[Federal Register Volume 89, Number 32 (Thursday, February 15, 2024)]
[Notices]
[Pages 11893-11896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03100]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99511; File No. SR-NYSE-2023-36]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change Regarding Enhancements to Its DMM Program

February 9, 2024.

I. Introduction

    On October 23, 2023, 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 its Designated Market Maker (``DMM'') 
program. The proposed rule change was published for comment in the 
Federal Register on November 13, 2023.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98869 (November 6, 
2023), 88 FR 77625 (November 13, 2023) (SR-NYSE-2023-36) 
(``Notice'').
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    On December 13, 2023, the Commission extended to February 11, 2024, 
the time period in which to approve the proposal, disapprove the 
proposal, or institute proceedings to determine whether to approve or 
disapprove the proposal.\4\ The Commission has received one comment
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    \4\ See Securities Exchange Act Release No. 99161 (December 13, 
2023), 88 FR 87829 (December 19, 2023).

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[[Page 11894]]

on the proposal.\5\ This order institutes proceedings under Section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposal.
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    \5\ See Letter from Thomas M. Merritt, Deputy General Counsel, 
Virtu Financial, Inc. (``Virtu'') dated January 29, 2024. Virtu 
supports the proposed rule change and states that it will: (i) level 
the playing field regarding access to information among different 
market participants; (ii) eliminate restrictions on cell phone 
communication from the floor and the prohibition on aggressing 
transactions during the close that will ensure that all participants 
engaging in market making are on the same footing; and (iii) attract 
new DMMs.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposal

