
[Federal Register Volume 75, Number 245 (Wednesday, December 22, 2010)]
[Notices]
[Pages 80553-80556]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32089]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63558; File No. SR-NYSEAmex-2010-100]


 Self-Regulatory Organizations; NYSE Amex LLC; Order Approving a 
Proposed Rule Change Relating to Complex Orders

December 16, 2010.

I. Introduction

    On October 20, 2010, NYSE Amex LLC (``NYSE Amex'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to: (i) Add to Rule 900.3NY(h) a definition of 
``Stock/Complex Order;'' (ii) revise Rule 963NY(d) to update the 
provisions governing open outcry trading of Complex Orders and Stock/
option Orders and apply these provisions to Stock/Complex Orders; (iii) 
delete Rule 963.1NY; (iv) add Rule 980NY(e) to establish an electronic 
Complex Order Auction (``COA''); and (v) revise other provisions of 
Rule 980NY to include Stock/Complex Orders. The proposed rule change 
was published for comment in the Federal Register on November 2, 
2010.\3\ The Commission received no comments regarding the proposal. 
This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63187 (October 27, 
2010), 75 FR 67424 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

A. Definition of Stock/Complex Order

    The proposal amends Rule 900.3NY(h) to add a definition of ``Stock/
Complex Order.'' Rule 900.3NY(h)(2) defines a ``Stock/Complex Order'' 
as the purchase or sale of a Complex Order, as defined in Rule 
900.3NY(e), coupled with an order to buy or sell a stated number of 
units of an underlying stock or a security convertible into the 
underlying stock (``convertible security'') representing either (A) the 
same number of units of the underlying stock or convertible security as 
are represented by the options leg of the Complex Order with the least 
number of options contracts, or (B) the number of units of the 
underlying stock necessary to create a delta neutral position, but in 
no case in a ratio greater than eight options contracts per unit of 
trading of the underlying stock or convertible security established for 
that series by the Clearing Corporation, as represented by the options 
leg of the Complex Order with the least number of options contracts.

B. Revisions To Open Outcry Rules

    The proposal revises paragraph (d) of Rule 963NY, ``Priority and 
Order Allocation Procedures--Open Outcry,'' to update the provisions 
governing the trading of Complex Orders Stock/option Orders in open 
outcry. Rule 963NY(d), as amended, will also apply to Stock/Complex 
Orders trading in open outcry. According to the Exchange, the changes 
to Rule 963NY(d) streamline and update the text of Rule 963NY(d), but 
do not alter the Exchange's existing procedures for trading Complex 
Orders or Stock/option Orders, or the priority of quotations and 
orders. The Exchange notes that the Rule 963NY(d), as amended, is based 
on Chicago Board Options Exchange, Incorporated (``CBOE'') Rule 
6.45(e).\4\
---------------------------------------------------------------------------

    \4\ CBOE Rule 6.45(e) states that ``A complex order as defined 
in Rule 6.42.01 may be executed at a net debit or credit price with 
another Trading Permit Holder without giving priority to equivalent 
bids (offers) in the individual series legs that are represented in 
the trading crowd or in the public customer limit order book 
provided at least one leg of the order betters the corresponding bid 
(offer) in the public customer limit order book by at least one 
minimum trading increment as defined in Rule 6.42 (i.e., $0.10, 
$0.05 or $0.01, as applicable) or a $0.01 increment, which increment 
shall be determined by the Exchange on a class-by-class basis. 
Stock-option orders and security future-option orders, as defined in 
Rule 1.1(ii)(a) and Rule 1.1(zz)(a), respectively, have priority 
over bids (offers) of the trading crowd but not over bids (offers) 
in the public customer limit order book.''
---------------------------------------------------------------------------

