
[Federal Register: June 11, 2008 (Volume 73, Number 113)]
[Notices]               
[Page 33131-33133]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jn08-107]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57927; File No. SR-NYSEArca-2008-54]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment No. 1, To Amend Rules 
6.62 and 6.91 Describing Complex Orders, Complex Order Priority, and 
Complex Order Execution

June 5, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 23, 2008, NYSE Arca, Inc. (``NYSE Arca'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by the Exchange. On June 5, 
2008, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 updates cross references to recently 
renumbered rules.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify Rules 6.62 and 6.91 describing 
Complex Orders, Complex Order Priority, and Complex Order Execution. 
The text of the proposed rule change is available at the principal 
office of NYSE Arca, at the Commission's Public Reference Room, and at 
http://www.nyse.com.

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 Exchange included statements

[[Page 33132]]

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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    For many years, the options exchanges have recognized that 
strategies involving more than one option series or more than one 
instrument associated with an underlying security are different from 
regular buy and sell orders for a single series, and orders to achieve 
such strategies should be defined separately. As the sophistication of 
the industry has grown, so have the strategies, and the options 
exchanges have regularly added new strategies to the list of defined 
complex order types. The investing industry, however, creates new, 
legitimate investment strategies that do not necessarily fit into one 
of the narrow definitions for complex order types that the exchanges 
presently use. These order types are often developed for a particular 
strategy, specific to a particular issue. The Exchange believes that to 
attempt to define every individual strategy imaginable, and file 
additional rules to memorialize them, would be a time consuming and 
onerous process, and would serve only to confuse the investing public. 
As a result, bona fide transactions to limit risk are not afforded the 
facility of execution afforded more common complex orders.
    For instance, the Chicago Board Options Exchange (``CBOE'') \4\ and 
the International Securities Exchange (``ISE'') \5\ each define at 
least nine specific complex strategies. These are the most 
comprehensive lists of complex strategies defined in a rule set, yet 
they do not cover all of the possibilities of complex orders which are 
routinely presented for execution on the trading floor. Some strategies 
that do not fit the predefined structures are: (i) Long in the money 
call, long two in the money put, long out of the money call; (ii) long 
in the money call, short at the money call, long out of the money call; 
and (iii) long one in the money put, short three at the money puts, 
long two out of the money puts. Each of these represents a legitimate 
investment strategy to limit risk or unwind an already established 
position in a portfolio.
---------------------------------------------------------------------------

    \4\ See CBOE Rule 6.53C.
    \5\ See ISE Rule 722.
---------------------------------------------------------------------------

    To provide for greater flexibility in the design and use of complex 
strategies, NYSE Arca proposes to eliminate specific complex order 
types described in Rule 6.62, and adopt a generic definition approved 
for use for exemption from Trade Through Liability by the Options 
Linkage Authority as described in the Plan For The Purpose Of Creating 
And Operating An Intermarket Option Linkage (``Linkage Plan''). The 
Exchange believes this will give investors greater flexibility in 
creating strategies that may be processed electronically with greater 
accuracy and less intermediation than the present manual methods.
    Proposed Rule 6.91 describes the entry of Complex Orders in the 
Consolidated Book and the operation of a Complex Matching Engine. The 
Complex Matching Engine is the mechanism in which Complex Orders are 
executed against each other or against individual quotes and orders in 
the Consolidated Book. Complex Orders in the Consolidated Book will be 
available to all market participants via an electronic interface. NYSE 
Arca proposes that Complex Orders be ranked in the Consolidated Book in 
strict price time based on the strategy and the total or net debit or 
credit.
    Complex Orders eligible for execution in the Complex Matching 
Engine are defined to be consistent with the Linkage Plan Trade Through 
exemption. Therefore execution prices for the individual legs of a 
Complex Trade that are outside of the National Best Bid or Offer may be 
reported. The Complex Matching Engine will never, however, execute any 
of the legs of a Complex Trade at a price outside of the NYSE Arca best 
bid or offer (``NYSE BBO'') for that leg.
    NYSE Arca also proposes that Complex Orders attempt to execute 
against other Complex Orders in the Consolidated Book before attempting 
to execute against the individual leg markets in the Consolidated Book, 
provided that for purposes of priority, where the total or net debit or 
credit derived from the individual leg market is better than or equal 
to the price of the Complex Order, the individual leg markets will 
maintain priority. NYSE Arca notes that the various options exchange 
rule sets recognize that investors wishing to complete a complex 
strategy should not be encumbered by orders for a single leg.
    To illustrate how the proposal would work, suppose, for instance, 
the markets for two call series is as follows:

