
[Federal Register Volume 77, Number 139 (Thursday, July 19, 2012)]
[Notices]
[Pages 42525-42529]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67437; File Nos. SR-NYSE-2011-56; SR-NYSEAmex-2011-86]


Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE 
Amex LLC; Order Disapproving Proposed Rule Changes To Codify Certain 
Traditional Trading Floor Functions That May Be Performed by Designated 
Market Makers and To Permit Designated Market Makers and Floor Brokers 
Access to Disaggregated Order Information

July 13, 2012.
    On October 31, 2011, the New York Stock Exchange LLC (``NYSE'') and 
NYSE Amex LLC (``NYSE Amex'') (collectively, the ``SROs'') each 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\ proposed rule changes (``SRO Proposals'') 
to amend certain of their respective rules relating to Designated 
Market Makers (``DMMs'') \3\ and Floor brokers. The SRO Proposals were 
published for comment in the Federal Register on November 17, 2011.\4\ 
The Commission received no comment letters on the proposals. On 
December 22, 2011, the Commission extended the time period in which to 
either approve the SRO Proposals, disapprove the SRO Proposals, or to 
institute proceedings to determine whether to disapprove the SRO 
Proposals, to February 15, 2012.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See NYSE Rule 98(b)(2). ``DMM unit'' means any member 
organization, aggregation unit within a member organization, or 
division or department within an integrated proprietary aggregation 
unit of a member organization that (i) Has been approved by NYSE 
Regulation pursuant to section (c) of NYSE Rule 98, (ii) is eligible 
for allocations under NYSE Rule 103B as a DMM unit in a security 
listed on the Exchange, and (iii) has met all registration and 
qualification requirements for DMM units assigned to such unit. The 
term ``DMM'' means any individual qualified to act as a DMM on the 
floor of the Exchange under NYSE Rule 103. See also NYSE Amex 
Equities Rule 2(i). Rule 2(i) defines the term ``DMM'' to mean an 
individual member, officer, partner, employee or associated person 
of a DMM unit who is approved by the Exchange to act in the capacity 
of a DMM. NYSE Amex Equities Rule 2(j) defines the term ``DMM unit'' 
as a member organization or unit within a member organization that 
has been approved to act as a DMM unit under NYSE Amex Equities Rule 
98.
    \4\ See Securities Exchange Act Release Nos. 65735 (November 10, 
2011), 76 FR 71405 (SR-NYSEAmex-2011-86) (``NYSE Amex Notice'') and 
65736 (November 10, 2011), 76 FR 71399 (SR-NYSE-2011-56) (``NYSE 
Notice'').
    \5\ See Securities Exchange Act Release No. 66036, 76 FR 82011 
(December 29, 2011).
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    On February 15, 2012, the Commission instituted proceedings to 
determine whether to disapprove the proposed rule changes.\6\ The 
Commission thereafter received five comment letters on the 
proposals.\7\ NYSE Euronext, on behalf of the SROs, submitted a 
response letter on March 28, 2012.\8\ On May 14, 2012, the Commission 
issued a notice of designation of longer period for Commission action 
on proceedings to determine whether to disapprove the proposed rule 
changes.\9\ This order disapproves the proposed rule changes.
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    \6\ See Securities Exchange Act Release No. 66397, 77 FR 10586 
(February 22, 2012) (``Order Instituting Proceedings'').
    \7\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from Kenneth Polcari, dated March 12, 2012 (``Polcari Letter''); 
Patrick Armstrong and Daniel Tandy, Co-Presidents, Alliance of Floor 
Brokers (``AFB''), dated March 13, 2012 (``AFB Letter''); Jonathan 
Corpina, President, and Jennifer Lee, Vice President, Organization 
of Independent Floor Brokers (``OIFB''), dated March 13, 2012 
(``OIFB Letter''); James J. Angel, Ph.D., CFA, dated March 15, 2012 
(``Angel Letter''); and John Petschauer, CEO, EZX, Inc., dated March 
14, 2012 (``EZX Letter'').
    \8\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, Executive Vice President and Corporate 
Secretary, NYSE Euronext, dated March 28, 2012 (``SRO Response 
Letter'').
    \9\ See Securities Exchange Act Release No. 66981, 77 FR 29730 
(May 18, 2012).
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I. Description of the Proposals