    Under Rule 963(d), as amended, Complex Orders, as defined in Rule 
900.3NY(e), and Stock/Complex Orders, as defined in Rule 900.3(h)(2), 
may be executed at a net debit or credit with another ATP Holder 
without giving priority to equivalent bids (offers) in the individual 
series legs that are represented in the Trading Crowd or Customer limit 
orders in the Consolidated Book, provided that at least one options leg 
of the order betters the corresponding Customer bid (offer) in the 
Consolidated Book by at least one minimum trading increment, as defined 
in Rule 960NY (i.e., $0.10, $0.50, or $0.01, as applicable), or a $0.01 
increment, as determined by the Exchange on a class-by-class basis. 
Stock/option Orders, as defined in Rule 900.3(h)(1), have priority over 
equivalent bids (offers) of the trading crowd, but not over equivalent 
Customer bids (offers) in the Consolidated Book.
    In addition, Rule 963NY(d) provides that bids and offers for 
Complex Orders, Stock/option Orders, and Stock/

[[Page 80554]]

Complex Orders may be expressed in $0.01 increments regardless of the 
minimum increment otherwise applicable to the individual legs of the 
order.
    The Exchange also proposes to delete Rule 963.1NY, ``Complex Order 
Transactions--Open Outcry.'' According to the Exchange, Rule 963NY(d) 
describes priority for all Complex Orders and Stock/option Orders. The 
Exchange states that Rule 963.1NY describes procedures for executing 
Complex Orders in open outcry, but does not describe any execution 
priority, obligation, or privilege that is not already described in 
other rules. In addition, Rule 963.1NY describes procedures only for 
Complex Orders with two options legs, rather than for all Complex 
Orders. The Exchange notes, further, that Rule 963.1NY(f) describes a 
narrow circumstance, relating to a Locked Book Market, that was more 
appropriate when an Order Book Official maintained the Public Customer 
Book. According to the Exchange, Rule 963NY(d), as amended, addresses 
this and similar circumstances more clearly. Accordingly, the Exchange 
proposes to delete Rule 963.1NY.

C. Electronic COA

    As described more fully in the Notice,\5\ the Exchange proposes to 
adopt Rule 980NY(e), which establishes an electronic request for 
responses COA for Complex Orders, Stock/option Orders, and Stock/
Complex Orders (``Electronic Complex Orders''). The Exchange states 
that the COA is similar to the electronic complex order auction 
provided for in CBOE Rule 6.53(d), with a priority change based on 
Nasdaq OMX Phlx, Inc. Rule 1080, Commentary .08(e)(vi)(A)(2). 
Electronic Complex Orders processed through the Exchange's COA may be 
executed without consideration to prices of the same complex orders 
that might be available on other exchanges.\6\
---------------------------------------------------------------------------

    \5\ See note 3, supra.
    \6\ See Rule 980NY(e)(1).
---------------------------------------------------------------------------

    The Exchange may determine, on a class-by-class basis, the 
Electronic Complex Orders that are eligible for a COA (``COA-eligible 
orders''), based on the order's marketability, size, number of series, 
and order origin type (i.e., Customer, broker-dealer that is not a 
Market-Maker or options exchange specialist, and/or Market-Maker or 
options exchange specialist).\7\ Upon receipt of a COA-eligible order, 
and direction from the entering ATP Holder that an auction be 
initiated, the Exchange will send an RFR message to ATP Holders that 
subscribe to RFR messages.\8\ The RFR message will identify the 
component series, the size of the order and any contingencies, but not 
the side of the market.\9\
---------------------------------------------------------------------------

    \7\ See Rule 980NY(e)(1)(A).
    \8\ See Rule 980NY(e)(2).
    \9\ Id.
---------------------------------------------------------------------------

    Each Market-Maker with an appointment in the relevant option class, 
and each ATP Holder acting as agent for orders resting at the top of 
the Consolidated Book in the relevant option series, may submit 
responses to the RFR message (``RFR Responses'') during the Response 
Time Interval.\10\ RFR Responses, which may be submitted in $0.01 
increments, will be ranked and displayed in the Consolidated Book.\11\ 
The Exchange will determine the length of the Response Time Interval, 
which will not exceed one second.\12\ The obligations of Rule 935NY, 
``Order Exposure Requirements,'' are separate from the duration of the 
Response Time Interval.\13\
---------------------------------------------------------------------------

