
[Federal Register Volume 77, Number 92 (Friday, May 11, 2012)]
[Notices]
[Pages 27820-27822]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11433]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66937; File No. SR-NYSEArca-2012-05]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Adding New Paragraph (cc) to NYSE Arca Options 
Rule 6.62 To Provide for a Post No Preference Light Only Quotation

May 7, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on May 3, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``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

    The Exchange proposes to add new paragraph (cc) to NYSE Arca 
Options Rule 6.62 to provide for a Post No Preference Light Only 
Quotation (``PNPLO Quotation''). The text of the proposed rule change 
is available at the Exchange, the Commission's Public Reference Room, 
and 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 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 is proposing to add new paragraph (cc) to NYSE Arca 
Options Rule 6.62 to provide for a PNPLO Quotation.
    As described in proposed new paragraph (cc), a PNPLO Quotation 
would be an electronic Market Maker quotation that, upon initial entry 
into the NYSE Arca System, would only be eligible to execute against 
displayed liquidity on the Consolidated Book. In this regard, a PNPLO 
Quotation would be similar to the Post No Preference Light Order 
(``PNP-Light Order'') under NYSE Arca Options Rule 6.62(v), which is a 
non-routable order type that is only eligible to execute against 
displayed liquidity. Under the proposed rule, a PNPLO Quotation that, 
upon entry, would execute exclusively against non-displayed liquidity 
on the Consolidated Book will be immediately rejected by the NYSE Arca 
System. Additionally, a PNPLO Quotation that, upon entry, would execute 
against both displayed and non-displayed liquidity on the Consolidated 
Book will immediately execute only against the displayed liquidity, but 
not against the non-displayed liquidity, and any remaining size of the 
PNPLO Quotation will be immediately rejected by the NYSE Arca System. 
Furthermore, a PNPLO Quotation that, upon entry, would execute 
exclusively against displayed liquidity on the Consolidated Book will 
immediately execute against the displayed liquidity and any remaining 
size of the PNPLO Quotation will be placed on the Consolidated Book and 
treated like a standard Market Maker quotation.\3\ Lastly, a PNPLO 
Quotation

[[Page 27821]]

