
[Federal Register Volume 77, Number 170 (Friday, August 31, 2012)]
[Notices]
[Pages 53242-53247]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67734; File No. SR-BYX-2012-019]


Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Adopt a Retail Price Improvement 
Program

August 27, 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 August 14, 2012, BATS Y-Exchange, Inc. (the ``Exchange'' or 
``BYX'') 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

    The Exchange's proposed rule change would adopt new Rule 11.24 to 
establish a Retail Price Improvement (``RPI'') Program (the ``Program'' 
or ``proposed rule change'') to attract additional retail order flow to 
the Exchange while also providing the potential for price improvement 
to such order flow.
    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room. The proposed 
rule text can be found in Exhibit 5.

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.

[[Page 53243]]

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

1. Purpose
Background
    The Exchange is proposing a one-year pilot program that would add 
new Rule 11.24 to establish an RPI Program to attract additional retail 
order flow to the Exchange while also providing the potential for price 
improvement to such order flow. Under the proposed rule change, the 
Exchange would create a new class of market participant called a Retail 
Member Organization (``RMO''), which would be eligible to submit 
certain retail order flow (``Retail Orders'') to the Exchange. As 
proposed, all Exchange Users \3\ will be permitted to provide potential 
price improvement for Retail Orders in the form of non-displayed 
interest that is better than the national best bid that is a Protected 
Quotation (``Protected NBB'') or the national best offer that is a 
Protected Quotation (``Protected NBO,'' and together with the Protected 
NBB, the ``Protected NBBO'').\4\
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    \3\ A ``User'' is defined in BYX Rule 1.5(cc) as any member or 
sponsored participant of the Exchange who is authorized to obtain 
access to the System.
    \4\ The term Protected Quotation is defined in BYX Rule 1.5(t) 
and has the same meaning as is set forth in Regulation NMS Rule 
600(b)(58). The terms Protected NBB and Protected NBO are defined in 
BYX Rule 1.5(s). The Protected NBB is the best-priced protected bid 
and the Protected NBO is the best-priced protected offer. Generally, 
the Protected NBB and Protected NBO and the national best bid 
(``NBB'') and national best offer (``NBO,'' together with the NBB, 
the ``NBBO'') will be the same. However, a market center is not 
required to route to the NBB or NBO if that market center is subject 
to an exception under Regulation NMS Rule 611(b)(1) or if such NBB 
or NBO is otherwise not available for an automatic execution. In 
such case, the Protected NBB or Protected NBO would be the best-
priced protected bid or offer to which a market center must route 
interest pursuant to Regulation NMS Rule 611.
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Definitions
    The Exchange proposes to adopt the following definitions under 
proposed Rule 11.24(a). First, the term ``Retail Member Organization'' 
would be defined as a Member \5\ (or a division thereof) that has been 
approved by the Exchange to submit Retail Orders.
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    \5\ A ``Member'' is defined in BYX Rule 1.5(n) as any registered 
broker or dealer that has been admitted to membership in the 
Exchange.
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    Second, the term ``Retail Order'' would be defined as an agency 
order that originates from a natural person and is submitted to the 
Exchange by an RMO, provided that no change is made to the terms of the 
order with respect to price or side of market and the order does not 
originate from a trading algorithm or any other computerized 
methodology.
    Finally, the term ``Retail Price Improvement Order'' or ``RPI 
Order'' would be defined as non-displayed interest on the Exchange that 
is better than the Protected NBB or Protected NBO by at least $0.001 
and that is identified as an RPI Order in a manner prescribed by the 
Exchange (``RPI interest'').\6\ The price of an RPI Order would be 
determined by a User's entry of the following into the Exchange: (1) 
RPI buy or sell interest; (2) an offset, if any; and (3) a ceiling or 
floor price. The Exchange expects that RPI sell or buy interest 
typically would be entered to track the Protected NBBO. The offset 
would be a predetermined amount by which the User is willing to improve 
the Protected NBBO, subject to a ceiling or floor price. The ceiling or 
floor price would be the amount above or below which the User does not 
wish to trade. RPI Orders in their entirety (the buy or sell interest, 