    \10\ See Rule 980NY(e)(4).
    \11\ Id.
    \12\ See Rule 980NY(e)(3).
    \13\ Id. Rule 935NY provides that: ``With respect to orders 
routed to the NYSE Amex System, Users may not execute as principal 
orders they represent as agent unless (i) agency orders are first 
exposed on the Exchange for at least one (1) second or (ii) the User 
has been bidding or offering on the Exchange for at least one (1) 
second prior to receiving an agency order that is executable against 
such bid or offer.''
---------------------------------------------------------------------------

    RFR Responses may be modified, but may not be withdrawn, at any 
time prior to the end of the Response Time Interval.\14\ At the end of 
the Response Time Interval, RFR Responses are firm with respect to the 
COA-eligible order, and RFR Responses that exceed the size of the COA-
eligible order are also firm with respect to other incoming COA-
eligible orders and RFR Responses that are received during the Response 
Time Interval.\15\ Any RFR Responses that are not accepted in full or 
in a permissible ratio will expire at the end of the Response Time 
Interval.\16\
---------------------------------------------------------------------------

    \14\ See Rule 980NY(e)(7).
    \15\ Id.
    \16\ Id.
---------------------------------------------------------------------------

    At the conclusion of the Response Time Interval, a COA-eligible 
order will be executed in whole or in part against the best priced 
contra side interest.\17\ At the same net price, a COA-eligible order 
will execute first against individual orders and quotes in the leg 
markets resting in the Consolidated Book prior to the initiation of the 
COA, provided that the COA-eligible order can be executed in full, or 
in a permissible ratio, by orders and quotes in the Consolidated Book; 
second, against Customer Electronic Complex Orders resting in the 
Consolidated Book before, or that are received during, the Response 
Time Interval, and Customer RFR Responses, allocated on a size pro rata 
basis as defined in Rule 964NY(b)(3); and third, against non-Customer 
Electronic Complex Orders resting in the Consolidated Book or placed in 
the Consolidated Book during the Response Time Interval, and non-
Customer RFR Responses, allocated on a size pro rata basis as defined 
in Rule 964NY(b)(3).\18\ Individual orders and quotes in the leg 
markets that cause the derived Complex Best Bid/Offer to be improved 
during the COA and match the best RFR Responses and/or Electronic 
Complex Orders received during the Response Time Interval will be 
filled after Electronic Complex Orders and RFR Responses at the same 
net price.\19\ Any unexecuted portion of a COA-eligible order will be 
placed in the Consolidated Book or, if marketable, will initiate 
another COA.\20\
---------------------------------------------------------------------------

    \17\ See Rule 980NY(e)(5) and (6).
    \18\ See Rule 980NY(e)(6)(A)-(C).
    \19\ See Rule 980NY(e)(6)(D).
    \20\ See Rule 980NY(e)(5).
---------------------------------------------------------------------------

    The COA rules also address the handling of unrelated Electronic 
Complex Orders received during a COA,\21\ and the effect of a change in 
the best bid or offer in the leg markets.\22\
---------------------------------------------------------------------------

    \21\ Incoming Electronic Complex Orders received during the 
Response Time Interval that are on the opposite side of the market 
from, and marketable against, the COA-eligible order will be ranked 
and executed in price/time priority with RFR Responses by account 
type, as provided in Rule 980NY(e)(6), and any remaining balance of 
the initiating COA-eligible order or the incoming Electronic Complex 
Order will be placed in the Consolidated Book. Incoming COA-eligible 
orders received during the Response Time Interval that are one the 
same side of the market and at a price that is equal to the price of 
the original COA-eligible order will join the COA, and a message 
with the updated size will be published. The incoming order(s) and 
the initiating COA-eligible order will be ranked and executed in 
price/time priority, and any remaining balance of the initiating 
order or the incoming order(s) will be placed in the Consolidated 
Book. Similarly, an incoming COA-eligible order on the same side of 
the market as the original COA-eligible order with a price that is 
worse than the price of the original COA-eligible order will join 
the COA, and will be ranked and executed with the initiating COA-
eligible order in price/time priority. An incoming COA-eligible 
order on the same side of the market as the original COA-eligible 
order with a price that is better than the price of the original 
COA-eligible order will cause the auction to end, and the initiating 
COA-eligible order will be executed in accordance with Rule 
980NY(e)(6). The COA-eligible order that caused the auction to end 
will then be executed, and any unexecuted portion will either be 
placed in the Consolidated Book or, if marketable, will initiate 
another COA. See Rule 980NY(e)(8).
    \22\ See Rule 980NY(e)(9).
---------------------------------------------------------------------------

