[Federal Register Volume 84, Number 247 (Thursday, December 26, 2019)]
[Notices]
[Pages 71018-71021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27734]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87794; File No. SR-NYSEAMER-2019-56]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Amend
Rule 967NY (Price Protection--Orders)
December 18, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934
[[Page 71019]]
(``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that
on December 5, 2019, NYSE American LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change described in Items I and II 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 967NY (Price Protection--
Orders) to modify and enhance certain of its current price protection
mechanisms. 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 paragraph (c) of Rule 967NY to
modify and enhance its Price Reasonability Checks for options orders to
sell puts or calls (the ``Sell Check''). As proposed, the Exchange
would enhance the Sell Checks applied when the National Best Bid
(``NBB'') is below a specified price and would exclude from the Sell
Check any Intermarket Sweep Orders, both of which changes would allow
for a more finely calibrated Sell Check.
Price Reasonability Checks
The Exchange has in place various price check mechanisms that are
designed to prevent incoming orders from automatically executing at
potentially erroneous prices.\4\ In particular, the Exchange has Price
Reasonability Checks (``Price Checks'') for Limit Orders based on the
principle that an option order is in error and should be rejected (or
canceled) when the same result can be achieved on the market for the
underlying equity security at a lesser cost.\5\ The Price Checks are
based on the consolidated last sale price of the security underlying
the option, once the security opens for trading (or reopens following a
Trading Halt).\6\ The Exchange offers Price Checks for buy and sell
options orders.\7\ The proposed change relates only to the Price Checks
for sell options orders (i.e., the Sell Check).\8\
---------------------------------------------------------------------------
\4\ See, e.g., Rules 967NY(a) (trading collars) and (b) (limit
order price filter), Rule 967.1NY(a) (price protection for Market
Maker quotes).
\5\ A Limit Order is an order to buy or sell a stated number of
option contracts at a specified price, or better. See Rule
900.3NY(b).
\6\ See Rule 967NY(c).
\7\ The Price Checks--or arbitrage checks--for buy orders
operate as follows: Unless otherwise provided in Commentary .01 of
the Rule, the Exchange rejects or cancels any limit order to buy a
put option if the price of the order is equal to or greater than the
strike price of the option; and, the Exchange rejects or cancels any
limit order to buy a call option if the price of the order is equal
to or greater than the consolidated last sale price of the
underlying security, plus a dollar amount to be determined by the
Exchange and announced by Trader Update. See Rule 967NY(c)(1)(A),
(B).
\8\ The proposed rule change would not impact the securities
that are excluded from the Price Checks per Commentary .01 to the
Rule, which currently are options series for which the underlying
security has a non-standard cash or stock deliverable as part of a
corporate action; options series for which the underlying security
is identified as OTC; option series on an index; and ByRDs. See
Commentary .01 to Rule 967NY.
---------------------------------------------------------------------------
Current Rule 967NY(c)(2) sets forth the current Sell Check, which
is designed to protect sellers of calls and puts from presumptively
erroneous executions based on the ``Intrinsic Value'' of an option. The
Intrinsic Value of an option series is measured as the difference
between the strike price and the consolidated last sale price. A sell
order in a call series creates an obligation to sell the underlying
security at the strike price and a sell order in a put series creates
an obligation to buy the underlying security at the strike price. Thus,
the Intrinsic Value for a call option is equal to the consolidated last
sale price of the underlying security minus the strike price; whereas
the Intrinsic Value for a put option is equal to the strike price minus
the consolidated last sale price of the underlying security.\9\ Under
the current Rule, the Exchange rejects or cancels options Limit Orders
to sell a call or to sell a put if the price of the order is equal to
or lower than its Intrinsic Value, minus a threshold percentage
(``percentage threshold''), which is determined by the Exchange and
announced by Trader Update.\10\ The percentage threshold buffer is an
important aspect of the Sell Check because there may be situations in
which market participants willingly opt to execute certain trading
strategies even if such trade or trades occur for a price less than the
Intrinsic Value of the options series.\11\ Absent this percentage
threshold buffer, application of the Sell Check could result in the
rejection or cancelation of certain options sell orders where market
participants seek an execution.
---------------------------------------------------------------------------
\9\ See Rule 967NY(c)(2).