    The SRO Proposals seek to amend the SROs' rules in several ways. 
First, the

[[Page 42526]]

SROs propose to codify certain trading floor functions that may be 
performed by DMMs. Second, the SROs propose to allow DMMs to access 
Exchange systems that would provide DMMs with additional order 
information about the securities in which they are registered. Third, 
the SROs propose to make certain conforming amendments to their rules 
to reflect the additional order information that would be available to 
DMMs through Exchange systems, and to specify what information about 
Floor broker agency interest file (``e-Quotes'') is available to the 
DMM. Finally, the SROs propose to modify the terms under which DMMs 
would be permitted to provide market information to Floor brokers and 
others.

A. Trading Floor Functions

    The SROs propose to codify certain trading floor functions formerly 
performed by specialists that are now performed by DMMs, and were 
described in each SRO's respective Floor Official Manual.\10\
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    \10\ See, e.g., NYSE 2004 Floor Official Manual, Market 
Surveillance June 2004 Edition, Chapter Two, Section I.
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    The proposed rules would specify four categories of trading floor 
functions that DMMs could perform: (1) Maintaining order among Floor 
brokers manually trading at the DMM's assigned panel;\11\ (2) bringing 
Floor brokers together to facilitate trading;\12\ (3) assisting Floor 
brokers with respect to their orders by providing information regarding 
the status of a Floor broker's orders, helping to resolve errors or 
questioned trades, adjusting errors, and cancelling or inputting Floor 
broker agency interest on behalf of a Floor broker;\13\ and (4) 
researching the status of orders or questioned trades.\14\
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    \11\ See id. at Section I.A. at 7 (``specialist helps ensure 
that such markets are fair, orderly, operationally efficient and 
competitive with all other markets in those securities'').
    \12\ See id. at Section I.B.3. at 10-11 (``[i]n opening and 
reopening trading in a listed security, a specialist should * * * 
[s]erve as the market coordinator for the securities in which the 
specialist is registered by exercising leadership and managing 
trading crowd activity and promptly identifying unusual market 
conditions that may affect orderly trading in those securities, 
seeking the advice and assistance of Floor Officials when 
appropriate'' and ``[a]ct as a catalyst in the markets for the 
securities in which the specialist is registered, making all 
reasonable efforts to bring buyers and sellers together to 
facilitate the public pricing of orders, without acting as principal 
unless reasonably necessary'').
    \13\ See id. at Section I.B.4. at 11 (``In view of the 
specialist's central position in the Exchange's continuous two-way 
agency auction market, a specialist should proceed as follows * * * 
[e]qually and impartially provide accurate and timely market 
information to all inquiring members in a professional and courteous 
manner.'').
    \14\ See id. at Section I.B.5. at 12 (A specialist should 
``[p]romptly provide information when necessary to research the 
status of an order or a questioned trade and cooperate with other 
members in resolving and adjusting errors.'').
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B. DMM Access to Additional Order Information

