
[Federal Register Volume 78, Number 51 (Friday, March 15, 2013)]
[Notices]
[Pages 16547-16549]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05981]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69103; File No. SR-NYSE-2013-20]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending Rule 107C To Clarify That a Retail Member Organization May 
Submit Retail Orders to the Retail Liquidity Program in a Riskless 
Principal Capacity as Well as in an Agency Capacity

March 11, 2013.
    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 March 1, 2013, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') 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 proposes to amend Rule 107C to clarify that a Retail 
Member Organization (``RMO'') may submit Retail Orders to the Retail 
Liquidity Program (the ``Program'') in a riskless principal capacity as 
well as in an agency capacity, provided that (i) the entry of such 
riskless principal orders meets the requirements of FINRA Rule 5320.03, 
including that the RMO maintains supervisory systems to reconstruct, in 
a time-sequenced manner, all Retail Orders that are entered on a 
riskless principal basis; and (ii) the RMO does not include non-retail 
orders together with the Retail Orders as part of the riskless 
principal transaction. 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 is proposing an amendment to Rule 107C to clarify that 
an RMO may submit Retail Orders to the Program in a riskless principal 
capacity as well as in an agency capacity, provided that (i) the entry 
of such riskless principal orders meets the requirements of FINRA Rule 
5320.03, including that the RMO maintains supervisory systems to 
reconstruct, in a time-sequenced manner, all Retail Orders that are 
entered on a riskless principal basis; and (ii) the RMO does not 
include non-retail orders together with the Retail Orders as part of 
the riskless principal transaction.\3\ Under current Rule 107C (a)(3), 
a ``Retail Order'' is 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 other computerized methodology.''
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    \3\ Recently, the Exchange proposed to amend the attestation 
requirement of Rule 107C to allow an RMO to attest that 
``substantially all'' orders submitted to the Program will qualify 
as ``Retail Orders.'' See Exchange Act Release No. 68747 (Jan. 28, 
2013), 78 FR 7824 (Feb. 4, 2013). Riskless principal transactions 
permitted by this amendment would be considered ``Retail Orders'' 
for purposes of the attestation requirement.
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    The Exchange believes that, for purposes of determining whether an 
order should qualify as a Retail Order, there is no difference between 
a riskless principal order that meets the requirements of FINRA Rule 
5320.03 and an agency order. A riskless principal transaction is a 
transaction in which a member, after having received an order to buy 
(sell) a security, purchases (sells) the security as principal and, 
contemporaneously, satisfies the original order by selling (buying) as 
principal at the same price. Generally, a riskless principal 
transaction involves two orders, the execution of one being dependent 
upon the receipt or execution of the other; thus, there is no ``risk'' 
in the interdependent transactions when completed. Unlike a riskless 
principal transaction, an agency order is entered directly in exchange 
systems on behalf of a customer. Ultimately, however, the results of a 
riskless principal transaction and an agency order are the same: the 
customer receives an execution while the involved member acts as an 
intermediary to effect the transaction.\4\
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    \4\ A principal transaction differs from both a riskless 
principal transaction and an agency order in that it is an order for 
the principal account of the entering member.
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    A riskless principal transaction under the Program would occur as 
follows. Assume an RMO receives a market order to sell 100 shares at 
$10.01 of ABC from a retail customer. The RMO then enters a Retail 
Order into the Program to sell at $10.01 under the Program, and that 
order receives a price-improved execution under the Program at $10.012. 
When that execution occurs, the RMO contemporaneously executes the 
order with the retail customer for the same price ($10.012) that it 
received within the program, exclusive of any markup or markdown, 
commission equivalent, or other fee. Thus, the retail customer would 
receive the same benefit from the Program that it would have if the 
Retail Order had been entered on an agency basis. Therefore, there is 
no functional distinction for purposes of the Program between an order 
entered by an RMO on an agency basis and one entered on a riskless 
principal basis, and including riskless principal orders improves the 
ability of RMOs to offer the possibility of price improvement to their 
customers.
    The Exchange believes that the requirement that the entry of such