the offset, and the ceiling or floor) will remain non-displayed. The 
Exchange will also allow Users to enter RPI Orders which establish the 
exact limit price, which is similar to a non-displayed limit order 
currently accepted by the Exchange today except the Exchange will 
accept sub-penny limit prices on RPI Orders with three numbers after 
the decimal. The Exchange's System \7\ will monitor whether RPI buy or 
sell interest, adjusted by any offset and subject to the ceiling or 
floor price, is eligible to interact with incoming Retail Orders.
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    \6\ Exchange systems would prevent Retail Orders from 
interacting with RPI Orders if the RPI Order is not priced at least 
$0.001 better than the Protected NBBO. The Exchange notes, however, 
that price improvement of $0.001 would be a minimum requirement and 
Users could enter RPI Orders that better the Protected NBBO by more 
than $0.001. Exchange systems will accept RPI Orders without a 
minimum price improvement value; however, such interest will execute 
at its floor or ceiling price only if such floor or ceiling price is 
better than the Protected NBBO by $0.001 or more. Concurrently with 
this filing, the Exchange has submitted a request for an exemption 
under Regulation NMS Rule 612 that would permit it to accept and 
rank the non-displayed RPI Orders. As outlined in the request, the 
Exchange believes that the minimum price improvement available under 
the Program, which would amount to $0.50 on a 500 share order, would 
be meaningful to the small retail investor. See Letter from Eric J. 
Swanson, Senior Vice President, General Counsel, BATS Global 
Markets, Inc. to Elizabeth M. Murphy, Secretary, Securities and 
Exchange Commission dated August 14, 2012 (``Sub-Penny Rule 
Exemption Request'').
    \7\ The ``System'' is defined in BYX Rule 1.5(aa) as ``the 
electronic communications and trading facility designated by the 
Board through which securities orders of Users are consolidated for 
ranking, execution and, when applicable, routing away.''
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    Users and RMOs may enter odd lots, round lots or mixed lots as RPI 
Orders and as Retail Orders respectively. As discussed below, RPI 
Orders will be ranked and allocated according to price and time of 
entry into the System consistent with Exchange Rule 11.12 and therefore 
without regard to whether the size entered is an odd lot, round lot or 
mixed lot amount. Similarly, Retail Orders will interact with RPI 
Orders according to the Priority and Allocation rules of the Program 
and without regard to whether they are odd lots, round lots or mixed 
lots. Finally, Retail Orders may be designated as Type 1 or Type 2 
without regard to the size of the order. In accordance with rules of 
the consolidated tape plans, executions less than a round lot will not 
print to the consolidated tape or be considered the last sale.
    RPI Orders would interact with Retail Orders as follows. Assume a 
User enters RPI sell interest with an offset of $0.001 and a floor of 
$10.10 while the Protected NBO is $10.11. The RPI Order could interact 
with an incoming buy Retail Order at $10.109. If, however, the 
Protected NBO was $10.10, the RPI Order could not interact with the 
Retail Order because the price required to deliver the minimum $0.001 
price improvement ($10.099) would violate the User's floor of $10.10. 
If a User otherwise enters an offset greater than the minimum required 
price improvement and the offset would produce a price that would 
violate the User's floor, the offset would be applied only to the 
extent that it respects the User's floor. By way of illustration, 
assume RPI buy interest is entered with an offset of $0.005 and a 
ceiling of $10.112 while the Protected NBB is at $10.11. The RPI Order 
could interact with an incoming sell Retail Order at $10.112, because 
it would produce the required price improvement without violating the 
User's ceiling, but it could not interact above the $10.112 ceiling. 
Finally, if a User enters an RPI Order without an offset (i.e., an 
explicitly priced limit order), the RPI Order will interact with Retail 
Orders at the level of the User's limit price as long as the minimum 
required price improvement is produced. Accordingly, if RPI sell 
interest is entered with a limit price of $10.098 and no offset while 
the Protected NBO is $10.11, the RPI Order could interact with the 
Retail Order at $10.098, producing $0.012 of price improvement. The 
System will not cancel RPI interest when it is not eligible to interact 
with incoming Retail Orders; such RPI interest will remain in the 
System and may become eligible again to interact with Retail Orders 
depending on the Protected NBB or Protected NBO.

