
[Federal Register Volume 78, Number 90 (Thursday, May 9, 2013)]
[Notices]
[Pages 27261-27263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11004]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69513; File Nos. SR-NYSE-2013-08; SR-NYSEMKT-2013-07]


Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE 
MKT LLC; Order Granting Approval to Proposed Rule Changes Amending the 
Attestation Requirement of Rule 107C (NYSE) and 107C--Equities (NYSE 
MKT) To Allow a Retail Member Organization To Attest That 
``Substantially All'' Orders Submitted to the Retail Liquidity Program 
Will Qualify as ``Retail Orders''

May 3, 2013.

I. Introduction

    On January 17, 2013, the New York Stock Exchange LLC (``NYSE'') and 
NYSE MKT LLC (``NYSE MKT'' and together with NYSE, the ``Exchanges'') 
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 to 
allow Retail Member Organizations (``RMOs'') to attest that 
``substantially all,'' rather than all, orders submitted to the 
Exchanges' respective Retail Liquidity Programs (``Programs'') qualify 
as ``Retail Orders.'' The proposed rule changes were published for 
comment in the Federal Register on February 4, 2013.\3\ The Commission 
received one comment on the proposals.\4\ On March 20, 2013, the 
Commission extended the time for Commission action on the proposed rule 
changes until May 5, 2013.\5\ The Exchanges submitted a response to the 
comment letter on April 2, 2013.\6\ This order approves the proposed 
rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 68747 (Jan. 28, 
2013), 78 FR 7824 (SR-NYSE-2013-08); and 68746 (Jan. 28, 2013), 78 
FR 7842 (SR-NYSEMKT-2013-07).
    \4\ See Letter to the Commission from Theodore R. Lazo, Managing 
Director and Associate General Counsel, Securities Industry and 
Financial Markets Association (SIFMA), dated March 11, 2013.
    \5\ See Securities Exchange Act Release No. 69187, 78 FR 18402 
(March 26, 2013).
    \6\ See Letter to the Commission from Janet McGinnis, General 
Counsel, NYSE Markets, dated April 2, 2013 (``Exchanges' Response 
Letter'').
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II. Description of the Proposals

    The Exchanges began operating their respective Programs after they 
were approved by the Commission on a pilot basis in July, 2012.\7\ 
Under the current rules, a member organization that wishes to 
participate in the Programs as an RMO must submit: (A) An application 
form; (B) supporting documentation; and (C) an attestation that ``any 
order'' submitted as a Retail Order \8\ will qualify as such under Rule 
107C.\9\
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    \7\ See Securities Exchange Act Release No. 67347 (July 3, 
2012), 77 FR 40673 (July 10, 2012) (``RLP Approval Order'').
    \8\ A Retail Order is defined in Rule 107C(a)(3) as ``an agency 
order or a riskless principal order that originates from a natural 
person and is submitted to the Exchange by a Retail Member 
Organization, 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.''
    \9\ Given that the rules governing the NYSE and NYSE MKT Retail 
Liquidity Programs are virtually identical, and that the rationale 
for the adoption of the proposed rule text is the same, references 
to the text of NYSE Rule 107C in this order and the rationale for 
its adoption, unless otherwise noted, apply equally to NYSE MKT Rule 
107C--Equities.
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    The proposals seek to lessen the attestation requirements of RMOs 
that submit ``Retail Orders'' eligible to receive potential price 
improvement through participation in the Programs. Specifically, the 
Exchanges propose to amend Rule 107C (NYSE) and 107C--Equities (NYSE 
MKT) to provide that an RMO may attest that ``substantially all''--
rather than all--of the orders it submits to the Program are Retail 
Orders as defined in Rule 107C.
    The Exchanges represented that they believe the categorical nature 
of the current ``any order'' attestation requirement is preventing 
certain member organizations with retail customer business from 
participating in the Programs. According to the Exchanges, some of 
these member organizations that wish to participate in the Programs 
represent both ``Retail Orders,'' as defined in Rule 107C(a)(3), as 
well as other agency flow that may not meet the strict definition of 
``Retail Order.'' The Exchanges understand that, due to technical 
limitations in order management systems and routing networks, such 
member organizations may not be able to fully segregate Retail Orders 
from other agency, non-Retail Order flow. As a result, the Exchanges 
believe that some member organizations choose not to participate in the 
Program because they cannot satisfy the current categorical attestation 
requirement, although they could satisfy the proposed ``substantially 
all'' requirement.
    The Exchanges clarified in their proposals that the ``substantially 
all'' standard is meant to allow only de minimis amounts of orders to 
participate in the Programs that do not meet the definition of a Retail 
Order in Rule 107C and that cannot be segregated from bona fide Retail 
Orders due to