\10\ See Rule 967NY(c)(2)(A). The percentage threshold for sell
orders is currently set to twenty-five percent (25%). The Exchange
refers to this existing percentage threshold as the ``Regular
Intrinsic Value percentage threshold'' to differentiate from the
proposed threshold. See proposed Rule 967NY(c)(2)(A).
\11\ For example, if the market participant is looking to close
out a position, it may be financially beneficial to pay a small
premium and close out the position rather than carry such position
to expiration and take delivery. See, e.g., Securities Exchange Act
Release No. 85925 (May 23, 2019), 84 FR 24831, 24832, fn14 (May 30,
2019) (SR-NYSEAMER-2019-19) (immediately effective filing
implementing Price Checks, including the Sell Check).
---------------------------------------------------------------------------
Proposed Low Price Intrinsic Value Percentage Threshold
The Exchange proposes to modify the Sell Check to introduce a
separate percentage threshold to better account for sell orders in
options series that are trading at relatively low prices so as to avoid
such orders potentially being (incorrectly) rejected or canceled.
Specifically, the Exchange would apply this modified check to limit
orders to sell when the NBB for the option series is equal to or below
a specified minimum price, as determined and announced by the Exchange
(the ``Minimum Price'').\12\ As proposed, if the Exchange receives an
order to sell a put or a call in an option series where the NBB ``is
equal to or below the Minimum Price,'' such order would be canceled or
rejected ``if the price of the order is equal to or lower than its
Intrinsic Value, minus a threshold percentage'' to be determined by the
Exchange and announced by Trader Update (the ``Low Price Intrinsic
Value percentage threshold'').\13\ The rule text would also make clear
that this Low Price Intrinsic Value percentage threshold would be
calculated as a
[[Page 71020]]
percentage of the Intrinsic Value.\14\ The Exchange believes this
proposed modification would enable the Exchange to apply a more finely
calibrated Sell Check (i.e., to options orders trading at or below a
certain price), which is distinct from the Regular Intrinsic Value
percentage threshold, and should reduce the possibility of such orders
on lower-priced options being improperly canceled or rejected.\15\
---------------------------------------------------------------------------
\12\ See proposed Rule 967NY(c)(2)(A)(i) (providing that the
current Sell Check will apply to orders ``provided the NBB for the
option series is greater than'' the Minimum Price; otherwise the Low
Price Intrinsic Value percentage threshold would apply). See also
proposed Rule 967NY(c)(2)(A)(i) [sic].
\13\ See proposed Rule 967NY(c)(2)(A)(i).
\14\ See id.
\15\ See id. The Exchange anticipates setting the Minimum Price
to $1.00 and the Low Price Intrinsic Value percentage threshold to
one hundred percent (100%) and whether and when these amounts change
would depend upon the interest and/or behavior of market
participants.
---------------------------------------------------------------------------
As noted above, market participants may opt to willingly execute
trading strategies regardless of whether the result is an execution for
a price less than the Intrinsic Value of the options series. The Low
Price Intrinsic Value percentage threshold is designed to allow greater
flexibility to market participants submitting sell orders in option
series trading at lower prices. This would allow participants
additional opportunities to execute certain orders (rather than reject
or cancel), while still maintaining a tolerance range. Thus, the
proposal would protect investors by adding flexibility and sensitivity
to the Sell Check for orders in lower-priced options and allow the
balance of the Price Checks to continue to operate as intended.
The following examples illustrate this proposed functionality.
Assumptions:
Minimum Price is $1.00.
(Regular) Intrinsic Value percentage threshold is 25%.
Low Price Intrinsic Value percentage threshold is 100%.
Series A: XYZ DEC 136 Call.
XYZ Stock is trading at $136.36.
Example 1: NBBO for Series A: (100) $2.00 x $3.00 (100).
The NBB of $2.00 is above the Minimum Price (i.e., $1.00),
thus, the (Regular) Intrinsic Value percentage threshold, per Rule
967NY(c)(2)(A), applies.
The Intrinsic Value of Series A is $0.36 ($136.36 -
$136.00); and
The lowest acceptable price for a sell in Series A is
$0.27 (after applying the 25% percentage threshold ($0.09)).
Example 2: NBBO for Series A: (100) $0.50 x $3.00 (100).
