
[Federal Register Volume 78, Number 91 (Friday, May 10, 2013)]
[Notices]
[Pages 27461-27462]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11172]



[[Page 27461]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69519; File No. SR-NSX-2013-02]


Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Order Granting Approval of Proposed Rule Change To Adopt a New Order 
Type Called the ``Auto-Ex Only'' Order and Add New Definitions 
Regarding Automatic Execution Mode and Automatic Execution Orders

May 6, 2013.

I. Introduction

    On January 23, 2013, National Stock Exchange, Inc. (``Exchange'' or 
``NSX'') 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\ a 
proposed rule change to adopt a new order type called the ``Auto-Ex 
Only'' order and to add new definitions regarding automatic execution 
(``Auto Ex'') mode and Auto Ex orders. The proposed rule change was 
published for comment in the Federal Register on February 7, 2013.\3\ 
The Commission received two comment letters on the proposed rule 
change.\4\ The Exchange submitted a response on March 14, 2013.\5\ On 
March 19, 2013, the Commission extended the time period for Commission 
action.\6\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68807 (Feb. 1, 
2013), 78 FR 9094 (Feb. 7, 2013) (``Notice'').
    \4\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from Peter J. Driscoll, Investment Professional, dated February 14, 
2013 (``Driscoll Letter'') and Theodore R. Lazo, Managing Director 
and Associate General Counsel, SIFMA, dated Mar. 6, 2013 (``SIFMA 
Letter'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Christopher Solgan, Senior Regulatory Counsel, NSX, dated Mar. 
14, 2013 (``NSX Response'').
    \6\ See Securities Exchange Act Release No. 69183 (Mar. 19, 
2013), 78 FR 18377 (Mar. 26, 2013).
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II. Description of the Proposed Rule Change

    The Exchange is proposing to (1) to adopt a new order type called 
the ``Auto-Ex Only'' order; and (2) add new definitions for ``Auto-Ex 
Mode'' and ``Auto-Ex Order'' to clarify the operation of its existing 
Auto-Ex Mode of order interaction.