[[Page 27262]]

systems limitations. Under the proposals, the Exchanges would require 
that RMOs retain in their books and records adequate substantiation 
that substantially all orders sent to the Exchange as Retail Orders met 
the strict definition and that those orders not meeting the strict 
definition are agency orders that cannot be segregated from Retail 
Orders due to system limitations, and are de minimis in terms of the 
overall number of Retail Orders sent to the Exchange.\10\
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    \10\ The Exchanges note that the Financial Industry Regulatory 
Authority, Inc. (``FINRA''), on behalf of the Exchanges, will review 
a member organization's compliance with these requirements.
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III. Comment Letters and the Exchanges' Responses

    The Commission received one comment on the proposals. The comment 
letter expressed concern over the proposed ``substantially all'' 
attestation requirement primarily for four reasons.
    First, the comment letter questioned whether the proposals would 
undermine the rationale on which the Commission approved the Retail 
Liquidity Programs. According to the commenter, when the Commission 
granted approval to the Programs, along with exemptive relief in 
connection with the operation of the Programs, it did so with the 
understanding that the Programs would service ``only'' retail order 
flow. To the extent the proposals would potentially allow non-Retail 
Orders to receive price improvement in the Programs, the commenter 
suggested that the Commission should reexamine its rationale for 
granting the exemptive relief relating to the Programs.
    In response, the Exchanges noted that the proposed amendments are 
designed to permit isolated and de minimis quantities of agency orders 
that do not qualify as Retail Orders to participate in the Programs, 
because such orders cannot be segregated from Retail Orders due to 
systems limitations. The Exchanges also noted that several significant 
retail brokers choose not to participate in the Programs currently 
because of the categorical ``any order'' standard, and that the 
proposed ``substantially all'' standard would allow the significant 
amount of retail order flow represented by these brokers the 
opportunity to receive the benefits of the Programs. Additionally, the 
Exchanges note that the Programs are designed to replicate the existing 
practices of broker-dealers that internalize much of the market's 
retail order flow off-exchange, and that the Programs, as modified by 
the ``substantially all'' proposals, would offer a competitive and more 
transparent alternative to internalization.
    Second, the commenter expressed its belief that the Exchanges did 
not sufficiently explain why retail brokers are not able to separate 
all Retail and non-Retail Orders, and thereby satisfy the current 
attestation requirement. The commenter expressed its belief that the 
Commission should require additional explanation as to how retail 
brokers could satisfy the proposed ``substantially all'' standard if 
they could not satisfy the current standard, including an analysis of 
the costs and benefits to retail brokers of implementing technology 
changes to identify orders as Retail or non-Retail. Furthermore, the 
commenter suggested that the Exchanges' proposals are at odds with the 
situation found in options markets where exchanges and brokers 
distinguish between public and professional customers--a distinction 
the commenter analogized to the Retail v. non-Retail distinction.
    The Exchanges responded that several retail brokers have explained 
that their order flow is routed in aggregate for retail execution 
purposes and that a de minimis amount of such flow may have been 
generated electronically, thus not meeting the strict Retail Order 
definition. According to the Exchanges, these retail brokers have 
chosen not to direct any of their significant shares of retail order 
flow to the Programs because the cost of complying with the current 
``any order'' standard, such as implementing any necessary systems 
changes, is too high. The Exchanges represented that the retail brokers 
have indicated their willingness to comply with the proposed 
``substantially all'' standard, as well as their ability to implement 
the proposed standard on their systems with confidence. The Exchanges 
further responded that the distinction between public and professional 
customers in the options market is not like distinction between Retail 
and non-Retail Orders; the former distinction turns on volume and is 
thus an easier bright-line threshold to implement, while the 
distinction between Retail and non-Retail Orders turns on whether the 
order originated from a natural person, which imposes a higher 
threshold for order flow segmentation purposes.
    Third, the commenter contended that the proposed ``substantially 
all'' standard is overly vague. According to the commenter, the 
Exchanges' proposed guidance on what constitutes ``substantially all'' 
is so vague that it could allow a material amount of non-retail order 
flow to qualify for the Programs. The commenter suggested that, should 
the Commission approve the proposals, it should first establish a 
bright-line rule to define what constitutes ``substantially all'' 
retail order flow.\11\
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    \11\ The commenter cited one example where a ``de minimis'' 
transaction is defined in 17 CFR 242.101(b)(7), in connection with a 
distribution of securities, as ``less than 2%.''
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    The Exchanges responded that the proposals represent only a modest 
modification of the attestation requirement. In this respect, the 
Exchanges noted that the proposals would permit only isolated and de 
minimis quantities of agency orders to participate in the Programs that 
do not satisfy the strict definition of a Retail Order but that cannot 
be segregated from Retail Orders due to systems limitations. 
Furthermore, the Exchanges noted that an RMO's compliance with this 
requirement would be monitored and subject to books and record-keeping 
requirements.
    Fourth, the commenter stated that the proposals may cause an 
exponential increase in monitoring and recordkeeping burdens associated 
with the Programs. The commenter expressed its belief that it could be 
especially difficult for the Exchanges not just to identify non-retail 
order flow, but also to monitor whether such flow exceeded a de minimis 
amount. The commenter also questioned whether the potential difficulty 
of the Exchanges monitoring their respective Programs might increase 
the likelihood that members may be subject to unfair discrimination in 
the Programs' approval and disqualification process.
    In response, the Exchanges note that they will issue Trader Alerts 
to provide clear guidance on how the ``substantially all'' standard 
will be implemented and monitored. The Exchanges also noted that the 
Programs are designed to attract as much retail order flow as possible, 
and that, should RMOs begin submitting substantial amounts of non-
retail order flow, Retail Liquidity Providers would become less willing 
to participate in the Programs. Finally, the Exchanges disagreed with 
the commenter's statement that a standard that provides a de minimis 
number of exceptions would be any harder to enforce than an standard 
that permitted no exceptions.

