading, Aggressing Transactions that would result
in a new high (low) price for a security on the Exchange for the day at
the time of the DMM's transaction would be prohibited with three
exceptions discussed below.
Proposed Rule 104(g)(1)
Proposed Rule 104(g)(1) would be based on current Rule104(g)(i).
Like current Rule 104(g)(i), proposed Rule 104(g)(1) would specify that
transactions on the Exchange by a DMM unit for the DMM unit's account
are to be effected in a reasonable and orderly manner in relation to
the condition of the general market and the market in the particular
stock. Proposed Rule 104(g)(1) would eliminate the definitions of
Neutral and Non-Conditional Transactions \17\ and retain Conditional
Transactions, which would be enhanced and renamed ``Aggressing
Transactions.''
---------------------------------------------------------------------------
\17\ As discussed below, the re-entry obligations for Neutral
and Non-Conditional Transactions would be retained and incorporated
into proposed subsection (g)(2).
---------------------------------------------------------------------------
Aggressing Transactions
In proposed Rule 104(g)(1)(A), the Exchange would define an
Aggressing Transaction as a DMM unit transaction that:
(i) is a purchase (sale) that reaches across the market to trade as
the contra-side to the Exchange published offer (bid); and
(ii) is priced above (below) the last differently-priced trade on
the Exchange and above (below) the last differently-priced published
offer (bid) on the Exchange.
The proposed definition of Aggressing Transaction would be the same
as the current definition of Conditional Transaction in Rule 104(h)(i)
and (ii), except that Aggressing Transaction would not be defined by
reference to whether the transaction increases or decreases the DMM's
position. Accordingly, a DMM unit Aggressing Transaction would be any
trade where the DMM both reaches across the market and aggressively
moves the price of the security.
Prohibited Transactions
The Exchange proposes to retain certain of the existing
prohibitions on specified DMM transactions during the final ten minutes
of the trading day and the current exceptions to Prohibited
Transactions, which are described in current Rule 104(g)(i)(A)(III).
With this proposed rule change, the Exchange proposes a substantive
difference for determining whether a DMM transaction should be
prohibited in the last ten minutes of trading. Rather than
[[Page 16082]]
the current rule, which looks at the DMM's position (long or short) and
then determines whether the trade should be prohibited based on whether
it results in a new Exchange high or low, as proposed, a DMM
transaction in the last ten minutes of trading would be prohibited if
it is an Aggressing Transaction, i.e., reaches across the market, and,
as a result, creates a new Exchange high or low. The Exchange also
proposes exceptions to this prohibition, which are based on exceptions
to prohibited transactions in the current rule.
To effect this change, proposed Rule 104(g)(1)(B) would define
``Prohibited Transactions'' as Aggressing Transactions during the last
ten minutes prior to the scheduled close of trading that would result
in a new high (low) price for a security on the Exchange for the day at
the time of the DMM's transaction. The proposed three exceptions to
this prohibition would be if the trade:
matches another market's better bid or offer price;
brings the price of that security into parity with an
underlying or related security or asset; or
liquidates or decreases the position of the DMM unit.
The first two exceptions are in current Rule 104(g)(i)(A)(III) and
the Exchange proposes to retain these exceptions in the proposed
rule.\18\ The third exception is based in part on the position-based
review of whether a transaction would be prohibited under current
rules. Current Rule 104(g)(i)(A)(III)(1) prohibits a DMM with a long
position in a security from making a purchase in that security during
the last ten minutes that results in a new high price; the rule does
not prohibit a DMM with a long position from selling or decreasing
their position in the security. Likewise, current Rule
104(g)(i)(A)(III)(2) prohibits a DMM with a short position in a
security from making a sale in that security during the last ten
minutes prior to the close of trading that results in a new low price,
but the rule does not prohibit a DMM with a short position from
purchasing or liquidating their position in that security. Because
looking at the DMM's position would be an exception rather than the
basis for the prohibition, the Exchange proposes to restate the rule as
an exception that permits a DMM to liquidate or decrease a position of
the DMM unit, rather than focus on what is prohibited when the DMM is
long or short. This proposed rule text is also based on Rule
104(g)(i)(A)(I), which has no restrictions as to price for ``Neutral
Transactions,'' i.e., transactions when the DMM liquidates or decreases
a position.
