
[Federal Register Volume 77, Number 91 (Thursday, May 10, 2012)]
[Notices]
[Pages 27505-27508]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11245]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66923; File No. SR-NSX-2012-05]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Its Rules Regarding Routing of Limit Orders

May 4, 2012.
    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 April 26, 2012, National Stock Exchange, Inc. (``NSX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    National Stock Exchange, Inc. (``NSX[supreg]'' or ``Exchange'') is 
proposing to modify the text of NSX Rule 11.15 to harmonize it with 
current system functionality of routed limit orders.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.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 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 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 parts of such 
statements.

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

1. Purpose
    NSX Rule 11.15(a)(ii)(A) (Routing to Away Trading Centers) 
currently provides that, for orders other than sweep orders that are, 
consistent with the terms of the order, routed to away trading centers, 
the order will be converted into one or more limit orders, as 
necessary, to be matched for execution against each protected quotation 
at the Protected National Best Bid or Offer (``NBBO'') available at 
away trading centers. With respect to the price of the routed limit 
order, Rule 11.15(a)(ii)(A) currently provides: ``Each such converted 
limit order shall be priced at the price of the protected quotation 
that it is to be matched for execution against'' (italics added).
    Notwithstanding the text of Rule 11.15(a)(ii)(A), the Exchange's 
trading system, NSX BLADE[supreg] (``Blade''), currently prices each 
such converted limit order at a price that is one trading increment 
inside the best bid or offer on the NSX book, but in any case not 
higher (if a bid) or lower (if an offer) than the limit price specified 
by the terms of the original order. The proposed edits to Rule 
11.15(a)(ii)(A) would conform the text of the rules to current Blade 
functionality. Specifically, new subsections (1) and (2) are proposed 
to be added to Rule 11.15(a)(ii)(A). Subsection (1) would address the 
pricing of routed market orders (the treatment of which remains 
unchanged, namely, such orders shall be routed at the price of the 
protected quotation that it is to be matched against for execution). 
Subsection (2) would address the pricing of converted limit orders, and 
specifies in clauses (x) and (y) the converted limit price for each a 
buy and sell order, respectively. In the case of a buy order, the 
converted limit price shall be the lower of the limit price of the 
original order and one increment lower than the lowest offer on the NSX 
book. In the case of a sell order, the converted limit price shall be 
the higher of the limit price of the original order and one increment 
higher than the highest bid on the NSX book.
    The proposed pricing methodology benefits ETP Holders by minimizing 
the risk of non-fills or delayed fills that might arise as a result of 
the order being routed at the NBBO price. NBBO quotes may flicker and/
or be cancelled by the time a routed order arrives at the away 
destination. Under such circumstances, if priced at the NBBO, a routed 
limit order may be rejected by the away destination and, upon return to 
NSX, undergo a re-evaluation within Blade (consistent with Regulation 
NMS and NSX rules), after which it may be subjected to one or more 
repeat cycles of the foregoing process (``unfilled routing cycles''). 
The orders are routed as Immediate or Cancel (``IOC'') orders and thus 
retain the full protections of Rule 611. By re-pricing routed limit 
orders as proposed above, the chances are maximized that an ETP 
Holder's routed limit order is filled quickly and at the best price 
available (and never worse than the original order's limit price), and 
not at a price that can otherwise be filled against the NSX book.
    The following examples reflect both the current functionality of 
routed limit orders in Blade and also routed limit order pricing under 
the proposed rules:

                                Example 1
------------------------------------------------------------------------
        Original order             NSX best offer    National best offer
------------------------------------------------------------------------
Buy Limit @ 10.10.............               10.05                 9.95
------------------------------------------------------------------------

    Result: The original limit order is converted to a buy limit order 
at a price of $10.04 (one increment lower than the lowest offer on the 
NSX book, which is lower than the original order limit price of 
$10.10), and routed to the market displaying the National Best Offer of 
$9.95. The order may then be executed at that away market, in whole or 
in part, subject to the applicable trading rules of