[[Page 53244]]

RMO Qualifications and Approval Process
    Under proposed Rule 11.24(b), any Member could qualify as an RMO if 
it conducts a retail business or handles retail orders on behalf of 
another broker-dealer. Any Member that wishes to obtain RMO status 
would be required to submit: (1) An application form; (2) an 
attestation, in a form prescribed by the Exchange, that any order 
submitted by the Member as a Retail Order would meet the qualifications 
for such orders under proposed Rule 11.24; and (3) supporting 
documentation sufficient to demonstrate the retail nature and 
characteristics of the applicant's order flow.\8\
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    \8\ For example, a prospective RMO could be required to provide 
sample marketing literature, Web site screenshots, other publicly 
disclosed materials describing the retail nature of their order 
flow, and such other documentation and information as the Exchange 
may require to obtain reasonable assurance that the applicant's 
order flow would meet the requirements of the Retail Order 
definition.
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    An RMO would be required to have written policies and procedures 
reasonably designed to assure that it will only designate orders as 
Retail Orders if all requirements of a Retail Order are met. Such 
written policies and procedures must require the Member to (i) exercise 
due diligence before entering a Retail Order to assure that entry as a 
Retail Order is in compliance with the requirements of this rule, and 
(ii) monitor whether orders entered as Retail Orders meet the 
applicable requirements. If the RMO represents Retail Orders from 
another broker-dealer customer, the RMO's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order. The RMO must (i) obtain an annual written 
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders 
that entry of such orders as Retail Orders will be in compliance with 
the requirements of this rule, and (ii) monitor whether its broker-
dealer customer's Retail Order flow continues to meet the applicable 
requirements.\9\
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    \9\ The Exchange or another self-regulatory organization on 
behalf of the Exchange will review an RMO's compliance with these 
requirements through an exam-based review of the RMO's internal 
controls.
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    If the Exchange disapproves the application, the Exchange would 
provide a written notice to the Member. The disapproved applicant could 
appeal the disapproval by the Exchange as provided in proposed Rule 
11.24(d), and/or reapply for RMO status 90 days after the disapproval 
notice is issued by the Exchange. An RMO also could voluntarily 
withdraw from such status at any time by giving written notice to the 
Exchange.
Failure of RMO To Abide by Retail Order Requirements
    Proposed Rule 11.24(c) addresses an RMO's failure to abide by 
Retail Order requirements. If an RMO designates orders submitted to the 
Exchange as Retail Orders and the Exchange determines, in its sole 
discretion, that those orders fail to meet any of the requirements of 
Retail Orders, the Exchange may disqualify a Member from its status as 
an RMO. When disqualification determinations are made, the Exchange 
would provide a written disqualification notice to the Member. A 
disqualified RMO could appeal the disqualification as provided in 
proposed Rule 11.24(d) and/or reapply for RMO status 90 days after the 
disqualification notice is issued by the Exchange. http://www.bloomberglaw.com/s/legal/0d8c2a43fe620ae36f925f9dd67c2081/document/X9RVKVG5GVG0?search32=C9P6UQR5E9FN6PB1E9HMGNRKCLP6QF9849P6AT31D5M20R39E5QMIP39EHSI0S3IDTJN4OBD48KJMERJEHIMQRB5CHFN6PB1E9HMGFB6C5M76P8-fn_8
Appeal of Disapproval or Disqualification