---------------------------------------------------------------------------
\18\ See Rule 104(g)(i)(A)(III) (referencing Rules
104(g)(i)(A)(II)(2)(i) through (g)(i)(A)(II)(2)(ii)).
---------------------------------------------------------------------------
With this proposed difference for Prohibited Transactions, in the
last ten minutes of trading, DMMs would be able to trade at prices
lower than the published offer, or higher than the published bid, even
if such trade would result in a new Exchange high or low for the day.
The Exchange believes that this proposed change would support DMMs in
meeting their affirmative obligations while at the same time continuing
to prevent DMMs from aggressively taking liquidity and moving prices on
the Exchange by trading with the published bid or offer in the final
ten minutes before the closing auction \19\ For example, if the
Exchange best bid and offer were $10.01 x $10.05, the DMM has a long
position, and the DMM posts a bid at $10.04 to try and tighten that
spread, under the current rules, if that $10.04 bid were to trade with
non-displayed sell liquidity at that price and that trade resulted in a
new high price on the Exchange for the day, that trade would be
prohibited. Under the proposed change to Prohibited Transactions, this
trade would no longer be prohibited because the DMM is not reaching
across the market.
---------------------------------------------------------------------------
\19\ See Rule 104(g)(i)(A)(III).
---------------------------------------------------------------------------
Finally, the Exchange notes that the proposal is consistent with,
and in no way diminishes or relieves the DMM of, the other obligations
regarding the quality of the markets in securities to which DMMs are
assigned under Rule 104.\20\
---------------------------------------------------------------------------
\20\ In general, as noted above, transactions on the Exchange by
a DMM for the DMM's account must be effected in a reasonable and
orderly manner in relation to the condition of the general market
and the market in the particular stock, and DMMs must refrain from
causing or exacerbating excessive price movements. DMMs have
affirmative obligations under Rule 104(a) to engage in a course of
dealings for their own account to assist in the maintenance of a
fair and orderly market insofar as reasonably practicable.
Specifically, Rule 104(f)(ii) sets forth the DMM's obligation to act
as reasonably necessary to ensure appropriate depth and maintain
reasonable price variations between transactions (also known as
price continuity) and prevent unexpected variations in trading.
Further, under Rule 123D(a), openings and reopenings must be fair
and orderly, reflecting the DMM's professional assessment of market
conditions at the time, and appropriate consideration of the balance
of supply and demand as reflected by orders represented in the
market. The Exchange supplies DMMs with suggested Depth Guidelines
for each security in which a DMM is registered, and DMMs are
expected to quote and trade with reference to the Depth Guidelines.
See Rule 104(f)(iii).
---------------------------------------------------------------------------
Proposed Rule 104(g)(2)
Proposed subsection (g)(2) would set forth the re-entry obligations
for DMM transactions, which would be based on the current rule's re-
entry obligations. Specifically, proposed Rule 104(g)(2) would provide
that a DMM unit's obligation to maintain a fair and orderly market may
require re-entry on the opposite side of the market after effecting one
or more transactions. The proposed rule would provide that such re-
entry should be commensurate with the size of the transaction(s) and
the immediate and anticipated needs of the market, which are the same
re-entry requirements specified in current Rules 104(g)(i)(A)(I)(3) and
104(g)(i)(A)(II)(3) for Neutral and Non-Conditional Transactions,
respectively, as well as the types of Conditional Transactions
referenced in current Rules 104(h)(iv) and 104(i).\21\ Accordingly,
these re-entry obligations would be applicable to DMM transactions
other than Aggressing Transactions.
---------------------------------------------------------------------------
\21\ Current Rule 104(h)(iv) provides that two types of
Conditional Transactions may be made without restriction as to
price: (1) A DMM's purchase from the Exchange published offer that
is priced above the last differently-priced trade on the Exchange or
above the last differently-priced published offer on the Exchange
((h)(iv)(A)); and (2) a DMM's sale to the Exchange published bid
that is priced below the last differently-priced trade on the
Exchange or below the last differently-priced published bid on the
Exchange ((h)(iv)(B)). Current Rule 104(i) provides that the re-
entry obligations following transactions defined in Rule
104(h)(iv)(A) and (h)(iv)(B) are the same as for Non-Conditional
Transactions pursuant to Rule 104(g) (i)(A)(3).
