
[Federal Register Volume 77, Number 126 (Friday, June 29, 2012)]
[Notices]
[Pages 38879-38880]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15940]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67252; File No. SR-NYSEArca-2012-05]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval 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

June 25, 2012.

I. Introduction

    On May 3, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
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 
add new paragraph (cc) to NYSE Arca Options Rule 6.62 to provide for a 
Post No Preference Light Only Quotation (``PNPLO Quotation''). The 
proposed rule change was published for comment in the Federal Register 
on May 11, 2012.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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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. 66937 (May 7, 2012), 
77 FR 27820 (May 11, 2012) (``Notice'').
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II. Description of the Proposal

    The Exchange has proposed to provide a new quotation type--the 
PNPLO Quotation. The PNPLO Quotation would be an electronic Market 
Maker \4\ quotation that, upon initial entry into the Exchange's 
trading system, would only be eligible to execute against displayed 
liquidity on Arca's Consolidated Book.\5\ If a PNPLO Quotation, upon 
entry, would: (1) Execute exclusively against non-displayed liquidity 
on the Consolidated Book, it would be rejected; (2) execute against 
both displayed and non-displayed liquidity on the Consolidated Book, it 
would immediately execute against such displayed liquidity, but not 
against the non-displayed liquidity, and any remaining size would be 
rejected; (3) execute exclusively against displayed liquidity on the 
Consolidated Book, it would immediately execute and any remaining size 
would be placed on the Consolidated Book and treated as a standard 
Market Maker quotation; and (4) not execute against either displayed or 
non-displayed liquidity, it would be placed on the Consolidated Book 
and treated as a standard Market Maker quotation.\6\ The entry of a 
PNPLO Quotation would cause the automatic removal of the pre-existing 
quotation(s) of a Market Maker, regardless of whether the PNPLO 
Quotation is accepted or rejected by the NYSE Arca System.\7\ 
Accordingly, in instances where the PNPLO Quotation is rejected by the 
system because of the presence of otherwise marketable non-displayed 
interest, 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.\8\
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    \4\ See NYSE Arca Options Rule 6.32 (defining ``Market Maker'').
    \5\ See new NYSE Arca Options Rule 6.62(cc); see also NYSE Arca 
Options Rule 6.1(b)(37) (defining ``Consolidated Book'').
    \6\ See new NYSE Arca Options Rule 6.62(cc).
    \7\ See supra note 3, at 27821.
    \8\ See id.
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    The PNPLO Quotation may only be submitted for options in penny 
pilot issues.\9\ On the Exchange, penny pilot issues are subject to a 
make/take fee structure, under which Market Makers receive credits for 
posting liquidity and incur fees for taking liquidity.\10\ By 
preventing interactions with resting, non-displayed liquidity through 
use of the PNPLO Quotation, Market Makers in penny pilot issues would 
be able to avoid incurring unexpectedly the fees associated with such 
interactions. The Exchange notes that this is desirable for Market 
Makers because it is difficult for them to account for this risk of 
interacting with non-displayed liquidity in their quoting models.\11\
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    \9\ See new NYSE Arca Options Rule 6.62(cc); see also Securities 
Exchange Act Release Nos. 55156 (January 23, 2007), 72 FR 4759 
(February 21, 2007) (order approving penny pilot program); 56568 
(September 27, 2007), 72 FR 56422 (October 3, 2007) (order approving 
expansion and extension of penny pilot); 59628 (March 26, 2009), 74 
FR 15025 (April 2, 2009) (notice of extension of penny pilot); 60224 
(July 1, 2009), 74 FR 32991 (July 9, 2009) (notice of extension of 
penny pilot); 60711 (September 23, 2009), 74 FR 49419 (September 28, 
2009) (order partially approving expansion of penny pilot); 61061 
(November 24, 2009), 74 FR 62857 (December 1, 2009) (order partially 
approving expansion of penny pilot); 63376 (November 24, 2010), 75 
FR 75527 (December 3, 2010) (notice of extension of penny pilot); 
65977 (December 15, 2011), 76 FR 79234 (December 21, 2011) (notice 
of extension of penny pilot).
    \10\ See supra note 3, at 27821.
    \11\ See id.
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III. Discussion and Commission Findings

    After careful review, 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.\12\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\13\ which 
requires, among other things, 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 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; 
and not be designed to permit unfair discrimination between customers, 
issuers, brokers or dealers.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange noted that the quoting algorithms of Market Makers may 
not be able to account accurately for the risk of interacting with 
resting, non-displayed liquidity in penny pilot issues and the related 
take fees. The Exchange represents that this challenge may result in 
Market Makers widening their quotes in penny pilot classes.\14\ The 
Exchange further represents that use of the PNPLO Quotation should 
allow Market Makers to better control their execution costs by avoiding 
unexpected take fees related to executions with resting, non-displayed 
liquidity in penny pilot issues. This cost certainty, according to the 
Exchange, could lead to narrower quote widths in penny pilot issues, 
thereby improving the Exchange's market and benefiting investors. 
Additionally, if the PNPLO Quotation is rejected by the NYSE Arca 
system because of the presence of otherwise marketable non-displayed 
interest, 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. For these reasons, the Commission 
believes that the proposed PNPLO Quotation is consistent with Section 
6(b)(5) of the Exchange Act as it is designed to remove impediments to 
and perfect the mechanisms of a free and open market

[[Page 38880]]

and a national market system, and in general to protect investors and 
the public interest.
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    \14\ See supra note 3, at 27821.
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    The Commission also believes that the proposed rule change is not 
unfairly discriminatory. Currently, market participants including 
Market Makers can achieve functionality similar to the PNPLO Quotation 
through use of the PNP-Light Order, which is a non-routable order type 
that is only eligible to execute against displayed liquidity.\15\ The 
Exchange is proposing a similar functionality for use by Market Makers 
when quoting. The PNPLO Quotation would be available for use by all 
Market Makers quoting in the penny pilot classes on the Exchange.\16\
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    \15\ See NYSE Arca Options Rule 6.62(v).
    \16\ See supra note 3, at 27821.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSEArca-2012-05) be, and it 
hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-15940 Filed 6-28-12; 8:45 am]
BILLING CODE 8011-01-P