XYZ July 30 2.20-2.40 10 x 10
XYZ July 35 1.10-1.25 10 x 10

    A Complex Order is entered to Buy 10 July 30/Sell 10 July 35 for a 
Net Debit of 1.30. The Complex Matching Engine checks the Consolidated 
Book and finds there are no Complex Orders willing to sell the 
strategy, so it executes against the leg markets at prices of 2.40 for 
the July 30 calls and 1.10 for the July 35 calls.
    With the same leg markets available, another Complex Order is sent 
to NYSE Arca to Buy 10 July 30/Sell 10 July 35 for a Net Debit of 1.00. 
Since the screen market is .95-1.30, the order would not execute but 
route to the Consolidated Book and post with a debit of 1.00. This 
would be disseminated to all NYSE Arca market participants. An order to 
Sell July 30/Buy July 35 for a credit of 1.00 arrives. It is routed 
directly to the Complex Matching Engine, where it is matched against 
the posted order, and priced at the first available prices found in the 
Complex Matching Engine, which, under this scenario, are 2.20 and 1.20.
    The Exchange proposes, however, that if the individual leg markets 
are pricing the strategy at the same price as the posted Complex Order, 
an order sent to be executed against the posted order will instead 
execute against the individual orders and quotes in the leg markets. 
For instance, suppose that before the second order described above 
arrives, the markets in the options change as follows:

XYZ July 30 2.20-2.40 10 x 10
XYZ July 35 1.10-1.20 10 x 10

    The individual leg markets are now pricing the strategy at the same 
price as the posted Complex Order. Even though the Complex Order net 
debit has been disseminated and advertised, the individual leg markets 
will maintain priority over the posted Complex Order. The Complex 
Matching Engine will execute the order with a credit of 1.00 against 
the 1.00 debit price of the leg markets, and then any residual will be 
matched against the Complex Order in the Consolidated Book at the same 
1.00 debit.
    Complex Orders that are not executable are entered into the 
Consolidated Book. The Complex Matching Engine will monitor the markets 
in the individual legs of Complex Orders in the Consolidated Book. If 
the market prices in the legs move so that the Complex Order is now 
executable in full (or in a permissible ratio), the Complex Order will 
be

[[Page 33133]]

executed against the individual orders and quotes in the leg markets.
    The Exchange proposes that Lead Market Makers (``LMM'') not be 
afforded any guaranteed allocation either in the execution of a complex 
strategy nor, if present, at the NYSE Arca BBO when a Complex Order 
executes against the individual leg markets. There is no obligation for 
LMMs (or any Market Maker) to quote prices for complex strategies; 
therefore there is no need for a guaranteed allocation. A market 
participant that establishes a price for a strategy should be rewarded 
for setting that price by being granted strict time priority. 
Similarly, the LMM quotes in the individual leg markets are available 
to all orders but are not advertising a particular strategy. They 
should not be granted a guaranteed allocation in any of the leg markets 
resulting from the execution of a Complex Order. Complex Orders will 
thus execute against the individual legs of the Consolidated Book in 
strict price time. The Exchange also proposes to continue to allow the 
individual legs of Complex Orders to be executed in the minimum 
applicable trading increments in the designated series in order to 
achieve the total or net debit/credit, consistent with Rule 6.72.
    For purposes of the firm quote rule, the Complex Order in the 
Consolidated Book shall be considered ``firm'' at the posted debit or 
credit.\6\
---------------------------------------------------------------------------

    \6\ See Rule 602 of Regulation NMS, 17 CFR 242.602.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \8\ in particular in that it is designed 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.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    NYSE Arca believes the proposed rule change related to Complex 
Orders is appropriate in that Complex Orders are widely recognized by 
market participants as invaluable, both as an investment and for risk 
management and investment strategy. The proposed rule change would 
provide the opportunity for a more efficient mechanism for carrying out 
these strategies.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2008-54 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-NYSEArca-2008-54. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying 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 such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2008-54 and should 
be submitted on or before July 2, 2008.

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-13066 Filed 6-10-08; 8:45 am]

BILLING CODE 8010-01-P