---------------------------------------------------------------------------
Proposed Rule 104(g)(2)(A) and (B) would specify the re-entry
obligations for Aggressing Transactions. Following an Aggressing
Transaction, proposed Rule 104(g)(2)(A) would require the DMM unit to
re-enter the opposite side of the market at or before the applicable
PPP for that security commensurate with the size of the Aggressing
Transaction. The re-entry requirement for Aggressing Transactions set
forth in proposed Rule 104(g)(2)(A) is based on the current re-entry
requirements for certain Conditional Transactions set forth in current
Rule 104(h)(iii).
Under proposed Rule 104(g)(2)(B), if the Aggressing Transaction (i)
is 10,000 shares or more or has a market value of $200,000 or more, and
(ii) exceeds 50% of the published offer (bid) size, immediate re-entry
on the opposite side of the market at or before the applicable PPP for
the security commensurate with the size of the Aggressing Transaction
would be required. The re-entry requirement for block-sized Aggressing
Transactions set forth in proposed Rule 104(g)(2)(B) is based the
current re-entry requirements for block-sized Conditional Transactions
under Rule 104(h)(iii)(C). The Exchange proposes a clarifying amendment
in proposed Rule 104(g)(2)(B), as compared to current Rule
104(h)(iii)(C), to provide that such
[[Page 16083]]
re-entry must be at or before the applicable PPP for that security. The
Exchange believes that this proposed change will provide greater detail
in the rule regarding the price at which the re-entry would be
required.
Proposed Rule 104(g)(3)
Finally, proposed Rule 104(g)(3)(A) would provide that the Exchange
would periodically issue PPP Guidelines that identify the price at or
before which a DMM unit is expected to re-enter the market following an
Aggressing Transaction. PPPs are only minimum guidelines and compliance
with them does not guarantee that a DMM unit is meeting its
obligations. This portion of the proposed Rule is based on Rule
104(h)(iii)(A) without any differences.
Proposed Rule 104(g)(3)(B) would provide that, notwithstanding that
a security may not have reached the PPP, the DMM unit may be required
to re-enter the market immediately after an Aggressing Transaction
based on the price and/or volume of the DMM unit's trading in reference
to the market in the security at the time of such trading. In such
situations, DMM units may or may not rely on the fact and circumstance
that there may have been one or more independent trades following the
DMM unit's trading to justify a failure to re-enter the market.
Subsection (B) of the proposed rule is based on current Rule
104(h)(iii)(B).
Proposed Amendment to Rule 98(c)(5)
As noted above, except for an exception to Prohibited Transactions,
the Exchange proposes to eliminate reliance on the DMM's position to
determine DMM trading requirements under proposed Rule 104(g). The
Exchange proposes a related change to Rule 98(c)(5) to require DMMs to
provide the Exchange with net position information daily. The Exchange
proposes a further clarifying change to require DMM to provide net
position information ``for'' such time ``periods,'' rather than ``at''
such times, prescribed by the Exchange. The Exchange does not believe
that DMM net position information would need to be provided in real
time in order for the Exchange to effectively monitor for compliance
with the proposed exception to Rule 104(g)(1)(B).\22\ Rather, the
Exchange believes it would be able to effectively monitor for
compliance with the proposed exception utilizing DMM position
information provided on a same-day basis for its automated
surveillances. The Exchange would publish regulatory guidance setting
forth the requirement that DMMs provide net position on a daily basis
but in no event later than trading day plus one (T+1). To implement
this change, the Exchange proposes to delete the term ``real time'' in
Rule 98(c)(5) and add the word ``daily'' after ``must'' and before
``provide.'' The Exchange would also replace ``for'' for ``at'' before
``such times,'' delete the ``s'' in times, and add ``periods''
immediately following in order to clarify that the Exchange may request
DMM net position information for specific time periods on a daily
basis.
---------------------------------------------------------------------------
\22\ The Exchange currently provides DMMs with a technology
interface that supports the submission of DMM real-time position
information. In extremely limited circumstances, the Exchange relies
on that position information to assist the DMMs in marking certain
manual orders as sell short or sell long. When the Exchange
transitions NYSE-listed securities to its Pillar trading system, it
will no longer support this technology interface; nor will it be
marking orders on behalf of the DMM.