[[Page 27506]]

that trading center.\3\ In this example, an execution at the away 
market would generally be at a price of $9.95.\4\ Current rule text 
would price the routed limit order at $9.95 (the price of the protected 
quotation against which it is matched for execution). This pricing 
methodology (which routes the buy order at $10.04 rather than $9.95) is 
beneficial to an ETP Holder because it minimizes the chances of 
repeated unfilled routing cycles as described above, intends to access 
the best priced displayed liquidity, and does not route the order at a 
price that can be filled against the NSX book.
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    \3\ See NSX Rule 11.15(c)(i).
    \4\ This predicted result is dependent on the rules of the away 
market and assumes certain things, including without limitation the 
absence of an un-displayed, lower priced offer at the away market 
that would interact at a lower price, and that the away market's 
displayed NBO of 9.95 has not changed (e.g., been cancelled or 
improved by a lower priced offer) by the time the routed order is 
received at the away trading center.

                                Example 2
------------------------------------------------------------------------
        Original order             NSX best offer    National best offer
------------------------------------------------------------------------
Buy Limit @ 10.00.............               10.05                 9.95
------------------------------------------------------------------------

    Result: The original limit order is converted to a buy limit order 
at a price of $10.00 (the limit price of the original order, which is 
lower than one increment lower than the lowest offer on the NSX book) 
and routed to the market displaying the National Best Offer of $9.95. 
The order may then be executed at that away market, in whole or in 
part, subject to the applicable trading rules of that trading center. 
In this example, an execution at the away market would generally be at 
a price of $9.95.\5\ Current rule text would price the routed limit 
order at $9.95 (the price of the protected quotation against which it 
is matched for execution). This pricing methodology (which routes the 
buy order at $10.00 rather than $9.95) is beneficial to an ETP Holder 
because it minimizes the chances of repeated unfilled routing cycles as 
described above, intends to access the best priced displayed liquidity, 
and does not route the order at a price higher than the limit price.
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    \5\ Id.

                                Example 3
------------------------------------------------------------------------
        Original order             NSX best offer    National best offer
------------------------------------------------------------------------
Buy Limit @ 9.95..............               10.05                 9.95
------------------------------------------------------------------------

    Result: The original limit order is converted to a buy limit order 
at a price of $9.95 (the limit price of the original order, which is 
lower than one increment lower than the lowest offer on the NSX book) 
and routed to the market displaying the National Best Offer of $9.95. 
The order may then be executed at that away market, in whole or in 
part, subject to the applicable trading rules of that trading center. 
In this example, an execution at the away market would generally be at 
a price of $9.95.\6\ Current rule text would likewise price the routed 
limit order at $9.95 (the price of the protected quotation against 
which it is matched for execution).
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    \6\ Id.

                                Example 4
------------------------------------------------------------------------
        Original order              NSX best bid      National best bid
------------------------------------------------------------------------
Sel Limit @ 9.90..............                9.95                10.05
------------------------------------------------------------------------

    Result: The original limit order is converted to a sell limit order 
at a price of $9.96 (one increment higher than the highest bid on the 
NSX book, which is higher than the original order limit price of $9.90) 
and routed to the market displaying the National Best Bid of $10.05. 
The order may then be executed at that away market, in whole or in 
part, subject to the applicable trading rules of that trading center. 
In this example, an execution at the away market would generally be at 
a price of $10.05.\7\ Current rule text would price the routed limit 
order at $10.05 (the price of the protected quotation against which it 
is matched for execution). This pricing methodology (which routes the 
sell order at $9.96 rather than $10.05) is beneficial to an ETP Holder 
because it minimizes the chances of repeated unfilled routing cycles as 
described above, intends to access the best priced displayed liquidity, 
and does not route the order at a price that can be filled against the 
NSX book.
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    \7\ This predicted result is dependent on the rules of the away 
market and certain things, including without limitation the absence 
of an un-displayed, higher priced bid at the away market that would 
interact at a higher price, and that the away market's displayed NBB 
of 10.05 has not changed (e.g., been cancelled or improved by a 
higher priced bid) by the time the routed order is received at the 
away trading center.