    Proposed Rule 11.24(d) provides appeal rights to Members. If a 
Member disputes the Exchange's decision to disapprove it as an RMO 
under Rule 11.24(b) or disqualify it under Rule 11.24(c), such Member 
(``appellant'') may request, within five business days after notice of 
the decision is issued by the Exchange, that the Retail Price 
Improvement Program Panel (``RPI Panel'') review the decision to 
determine if it was correct.
    The RPI Panel would consist of the Exchange's Chief Regulatory 
Officer (``CRO''), or a designee of the CRO, and two officers of the 
Exchange designated by the Chief Operating Officer (``COO''). The RPI 
Panel would review the facts and render a decision within the time 
frame prescribed by the Exchange. The RPI Panel could overturn or 
modify an action taken by the Exchange and all determinations by the 
RPI Panel would constitute final action by the Exchange on the matter 
at issue.
Retail Liquidity Identifier
    Under proposed Rule 11.24(e), the Exchange proposes to disseminate 
an identifier when RPI interest priced at least $0.001 better than the 
Exchange's Protected Bid or Protected Offer for a particular security 
is available in the System (``Retail Liquidity Identifier''). The 
Retail Liquidity Identifier will be disseminated through consolidated 
data streams (i.e., pursuant to the Consolidated Tape Association Plan/
Consolidated Quotation Plan, or CTA/CQ, for Tape A and Tape B 
securities, and the Nasdaq UTP Plan for Tape C securities) as well as 
through proprietary Exchange data feeds.\10\ The Retail Liquidity 
Identifier will reflect the symbol and the side (buy or sell) of the 
RPI interest, but will not include the price or size of the RPI 
interest. In particular, CQ and UTP quoting outputs will include a 
field for codes related to the Retail Price Improvement Identifier. The 
codes will indicate RPI interest that is priced better than the 
Exchange's Protected Bid or Protected Offer by at least the minimum 
level of price improvement as required by the Program.
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    \10\ The Exchange notes that the Retail Liquidity Identifier for 
Tape A and Tape B securities will be disseminated pursuant to the 
CTA/CQ Plan as soon as the Program, if approved, becomes 
operational. If the Program is approved and becomes operational in 
the near future, then the Retail Liquidity Identifier for Tape C 
securities will only be available through the Exchange's proprietary 
data feeds until approximately October 1, 2012, at which time the 
identifier will also be available through the consolidated public 
market data stream for Tape C securities. October 1, 2012 is the 
date that the processor for the Nasdaq UTP quotation stream 
anticipates offering the ability to disseminate the Retail Liquidity 
Identifier and analogous identifiers from other market centers that 
operate programs similar to the RPI Program.
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Retail Order Designations
    Under proposed Rule 11.24(f), an RMO can designate how a Retail 
Order would interact with available contra-side interest as follows. As 
proposed, a Type 1-designated Retail Order would interact with 
available contra-side RPI Orders and other price improving liquidity 
but would not interact with other available contra-side interest in the 
System or route to other markets. The portion of a Type 1-designated 
Retail Order that does not execute against contra-side RPI Orders or 
other price improving liquidity would be immediately and automatically 
cancelled. A Type 2-designated Retail Order would interact first with 
available contra-side RPI Orders and other price improving liquidity 
and then any remaining portion of the Retail Order would be executed as 
an Immediate or Cancel (``IOC'') Order pursuant to Rule 11.9(b)(1). A 
Type 2-designated Retail Order can either be submitted as a

