
[Federal Register Volume 77, Number 145 (Friday, July 27, 2012)]
[Notices]
[Pages 44294-44298]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18330]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67489; File No. SR-NYSEMKT-2012-26]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Amending Rule 76--Equities To Add Supplementary 
Material Relating to a Cross Function That Provides a Regulation NMS 
Rule 611-Compliant Tool for Floor Brokers

July 23, 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 July 13, 2012, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III 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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[[Page 44295]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 76--Equities to add 
supplementary material relating to a cross function that provides a 
Regulation NMS Rule 611-compliant tool for Floor Brokers. The text of 
the proposed rule change is available on the Exchange's Web site at 
www.nyse.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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 76--Equities to describe an 
enhancement to the current processes used by Floor Brokers to manually 
cross orders in compliance with Regulation NMS Rule 611 (``Rule 611''). 
Specifically, the Exchange proposes to allow Floor Brokers to use new 
functionality for the wireless hand held devices (``HHD'') that will 
assist them in meeting their Rule 611 compliance requirements by 
providing for a ``look-back'' period in effecting crosses under 
Exchange rules. The Exchange believes that use of the HHD by Floor 
Brokers to assist in the execution of manual cross trades, combined 
with a brief and reasonable amount of time to accommodate the manual 
manner by which Floor Brokers must comply with Exchange crossing rules, 
will enhance the efficiency of such crosses and provide a better audit 
trail for purposes of Rule 611. The new functionality (``Cross 
Function'') and the proposed procedures are described below.
Background
    Rule 76--Equities governs the execution of ``cross'' or 
``crossing'' orders by Floor Brokers. Rule 76--Equities applies only to 
manual transactions executed at the point of sale on the trading Floor 
and provides that when a member has an order to buy and an order to 
sell the same security that can be crossed at the same price, the 
member is required to announce to the trading crowd the proposed cross 
by offering the security at a price that is higher than his or her bid 
by a minimum variation permitted in the security before crossing the 
orders. Any other member, including the Designated Market Maker 
(``DMM''), can break up the announced bid and offer by trading with 
either side of the proposed cross transaction.\3\ If no one in the 
trading crowd breaks up the proposed cross, the DMM on behalf of the 
Floor Broker enters the cross transaction into the Exchange's Display 
Book system as a completed transaction. The completed transaction is 
printed to the Consolidated Tape at that price.
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    \3\ An agency ``cross'' of 10,000 shares or more at or between 
the Exchange best bid or offer has priority and can only be broken 
up to provide price improvement that is better than the cross price 
as to all or part of such bid or offer. A buy and sell order to be 
crossed pursuant to Rule 72(d)--Equities is subject to Rule 76--
Equities, including the requirement that such a proposed cross be 
announced to the crowd. See Rule 72(d)--Equities. In addition, cross 
transactions to be executed at a clean-up price outside the current 
quotation on the Exchange are subject to Rule 127. See Rule 127--
Equities.
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    Currently, after announcing a proposed cross transaction, the Floor 
Broker and DMM manually monitor the protected best bid or offer to 
ensure that the proposed cross can be executed in accordance with the 
customer's instructions and in compliance with Rule 611. In today's 
fast-moving, electronic markets, where prices can change in millisecond 
timeframes, this manual monitoring process may not be the optimal 
manner by which to facilitate and evidence such compliance.
    The Commission and its staff have recognized the difficulty that 
broker-dealers face when manually handling orders in light of Rule 611. 
Specifically, the SEC staff has issued guidance pertaining to the 
manual execution of orders under staff FAQ 3.23 of Rule 611.\4\ Under 
the FAQ, a broker-dealer that acts as agent in arranging block 
transactions between two or more parties at prices that are 
individually negotiated,\5\ and at a price that is at or within the 
protected quotations must capture the negotiated price in its automated 
system within a reasonable time period.\6\ Due to the manual nature of 
these transactions, the individually negotiated price may not be at or 
within the protected bid and offer at the time the transaction terms 
ultimately are captured in the automated system. FAQ 3.23 addresses 
this issue by permitting the broker-dealer to utilize a 20-second 
``look-back'' period for purposes of demonstrating compliance with Rule 
611.
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    \4\ See ``Responses to Frequently Asked Questions Concerning 
Rule 611 and Rule 610 of Regulation NMS,'' FAQ 3.23 ``Agency Block 
Transactions with Non-Trade-Through Prices that are Individually 
Negotiated'' (``FAQ 3.23''). FAQ 3.23 is available at: http://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm.
    \5\ The negotiations can occur either through communications 
with personnel of the broker-dealer or through direct communications 
between the parties of the transaction, and the negotiations may 
occur through a telephone conversation or through automated messages 
(e.g., email).
    \6\ Under the FAQ, the transaction must be individually 
negotiated, and at least one of the parties individually negotiating 
the price of the transaction must be a ``customer,'' as defined in 
Rule 600(b)(16) of Regulation NMS. Similarly, crosses under the FAQ 
must be in block size, as defined in Rule 600(b)(9).
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    As discussed below, the Exchange is proposing a similar means for 
assisting Floor Brokers with compliance with Rule 611 that is 
consistent with existing Exchange crossing rules. Exchange Floor 
Brokers cross large orders pursuant to Rule 76--Equities. In many 
cases, these orders are sent to a Floor Broker by customers seeking a 
primary market print, as well as orders from customers who do not wish 
to have their orders handled by broker-dealers that also trade as 
principal. While the crossing of orders by Floor Brokers using the 
proposed Cross Function would differ in degree from the crossing 
guidance in FAQ 3.23,\4\ as discussed below, the fundamental issue of 
facilitating compliance with Rule 611 when handling large manual trades 
is the same. Moreover, the proposed Cross Function is narrowl y 
tailored to address the manual handling of cross orders by Floor 
Brokers, who face unique issues by virtue of their status as Floor-
based participants.
    Floor Broker activities are subject to various regulatory 
restrictions that are not imposed upon broker-dealers executing orders 
off the Floor of the Exchange. Floor Broker activities on the Floor of 
the Exchange are subject to Section 11(a) of the Exchange Act and the 
rules thereunder.\7\ As such, Floor Brokers are limited in their 
ability to trade for their own account or for the account of an 
associated person or an account over which they exercise discretion. In 
addition, pursuant to Rule 112--Equities, Floor Brokers are also