                                Example 5
------------------------------------------------------------------------
        Original order              NSX best bid      National best bid
------------------------------------------------------------------------
Sell Limit @ 10.00............                9.95                10.05
------------------------------------------------------------------------


[[Page 27507]]

    Result: The original limit order is converted to a sell limit order 
at a price of $10.00 (the limit price of the original order, which is 
higher than one increment higher than the highest bid on the NSX book) 
and routed to the market displaying the National Best Bid of $10.05. 
The order may then be executed at that away market, in whole or in 
part, subject to the applicable trading rules of that trading center. 
In this example, an execution at the away market would generally be at 
a price of $10.05.\8\ Current rule text would price the routed limit 
order at $10.05 (the price of the protected quotation against which it 
is matched for execution). This pricing methodology (which routes the 
sell order at $10.00 rather than $10.05) is beneficial to an ETP Holder 
because it minimizes the chances of repeated unfilled routing cycles as 
described above, intends to access the best priced displayed liquidity, 
and does not route the order at a price higher than the limit price.
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    \8\ Id.

                                Example 6
------------------------------------------------------------------------
        Original order              NSX best bid      National best bid
------------------------------------------------------------------------
Sell Limit @ 10.05............                9.95                10.05
------------------------------------------------------------------------

    Result: The original limit order is converted to a sell limit order 
at a price of $10.05 (the limit price of the original order, which is 
higher than one increment higher than the highest bid on the NSX book) 
and routed to the market displaying the National Best Bid of $10.05. 
The order may then be executed at that away market, in whole or in 
part, subject to the applicable trading rules of that trading center. 
In this example, an execution at the away market would generally be at 
a price of $10.05.\9\ Current rule text would likewise price the routed 
limit order at $10.05 (the price of the protected quotation against 
which it is matched for execution).
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    \9\ Id.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act,\10\ and the rules and regulations thereunder and, 
in particular, the requirements of Section 6(b) of the Act.\11\ 
Specifically, the Exchange believes the modification of Rule 11.15 
furthers the objective of Section 6(b)(1) of the Act because it aligns 
the text of the rule with the actual functionality regarding how limit 
orders are currently routed. By conforming the text of the Exchange's 
rules to accurately reflect the method by which the Exchange's system 
currently re-prices routed limit orders, the proposed rule change 
harmonizes the Exchange's trading system functionality with the text of 
NSX rules and thereby promotes clarity and eliminates confusion. In 
addition, the manner in which limit orders are routed by the Exchange 
as described herein allows an ETP Holder's routed limit order to be 
filled more quickly and at the best price available (and never worse 
than the original order's limit price), and not at a price that can 
otherwise be filled against the NSX book. The Exchange believes that 
this manner of pricing routed limit orders best serves its ETP Holders. 
Accordingly, the Exchange believes that the proposed rule change 
promotes just and equitable principles of trade, removes impediments, 
and perfects the mechanism of a free and open market and a national 
market system and, in general, protects investors and the public 
interest.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b).
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    The proposed rule change provides transparency and certainty with 
respect to routed limit orders by providing detail on precisely how 
Blade prices and routes limit orders to away market centers. In so 
doing, the proposed rule change promotes the maintenance of a fair and 
orderly market, the protection of investors and the protection of the 
public interest, consistent with the Act and the rules promulgated 
thereunder.

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

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    Because the 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 if consistent with the protection of investors 
and the public interest, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) 
thereunder.\13\ At any time within 60 days of the filing of such 
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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change along with a 
brief description and the 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.
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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 rule-comments@sec.gov. Please include 
File Number SR-NSX-2012-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSX-2012-05. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your

[[Page 27508]]

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 Web site 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; 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-NSX-2012-05 and 
should be submitted on or before May 31, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11245 Filed 5-9-12; 8:45 am]
BILLING CODE 8011-01-P