[[Page 53245]]

BATS Only Order \11\ or as an order eligible for routing pursuant to 
Rule 11.13(a)(2). Accordingly, a Type 2-designated Retail Order could 
interact with other interest in the System and, if designated as 
eligible for routing, would route to other markets in compliance with 
Regulation NMS.
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    \11\ A BATS Only Order is defined in BYX Rule 11.9(c)(4) and 
includes orders that are not eligible for routing to other trading 
centers.
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Priority and Order Allocation
    Under proposed Rule 11.24(g), the Exchange proposes that competing 
RPI Orders in the same security would be ranked and allocated according 
to price then time of entry into the System. The Exchange further 
proposes that executions will occur in price/time priority in 
accordance with Rule 11.12. Any remaining unexecuted RPI interest will 
remain available to interact with other incoming Retail Orders if such 
interest is at an eligible price. Any remaining unexecuted portion of 
the Retail Order will cancel or execute in accordance with proposed 
Rule 11.24(f). The following example illustrates this proposed method:

Protected NBBO for security ABC is $10.00-$10.05
User 1 enters an RPI Order to buy ABC at $10.015 for 500
User 2 then enters an RPI Order to buy ABC at $10.02 for 500
User 3 then enters an RPI Order to buy ABC at $10.035 for 500

    An incoming Retail Order to sell ABC for 1,000 executes first 
against User 3's bid for 500 at $10.035, because it is the best priced 
bid, then against User 2's bid for 500 at $10.02, because it is the 
next best priced bid. User 1 is not filled because the entire size of 
the Retail Order to sell 1,000 is depleted. The Retail Order executes 
against RPI Orders in price/time priority.
    However, assume the same facts above, except that User 2's RPI 
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to 
sell 1,000 executes first against User 3's bid for 500 at $10.035, 
because it is the best priced bid, then against User 2's bid for 100 at 
$10.02, because it is the next best priced bid. User 1 then receives an 
execution for 400 of its bid for 500 at $10.015, at which point the 
entire size of the Retail Order to sell 1,000 is depleted.
    As a final example, assume the same facts as above, except that 
User 3's order was not an RPI Order to buy ABC at $10.035, but rather, 
a non-displayed order to buy ABC at $10.03. The result would be similar 
to the result immediately above, in that the incoming Retail Order to 
sell 1,000 executes first against User 3's bid for 500 at $10.03, 
because it is the best priced bid, then against User 2's bid for 100 at 
$10.02, because it is the next best priced bid. User 1 then receives an 
execution for 400 of its bid for 500 at $10.015, at which point the 
entire size of the Retail Order to sell 1,000 is depleted.
Implementation
    The Exchange proposes that all securities traded on the Exchange 
would be eligible for inclusion in the RPI Program.\12\
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    \12\ The Exchange offers trading of all NMS stocks pursuant to 
unlisted trading privileges, consistent with Section 12(f) of the 
Act and Rule 12f-5 thereunder. Accordingly, the Exchange offers 
trading of securities listed on BATS Exchange, Inc., the New York 
Stock Exchange LLC, NYSE Arca, Inc., NYSE MKT LLC (formerly the 
American Stock Exchange), and The NASDAQ Stock Market LLC.
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    The Exchange proposes to limit the Program during the pilot period 
to trades occurring at prices equal to or greater than $1.00 per share. 
Toward that end, Exchange trade validation systems would prevent the 
interaction of RPI buy or sell interest (adjusted by any offset) and 
Retail Orders at a price below $1.00 per share.\13\ For example, if 
there was RPI buy interest tracking the Protected NBB at $0.99 with an 
offset of $0.001 and a ceiling of $1.02, Exchange trade validation 
systems would prevent the execution of the RPI Order at $0.991 with a 
sell Retail Order with a limit of $0.99. However, if the Retail Order 
was Type 2 as defined [sic] the Program,\14\ it would be able to 
interact at $0.99 with liquidity outside the Program in the Exchange's 
order book. In addition to facilitating an orderly \15\ and 
operationally intuitive pilot, the Exchange believes that limiting the 