---------------------------------------------------------------------------
Rule Implementation
Subject to approval of this proposed rule change, the Exchange
proposes to implement these changes concurrent with the transition of
Exchange-listed securities to the Pillar trading system, which is
currently anticipated to begin in the third quarter of 2019.\23\
---------------------------------------------------------------------------
\23\ The Exchange has announced that, subject to rule approvals,
the Exchange will begin transitioning Exchange-listed securities to
Pillar on July 15, 2019, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/Pillar_Update_NYSE_Tape_A_NGW_February_2019.pdf. The Exchange will
publish by separate Trader Update a complete symbol migration
schedule.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\24\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\25\ in particular, because it
is designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and protect investors and the public interest.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the Exchange believes that revising the requirements
for DMM transactions based on the type of DMM trading rather than the
DMM's position and introducing a new, enhanced DMM transaction called
an ``Aggressing Transaction'' would remove impediments to and perfect
the mechanism of a free and open market and a national market system by
simplifying and streamlining the requirements for DMM transactions. The
proposal would eliminate four separate types of DMM transactions and
introduce a simplified framework whereby all DMM transactions would be
subject to general re-entry requirements based on the current re-entry
obligations for Neutral, Non-Conditional and Conditional transactions,
and specific re-entry requirements for Aggressing Transactions, except
for Aggressing Transactions during the final ten minutes of trading
that result in a new high (low) price for a security on the Exchange
for the day at the time of the DMM's transaction, which would continue
to be prohibited unless subject to a specified exception.
The Exchange believes that the proposal would not be inconsistent
with the public interest and the protection of investors. As noted, the
proposed rule would carry over the requirement that all DMM
transactions be effected in a reasonable and orderly manner in relation
to the condition of the general market and the market in the particular
stock. Further, DMM Aggressing Transactions would continue to require
re-entry on the opposite side of the market at or before the applicable
PPP for the security as warranted. Aggressing Transactions in the final
ten minutes of trading that result in a new high (low) price for a
security on the Exchange for the day at the time of the DMM's
transaction would continue to be prohibited. These safeguards would
reasonably ensure that DMM transactions continue to bear a reasonable
relationship to overall market conditions and that DMMs cannot
destabilize, inappropriately influence or manipulate a security going
into the close. In addition, the prohibition on Aggressing Transactions
that would create a new high or low price on the Exchange would
maintain the current bright-line rule that prohibits DMM transactions
that aggressively take liquidity during the final ten minutes prior to
the close.
The Exchange believes that the proposed substantive difference to
Prohibited Transactions in the last ten minutes of trading to permit
DMM trades between the Exchange BBO, even if such trades resulted in a
new Exchange high or low and regardless of the DMM's position at the
time, would promote fair and orderly markets and not be inconsistent
with the public interest and the protection of investors because this
proposed change would promote the display of liquidity by enabling DMMs
to post bids and offers that would tighten the Exchange published bid
and offer. The Exchange further believes that retaining the current
exceptions for Prohibited Transactions, and permitting Aggressing
Transactions that would liquidate or
[[Page 16084]]
decrease the DMM unit's position during the ten minutes prior to the
scheduled close of trading even if they would result in a new Exchange
high or low price, would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because DMMs would be able to quote appropriately in their assigned
securities during the period of the prohibition. The Exchange further
believes that not restricting Aggressing Transactions in the last ten
minutes of trading that result in a new Exchange high or low price for
the day if such trade is the result of the DMM liquidating or
decreasing a position would remove impediments to and perfect the
mechanisms of a free and open market and a national market system
because this exception is based on the current position-based review of
whether a transaction would be prohibited, which does not prohibit such
transactions, as well the current definition of ``Neutral
Transactions'' which have no restrictions as to price. Further, the
Exchange believes that the proposed exception would remove impediments
to and perfect the mechanisms of a free and open market and a national
market system because a DMM that reaches across the market when
liquidating or decreasing a position is generally not doing so to favor
a position leading into the close.
Moreover, the numerous obligations currently imposed by Rule 104
would in no way be altered or diminished by the proposal. The Exchange
does not believe that the balance of benefits and obligations under
Rule 104 would be impacted by this proposed rule change. DMMs would
continue to be prohibited from engaging in specified transactions in
the final ten minutes prior to the close. Moreover, the proposed rule
would carry over the requirement that all DMM transactions be effected
in a reasonable and orderly manner in relation to the condition of the
general market and the market in the particular stock. These safeguards
would reasonably ensure that DMM transactions bear a reasonable
relationship to overall market conditions and that DMMs cannot
destabilize, inappropriately influence or manipulate a security going
into the close. For the same reasons, the proposed prohibition would
not alter or disrupt the balance between DMM benefits and obligations
of being an Exchange DMM.