A. Auto-Ex Only Order Type

    NSX is a price-time priority market with two modes of order 
interaction: (1) Auto-Ex Mode and (2) Order Delivery Mode.\7\ The 
Exchange's trading system, NSX BLADE[supreg] (``Blade''), matches and 
executes like-priced orders, regardless of whether an order was entered 
via Auto-Ex Mode or Order Delivery Mode, that are resting on the NSX 
Book \8\ in accordance with the process described in NSX Rule 
11.13(b)(1).
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    \7\ See Securities Exchange Act Release No. 54391 (Aug. 31, 
2006), 71 FR 52836 (Sept. 7, 2006) (SR-NSX-2006-08). The Exchange's 
two modes of order interaction are described in NSX Rule 11.13(b).
    \8\ ``NSX Book'' is defined as ``the System's electronic file of 
orders.'' See NSX Rule 1.5(N)(1).
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    Currently, an incoming marketable order would be executed 
immediately against contra-side orders entered via Auto-Ex Mode resting 
in the NSX Book. However, that same incoming marketable order may 
experience a delay if matched against an order resting on the NSX Book 
that was entered via Order Delivery Mode.\9\ To provide Users \10\ with 
the ability to avoid the delays associated with order delivery service, 
the Exchange proposes to implement a new order type--the Auto-Ex Only 
order, which would allow Users to submit an immediate-or-cancel 
(``IOC'') limit \11\ or market order with ``Auto-Ex Only'' handling 
instructions.\12\ Auto-Ex Only orders would be executed solely against 
orders with price-time priority entered via Auto-Ex Mode and posted to 
the NSX Book. An Auto-Ex Only order would not interact with any orders 
resting on the NSX Book entered via Order Delivery Mode and would not 
be routed away to another trading center. Like an IOC order, the 
unexecuted portion of an Auto-Ex Only order would be cancelled if not 
fully matched for execution against Auto-Ex orders with price/time 
priority on the NSX Book.
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    \9\ The delays are due to the Exchange sending to and receiving 
a response from a User that has satisfied the Exchange's 
requirements to participate in order delivery service. See NSX Rule 
11.13(b)(2) and the Interpretations and Policies thereto. To be 
eligible for order delivery service, Users must demonstrate to 
Exchange examiners that the User's system can automatically process 
the inbound order and respond immediately.
    \10\ A ``User'' is any ETP Holder or Sponsored Participant who 
is authorized to obtain access to the System pursuant to NSX Rule 
11.9. See NSX Rule 1.5(U)(1).
    \11\ An IOC order is a limit order that is to be executed in 
whole or in part as soon as such order is received, and the portion 
not so executed is to be treated as cancelled. See NSX Rule 
11.11(b)(1). An order designated as IOC is not eligible to be routed 
away pursuant to NSX Rule 11.15.
    \12\ See Proposed NSX Rule 11.11(c)(13).
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    According to the Exchange, its price/time priority and order 
execution rules \13\ would limit an Auto-Ex Only order's ability to 
interact with certain undisplayed orders. Specifically, an Auto-Ex Only 
order would first execute against displayed orders on the NSX Book. An 
Auto-Ex Only order could be precluded from interacting with an 
undisplayed order (e.g., a Zero Display Reserve Order \14\) entered via 
Auto-Ex Mode if the undisplayed order shares a price point with an 
order entered via Order Delivery Mode. Similarly, an order entered via 
Order Delivery Mode could also prevent an incoming Auto-Ex Only order 
from interacting with the undisplayed portion of a Reserve Order \15\ 
under circumstances in which the order entered via Order Delivery Mode 
has price/time priority. Like displayed orders, the displayed portion 
of a Reserve Order will interact against incoming Auto-Ex Only orders 
only to the extent that there are no orders entered via Order Delivery 
Mode in the NSX Book with price/time priority.\16\
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    \13\ See NSX Rule 11.14(a) and, with respect to Reserve Orders 
(including Zero Display Reserve Orders), NSX Rule 11.14(a)(4).
    \14\ See NSX Rule 11.11(c)(2)(A). A User may enter a Reserve 
Order with zero display quantity, in which case the Reserve Order 
will be known as a ``Zero Display Reserve Order.''
    \15\ A Reserve Order is defined as a ``limit order with a 
portion of the quantity displayed and with a reserve portion of the 
quantity that is not displayed.'' See NSX Rule 11.11(c)(2).
    \16\ The Exchange provided several illustrative examples that 
provide greater clarity regarding how the proposed Auto-Ex Only 
order type will interact with other orders. See Notice, supra note 
3, at 9096-7.
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B. Proposed New Definitions

    The Exchange proposes to amend NSX Rules 1.5 and 11.11 to include 
definitions for Auto-Ex Mode and Auto-Ex orders. Specifically, the 
Exchange proposes to define ``Automatic Execution Mode'' as ``[t]he 
mode of order interaction on the Exchange as described in Rule 
11.13(b)(1).'' \17\ In addition, the Exchange proposes to define an 
``Auto-Ex Order'' as ``[a] limit or market order that is automatically 
executed by the System against any marketable contra side order as in 
the manner described in Rule 11.13(b)(1).'' \18\ These definitions are 
intended to add clarity and provide the ability to internally cross 
reference these terms in the Exchange's rules.
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    \17\ See Proposed NSX Rule 1.5(A)(3). Rule 11.13(b)(1) provides 
as follows: ``If automatic execution is selected, the System shall 
match and execute like-priced orders on an order by order basis only 
at the specific instruction of Users.''
    \18\ See Proposed NSX Rule 11.11(c)(11). Rule 11.13(b)(1) 
provides as follows: ``If automatic execution is selected, the 
System shall match and execute like-priced orders on an order by 
order basis only at the specific instruction of Users.''
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of

[[Page 27462]]