    As described in more detail in the Notice,\7\ the Exchange proposes 
changes to its DMM program by (1) amending Rule 7.35B(d)(2) (DMM-
Facilitated Closing Auctions); Rule 36 (Access to and Communication 
with Floor); Rule 76 (``Crossing'' Orders); Rule 98 (Operation of a DMM 
Unit); Rule 103 (Registration and Capital Requirements of DMMs and DMM 
Units); Rule 103B (Security Allocation and Reallocation); and Rule 104 
(Dealings and Responsibilities of DMMs); (2) deleting Rule 104A (DMMs--
General) and Rule 106A (Taking Book or Order of Another Member); and 
(3) adopting a new Rule 104B establishing the DMM Unit Introductory 
Program in ETPs.
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    \7\ See Notice, supra note 3.
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    The Exchange proposes to amend Rule 104 to eliminate DMMs' access 
to aggregate order information during Core Trading Hours \8\ with 
exception for reopenings and to limit DMMs' ability to utilize and 
disseminate this information to other market participants on the 
Trading Floor \9\ when it is provided by the Exchange.\10\ 
Specifically, in order to facilitate openings and reopenings, the 
Exchange proposes to limit DMMs' access to non-public aggregate order 
information on an as-needed basis and only before the open or until a 
security opens for trading. Moreover, DMMs' access to aggregate order 
information to facilitate the Closing Auction \11\ would be only on an 
as-needed basis and outside Core Trading Hours. Further, revised Rule 
104 would continue to permit DMMs to provide aggregate order 
information and post-trade information in response to an inquiry from a 
Floor broker, provided that aggregate order information can only be 
provided in response to an inquiry before the open or until a security 
opens for trading, or while trading is halted and only until a security 
is reopened for trading.
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    \8\ See Rule 1.1(d) for the definition of ``Core Trading 
Hours.''
    \9\ See Rule 6A for the definition of ``Trading Floor.''
    \10\ See Notice, supra note 3 at 77631.
    \11\ See Rule 7.35(a)(1)(C) for the definition of ``Closing 
Auction.''
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    The Exchange also proposes to amend Rule 76 to permit the Exchange 
to announce manual cross transactions. Namely, rather than perpetuating 
the current practice of a Floor broker verbally announcing a cross 
trade at a DMM post/panel and having a DMM acknowledge the Floor broker 
announcement, the Exchange would announce and acknowledge Floor broker 
cross transactions, thereby eliminating any interaction between a Floor 
broker and a DMM during cross transactions.
    Based on these changes to Rules 104 and 76, the Exchange believes 
it would be appropriate to remove the restrictions in Rule 36 on a DMM 
unit's communications from the Trading Floor and the specific Rule 98 
restrictions arising from the presence of Floor-based non-public order 
information. The Exchange also believes that these changes justify the 
elimination of the prohibition on Aggressing Transactions \12\ in the 
final ten minutes of the trading day.
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    \12\ See Rule 104(d)(1)(A) for the definition of ``Aggressing 
Transaction.''
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    The Exchange proposes to amend Rule 36 to permit DMM units to use 
any telephone registered with the Exchange, including cellular or 
wireless telephones, to communicate with persons off the Trading Floor. 
A DMM would be permitted to engage in direct voice communication to an 
off-Floor location with any individual with whom telephone 
communications are permitted under Rule 98. DMM units would be required 
to: (i) register, prior to use any new telephone, including cellular or 
wireless phones, to be used on the Trading Floor; (ii) maintain records 
of the use of telephones and all other approved alternative 
communication devices, including logs of calls placed; and (iii) 
establish policies and procedures reasonably designed to ensure that 
use of telephones and alternative communication devices is consistent 
with all SEC rules and Exchange rules.
    In addition, the Exchange proposes to delete current Rule 36.30 
permitting DMMs to use a telephone connection or order entry terminal 
at the DMM's post to enter a proprietary order in an Investment Company 
Unit \13\ or a Trust Issued Receipt \14\ in another market center in 
either a component security of an Investment Company Unit or Trust 
Issued Receipt, or in an options or futures contract related to such 
securities.
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    \13\ See Rule 5.2(j)(3) for the definition of ``Investment 
Company Unit.''
    \14\ See Rule 8.200 for the definition of ``Trust Issued 
Receipt.''
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    And related to the proposed changes to Rule 36, the Exchange also 
proposes to amend Rule 104(g) to permit employees of a DMM unit to 
communicate with a listed issuer contact from the Trading Floor via 
telephone or written electronic communications, consistent with Rule 
36.30 and Rule 98.
    The Exchange also proposes to amend Rue 98 to, among other things, 
delete the definition of ``Floor-based non-public order,'' \15\ and 
delete the requirement to protect against the misuse of Floor-based 
non-public order information and the requirement to only permit access 
to Floor-based non-public order information to Floor-based DMM 
employees and individuals responsible for the direct supervision of the 
DMM's Floor-based operations. Instead, DMMs would be prohibited from 
misusing material, non-public information.
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    \15\ Rule 98(b)(4) defines ``Floor-based non-public order'' to 
mean any order, whether expressed electronically or verbally, or any 
information regarding a reasonably imminent non-public transaction 
or series of transactions entered or intended for entry or execution 
on the Exchange and which is not publicly available on a real-time 
basis via an Exchange-provided datafeed, such as NYSE 
OpenBook[supreg] or otherwise not publicly available. Non-public 
orders include order information at the opening, re-openings, the 
close, and order information in Exchange systems that is not 
available via NYSE OpenBook[supreg].
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    In addition, the Exchange proposes to redefine an Aggressing 
Transaction in Rule 104 as a purchase (sale) that reaches across the 
market to trade as the contra-side of the Exchange published bid 
(offer) priced above (below) the last consolidated trade. Currently, 
Rule 104 defines an Aggressing Transaction as a DMM unit transaction 
that is a purchase (sale) that reaches across the market to trade as 
the contra-side to the Exchange published offer (bid), and 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 Exchange also proposes to make DMM re-entry, following an 
Aggressing Transaction, on the opposite side of the market at or before 
the applicable Price Participation Point (``PPP'') \16\ for that 
security to be more deterministic. Namely, rather than the current 
requirement that DMMs re-enter ``commensurate with the size of the

[[Page 11895]]