[[Page 44296]]

prohibited from initiating orders on the Trading Floor. Consequently, 
Floor Brokers act only as agents on the Floor, even in circumstances 
where they are representing principal order flow from an associated 
person or upstairs desk. Moreover, because Floor Brokers may not access 
away markets directly while at the point of sale,\8\ Floor Brokers 
cannot rely on the exception set forth in Rule 611(b)(6), which permits 
market participants to send intermarket sweep orders while 
simultaneously effecting a crossing transaction that may trade through 
protected quotations.
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    \7\ 15 U.S.C. 78k(a). The Exchange notes that, although Section 
11(a) provides for certain limited exceptions for Floor Broker 
activities (e.g., transactions to offset a transaction made in 
error), it generally imposes limitations on Floor Brokers that are 
not applicable to broker-dealers engaged in trading off the Floor of 
the Exchange.
    \8\ See Rules 76--Equities and 70.40--Equities. Floor Brokers 
must be at the point of sale to execute crossing transactions 
pursuant to Rule 76--Equities.
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    Furthermore, broker-dealers executing cross transactions off the 
floor of the Exchange are not subject to Rule 76--Equities 
requirements. Rule 76--Equities requires that Floor-based crossing 
transactions be exposed to the DMM and the crowd prior to being 
executed, which provides other Exchange members and public customers 
the ability to participate in such transactions. Because of this 
requirement, Floor Broker proposed cross transactions are required to 
be exposed publicly in a manner not required of off-Floor participants.
    As explained in greater detail below and given the regulatory 
restrictions applicable to the operation of Floor Brokers, the Exchange 
believes the proposal is consistent with the purposes underlying FAQ 
3.23, notwithstanding certain factual differences in the scenarios. As 
previously noted, Floor Brokers currently monitor protected bids and 
offers manually to ensure that the proposed cross can be executed in 
accordance with Rule 611, which is not optimal in today's electronic 
markets. The relief provided in FAQ 3.23 is designed to facilitate 
compliance with Rule 611 for manual transactions. Likewise, the 
Exchange is proposing to amend Rule 76--Equities to enable Floor 
Brokers to effectively and efficiently cross customer orders in 
compliance with Exchange Rules and Regulation NMS.
Proposed Amendment to Rule 76--Equities
    To assist Floor Brokers in monitoring the price of protected 
quotations and ensuring compliance with Rule 611, the Exchange proposes 
the Cross Function as set forth in the proposed supplementary material 
to Rule 76--Equities. As proposed, Floor Brokers would be able to 
submit not held orders to be crossed (purchase and sale of the same 
security) into the HHD at a limit price consistent with customer 
instructions and as determined by the Floor Broker. The Floor Broker, 
however, may not use the Cross Function with regard to a cross 
involving a principal order to buy and a principal order to sell 
submitted by the same broker-dealer. After the orders are entered into 
the HHD, a quote minder function within Exchange systems will monitor 
protected quotations to determine when the limit prices assigned to the 
buy and sell orders are such that the orders may be executed consistent 
with Rule 611. When the protected quotation permits a Rule 611-
compliant print (i.e., the desired crossing price is at or between the 
protected bid and offer), the quote minder will:
    (i) Deliver an Alert message to the Floor Broker's HHD indicating 
that the orders may be crossed;
    (ii) Capture within Exchange systems a time-stamped quote that 
includes the time the Alert is sent to the HHD and the protected bid 
and offer at that time;
    (iii) Start a 20-second timer (as discussed below), and
    (iv) Enable a ``print'' key function in the HHD allowing the Floor 
Broker to execute the orders and send the trade report through Exchange 
systems to the Tape.
    As proposed, the Cross Function includes a 20-second timer that 
commences from the moment the cross trade at its proposed price could 
be executed at or between the protected bid and offer. As detailed 