IV. Discussion and Commission Findings

    After careful review of the proposals, the comment letter received, 
and the Exchanges' response, the Commission

[[Page 27263]]

finds that the proposed rule changes are consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange.\12\ In particular, 
the Commission finds that the proposed rule changes are consistent with 
Section 6(b)(5) of the Act,\13\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
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    \12\ In approving the proposals, the Commission has considered 
the proposed rules' impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed ``substantially all'' 
standard is a limited and sufficiently-defined modification to the 
Programs' current RMO attestation requirements that does not constitute 
a significant departure from the Programs as initially approved by the 
Commission.\14\ The proposals make clear that to comply with the 
standard, RMOs may submit only isolated and de minimis amounts of 
agency orders that cannot be segregated from Retail Orders due to 
systems limitations.\15\ Furthermore, as the Exchanges note, RMOs will 
need to adequately document their compliance with the ``substantially 
all'' standard in their books and records. Specifically, an RMO would 
need to retain adequate documentation that substantially all orders 
sent to the Exchanges as Retail Orders met that definition, and that 
those orders not meeting that definition are agency orders that cannot 
be segregated from Retail Orders due to system limitations, and are de 
minimis in terms of the overall number of Retail Orders sent to the 
Exchanges. The Commission also notes that FINRA will monitor an RMO's 
compliance with this requirement.
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    \14\ The Commission notes that it approved the Programs on a 
pilot basis subject to ongoing Commission review.
    \15\ While the Commission recognizes the potential benefit of 
the commenter's suggestion concerning a bright-line definition of de 
minimis, see supra note 11, the Commission believes that, in light 
of the facts surrounding the instant proposals, the proposals, and 
the guidance that the Exchanges will provide to their members on 
this point, are sufficiently clear. The Commission also notes that 
the example the commenter cites is found in Regulation M, which 
governs different circumstances than those at issue here.
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    Additionally, the Commission finds that the Exchanges have provided 
adequate justification for the proposals. The Exchanges represented 
that, as several significant retail brokers explained to them, the 
current ``any order'' standard is effectively prohibitive, given the 
brokers' order flow aggregation and management systems. The Exchanges 
further represented that these retail brokers indicated their systems 
would allow them to comply with the ``substantially all'' standard, as 
proposed. By allowing these retail brokers to participate in the 
Programs, the proposals could bring the potential benefits of the 
Programs, including price improvement and increased transparency,\16\ 
to the retail order flow that these brokers represent.\17\
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    \16\ For a more detailed discussion of the Program's potential 
benefits, see RLP Approval Order, supra note 7.
    \17\ The commenter also expressed concern that this proposal may 
increase the burden upon the Exchanges in monitoring compliance with 
the Programs. The Commission finds that any potential concerns 
raised by this assertion, which are disputed by the Exchanges, are 
outweighed by the potential benefits of the proposals; namely, that 
the proposals may allow more retail orders the opportunity to 
participate in the Programs and receive the attendant benefits of 
the Programs. With respect to the commenter's concern that members 
may be subject to unfair discrimination in the approval and 
disqualification process for participation in the Programs, the 
Commission notes that it previously found that the Programs' 
provisions concerning the certification, approval, and potential 
disqualification of RMOs and Retail Liquidity Providers are not 
inconsistent with the Act. See RLP Approval Order, supra note 7.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rules changes (SR-NYSE-2013-08; SR-NYSEMKT-
2013-07) be, and hereby are, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(83).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11004 Filed 5-8-13; 8:45 am]
BILLING CODE 8011-01-P