Program to trades equal to or greater than $1.00 per share during the 
pilot will enable it better to focus its efforts to monitor price 
competition and to assess any indications that data disseminated under 
the Program is potentially disadvantaging retail orders. As part of 
that review, the Exchange will produce data throughout the pilot, which 
will include statistics about participation, the frequency and level of 
price improvement provided by the Program, and any effects on the 
broader market structure.
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    \13\ As discussed above, the price of an RPI would be determined 
by a User's entry of buy or sell interest, an offset (if any) and a 
ceiling or floor price. The Exchange expects that RPI sell or buy 
interest typically would track the Protected NBBO.
    \14\ Type 2 Retail Orders are treated as IOC orders that execute 
against displayed and non-displayed liquidity in the Exchange's 
order book where there is no available liquidity in the Program. 
Type 2 Retail Orders can either be designated as eligible for 
routing or as BATS Only Orders, and thus non-routable, as described 
above.
    \15\ Given the proposed limitation, the pilot Program would have 
no impact on the minimum pricing increment for orders priced less 
than $1.00 and therefore no effect on the potential of markets 
executing those orders to lock or cross. In addition, the non-
displayed nature of the liquidity in the Program simply has no 
potential to disrupt displayed, protected quotes. In any event, the 
Program would do nothing to change the obligation of exchanges to 
avoid and reconcile locked and crossed markets under NMS Rule 
610(d).
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Comparison to Existing Programs
    Proposed BYX Rule 11.24 is based on NYSE Rule 107C, governing 
NYSE's ``Retail Liquidity Program,'' which was recently approved by the 
Commission and commenced operations on August 1, 2012.\16\ Proposed 
Rule 11.24 is similar to NYSE Rule 107C with three key 
distinctions.\17\ The first distinction is that NYSE Rule 107C includes 
a class of participant that is registered as a provider of liquidity 
and provides specific procedures and rules related to such participants 
and their role in the NYSE RLP. NYSE Rule 107C does permit all 
participants to submit RPI Orders to NYSE, but provides the specific 
class of registered retail liquidity providers with execution fees that 
are lower than fees charged to other participants in exchange for a 
requirement to maintain RPI Orders on NYSE at least 5% of the trading 
day.\18\ The Exchange believes that equal treatment for all Exchange 
Users that enter RPI Orders will result in a higher level of 
competition and maximize price improvement to incoming Retail Orders. 
Accordingly, the Exchange has not proposed to adopt a special category 
of retail liquidity provider.
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    \16\ Securities Exchange Act Release No. 67347 (July 3, 2012), 
77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84) 
(the ``RLP Approval Order''). In conjunction with the approval of 
the NYSE Retail Liquidity Program, a nearly identical program was 
proposed and approved to operate on NYSE MKT LLC (formerly, the 
American Stock Exchange). For ease of reference, the comparisons 
made in this section only refer to NYSE Rule 107C, but apply equally 
to NYSE MKT Rule 107C.
    \17\ The Exchange has proposed to accept RPIs in a manner 
similar to the explicitly accepted method at NYSE and NYSE MKT, 
specifically, with an offset as well as a ceiling or a floor (i.e., 
the entry of an RPI bid with an offset of $0.015 and a ceiling of 
$10.04; when the NBBO is $10.02 by $10.04, an incoming sell order 
would execute against such RPI at $10.035). The Exchange notes that 
like NYSE and NYSE MKT, Users will be able to submit retail price 
improving orders with an explicit sub-penny floor or ceiling and no 
offset, effectively creating a static sub-penny limit order, and the 
Exchange has proposed rule text to make this ability clear.
    \18\ NYSE Rule 107C(f).
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    The second distinction between proposed BYX Rule 11.24 and NYSE 
Rule 107C is that the Exchange proposes to in all cases execute 
incoming Retail Orders against resting RPI Orders and other resting 
non-displayed liquidity to