below, the Floor Broker will use this brief period to comply with the 
Rule 76--Equities requirement to announce the proposed cross 
transaction to the crowd. If Exchange systems do not receive the 
``print'' message from the HHD within the allotted time period, the 
ability to execute the orders and print to the tape will expire and the 
cross instructions will be canceled.
    As required by Rule 76--Equities, when using the proposed Cross 
Function, the Floor Broker must first ``clear'' the crowd before 
executing a cross transaction. Therefore, the Floor Broker is required 
to be physically present at the post/panel of the DMM for the subject 
security and must verbally announce the cross trade. If there is crowd 
and/or DMM interest in response to the Floor Broker's verbal 
announcement of the cross trade, the Floor Broker must trade with such 
interest on behalf of the applicable customer order(s), as required by 
Exchange Rules. Under the proposed functionality, if the original terms 
of the proposed cross transaction cannot be met for any reason, for 
example, if the crowd trades with a portion of either the proposed bid 
or offer and the Floor Broker cannot otherwise complete the proposed 
cross transaction in the size or price that was entered into the 
Crossing Function, the originally-entered proposed cross transaction 
will be cancelled.\9\
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    \9\ Currently, due to limitations in the functionality of the 
system, the Exchange cancels a proposed cross transaction when the 
originally-entered size of the cross changes. However, the Exchange 
is exploring the possibility of making system changes to allow a 
proposed cross transaction to proceed if the only change in the 
proposed cross is a change in the size.
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    If the crowd or DMM does not break up the proposed cross trade, the 
Floor Broker may execute the trade by selecting the ``print'' key in 
the HHD prior to the expiration of the 20-second timer, which also will 
transmit a message to Exchange systems to print the transaction to the 
Tape. Thus, the 20-second timer permits a reasonable time for Floor 
Brokers to comply with Exchange crossing rules and establishes a brief 
``look-back'' period that permits the crossing of the orders at the 
designated limit price even if the market for the security subsequently 
moves while the Floor Broker is meeting its obligation under Rule 76--
Equities. The Exchange believes that providing the 20-second timer is 
consistent with FAQ 3.23 because, similar to how off-Floor transactions 
require sufficient time for negotiation and entry into execution 
systems, Floor Broker proposed transactions need a similar time period 
to be exposed to the public and then, once executed, to be transmitted 
through broker systems to the Display Book and then to the Tape.\10\ To 
confirm compliance with Rule 76--Equities, the DMM will be required to 
enter the Floor Broker's badge number into Exchange systems.
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    \10\ As with off-Floor crossing transactions that are executed 
consistent with FAQ 3.23, the time that the proposed Floor Broker 
cross transaction ``prints'' via the HHD key may be at a time when 
either the protected bid or offer or Exchange best bid or offer has 
moved. Accordingly, by using the Cross Function, Floor Brokers will 
ensure compliance with not only Rule 611, but also NYSE Rule 127--
Equities in that the proposed cross transaction will not trade 
through the Exchange's best bid or offer at the time of Rule 611 
validation.
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    A Floor Broker may cancel the orders associated with the proposed 
Cross Function at any time up to the point that the trade is executed 
(that is, at the time the ``print'' key is activated).\11\
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    \11\ The Exchange notes that Floor Brokers are required to have 
policies and procedures designed to ensure compliance with, among 
other things, Rule 76--Equities. Therefore, Floor Brokers will be 
required to update their policies and procedures to reflect any 
amendments to Rule 76--Equities.
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    In addition, consistent with FAQ 3.23, the proposed Cross Function 
would be