Finally, revising the requirements for DMM transactions based on
the type of DMM trading rather than the DMM's position, and amending
Rule 98 to require that DMM units provide net position information to
the Exchange on a daily basis and for such time periods as prescribed
by the Exchange, would remove impediments to and perfect the mechanism
of a free and open market and a national market system by simplifying
and streamlining the requirements for DMM transactions. The Exchange
further believes that the proposed rule change would promote just and
equitable principles of trade and is designed to prevent fraudulent and
manipulative acts and practices because DMMs would be required to
provide net position information daily to the Exchange and the Exchange
would be able to conduct automated surveillances monitoring for
compliance with the amended rule for this exception.
For the foregoing reasons, the Exchange believes that the proposal
is consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange proposes
amendments to the rule governing DMM obligations to simplify and
streamline the requirements for DMM transactions. The Exchange believes
that the proposal would promote competition by allowing DMMs to quote
more aggressively in the final minutes of trading, thereby permitting
DMMs to remain competitive with other traders both on the Exchange and
on other trading venues, thereby enhancing the ability of DMMs to meet
their affirmative obligation under Rule 104. The Exchange further
believes that its proposed rules governing DMMs would not impose any
burden on competition that is not necessary or appropriate because the
proposed rules are designed to foster a fair and orderly marketplace
without diminishing the balance of benefits and obligations under Rule
104 or altering or diminishing the numerous obligations currently
imposed by Rule 104 on DMMs.
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. Summary of Comments Received
The Commission received one comment letter in support of the
proposal as initially filed by the Exchange. The commenter asserts that
the proposal materially increases the obligations of DMMs because the
proposal would impose re-entry obligations on DMMs throughout the
trading day, including following transactions that reduce or liquidate
the DMM's position.\26\ The commenter asserts that the proposed
prohibition prior to the close of trading is also strengthened because
it would eliminate reference to the DMM's position.\27\ The commenter
also states that it supports the proposed changes to the NYSE rule
regarding prohibited transactions because it would modernize the rule
to reflect market structure changes, retain a bright line rule negative
obligation, and maintain an appropriate balance of benefits and
obligations for DMMs.\28\
---------------------------------------------------------------------------
\26\ See Citadel Letter, supra note 9, at 1.
\27\ See id. at 2. This commenter also asserted that the
prohibition would be strengthened because the rule would reference
the consolidated high or low price of a security, rather than the
high or low price on the NYSE, but Amendment No. 1, which was filed
after this comment letter was submitted, changed the Exchange's
proposal so that it no longer changed the reference price. See id.
\28\ See id. The proposed rule change with respect to Prohibited
Transactions was substantially altered by Amendment No. 1, which was
filed after this comment letter was submitted.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
After careful review of the proposal, as modified by Amendment No.
1, and the comments received, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\29\ In particular, the
Commission finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\30\ which requires, among
other things, that the rules of a national securities exchange be
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 facilitating transactions in
securities, 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; and are not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. The Commission also finds that the proposed rule change, as
amended, is consistent with Section 6(b)(8) of the
[[Page 16085]]
Act, which provides that the rules of a national securities exchange
must not ``impose any burden on competition not necessary or
appropriate in furtherance of the purposes of'' the Act.\31\
---------------------------------------------------------------------------
\29\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\30\ 15 U.S.C. 78f(b)(5).
\31\ 15 U.S.C. 78(f)(8).
---------------------------------------------------------------------------
The Exchange has proposed to substantially modify the provisions of
NYSE Rule 104(g) and (h) that govern the obligations of DMMs to re-
enter the market after certain transactions in assigned securities and
that prohibit certain transactions by DMMs in assigned securities near
the end of the trading day.\32\ Currently, whether a DMM's re-entry
obligation is triggered depends, in the first instance, on whether the
DMM's transaction establishes or increases the DMM's position or
instead liquidates or decreases the DMM's position, and this
distinction is reflected in the existing definitions in NYSE Rule
104(g) and (h) of Neutral Transactions, Non-Conditional Transactions,
and Conditional Transactions.\33\
---------------------------------------------------------------------------
\32\ The Exchange has also proposed to make non-substantive
changes to renumber provisions within NYSE Rule 104 and to relocate
existing rule text regarding Price Participation Points.