Section 6 of the Act \19\ and the rules and regulations thereunder 
applicable to a national securities exchange.\20\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\21\ which requires, among other things, 
that the Exchange's rules 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 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.
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    \19\ 15 U.S.C. 78f.
    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that NSX's proposed new order type will 
offer Users the option of interacting with marketable orders on the 
NSX's Book without having to incur the delays associated with the order 
delivery service. Accordingly, the Commission finds that the proposed 
rule change is consistent with the Act as it is designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market, and protects investors 
and the public interest. The Commission further believes that NSX's 
proposed new definitions will provide clarity when referring to the 
Auto-Ex Mode of order interaction and the Auto-Ex order type, which 
will further the Act's goal of promoting just and equitable principles 
of trade.
    The Commission received two comment letters on the proposed rule 
change. Both commenters asserted that the proposed order type raises 
concerns under Regulation NMS.\22\ Specifically, one commenter stated 
that the proposed Auto-Ex Only order is inconsistent with the 
underlying policy goals of Rule 611 of Regulation NMS (``Order 
Protection Rule'') \23\ by designating that only certain ``protected 
quotations'' are in fact protected.\24\ NSX responded to this concern 
by explaining that the proposed Auto-Ex Only order would not trade-
through a protected quotation established by an order submitted via 
Order Delivery Mode.\25\ According to the Exchange, Blade would reject 
any Auto-Ex Only order when there is an order that was entered via 
Order Delivery Mode that has price/time priority resting on the NSX 
Book. Based on the Exchange's representations, the Commission does not 
believe that the Auto-Ex Only order is inconsistent with Rule 611 of 
Regulation NMS because an Auto-Ex Only order will not trade-through a 
protected quotation in violation of Rule 611.
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    \22\ See SIFMA Letter and Driscoll Letter, supra note 4.
    \23\ 17 CFR 242.611. Rule 611(a)(1) requires trading centers to, 
among other things, establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent 
trade-throughs on that trading center of protected quotations in NMS 
stocks.
    \24\ See SIFMA Letter, supra note 4, at 2.
    \25\ See NSX Response, supra note 5, at 2.
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    In addition, one of the commenters stated that the proposed new 
order type is inconsistent with Rule 610(a) of Regulation NMS (``Access 
to Quotations Rule''),\26\ which prohibits an exchange from imposing 
discriminatory terms that prevent or inhibit any person from obtaining 
efficient access to such quotations, by preventing orders submitted 
through Order Delivery Mode from interacting with Auto-Ex Only 
orders.\27\ NSX responded to this commenter's concern by stating that 
the Auto-Ex Only order would not prevent or inhibit any person from 
obtaining access to a displayed quotation.\28\ The Exchange further 
explained that Users could access a displayed quotation by submitting 
an intermarket sweep order or by submitting an Auto-Ex Only order to 
gain access to orders in the Exchange's displayed quotations that are 
entered using the Auto-Ex Mode.\29\ The Commission does not believe 
that the Auto-Ex Only order is inconsistent with the Access to 
Quotations Rule because it does not prevent or inhibit a market 
participant from gaining access to a displayed quotation.
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    \26\ 17 CFR 242.610(a).
    \27\ See SIFMA Letter, supra note 4, at 2-3.
    \28\ See NSX Response, supra note 5, at 2.
    \29\ See id.
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    Both commenters also noted concerns regarding the complexity of the 
U.S. equity market structure, and one commenter stated that the NSX's 
proposal would unnecessarily continue the trend of complexity for its 
sake, without justification as to how the proposal would serve the 
larger investing public.\30\ The same commenter believes that the NSX's 
proposal adds to the proliferation of order types, with the potential 
to cause investor confusion without serving any identifiable policy 
objective other than to allow market participants to bypass quotations 
that are otherwise entitled to trade-through protection under 
Regulation NMS simply because of the manner in which the quotations 
were entered.\31\ The other commenter asserted that the proposed order 
type adds another layer of complexity to an already overly complex 
market structure.\32\ The Commission believes that the NSX's proposed 
Auto-Ex Only order will benefit Users by offering them the option of 
interacting with marketable orders on the NSX's Book without having to 
incur the delays associated with the order delivery service and will 
not cause investor confusion or significantly add to the complexity of 
the existing market structure.
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    \30\ See Driscoll Letter, supra note 4, at 1-2 and SIFMA Letter, 
supra note 4, at 3.
    \31\ See SIFMA Letter, supra note 4, at 3.
    \32\ See Driscoll Letter, supra note 4, at 2. The commenter went 
on to question whether the current market structure needs an order 
delivery function and whether the current criteria under which order 
delivery operates is appropriate. Id. at 2-4. This concern is beyond 
the scope of the proposed rule change and the Commission's 
consideration of such proposed rule change.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-NSX-2013-02) be, and hereby 
is, approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11172 Filed 5-9-13; 8:45 am]
BILLING CODE 8011-01-P