[[Page 53246]]

maximize the price improvement available to the incoming Retail Order. 
As proposed, the Exchange will maintain its strict price/time priority 
model and will provide all available price improvement to incoming 
Retail Orders, whether such price improvement is submitted pursuant to 
the Program or as an order type currently accepted by the Exchange, 
such as non-displayed orders. In contrast, pursuant to NYSE Rule 
107C(k)(1), a Type 1-designated Retail Order, ``will interact only with 
available contra-side Retail Price Improvement Orders and will not 
interact with other available contra-side interest in Exchange 
systems.'' \19\ Accordingly, other non-displayed orders offering price 
improvement at prices better than resting RPI interest do not have an 
opportunity to interact with incoming Retail Orders pursuant to the 
NYSE RLP. The Exchange is proposing in all cases to provide the maximum 
price improvement available to incoming Retail Orders. Accordingly, 
Retail Orders under the Exchange's Program will always interact with 
available contra-side RPI Orders and any other price improving contra-
side interest, in price/time priority consistent with the Exchange's 
Rule 11.12. Such ``other'' price improving contra-side interest will of 
course remain available to all participants, as it is today, while RPI 
Orders will only be available to RMOs, as described above.
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    \19\ Moreover, although pursuant to NYSE Rules 107C(k)(2) and 
107C(k)(3), a Type 2-designated Retail Order and a Type 3-designated 
Retail Order can interact with other non-RPI interest in the NYSE 
systems, such interaction only occurs after a Retail Order first 
executes against RPI Orders. As such, non-displayed orders in NYSE 
systems offering prices better than resting RPI Orders interact with 
Retail Orders only after all RPI interest is exhausted.
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    Finally, as proposed the Exchange will provide applicable price 
improvement to incoming Retail Orders at potentially multiple price 
levels. In contrast, pursuant to NYSE Rule 107C an incoming Retail 
Order to NYSE will execute at the single clearing price level at which 
the incoming order will be fully executed. To illustrate, assume the 
same facts set forth in the second example above, where User 2's RPI 
Order to buy ABC at $10.02 was for 100 shares. Pursuant to NYSE Rule 
107C, an incoming Retail Order to sell 1,000 shares would execute first 
against User 3's bid for 500 shares, because it is the best priced bid, 
then against User 2's bid for 100 shares, because it is the next best 
priced bid, then against 400 of the 500 shares bid by User 1. However, 
rather than executing at each of these price levels for the number of 
shares available (i.e., 500 shares at $10.035, 100 shares at $10.02 and 
400 shares at $10.015), as it would under proposed BYX Rule 11.24, the 
Retail Order submitted to NYSE pursuant to NYSE Rule 107C executes at 
the single clearing price that completes the order's execution, which 
is $10.015 to complete the entire order to sell 1,000 shares. The 
Exchange intends to provide all of the price improvement in these 
examples to the incoming Retail Order, and thus has proposed to execute 
orders under the Program consistent with its existing price/time market 
model.
Fee Structure of Program
    The Exchange will submit a separate proposal to amend its fee 
schedule in connection with the proposed RPI Program. Under that 
proposal, the Exchange expects to charge Users a fee for executions of 
their RPI Orders against Retail Orders and in turn would provide a 
credit or free executions to RMOs for executions of their Retail Orders 
against RPI Orders. The fees and credits for liquidity providers and 
RMOs will be determined based on experience with the Program in the 
first several months.
    As explained above, the Exchange proposes to execute incoming 
Retail Orders against all available contra-side interest that will 
provide price improvement to the Retail Order, including non-displayed 
orders other than RPI Orders. In the event non-displayed interest other 
than an RPI Order interacts with a Retail Order, the Exchange 
anticipates proposing to charge the User that entered such non-
displayed interest the same fee as is imposed for an RPI Order 
execution. In such cases, the fee charged to the User that entered the 
non-displayed interest will likely be greater than the fee charged that 
same User for an execution against a non-Retail Order.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\20\ In particular, 
the Exchange believes the proposed change furthers the objectives of 
Section 6(b)(5) of the Act,\21\ in that it is 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The Exchange believes that the 
proposed rule change is consistent with these principles because it 
would increase competition among execution venues, encourage additional 
liquidity, and offer the potential for price improvement to retail 
investors. The Exchange notes that a significant percentage of the 
orders of individual investors are executed over-the-counter.\22\ The 
Exchange believes that it is appropriate to create a financial 
incentive to bring more retail order flow to a public market. The 
Exchange also notes that the Commission recently approved a similar 
proposal by NYSE and NYSE MKT.\23\ Accordingly, the proposal generally 
encourages competition between exchange venues. In this connection, the 
Exchange believes that the proposed distinctions between the Exchange's 
proposal and the approved programs for NYSE and NYSE MKT will both 
enhance competition amongst market participants and encourage 
competition amongst exchange venues.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ See Concept Release on Equity Market Structure, Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (noting that dark pools and internalizing broker-
dealers executed approximately 25.4% of share volume in September 
2009). See also Mary L. Schapiro, Strengthening Our Equity Market 
Structure (Speech at the Economic Club of New York, Sept. 7, 2010) 
(available on the Commission's Web site). In her speech, Chairman 
Schapiro noted that nearly 30 percent of volume in U.S.-listed 
equities was executed in venues that do not display their liquidity 
or make it generally available to the public and the percentage was 
increasing nearly every month.
    \23\ See RLP Approval Order, supra note 16.
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    The Exchange understands that Section 6(b)(5) of the Act \24\ 
prohibits an exchange from establishing rules that treat market 
participants in an unfairly discriminatory manner. However, Section 
6(b)(5) of the Act does not prohibit exchange members or other broker-
dealers from discriminating, so long as their activities are otherwise 
consistent with the federal securities laws. Nor does Section 6(b)(5) 
of the Act require exchanges to preclude discrimination by broker-
dealers. Broker-dealers commonly differentiate between customers based 
on the nature and profitability of their business.
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    \24\ 15 U.S.C. 78f(b)(5).
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    While the Exchange believes that markets and price discovery 
optimally function through the interactions of diverse flow types, it 
also believes that growth in internalization has required 
differentiation of retail order flow from