Aggressing Transaction,'' the Exchange proposes to require re-entry to 
be in the same size as the Aggressing Transaction. Further, the 
Exchange proposes to eliminate DMMs' restriction against Prohibited 
Transactions--the prohibition on DMMs engaging in Aggressing 
Transactions during the last ten minutes prior to the scheduled close 
of trading.
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    \16\ Rule 104(d)(3)(A) (PPP Guidelines) states that ``[t]he 
Exchange will 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.''
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    Finally, the Exchange proposes a DMM Unit Introductory Program in 
ETPs (the ``Program''), which would be set forth in proposed Rule 
104B(a). The Program would be open to all member organizations in good 
standing registered as a non-DMM Market Maker or a Supplemental 
Liquidity Providers on the Exchange. The Program is limited to exchange 
traded products and is designed to provide eligible member 
organizations with a 12-month ramp up period to becoming fully 
operational, Trading Floor-based DMM units. As proposed, during the 12-
month Program period, DMM units and their DMMs would be subject to the 
duties and responsibilities set forth in Rules 104 and 98. Further, 
DMMs operating in the Program would be permitted to conduct business 
for the DMM unit such as entering orders and quotations for the account 
of the DMM unit during the Program. In addition, the proposed rule 
would provide that during the 12-month Program period, DMM units would 
not be required to comply with the requirements of Rule 35.20 \17\ 
regarding personnel available to DMM units on the Trading Floor.\18\
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    \17\ Rule 35.20 requires each DMM unit to have (1) at least one 
employee approved by the Exchange for admittance to the Floor for 
every Post space assigned to the unit, and (2) an adequate number of 
additional approved employees to provide proper service during the 
trading day.
    \18\ The Exchange also proposes other changes, including: (1) 
deleting Rules 104(e) (Trading Floor Functions of DMMs) and (f) 
(Temporary DMMs); (2) deleting Rule 103B(III)(C) (DMM One Year 
Obligation); (3) deleting Rule 7.35(d)(2) (Publication of Manual 
Closing Imbalance); (4) deleting Rule 104A, Supplementary Material 
.50 (Equity Trading Reports); and (5) other technical changes 
described in the Notice.
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III. Proceedings to Determine Whether To Disapprove SR-NYSE-2023-36 and 
Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \19\ to determine whether the proposal should be 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposal, as 
discussed below. Institution of disapproval proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described in greater detail 
below, the Commission seeks and encourages interested persons to 
provide additional comment on the proposal.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\20\ which requires that the rules of an exchange be 
designed, among other things, to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest. In addition, Section 6(b)(5) of the 
Act prohibits the rules of an exchange from being designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers. 
Further, Section 6(b)(8) of the Act requires that the rules of an 
exchange not impose any burden on competition that is not necessary or 
appropriate under the Act.\21\
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    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(8).
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    The Exchange proposes a comprehensive change to its rules 
pertaining to the obligations of DMMs based on its contemporaneous 
proposal to eliminate DMMs' access to intraday aggregate order 
information except under certain circumstances and DMMs' interaction 
with Floor brokers during cross transactions. Chief among the changes, 
the Exchange proposes to eliminate the Prohibited Transactions rule; 
eliminate rules designed to mitigate concerns related to DMM 
communication from the Trading Floor with certain off-Floor locations; 
and eliminate rules designed to mitigate the misuse of Floor-based non-
public order information.
    Given the scope of changes proposed by the Exchange, the Commission 
analyzes the proposal in the context of the unique role played by DMMs 
on the Exchange, namely their role to assist in the maintenance of a 
fair and orderly market in securities for which they have been assigned 
responsibility as the DMM (e.g., the maintenance of price continuity 
with reasonable depth) and to facilitate certain transactions in their 
assigned securities, most notably the opening, reopening, and closing 
auctions.\22\ And because the Exchange's proposal would significantly 
alter the benefits and obligations of DMMs, the Commission takes into 
consideration questions as to whether the Exchange rules, as amended, 
would continue to strike an appropriate balance between such benefits 
and obligations, consistent with Section 6 of the Act.
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    \22\ DMMs also have the affirmative obligation to maintain 
quotes in their assigned securities at the inside market a specified 
percentage of time. See Rule 104.
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    One obligation that the Exchange proposes to delete is the negative 
obligation the Exchange currently imposes on DMMs to restrict 
aggressive trading in the last ten minutes before the close, i.e., 
Prohibited Transactions. This raises questions as to whether the 
elimination of Prohibited Transactions is both consistent with a DMM's 
obligation to maintain a fair and orderly market and, more generally, 
designed to prevent fraudulent or manipulative acts and practices. 
According to the Exchange, the deletion is appropriate because: 
removing DMMs' intraday access to aggregate order information would 
place DMMs on the same informational footing as all other market 
participants; the proposal would retain the re-entry requirement 
following an Aggressing Transaction; and there may be a variety of 
reasons related to the DMM unit's obligations to the marketplace for a 
DMM to quote aggressively in its assigned securities at the close. In 
light of the Exchange's arguments, the Commission seeks comments on 
whether commenters agree. Has the Exchange adequately justified how 
allowing DMMs to aggressively take liquidity and potentially move 
prices on the Exchange immediately before the closing auction is 
consistent with the Act and DMM obligations under Exchange rules?
    Another issue raised by the Exchange's proposal is whether the 
changes are adequately designed to mitigate concerns related to access 
by DMMs to non-public information from the Trading Floor. According to 
the Exchange, based on its proposal to limit DMMs' access to aggregate 
order information intraday, and to remove DMMs from involvement in 
manual cross transactions, it is appropriate to delete the restrictions 
on DMM communications from the Trading Floor, including restrictions 
involving Floor-based non-public order information. Applying the same 
rationale, the Exchange also proposes to delete its rule prohibiting 
DMM communications with a listed issuer contact from the Trading Floor 
via