    Each SRO proposes to make Exchange systems available to a DMM at 
the post that display the following types of information about 
securities in which the DMM is registered: (A) Aggregated information 
about buying and selling interest;\15\ (B) disaggregated information 
about the price and size of any individual order or e-Quotes and the 
entering and clearing firm information for such orders, except that 
Exchange systems would not make available to DMMs information about any 
order or e-Quote, or portion thereof, that a market participant has 
elected not to display to a DMM; and (C) post-trade information.\16\ 
The proposals would make available to DMMs disaggregated information 
about the following interest in securities in which the DMM is 
registered: (a) the price and size of all displayable interest 
submitted by off-Floor participants (off-Floor participants may submit 
non-displayable interest that is hidden from the DMM);\17\ and (b) all 
e-Quotes, including reserve e-Quotes, that the Floor broker has not 
elected to exclude from availability to the DMM.\18\
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    \15\ Exchange systems currently make available to DMMs aggregate 
information about the following interest in securities in which the 
DMM is registered: (a) All displayable interest submitted by off-
floor participants; (b) all Minimum Display Reserve orders, 
including the reserve portion; (c) all displayable floor broker 
agency interest files (``e-Quotes''); (d) all Minimum Display 
Reserve e-Quotes, including the reserve portion; and (e) the reserve 
quantity of Non-Display Reserve e-Quotes, unless the floor broker 
elects to exclude that reserve quantity from availability to the 
DMM.
    \16\ For the latter two categories, the DMM also would have 
access to entering and clearing firm information for each order and, 
as applicable, the badge number of the floor broker representing the 
order. According to the SROs, the systems would not contain any 
information about the ultimate customer (i.e., the name of the 
member or member organization's customer) in a transaction.
    \17\ See NYSE and NYSE Amex Rule 13, defining non-displayed 
order types.
    \18\ The SROs previously permitted DMMs to have access to 
Exchange systems that contained the disaggregated order information 
described above. The SROs stopped making such information available 
to DMMs on January 19, 2011. See NYSE and NYSE Amex Information Memo 
11-03.
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C. Conforming Amendments and Floor Broker e-Quote Information

    The SROs also propose to make conforming amendments to their rules 
to reflect the additional order information that would be available to 
DMMs through Exchange systems, and to specify what information about e-
Quotes is available to the DMM. Specifically, the SROs propose to 
revise NYSE Rule 70 and NYSE Amex Rule 70 governing e-Quotes to reflect 
that disaggregated order information would be available to the DMM 
except as elected otherwise. The SROs would allow a Floor broker to 
enter e-Quotes with reserve interest (``Reserve e-Quote'') with or 
without a displayable portion.
    A Reserve e-Quote with a displayable portion would participate in 
manual and automatic executions. Order information at each price point, 
including the reserve portion, would be included in the aggregate 
interest available to the DMM. Order information at each price point 
would be available to the DMM on a disaggregated basis as well. If the 
Floor broker chooses to exclude the Reserve e-Quote with a displayable 
portion from the DMM, then the DMM would have access to the entire 
portion on an aggregated basis but would not have access to any of that 
interest on a disaggregated basis.
    A Reserve e-Quote with an undisplayable portion would also 
participate in manual and automatic executions. Like the Reserve e-
Quote with a displayable portion, order information at each price point 
would be included in the aggregate interest available to the DMM. 
Again, like the Reserve e-Quote with a displayable portion, order 
information at each price point would be available to the DMM on a 
disaggregated basis as well. If the Floor broker chooses to exclude the 
Reserve e-Quote with an undisplayable portion from the DMM, however, 
then the DMM would not have access to such interest on either an 
aggregated basis or a disaggregated basis. Such interest would not 
participate in manual executions.
    In addition, the SROs propose to delete rules which currently 
prohibit DMMs from using the Display Book system to access information 
about e-Quotes excluded from the aggregated agency interest and Minimum 
Display Reserve Order information, other than for the purpose of 
effecting transactions that are reasonably imminent where such Floor 
broker agency and Minimum Display Reserve Order interest information is 
necessary to effect such transaction.\19\
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    \19\ See proposed deletions to NYSE Rule 104(a)(6) and NYSE Amex 
Rule 104(a)(b).
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D. Ability of DMMs to Provide Market Information on the Trading Floor

    The SROs also propose to modify the manner under which DMMs would 
be permitted to provide market information to Floor brokers and 
visitors on the trading floor. Specifically, the proposed

[[Page 42527]]