[[Page 44297]]

available only for proposed cross transactions that are for at least 
10,000 shares or a quantity of stock having a market value of $200,000 
or more, which is the definition of a block transaction under 
Regulation NMS Rule 600(b)(9).
    Moreover, the Exchange proposes that the proposed cross transaction 
may not be for orders for the account of the member or member 
organization, an account of an associated person, or an account with 
respect to which the member, member organization or associated person 
thereof exercises investment discretion. The Exchange believes that 
requiring orders to be on behalf of unaffiliated entities provides the 
Floor broker analog to the FAQ 3.23 requirement that at least one side 
of the transaction be for a ``customer.'' As recognized in Rule 72(d)--
Equities, which permits a Floor broker to assert priority on behalf of 
block-sized order flow from an unaffiliated member organization, Floor 
broker customers are not limited to non-broker dealers. The Exchange 
believes that the proposed limitation to use the proposed Cross 
Function on behalf of unaffiliated broker dealers meets the spirit of 
FAQ 3.23 by assuring that the Cross Function will not be used for 
affiliated principal order flow.
    Accordingly, as proposed, a Floor broker may use the proposed Cross 
Function for any order flow he or she may receive from an unaffiliated 
member organization, even if one side of the proposed cross transaction 
is for the account of the unaffiliated member organization. Likewise, a 
Floor broker could use the proposed Cross Function for proposed crossed 
transactions that represent principal orders of two different 
unaffiliated broker-dealer customers.
    The Exchange believes that Floor Brokers provide a useful service 
to the market and their customers in their ability to source liquidity 
and provide price discovery for transactions. Therefore, the Cross 
Function is designed to assist Floor Brokers in providing such services 
in a more efficient and effective manner in light of the requirements 
of Rule 611. Specifically, the Cross Function, with its ``look-back'' 
feature, would provide a more effective mechanism by which a Floor 
Broker can manually execute a cross in accordance with the customer's 
instructions and in compliance with Rule 611, particularly when there 
is significant quote traffic with flickering prices. Moreover, the 
proposed changes to Rule 76--Equities are narrowly drafted to address 
the practical issues and concerns related to the interaction between a 
manual process and electronic quotes as well as the unique limitations 
applicable only to Floor Brokers. It would not otherwise change the 
current operation of Rule 76--Equities; in particular, the requirement 
to expose crosses to the crowd for possible price improvement prior to 
finalizing the cross would remain intact.\12\
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    \12\ The Exchange notes that Rule 76--Equities currently governs 
the manual execution of cross orders by Floor Brokers without 
consideration of the order size. The Exchange is not proposing to 
amend Rule 76--Equities to limit Floor Brokers' ability to manually 
execute cross orders that are block size.
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    The Cross Function would not be available with regard to crosses 
involving buy and sell principal orders represented by the same broker-
dealer, and all crosses, including crosses involving principal and 
agency orders, will be subject to being broken up upon exposure to the 
crowd and the DMM. The Exchange recognizes that a proposed Floor broker 
crossed transaction that represents principal orders of two separate 
broker-dealer customers differs from the scenario in FAQ 3.23. However, 
given the unique limitations on Floor Broker trading, including that 
Floor Brokers cannot initiate orders on the Floor and in such 
situations, are acting as agents for their broker-dealer customers, the 
Exchange believes that the intent is consistent with FAQ 3.23. In 
addition, the Cross Function will timely capture the transaction terms 
in an automated system, thereby providing a better audit trail for 
manually crossed orders. Such an audit trail will facilitate the review 
of the Floor Brokers' manual crosses to ensure their compliance with 
Rule 611.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Act,\13\ in general, and 
Section 6(b)(5) of the Act,\14\ in particular, in that it is designed 
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 for a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that the proposed Cross 
Function and proposed amendment to Rule 76--Equities remove impediments 
to and perfect the mechanism for a free and open market because the 
Cross Function will assist Floor brokers' ability to meet both their 
Rule 611 obligations and existing Rule 76--Equities requirements with 
respect to crossed orders. Additionally, the Exchange believes the 
proposal removes impediments to and perfects the mechanism for a free 
and open market because Floor Brokers will have automated tools to 
enable their compliance with Rule 611 of Regulation NMS and efficiently 
execute the cross transactions. Furthermore, the Exchange believes the 
proposal will generate a better audit trail for purposes of Rule 611 of 
the crossed transactions.

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.

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 such 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-NYSEMKT-2012-26 on the subject line.

[[Page 44298]]

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-NYSEMKT-2012-26. 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-NYSEMKT-2012-26 and should 
be submitted on or before August 17, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18330 Filed 7-26-12; 8:45 am]
BILLING CODE 8011-01-P