\33\ See Section II.A.1, supra. Non-Conditional Transactions are
distinguished from Conditional Transactions by whether a DMM has
reached across the market to trade as the contra-side to an Exchange
bid or offer. See id.
---------------------------------------------------------------------------
NYSE now proposes to eliminate these transaction-type definitions
and replace them with a single transaction type called an Aggressing
Transaction, which would be a DMM unit purchase (sale) that reaches
across the market to trade with the Exchange's published offer (bid)
and is priced above (below) both the last differently priced trade on
the Exchange and the last differently priced offer (bid) on the
Exchange. An Aggressing Transaction would be similar to a Conditional
Transaction, which also involves a DMM reaching across the market, and
the same re-entry obligations that apply to Conditional Transactions
under current NYSE Rule 104 would apply to Aggressing Transactions
under amended NYSE Rule 104. But, while Conditional Transactions by
definition establish or increase a DMM position, whether a transaction
is an Aggressing Transaction would not depend on the DMM's position.
The Commission believes that triggering DMM re-entry obligations
based solely on whether the DMM is aggressively taking liquidity--
rather than also considering a DMM's position at the time of trading--
is consistent with the Act, because those re-entry obligations are
based on price movement, rather than on the DMM's position. The
Commission further notes that, while the Exchange proposes to eliminate
the definitions of Neutral Transactions and Non-Conditional
Transactions, which currently have their own re-entry obligations,
those re-entry obligations are not substantially different from the
DMMs' general obligations under NYSE Rule 104(a) to ``engage in a
course of dealings for their own account to assist in the maintenance
of a fair and orderly market'' and under NYSE Rule 104(f) to maintain
``price continuity with reasonable depth.'' Thus, the Commission does
not believe that the Exchange's proposal to replace the existing
categories of Neutral Transactions, Non-Conditional Transactions, and
Conditional Transactions with a newly defined Aggressing Transaction
would substantially alter the balance of DMM benefits and obligations
previously approved by the Commission.\34\
---------------------------------------------------------------------------
\34\ See Securities Exchange Act Release No. 58845 (Oct. 24,
2008), 73 FR 64379, 64388-89 (Oct. 29, 2008) (SR-NYSE-2008-46)
(approving NYSE New Market Model pilot and finding that it reflected
``an appropriate balance of DMM obligations against the benefits
provided to DMMs''). See also Citadel Letter, supra note 9, at 1
(asserting that the proposal materially increases the obligations on
DMMs during the trading day because the proposal would impose
obligations following transactions that reduce or liquidate the
DMM's position).
---------------------------------------------------------------------------
The Exchange has also proposed to modify the existing definition of
Prohibited Transactions. Under its initial proposal, the Exchange
sought to make four substantive changes: (1) To limit the applicability
of the prohibition to the last 10 seconds of trading before the close,
rather than the last 10 minutes; (2) to change the price test in the
rule to the high or low consolidated price for the day, rather than the
high or low Exchange price for the day; (3) to remove from the
Prohibited Transactions rule the focus on a DMM's position at the time
of the transaction; and (4) to apply the Prohibited Transactions rule
only to Aggressing Transactions, rather than including certain
liquidity-providing trades.\35\
---------------------------------------------------------------------------
\35\ See Notice, supra note 3.
---------------------------------------------------------------------------
In its Order Instituting Proceedings, the Commission asked
questions about whether the proposed changes were consistent with the
Act.\36\ The Exchange subsequently amended its proposal significantly
with respect to Prohibited Transactions. First, the Exchange proposed
to retain the existing 10-minute period for Prohibited Transactions.
Second, the Exchange proposed to retain the existing price test for
Prohibited Transactions. And third, the Exchange proposed to add an
exception for transactions that would liquidate or decrease the
position of the DMM unit, incorporating as a specific exception to the
proposed Prohibited Transactions rule a transaction that is, by
definition, not covered by the existing rule.\37\
---------------------------------------------------------------------------
\36\ See Order Instituting Proceedings, supra note 7, 83 FR at
55764-65.