rules would permit a DMM to provide the market information to which he 
or she has access to a: (1) Floor broker in response to an inquiry in 
the normal course of business; or (2) visitor to the trading floor for 
the purpose of demonstrating methods of trading. As such, Floor brokers 
would be able to access disaggregated order information that market 
participants have not otherwise elected to be hidden from the DMM. A 
Floor broker would not be able to submit such an inquiry for market 
information by electronic means, and the DMM's response containing 
market information could not be delivered through electronic means.
    Because the proposed rule expands on and incorporates the current 
SRO rules regarding disclosure of order information by DMMs, the SROs 
are proposing to delete these rules.\20\ The current rules provide that 
a DMM may disclose market information for three purposes. First, a DMM 
may disclose market information for the purpose of demonstrating the 
methods of trading to visitors to the trading floor. This aspect of the 
current rule is replicated in the proposed rules. Second, a DMM may 
disclose market information to other market centers in order to 
facilitate the operation of the Intermarket Trading System (``ITS''). 
According to the SROs, this text is obsolete as the ITS Plan has been 
eliminated and therefore the SROs are proposing to delete it. Third, a 
DMM may, while acting in a market making capacity, provide information 
about buying or selling interest in the market, including (a) 
Aggregated buying or selling interest contained in Floor broker agency 
interest files other than interest the broker has chosen to exclude 
from the aggregated buying and selling interest, (b) aggregated 
interest of Minimum Display Reserve Orders and (c) the interest 
included in DMM interest files, excluding Capital Commitment Schedule 
(``CCS'') interest as described in Rule 1000(c), in response to an 
inquiry from a member conducting a market probe in the normal course of 
business. The proposed rules would permit DMMs to provide Floor brokers 
not only with the same aggregated order information that DMMs currently 
are permitted to provide under current rules, but also with the 
disaggregated and post-trade order information described above.\21\
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    \20\ The SROs are also proposing conforming amendments to 
correct cross-references to the former rule.
    \21\ Because DMMs on the trading floor do not have access to CCS 
interest information, the proposed rule does not specify that DMMs 
would not be disseminating such information.
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    The proposed rules would permit a DMM to provide market information 
to a Floor broker in response to a specific request by the Floor broker 
to the DMM at the post, rather than specifying that the information 
must be provided ``in response to an inquiry from a member conducting a 
market probe in the normal course of business,'' as currently provided 
in the SRO rules. Under the proposed rule change, Floor brokers would 
not have access to Exchange systems that provide disaggregated order 
information, and Floor brokers would only be able to access such market 
information through a direct manual interaction with a DMM at the post.

II. Disapproval Proceedings, Summary of Comment Letters and the SROs' 
Response

    In the Order Instituting Proceedings, the Commission expressed 
concern about the consistency of the proposals with Section 6(b)(5) of 
the Act, including whether they would permit unfair discrimination, 
promote just and equitable principles of trade, and protect investors 
and the public interest.\22\ Among other things, the Commission noted 
that, while the proposals may improve the ability of DMMs and Floor 
brokers to trade on the Exchanges, the proposals also would provide 
them access to potentially valuable information about Exchange orders 
that is not available to other members or market participants, 
including the identity of the entering and clearing firm.\23\ The 
Commission stated that, while exchanges may legitimately confer special 
benefits on market participants willing to accept substantial 
responsibilities to contribute to market quality, such benefits must 
not be disproportionate to the services provided.\24\ The Commission 
noted that the Exchanges were not proposing to require any additional 
obligations from DMMs and Floor brokers in exchange for the additional 
order information, and had not clearly explained how the proposals 
would materially improve the quality of the SROs' markets.\25\ As a 
result, the Commission was concerned that the proposals unfairly 
discriminated in favor of DMMs and Floor brokers, might not have been 
designed to protect the broad group of investors that trade on the 
SROs, and otherwise might be inequitable.\26\
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ See Order Instituting Proceedings, supra note 6, at 10589.
    \24\ See Order Instituting Proceedings, supra note 6, at 10588.
    \25\ Id. at 10589.
    \26\ See id.
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    The Commission received five comment letters in support of the 
proposed rule changes,\27\ along with a response from the SROs.\28\ In 
general, the commenters believed that the floors of the Exchanges 
continued to provide a valuable service to the markets, particularly 
with respect to the facilitation of block trades, and they broadly 
indicated that the proposed provision of disaggregated order 
information to Floor members would further this important function.\29\ 
One commenter also stated that the access to this information would 
enable DMMs to assist Floor brokers in the event of a technical 
failure.\30\ Some noted that this type of information had historically 
been made available to Floor members.\31\
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    \27\ See supra note 7.
    \28\ See supra note 8.
    \29\ AFB Letter, supra note 7, at 3; Angel Letter, supra note 7, 
at 2; EZX Letter, supra note 7; OIFB Letter, supra note 7, at 1; and 
Polcari Letter, supra note 7, at 2.
    \30\ See OIFB Letter, supra note 7, at 1.
    \31\ See AFB Letter, supra note 7, at 2; Angel Letter, supra 
note 7, at 2; and OIFB Letter, supra note 7, at 1.
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    Commenters did not believe the proposals were unfairly 
discriminatory because, in their view, DMMs would be obligated to 
provide disaggregated order information to Floor brokers in a non-
discriminatory fashion, and Floor brokers would be obligated to do the 
same for their customers.\32\ Commenters also expressed the view that 
the disaggregated order information would be of limited utility because 
it could only be accessed manually,\33\ and they noted that Floor 
brokers were restricted from trading proprietarily and thus could not 
directly benefit from this information.\34\
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    \32\ See AFB Letter, supra note 7, at 3; Angel Letter, supra 
note 7, at 3; OIFB Letter, supra note 7, at 1-2; and Polcari Letter, 
supra note 7, at 2.
    \33\ See OIFB Letter, supra note 7, at 2.
    \34\ See AFB Letter, supra note 7, at 4; OIFB Letter, supra note 
7, at 2; Polcari Letter; supra note 7, at 3.
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    Commenters also emphasized that market participants that do not 
wish to allow their disaggregated order information to be provided to 
DMMs and Floor brokers can use undisplayed orders or place orders on a 
competing exchange.\35\ One commenter urged the Commission to allow 
exchange experimentation and believed that, if the proposals resulted 
in information leakage or degraded market quality, then order flow 
would rapidly shift to other trading venues.\36\
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    \35\ See AFB Letter, supra note 7, at 2; Angel Letter, supra 
note 7, at 3; and OIFB Letter, supra note 7, at 1.
    \36\ See Angel Letter, supra note 7, at 3-4.