    A pattern or practice of submitting unrelated orders that cause a 
COA to conclude early, or the dissemination to third parties of 
information related to COA-eligible orders, will be deemed

[[Page 80555]]

conduct inconsistent with just and equitable principles of trade.\23\
---------------------------------------------------------------------------

    \23\ See Rule 980NY(e), Commentary .04.
---------------------------------------------------------------------------

D. Additional Changes

    The proposal modifies Rule 980NY, Commentary .02 to provide that at 
least one leg of an Electronic Complex Order must trade at a price that 
is a least $0.01 better than the corresponding Customer bid or offer in 
the Consolidated Book if the Exchange has designated the options class 
as eligible for COAs. The proposal also amends Rule 980NY, Commentary 
.03(a) to require the execution of the stock component of a Stock/
Complex Order to be consistent with the rules of the stock execution 
venue. In addition, the proposal revises Rule 980NY, Commentary .03(c) 
to establish the execution sequence for Stock/Complex Orders submitted 
to the Exchange's Complex Matching Engine (``CME''). The proposal also 
amends Rule 980NY, Commentary .03(d), to provide that the requirement 
to trade with existing Customer interest at the Exchange's best bid 
(offer) before executing the options legs of a Stock/Complex Order will 
apply only if there are Customer orders at the best bid (offer) for 
each of the options legs of the Stock/Complex Order.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\24\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\25\ which requires, in part, 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 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. The Commission 
finds that the proposal is designed to facilitate the trading of 
Complex Orders, Stock/option Orders, and Stock/Complex Orders on the 
Exchange.
---------------------------------------------------------------------------

    \24\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Rule 900.3NY(h)(2) defines a new order type, the Stock/Complex 
Order, that could provide market participants with flexibility by 
permitting orders composed of an underlying stock or convertible 
security and multiple options legs. As discussed above, a Stock/Complex 
Order must be comprised of a Complex Order, as defined in Rule 
900.3NY(e), and a stock leg.\26\ Under the proposal, the options legs 
of a Stock/Complex Order must (a) satisfy the conditions in the 
definition of Complex Order; \27\ and (b) at least one options leg of a 
Complex Order or a Stock/Complex Order must trade at a price that is 
better than the corresponding Customer bid or offer for the same 
series.\28\ Accordingly, the priority provisions applicable to Stock/
Complex Orders are consistent with the priority provisions applicable 
to Complex Orders.
---------------------------------------------------------------------------

    \26\ See Rule 900.3NY(h)(2).
    \27\ See Rule 900.3NY(e). Specifically, Rule 900.3NY(e) states 
that a Complex Order is an order involving the simultaneous purchase 
and/or sale of two or more different option series in the same 
underlying security, for the same account, in a ratio that is equal 
to or greater than one-to-three (.333) and less than or equal to 
three-to-one (3.00) and for the purpose of executing a particular 
investment strategy.
    \28\ See Rules 963NY(d) and 980NY, Commentary .02.
---------------------------------------------------------------------------