\37\ Consistent with its initial proposal, the Exchange's
amended proposal would also define a Prohibited Transaction as a
type of Aggressing Transaction, rather than as a separate type of
transaction, and it would retain the existing exceptions to the
Prohibited Transactions rule for transactions that would match
another market's better bid or offer or that would bring the price
of an assigned security into parity with an underlying security or
asset. See Proposed NYSE Rule 104(g)(1)(B).
---------------------------------------------------------------------------
The Commission believes that the Exchange's amended proposal with
respect to Prohibited Transactions is consistent with the Act. While
the language and structure of the Prohibited Transactions rule would be
different, the only substantive difference between the Prohibited
Transactions rule in Amendment No. 1 and the existing rule would be
that DMMs could no longer potentially run afoul of the rule by
passively providing liquidity through a quote that narrowed the spread
in an assigned security. Consistent with its analysis in disapproving
an earlier proposal by the Exchange to eliminate the Prohibited
Transactions rule, the Commission does not believe that the provision
of liquidity by DMMs under such circumstances risks destabilizing the
market.\38\
---------------------------------------------------------------------------
\38\ See Securities Exchange Act Release No. 81150 (July 1,
2017), 82 FR 33534, 33537 (July 20, 2018) (SR-NYSE-2016-71).
---------------------------------------------------------------------------
Finally, the Exchange proposes to amend the obligation under NYSE
Rule 98 of a member organization operating a DMM unit to provide the
DMM unit's net position data to the Exchange. As amended, NYSE Rule 98
would require that daily data be provided for specified time periods,
rather than requiring real-time data. The Commission notes that the DMM
unit net position information to be provided will be relevant under
amended NYSE Rule 104 only for the last 10 minutes of trading before
the close--when the modified Prohibited Transactions rule would be in
effect--and the Exchange represents that it will be able to effectively
monitor for compliance with the proposed exception using information
provided as required by amended NYSE Rule 98, rather than in real time,
as required by current NYSE Rule 98.\39\ The Commission therefore
believes that this
[[Page 16086]]
change to NYSE Rule 98 is consistent with the Act.
---------------------------------------------------------------------------
\39\ Under amended NYSE Rule 98, DMMs would have to provide net
position information on a same-day basis, but in no event later than
trading day plus one.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with
Sections 6(b)(5) and 6(b)(8) of the Act and the rules and regulations
thereunder applicable to a national securities exchange.
V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
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-NYSE-2018-34 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-2018-34. 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-2018-34 and should be submitted on
or before May 8, 2019.
VI. Accelerated Approval of Proposed Rule Change, as Modified By
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As discussed above,\40\ Amendment No. 1
substantially modifies the original proposed rule change with respect
to the Prohibited Transactions rule, narrowing the proposed rule change
significantly so that the only substantive change to the existing rule
governing Prohibited Transactions would be to limit the applicability
of the rule to instances in which a DMM was aggressively taking
liquidity, rather than including certain instances in which a DMM was
providing liquidity. As noted above, the Commission does not believe
that the provision of liquidity by DMMs under these circumstances risks
destabilizing the market.\41\ Amendment No. 1 made no other substantive
changes to the definition of Aggressing Transaction as published in the
original Notice.\42\
---------------------------------------------------------------------------
\40\ See supra notes 36-38 and accompanying text.
\41\ See supra note 38 and accompanying text.
\42\ See Notice, supra note 3.
---------------------------------------------------------------------------
Additionally, in Amendment No. 1, the Exchange proposes to amend
Rule 98--which requires that member organizations operating a DMM unit
provide the Exchange with real-time net position information for the
DMM unit--to require that DMM unit net position information be provided
to the Exchange on a daily basis and for such time periods as
prescribed by the Exchange. The Commission believes this proposal does
not raise regulatory concerns, as the Exchange has represented that it
would be able to effectively monitor for compliance with the proposed
exception to the Prohibited Transactions rule using information
provided under an amended Rule 98, rather than in real time, as
required under current Rule 98.\43\
---------------------------------------------------------------------------
\43\ See supra note 39 and accompanying text.
---------------------------------------------------------------------------
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\44\ to approve the proposed rule change, SR-NYSE-
2018-34, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78s(b)(2).
\45\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-07707 Filed 4-16-19; 8:45 am]
BILLING CODE 8011-01-P