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[[Page 42528]]

    In their response, the SROs, among other things, emphasized that 
``[t]he purpose of the Proposals is to help DMMs facilitate large 
orders on the Trading Floor if an investor wishes to utilize the 
resources of a Floor broker,'' \37\ and argued that the proposals would 
``potentially make the Floor more hospitable to large orders, reduce 
transaction costs and produce savings for long-term investors.'' \38\ 
In proposing to provide disaggregated order information to Floor 
members, the SROs ``seek to provide improved conditions for buyers and 
sellers to interact at potentially more favorable prices, or in larger-
sized executions, on the Floors of the Exchanges.'' \39\ The SROs 
believe that ``making this information available to Floor brokers 
[would make] it easier for * * * size trades to be arranged, and for 
leakage and market impact to be avoided.'' \40\
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    \37\ SRO Response Letter, supra note 7, at 15-16.
    \38\ Id. at 3.
    \39\ Id. at 4-5.
    \40\ Id. at 11.
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    At the same time, the SROs take the position that ``any 
informational advantage conveyed is extremely slight.'' \41\ They note 
that DMMs and Floor brokers already have access to aggregated order 
information, and that the proposals would allow them ``to see the 
disaggregated form of such aggregated interest, which means simply that 
the components of the aggregated interest and the entering and clearing 
firms that are associated with those components (but not the ultimate 
customers) will be visible.'' \42\ The SROs also point out that the 
disaggregated information ``is only available to a DMM while on the 
trading Floor at the trading post,'' and take the position that the 
``DMM must query the specific information about a particular security, 
a process which limits the number of securities for which information 
can be obtained at any given time,'' so that ``[a]ny actual 
informational advantage resulting from viewing disaggregated 
information would be eliminated by the staleness of the information.'' 
\43\ In the view of the SROs, because the proposals do ``not convey any 
truly exclusive or significant benefit to DMMs and Floor brokers, new, 
additional obligations are not necessary.''\44\
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    \41\ Id. at 11.
    \42\ Id. at 10-11.
    \43\ Id. at 12.
    \44\ Id. at 13.
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    In addition, the SROs believe that existing restrictions on trading 
by DMMs and Floor brokers address concerns associated with any 
potential informational advantage.\45\ According to the SROs, the 
disaggregated order information would not be available to a DMM's 
trading algorithm, and Exchange rules effectively erect an information 
barrier between DMM personnel on the Floor and the DMM's off-Floor 
trading operations.\46\ With respect to Floor brokers, the SROs state 
that, because ``they are prohibited from trading on a principal basis, 
any potential benefit accrues to the investor, not the Floor broker.'' 
\47\ The SROs also note that, prior to the adoption of their ``Hybrid 
Market,'' specialists were permitted to provide disaggregated order 
information to Floor brokers.\48\ Finally, the SROs take the position 
that ``access to the disaggregated order information is entirely 
consensual,'' \49\ because a market participant that does not want its 
interest shown can ``(1) choose to have the order not display on a 
disaggregated basis or (2) place the order with a NYSE competitor.'' 
\50\
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    \45\ Id. at 3.
    \46\ Id. at 11-12.
    \47\ Id. at 12.
    \48\ Id. at 5 and 16.
    \49\ Id. at 11.
    \50\ Id. at 16.
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III. Discussion