[[Page 11896]]

telephone, and proposes instead to rely on the requirement that DMMs 
comply with current Rule 98 and the Exchange's proposed general 
requirement that DMM units establish policies and procedures reasonably 
designed to ensure that the use of communication devices is consistent 
with all SEC rules and Exchange rules. DMMs, however, have a unique 
position on the Trading Floor and would still have access to non-public 
aggregate order information--namely before the open or until a security 
opens for trading; while trading is halted and until a security is 
reopened for trading; and after the end of Core Trading Hours. DMMs 
would also continue to have the ability to observe negotiations and 
other interactions on the Trading Floor. Accordingly, Commission seeks 
comments regarding the sufficiency of the remaining Exchange rules to 
address concerns regarding the unique access to, and potential misuse 
of, non-public trading, issuer, and other information, including the 
Floor-based non-public order information as it is currently defined in 
the rules. Do the changes to remove DMMs' access to intraday aggregate 
order information and eliminate DMMs' involvement in cross transactions 
sufficiently limit DMMs ability to obtain non-public information such 
that prescriptive restrictions on DMM communication from the Trading 
Floor, including those listed issuer contact, is no longer necessary? 
Do they mitigate concerns that restrictions pertaining to Floor-based 
non-public order information are meant to address?
    In addition to the above requests for comments, the Commission also 
seeks comments regarding the Exchange's proposal relating to the 
following:
    1. The Exchange proposes to use the last consolidated trade rather 
than the last trade on the Exchange in the definition of Aggressing 
Transaction. The Exchange states that the last consolidated trade is a 
more meaningful benchmark for the underlying security. What effect 
would this change have for the operation of Rule 104?
    2. The Exchange proposes to delete Rule 104A in its entirety, 
including DMM recordkeeping and/or reporting obligations pertaining to 
securities, options, single stock futures, and foreign securities. 
According to the Exchange, it is appropriate to delete the rule as it 
is duplicative of Exchange and SEC books and recordkeeping 
requirements. Do commenters agree? Why or why not?
    3. The Exchange also proposes to delete in Rule 36.30 the provision 
that stipulates that DMMs can only enter proprietary order in Component 
Securities of Investment Company Units or Trust Issued Receipts for the 
purpose of hedging a position in the Investment Company Units or Trust 
Issued Receipts. According to the Exchange, this provision is obsolete 
but does not explain why. Do commenters agree with the Exchange's 
statement that the provision is obsolete?

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) \23\ of the Act or any other provision 
of the Act, or the rules and regulations thereunder. Although there do 
not appear to be any issues relevant to approval or disapproval that 
would be facilitated by an oral presentation of views, data, and 
arguments, the Commission will consider, pursuant to Rule 19b-4 under 
the Act,\24\ any request for an opportunity to make an oral 
presentation.\25\
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 17 CFR 240.19b-4.
    \25\ Rule 700(c)(2) of the Commission's Rules of Practice 
provides that ``[t]he Commission, in its sole discretion, may 
determine whether any issues relevant to approval or disapproval 
would be facilitated by the opportunity for an oral presentation of 
views.'' 17 CFR 201.700(c)(2).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 7, 2024. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by March 21, 
2024.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NYSE-2023-36 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-2023-36. 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 (https://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 
a.m. and 3 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-2023-36 and should be 
submitted by March 7, 2024. Rebuttal comments should be submitted by 
March 21, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03100 Filed 2-14-24; 8:45 am]
BILLING CODE 8011-01-P