[[Page 16548]]

riskless principal orders satisfy FINRA Rule 5320.03 provides 
sufficient protection against RMOs submitting orders for their own 
account to the Program. An RMO entering a riskless principal 
transaction will have to, contemporaneously with the execution of the 
customer's order, submit a report identifying the trade as riskless 
principal to FINRA. Additionally, the RMO will need to have written 
policies and procedures to ensure that riskless principal transactions 
comply with applicable FINRA rules. The policies and procedures, at a 
minimum, must require that the customer order be received prior to the 
offsetting principal transaction, and that the offsetting principal 
transaction is at the same price as the customer order exclusive of any 
markup or markdown, commission equivalent, or other fee, and is 
allocated to a riskless principal or customer account in a consistent 
manner and within 60 seconds of execution. Additionally, the RMO must 
have supervisory systems in place that produce records that enable the 
RMO and FINRA to reconstruct accurately, readily, and in a time-
sequenced manner all Retail Orders that are entered on a riskless 
principal basis. The RMO must also ensure that non-Retail Orders are 
not included with the Retail Orders as part of a riskless principal 
transaction. The above requirements ensure that despite the procedural 
differences between the execution of a riskless principal transaction 
and an agency order, the only difference will be the procedure in which 
the transactions are effected and not the result.
    The Exchange further believes that clarifying that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 are 
able to participate in the Program on the same basis as agency orders 
will enable more retail customers to benefit from the enhanced price 
competition and transparency of the Program.
 2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\5\ in general, and 
furthers the objectives of Section 6(b)(5),\6\ in particular, in that 
it is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change promotes just 
and equitable principles of trade because it will ensure that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 will 
have the same opportunity to participate in the Program as agency 
orders. As discussed above, there is no functional distinction for 
purposes of the Program between an order entered by an RMO on an agency 
basis and one entered on a riskless principal basis. The Exchange 
believes that the proposed change would tend to reduce any potential 
discrimination between similarly situated customers or brokers by 
ensuring that the ability of retail customers to benefit from the 
Program does not depend on a distinction in capacity that is not 
meaningful for purposes of the Program. As a result of the change, a 
retail customer will be able to benefit from the price improvement 
offered by the Program without regards to whether the RMO enters the 
order on a riskless principal or agency basis.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it will clarify that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 are 
eligible to participate in the Program on the same basis as agency 
orders. By allowing all orders that are functionally equivalent to 
agency orders to participate in the Program, the proposed change would 
potentially stimulate further price competition for retail orders.
    Finally, the Exchange believes that the proposed change would 
protect investors and public interest by expanding the access of retail 
customers to the price improvement and transparency offered by the 
Program and the access of the public to an exchange-sponsored 
alternative to broker-operated internalization venues.

 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. The Exchange believes that 
the amendment, by increasing the eligible level of participation in the 
program, will reduce burdens on competition around retail executions 
such that retail investors would receive better prices than they 
currently do on the Exchange and potentially through bilateral 
internalization arrangements. The Exchange believes that the 
transparency and competitiveness of operating a program such as the 
Retail Liquidity Program on an exchange market would result in better 
prices for retail investors, and benefits retail investors by expanding 
the capabilities of Exchanges to encompass practices currently allowed 
on non-Exchange venues.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \7\ and Rule 19b-4(f)(6) thereunder.\8\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \7\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \8\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Commission has waived the five-day prefiling requirement in this 
case.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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:

[[Page 16549]]

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-NYSE-2013-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2013-20. 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 
10:00 a.m. and 3:00 p.m. Copies of such 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 publicly available. All 
submissions should refer to File Number SR-NYSE-2013-20 and should be 
submitted on or before April 5, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05981 Filed 3-14-13; 8:45 am]
BILLING CODE 8011-01-P