    Under Section 19(b)(2)(C) of the Act, the Commission shall approve 
a proposed rule change of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act, and the rules and regulations thereunder that 
are applicable to such organization.\51\ The Commission shall 
disapprove a proposed rule change if it does not make such a 
finding.\52\ The Commission's Rules of Practice, under Rule 700(b)(3), 
state that the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder * * * is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements * * * is not sufficient.'' 
\53\
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    \51\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \52\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700 
(b)(3) and note 56 infra, and accompanying text.
    \53\ See 17 CFR 201.700. The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis 
of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. See id. Any failure of a self-regulatory 
organization to provide the information elicited by Form 19b-4 may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a proposed rule change is consistent with 
the Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization. Id.
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    After careful consideration, the Commission does not find that the 
proposed rule changes are consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission does not find that 
the proposals are consistent with Section 6(b)(5) of the Act,\54\ 
which, among other things, requires that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to protect investors and the public interest, and 
not to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \54\ 15 U.S.C. 78f(b)(5).
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    Specifically, the SROs propose to provide their Floor members--DMMs 
and Floor brokers--special access to information about individual 
orders on the Exchanges. The proposals would permit DMMs to access 
information about the price and size of individual orders on the 
Exchange books, as well as Floor broker e-Quotes, along with the 
identity of the broker-dealer that entered the order and the clearing 
firm. DMMs also would be provided post-trade information with respect 
to Exchange orders that, similarly, includes the identity of the 
broker-dealer that entered the order and the clearing firm.
    In the Order Instituting Proceedings, the Commission expressed 
concern that, while the proposals may improve the ability of DMMs and 
Floor brokers to trade on the SROs, the proposals also would provide 
DMMs and Floor brokers access to potentially valuable information about 
Exchange orders generated both on and off the Floor that is not made 
available to other Exchange members or market participants, unless it 
is acquired through a Floor broker. The Commission also noted that the 
SROs were not proposing to require any additional obligations from DMMs 
and Floor brokers in exchange for the additional order information, and 
had not clearly explained how the proposals would materially improve 
the quality of the SROs' markets. In response, commenters and the SROs 
made general arguments that the proposals would facilitate the ability 
of DMMs and Floor brokers to perform important trading floor functions, 
such as bringing together market participants seeking to trade large 
orders or assisting Floor members in the event they experience a 
technical failure. Neither the SROs nor the commenters explained, 
however, how the particular information proposed to be provided--
disaggregated information about public orders on the Exchange books as 
well as Floor broker