that would not execute against either displayed or non-displayed 
liquidity will be placed in the Consolidated Book and treated as a 
standard Market Maker quotation.
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    \3\ This would include being eligible to interact with non-
displayed liquidity on the Consolidated Book.
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    The Exchange notes that the NYSE Arca System would automatically 
remove the pre-existing quotation(s) of a Market Maker upon entry of a 
PNPLO Quotation, as it does upon the entry of any other quotation, 
regardless of the acceptance or rejection of the PNPLO Quotation by the 
NYSE Arca System. Accordingly, in the event that a PNPLO Quotation is 
rejected by the NYSE Arca System, the Market Maker would be required to 
re-enter a quotation for purposes of satisfying any applicable quoting 
obligations under NYSE Arca Options Rule 6.37B.
    The Exchange is proposing to offer this new quote type to provide 
Market Makers with greater control over the circumstances in which 
their quotations interact with contra-side trading interest on the 
Exchange by preventing interaction with non-displayed liquidity. This 
increase in control is desirable from the perspective of Market Makers 
because it is difficult for them to account for non-displayed liquidity 
in their quoting models. In addition, Market Makers on NYSE Arca in 
penny pilot issues receive post liquidity credits for electronic 
executions against their quotes that are resting in the Consolidated 
Book, and are charged take liquidity fees when their quotes execute 
against resting liquidity in the Consolidated Book. Market Makers 
consider these fees when calculating their quotes, and they may provide 
a wider quote than they otherwise would if they believe there is a 
chance that they would be charged a take liquidity fee for submitting a 
quote that executes against non-displayed liquidity (instead of 
receiving a post liquidity credit for executions against a resting 
quote). By eliminating the risk of incurring additional fees, the PNPLO 
Quotation may lead Markets Makers to provide narrower quotes on the 
Exchange, which in turn would benefit investors.
    The Exchange further notes that the PNPLO Quotation would not be 
the only non-standard quote type at the Exchange. In this respect, the 
Exchange already offers a Price Improving Quote type, which allows a 
Market Maker to enter a quote that is better than the minimum price 
variation in an option and that is rounded for display purposes (up for 
offers and down for bids) so that it is displayed at the minimum price 
variation in the option.\4\
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    \4\ See NYSE Arca Options Rule 6.62(s), which provides, in part, 
that a Price Improving Quote is a quote ``to buy or sell an option 
at a specified price at an increment smaller than the minimum price 
variation in the security,'' which ``may be entered in increments as 
small as one cent.''
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\5\ in general, and furthers the objectives of Section 6(b)(5) 
of the Act,\6\ in particular, because it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanisms of a free and open market and a national market system and, 
in general, to protect investors and the public interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    Like the existing Price Improving Quote, the proposed PNPLO 
Quotation would provide a Market Maker with the ability to control its 
interactions with contra-side liquidity.\7\ Specifically, upon initial 
entry, a PNPLO Quotation would not be eligible to interact with non-
displayed liquidity. In this regard, the Exchange understands that a 
Market Maker's quoting algorithm can take into account existing 
liquidity in the marketplace, but may not be able to accurately account 
for the risk of interacting with non-displayed liquidity. As noted, 
Market Makers on NYSE Arca in penny pilot issues receive post liquidity 
credits for electronic executions against their quotes that are resting 
in the Consolidated Book, [sic] and are charged take liquidity fees 
when their quotes execute against resting liquidity in the Consolidated 
Book. Market Makers consider these fees when calculating their quotes, 
and they may provide a wider quote than they otherwise would if they 
believe there is a chance that they would be charged a take liquidity 
fee for submitting a quote that executes against non-displayed 
liquidity (instead of receiving a post liquidity credit for executions 
against a resting quote). Accordingly, the PNPLO Quotation would permit 
Market Makers to eliminate from their quoting decisions the risk of 
incurring certain fees, and therefore may result in narrower quote 
widths, which would increase the quality of the Exchange's market and 
thereby benefit investors.
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    \7\ See supra note 5.
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    The Exchange believes that the PNPLO Quotation is just, equitable 
and not unfairly discriminatory. For example, the PNPLO Quotation 
treats all similarly situated market participants the same in that it 
would be available for use by all Market Makers on the Exchange. 
Moreover, the Exchange notes that all market participants, including 
Market Makers, already have the ability to avoid trading with non-
displayed liquidity by entering PNP-Light Orders, which have existed on 
the Exchange since 2009.\8\ The Exchange also notes that market 
participants that enter non-displayed liquidity (i.e., orders with 
reserve size) are choosing not to have the full size of their trading 
interest displayed, which is in contrast to the Commission's 
encouragement of a market structure in which trading interest is 
displayed,\9\ and accordingly do not receive all of the benefits with 
respect to that non-displayed liquidity that are afforded to displayed 
liquidity.\10\ For the forgoing reasons, the Exchange believes that the 
proposal is not unfairly discriminatory. Overall, the Exchange believes 
that the proposal protects investors and the public interest because it 
may contribute to more aggressive quoting by Market Makers and may lead 
to more displayed liquidity on the Exchange, which, in turn, should 
increase the quality of the Exchange's market and benefit investors.
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    \8\ The Exchange notes that it adopted the PNP-Light Order type 
pursuant to Section 19(b)(3)(A) of the Exchange Act, and that the 
rule filing adopting that order type was not abrogated. See 
Securities Exchange Act Release 59603 (March 19, 2009), 74 FR 13279 
(March 26, 2009) (SR-NYSEArca-2009-21) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change by NYSE Arca, Inc. 
Amending Rule 6.62 to Provide Additional Order Types).
    \9\ See, e.g., Securities Exchange Act Release No. 60684 
(September 18, 2009), 74 FR 48632, 48636 (September 23, 2011) (File 
No. S7-21-09) (Proposed Elimination of Flash Order Exception from 
Rule 602 of Regulation NMS) (``The Commission long has emphasized 
the need to encourage displayed liquidity in the form of publicly 
displayed limit orders.'').
    \10\ In this regard, the Exchange notes that non-displayed 
liquidity is not afforded trade-through protection under Section 5 
of the Options Order Protection and Locked/Crossed Market Plan. See, 
e.g., Securities Exchange Act Release No. 60405 (July 30, 2009), 74 
FR 39362 (August 6, 2009) (File No. 4-546).
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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 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.

[[Page 27822]]

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

    Within 45 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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-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-NYSEArca-2012-05. 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 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 
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; 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-2012-05 and 
should be submitted on or before June 1, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11433 Filed 5-10-12; 8:45 am]
BILLING CODE 8011-01-P