    Rule 963NY(d), as amended, sets forth the procedures and priority 
requirements for Complex Orders, Stock/option Orders, and Stock/Complex 
Orders trading in open outcry. As described more fully above, Rule 
963NY(d) states that Complex Orders and Stock/Complex Orders may be 
executed at a net debt or credit with another ATP Holder without giving 
priority to equivalent bids (offers) in the individual series legs that 
are represented in the Trading Crowd or Customer limit orders in the 
Consolidated Book, provided that at least one options leg of the order 
betters the corresponding Customer bid (offer) by at least one minimum 
trading increment or by a $0.01 increment, as applicable. Stock/option 
Orders have priority over equivalent bids (offers) in the Trading 
Crowd, but not over equivalent Customer bids (offers) in the 
Consolidated Book. The Commission notes that Rule 963NY(d), as amended, 
is substantially similar to CBOE Rule 6.45(e). According to the 
Exchange, the proposal streamlines and updates Rule 963NY(d), but does 
not substantively alter the procedures or priorities for trading 
Complex Order and Stock/option Orders in open outcry.
    The proposal also applies the priorities and procedures in Rule 
963NY(d) to Stock/Complex Orders. The Commission believes that it is 
reasonable to apply these procedures and priorities to Stock/Complex 
Orders to provide consistent treatment of Complex Orders, which are 
comprised of multiple options legs, and Stock/Complex Orders, which are 
comprised of multiple options legs and the underlying stock or 
convertible security. The Commission believes, further, that the 
changes to Rule 963NY(d), together with the deletion of Rule 963.1NY, 
which has become outdated, should help to assure that the Exchange's 
rules clearly describe the procedures and priorities for executing 
Complex Orders, Stock/Complex Orders, and Stock/option Orders in open 
outcry.
    The Commission believes that the electronic COA provided in new 
Rule 980NY(e) could facilitate the trading of Complex Orders, Stock/
Complex Orders, and Stock/option Orders and provide price improvement 
opportunities for these orders. As described more fully above, Market 
Makers with an appointment in the relevant options class and ATP 
Holders acting as agent for orders resting at the top of the 
Consolidated Book will be able to submit RFR Responses. At the 
conclusion of a COA, the auctioned order may execute against individual 
orders or quotes, Customer Electronic Complex Orders or RFR Responses, 
or non-Customer Electronic Complex Orders or RFR Responses, as provided 
in Rule 980NY(e)(6). The Commission notes that the Exchange's COA is 
substantially similar to the electronic complex order auction provided 
under CBOE Rule 6.53C(d).
    The proposal revises Rule 980NY, Commentary .02, to provide that, 
for options classes designated as eligible for COAs, at least one leg 
of an Electronic Complex Order must trade at a price that is better 
than the corresponding Customer bids or offers in the same series in 
the Consolidated Book by at least $0.01. The Commission believes that 
the $0.01 price improvement requirement is appropriate in this 
circumstance in light of the price competition for Electronic Complex 
Orders driven by the Consolidated Book and the availability of the COA.
    In addition, the Commission notes that the changes to Rule 980NY, 
Commentary .03, relating to the electronic trading of Stock/Complex 
Orders, are consistent with the treatment in CBOE Rule 6.53C, 
Commentary .06, of orders composed of stock and multiple options legs. 
The requirement in Rule 980NY, Commentary .03(a) that the stock leg of 
a Stock/Complex Order be executed consistent with the rules of the 
stock execution venue is consistent with the requirement in CBOE Rule 
6.53C, Commentary .06(a), that the stock leg of an order be executed 
consistent with the order execution rules of the CBOE Stock

[[Page 80556]]

Exchange. The execution sequence for Stock/Complex Orders in Rule 
980NY, Commentary .03(b) for orders submitted to the Exchange's CME is 
consistent with the execution sequence set forth in CBOE Rule 6.53C, 
Commentary .06(c), and the requirement in Rule 980NY, Commentary .03(d) 
to trade with Customer orders only if there are Customer orders at the 
Exchange's best quote for each of the options legs of a Stock/Complex 
Order is consistent with CBOE Rule 6.53C, Commentary .06(f).
    Rule 980NY, Commentary .04 provides that a pattern or practice of 
submitting unrelated orders that cause a COA to conclude early will be 
deemed conduct inconsistent with just and equitable principles of 
trade, as will the dissemination to third parties of information 
related to COA-eligible orders. These provisions, which are comparable 
to CBOE Rule 6.53C, Commentary .05, will require the Exchange to 
surveil for, and should help to deter, potential abuses of the COA 
process. Finally, the Commission notes that the order exposure 
obligations in Rule 935NY apply to orders submitted to a COA, and that 
these order exposure obligations are separate from the duration of the 
Response Time Interval.\29\
---------------------------------------------------------------------------

    \29\ See Rule 980NY(e)(3) and note 13, supra.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (File No. SR-NYSEAmex-2010-100) 
is approved.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32089 Filed 12-21-10; 8:45 am]
BILLING CODE 8011-01-P