[[Page 42529]]

e-Quotes--would further those legitimate Floor functions. Although not 
articulated by the SROs or commenters, the Commission could envision an 
argument that allowing DMMs to see information about individual Floor 
broker e-Quotes, including the identity of the responsible Floor 
broker, and convey that information to other Floor brokers, could 
facilitate the bringing together of buyers and sellers of large orders 
on the Floor more efficiently than through verbal communications. 
However, neither the SROs nor the commenters have offered any specific 
explanation, nor has the Commission been able to otherwise discern, how 
the provision of disaggregated pre-trade and post-trade information 
about public orders on the Exchange books, including the identity of 
the entering and clearing firms, would promote a legitimate Floor 
function. Nor have the SROs or the commenters provided any specific 
justification for allowing Floor brokers to pass on to their customers 
the identity of the responsible Floor broker for e-Quotes, or any 
disaggregated order information (pre-trade or post trade) with respect 
to orders on the Exchange books that originate off the Exchange floors.
    Although the SROs and commenters have taken the position that the 
disaggregated order information proposed to be provided would afford 
only a slight benefit to Floor members, given that it must be accessed 
manually, they have not clearly explained why this is the case, 
particularly with respect to less liquid securities where order 
information is less likely to become rapidly stale. In addition, 
neither the SROs nor the commenters have articulated a rationale for 
providing disaggregated order information--particularly that relating 
to public orders on the Exchange books--exclusively to DMMs and Floor 
brokers and, by extension, exclusively to Floor broker customers, and 
not to all Exchange members and customers. While the SROs and 
commenters believe that the proposals are not unfairly discriminatory 
because DMMs must provide the information to Floor brokers in a non-
discriminatory fashion, and Floor brokers must do the same with respect 
to their customers, they do not explain why it is not unfairly 
discriminatory to offer this information only through Floor brokers and 
not through other Exchange members.
    The SROs and commenters point out that customers can prevent their 
disaggregated order information from being accessed by DMMs and Floor 
brokers by submitting a non-displayable order or, with respect to Floor 
broker e-Quotes, instructing that the information be withheld from the 
DMM. They also note that Floor brokers are not permitted to trade on a 
proprietary basis, and that DMMs are subject to restrictions that limit 
their ability to benefit directly from their receipt of disaggregated 
order information by trading proprietarily. Although these are factors 
that may mitigate potential harm that may result from the proposals, 
they do not in themselves offer an affirmative justification as to why 
the specific proposals under consideration would not permit unfair 
discrimination, or would promote just and equitable principles of trade 
and protect investors and the public interest, or would otherwise be 
consistent with the Act. Similarly, while the SROs and commenters note 
that specialists historically were permitted to provide disaggregated 
order information to Floor brokers prior to the Exchanges' conversion 
to a more automated ``Hybrid Market,'' they do not articulate how this 
former practice is relevant to whether the proposed provision of 
disaggregated order information to Floor members in the context of the 
current market models of the SROs is consistent with the Act.
    When the Commission is engaged in rulemaking or the review of a 
rule filed by a self-regulatory organization, and is required to 
consider or determine whether an action is necessary or appropriate in 
the public interest, the Commission shall also consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation.\55\ Based on the 
evidence presented, the Commission notes that making the information 
that is proposed to be provided under this filing exclusively available 
to DMMs and Floor brokers could have a detrimental effect on 
competition between on-Floor and off-Floor members of the Exchanges. 
Moreover, while providing DMMs and Floor brokers with order information 
related to Floor broker interest may promote efficiency, the SROs have 
not demonstrated that other aspects of these proposals--specifically, 
providing DMMs and Floor brokers with order information about public 
orders on the Exchange books--would have a similar effect.
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    \55\ See 15 U.S.C. 78c(f).
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    As noted above, Rule 700(b)(3) of the Commission's Rules of 
Practice states that ``[t]he burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder * * * is on the self-regulatory 
organization that proposed the rule change'' and that a ``mere 
assertion that the proposed rule change is consistent with those 
requirements * * * is not sufficient.'' \56\ For the reasons set forth 
above, the Commission does not believe that the SROs have met their 
burden to demonstrate that the proposed rule changes are consistent 
with the requirements of the Act and the rules and regulations 
thereunder.
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    \56\ 17 CFR 201.700(b)(3).
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IV. Conclusion

    For the foregoing reasons, the Commission does not find that the 
proposed rule changes are consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\57\ that the proposed rule changes (SR-NYSE-2011-56 and SR-
NYSEAmex-2011-86) be, and hereby are, disapproved.
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    \57\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17551 Filed 7-18-12; 8:45 am]
BILLING CODE 8011-01-P