[[Page 53247]]

other order flow types. The differentiation proposed herein by the 
Exchange is not designed to permit unfair discrimination, but instead 
to promote a competitive process around retail executions such that 
retail investors would receive better prices than they currently do 
through bilateral internalization arrangements. The Exchange believes 
that the transparency and competitiveness of operating a program such 
as the RPI Program on an exchange market would result in better prices 
for retail investors. The Exchange recognizes that sub-penny trading 
and pricing could potentially result in undesirable market behavior. 
The Exchange will monitor the Program in an effort to identify and 
address any such behavior.
    The Exchange will separately propose fees applicable to the 
Program, including fees for non-displayed orders offering price 
improvement other than RPI Orders that interact with Retail Orders. The 
Exchange believes any such proposal to treat such non-displayed orders 
differently depending on the parties with whom they interact is 
consistent with Section 6(b)(5) of the Act,\25\ which requires that the 
rules of an exchange are not designed to permit unfair discrimination. 
The Exchange believes that such a differential pricing structure for 
non-displayed orders is not unfairly discriminatory. As stated in the 
NYSE RLP Approval Order, the ``Commission has previously recognized 
that the markets generally distinguish between individual retail 
investors, whose orders are considered desirable by liquidity providers 
because such retail investors are presumed on average to be less 
informed about short-term price movements, and professional traders, 
whose orders are presumed on average to be more informed.'' \26\ The 
Exchange's proposed differential pricing structure for non-displayed 
orders raises substantively identical policy considerations as the 
rules approved by the Commission in the NYSE RLP Approval Order, which 
account for the difference of assumed information and sophistication 
level between different trading participants by providing Retail Orders 
access to better execution prices as well as more favorable access 
fees.
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    \25\ 15 U.S.C. 78f(b)(5).
    \26\ See RLP Approval Order, supra note 16, at 40679-40680 
(citing Concept Release on Equity Market Structure and approval of 
an options exchange program related to price improvement for retail 
orders). Certain options exchanges deploy this same rationale today 
through pricing structures that vary for a trading participant based 
on the capacity of the contra-side trading participant. See, e.g., 
Securities Exchange Act Release No. 63632 (January 3, 2011), 76 FR 
1205 (January 7, 2011) (SR-BATS-2010-038) (notice of filing and 
immediate effectiveness of proposal to modify fees for BATS Options, 
including liquidity rebates that are variable depending on the 
capacity of the contra-party to the transaction; see also Securities 
Exchange Act Release No. 67171 (June 8, 2012), 77 FR 35732 (June 14, 
2012) (SR-NASDAQ-2012-068) (notice of filing and immediate 
effectiveness of proposal to modify fees for the NASDAQ Options 
Market, including certain fees and rebates that are variable 
depending on the capacity of the contra-party to the transaction).
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    Finally, the Exchange proposes that the Commission approve the 
proposed rule for a pilot period of twelve months from the date of 
implementation, which shall occur no later than 90 days after 
Commission approval of Rule 11.24. The Program shall expire on [Date 
will be determined upon adoption of Rule 11.24]. The Exchange believes 
that this pilot period is of sufficient length to permit both the 
Exchange and the Commission to assess the impact of the rule change 
described herein.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
any burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Changes 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 Exchange 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 proposal 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 No. SR-BYX-2012-019 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 No. SR-BYX-2012-019. 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 changes 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 such filing will also 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 No. SR-BYX-2012-019 and should be 
submitted on or before September 21, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21592 Filed 8-30-12; 8:45 am]
BILLING CODE 8011-01-P