The NBB of $0.50 is below the Minimum Price (i.e., $1.00),
thus, the Low Price Intrinsic Value percentage threshold, per proposed
Rule 967NY(c)(2)(A)(i), applies.
The Intrinsic Value of Series A is $0.36 ($136.36 -
$136.00); and
The lowest acceptable price for a sell in Series A is
$0.00 (after applying the 100% percentage threshold ($0.36)) (i.e.
there is no intrinsic check in this case).
ISOs Excluded From Sell Checks
The Exchange also proposes to modify the Sell Check to exclude any
Intermarket Sweep Order or ISO.\16\ An ISO is a Limit Order for an
options series that instructs the Exchange to execute the order up to
the price of its limit, regardless of the NBBO. An ATP Holder may
submit an ISO to sell only if it has simultaneously routed one or more
additional ISOs, as necessary, to execute against the full displayed
size of any better-priced protected quotations for the options series
(i.e., the Protected Bid), with a price that is superior to the limit
of the ISO.\17\ Because an ISO is generally used when trying to sweep a
price level across multiple exchanges in an effort to post the balance
of an order without locking an away market, the Exchange believes it is
appropriate to exclude such orders from the Sell Check so as not to
interfere with the intended functioning of such order type.
---------------------------------------------------------------------------
\16\ See proposed Rule 967NY(c)(2).
\17\ See Rule 900.3NY(u).
---------------------------------------------------------------------------
Implementation
The Exchange will announce by Trader Update the implementation date
of the proposed rule change.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\18\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\19\ in particular, in that 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 mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed Sell Check as
modified to account for lower-priced options and to exclude ISOs would
protect investors and the public interest and maintain fair and orderly
markets by ensuring that properly entered orders are not inadvertently
rejected or canceled by the Exchange. In particular, the Low Price
Intrinsic Value percentage threshold would allow for better calibration
of the Sell Check (i.e., to options orders trading at or below a
certain price), which should reduce the possibility of such orders on
lower-priced options being improperly canceled or rejected. Under
certain circumstances, market participants may choose to execute
trading strategies regardless of whether the result is an execution for
a price less than the Intrinsic Value of the options series. The Low
Price Intrinsic Value percentage threshold (which is distinct from the
Regular Intrinsic Value percentage threshold) is designed to allow
greater flexibility to market participants submitting sell orders in
option series trading at lower prices. This would allow participants
additional opportunities to execute certain orders (rather than reject
or cancel), while still maintaining a tolerance range. Thus, the
proposal would promote just and equitable principles of trade and would
protect investors by adding flexibility and sensitivity to the Sell
Check for orders in lower-priced options and allow the balance of the
Price Checks to continue to operate as intended.
In addition, with regard to ISOs, the Exchange believes it is
appropriate to exclude such orders from the Sell Check to ensure that
the order type (as well as the Sell Check) operates as intended.
Moreover, modifying the rule to specify that ISOs would be excluded
from the Sell Check would add clarity and transparency to Exchange
rules.
The Exchange is proposing the modifications to the Sell Check for
the benefit of, and in consultation with ATP Holders and believes the
proposed rule change would help to maintain a fair and orderly market,
and provide a valuable service to investors. In particular, the
proposed changes to the Sell Check are responsive to member input
regarding certain orders being erroneously rejected or canceled by the
Sell Check (either an ISO or a sell order on an option series trading
at a (relatively) low price). This proposal would thus facilitate
transactions in securities and perfect the mechanism of a free and open
market by providing ATP Holders with enhanced functionality that will
assist them with managing their portfolio and risk profile.
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
[[Page 71021]]
of the purposes of the Act. The proposed rule change enhances the
existing Sell Check for option orders of all ATP Holders submitted to
the Exchange and is designed to ensure that properly entered orders are
not inadvertently rejected or canceled by the Exchange--insofar as the
Sell Check would exclude (and not interfere with the operation of) ISO
orders, and, would apply a modified/more finely calibrated percentage
threshold to sell orders in option series trading at a relatively low
price.
The Exchange further believes that because the proposed rule change
would be applicable to all ATP Holders it would not impose any burden
on intra-market competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEAMER-2019-56 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-NYSEAMER-2019-56. 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-NYSEAMER-2019-56 and should be submitted
on or before January 16, 2020.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27734 Filed 12-23-19; 8:45 am]
BILLING CODE 8011-01-P