
[Federal Register Volume 78, Number 147 (Wednesday, July 31, 2013)]
[Notices]
[Pages 46392-46395]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18346]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70038; File No. SR-NYSEArca-2013-72]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Adding a New Rule 
To Codify Existing Price Protection Mechanisms

July 25, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on July 17, 2013, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 add a new rule to codify existing price 
protection mechanisms. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to add Rule 6.60 to codify and clarify 
price protection mechanisms already in use on the Exchange. The 
Exchange has in place various price check parameter features that are 
designed to help maintain a fair and orderly market by preventing 
incoming options orders from automatically executing at potentially 
erroneous prices. The Exchange believes that the features assist with 
the maintenance of fair and orderly markets by helping to mitigate the 
potential risks associated with orders sweeping through multiple price 
points, thereby resulting in executions at prices that are away from 
the last sale price or best bid or offer and that are potentially 
erroneous. The Exchange is proposing to add a new rule to codify 
existing price check protection and order handling features to provide 
clarity on the operation of the functionality.

Trading Collars

    The Exchange applies a ``Trade Collar Protection'' mechanism that 
prevents the immediate execution of incoming market orders or 
marketable limit orders (``marketable orders'') outside of a specified 
parameter (referred to as a

[[Page 46393]]

``Trading Collar''). Pursuant to proposed Rule 6.60(a)(3), the Trade 
Collar Protection mechanism is not available for quotes \4\ or for 
orders with execution conditions IOC, AON, FOK and NOW.\5\
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    \4\ Market Makers have obligations to provide liquidity through 
the quoting obligations set forth in Rule 6.37B. The Exchange does 
not believe it is necessary to provide Trade Collar Protection to 
quotes, as they may be priced to address dislocation in the market. 
The Exchange provides Market Makers with a dedicated trade 
protection mechanism set forth in Rule 6.40.
    \5\ IOC, AON, FOK or NOW are time in force indicators added to 
orders that notify the Exchange that the order is not eligible for 
Trade Collar Protection. When Trade Collar Protection does not 
apply, marketable orders will receive an immediate execution. The 
Exchange does not believe that Trade Collar Protection is necessary 
for orders with IOC, FOK, or NOW instructions because by definition, 
those orders are intended to access all availability liquidity 
without delay and cancel if they do not execute. Because Trade 
Collar Protection may hold a market or marketable limit order for 
execution, the Exchange believes that it would contradict the 
explicit instruction of a customer using IOC, FOK, or NOW 
instructions (immediately execute or cancel). The Exchange further 
believes that the Trade Collar Protection is not necessary for AON 
orders because by definition, an AON order must meet sufficient size 
before executing, and so partial executions at multiple price points 
would contradict the explicit instruction of a customer using an AON 
instruction.
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    Trading Collars are determined by the Exchange on a class-by-class 
basis and, unless announced otherwise via Trader Update, are the same 
value as the bid-ask differential guidelines established pursuant to 
Rule 6.37(b)(1), as set forth in proposed Rule 6.60(a)(2). For example, 
Rule 6.37(b)(1) sets the bid-ask differential for an option priced less 
than $2.00 at $0.25. For any option that has a bid less than $2.00, the 
Trading Collar will be $0.25. Accordingly, if the National Best Bid and 
Offer (``NBBO'') for XYZ is $0.75 bid and $1.75 offer, any marketable 
orders the Exchange receives will be subject to a $0.25 Trading 
Collar.\6\ If necessary to preserve a fair and orderly market,\7\ the 
Exchange may, with the approval of two Trading Officials,\8\ widen or 
narrow the Trading Collar for one or more option series.\9\
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    \6\ The bid-ask differential changes as the price increases. 
Rule 6.37(b)(1) sets the bid-ask differential at no more than $0.40 
where the bid is $2.00 or more but does not exceed $5.00. 
Accordingly, if the NBBO for XYZ is $3.00 bid and $3.50 offer, any 
marketable orders the Exchange receives will be subject to a $0.40 
Trading Collar Protection.
    \7\ As an example, situations of extreme market volatility or a 
major news announcement in an underlying security may prompt a 
review of the Trading Collar values.
    \8\ A Trading Official, as defined by Rule 6.1(b)(34) is an 
officer or employee of the Exchange. Trading Officials are not 
affiliated with OTP Holders.
    \9\ If the Exchange announces by Trader Update that the Trading 
Collars are being modified outside the bid-ask differential 
guidelines established pursuant to Rule 6.37(b)(1), the Exchange 
will publish a Trader Update that advises OTP Holders when the 
Trading Collars will return to the bid-ask differential guidelines 
set forth in Rule 6.37(b)(1). The Exchange will maintain records 
regarding when and why a Trading Collar may be modified and will 
make such records available to NYSE Regulation.
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    Trade Collar Protection applies to two scenarios. First, pursuant 
to proposed Rule 6.60(a)(1)(i), Trade Collar Protection prevents 
executions of certain incoming marketable orders when the difference 
between the National Best Offer (``NBO'') and the National Best Bid 
(``NBB'') is greater than one Trading Collar. Second, pursuant to 
proposed Rule 6.60(a)(1)(ii), Trade Collar Protection prevents the 
execution of the balance of an incoming marketable order if it were to 
execute at a price that is the NBO plus a Trading Collar for eligible 
marketable buy orders (or a price that is the NBB minus a Trading 
Collar for eligible marketable sell orders).
    The purpose of Trade Collar Protection in the first scenario, set 
forth in proposed Rule 6.60(a)(1)(i), is to prevent executions when the 
spread between the bid and ask exceeds the bid-ask differential 
guidelines and to provide an opportunity to attract additional 
liquidity at tighter spreads by displaying the incoming marketable 
order at successive prices until the displayed bid and offer is equal 
to the bid-ask differential guideline for that option, i.e., equal to 
the Trading Collar. Accordingly, if the difference between the NBO and 
the NBB is greater than one Trading Collar, the Exchange will prevent 
execution or routing of the incoming marketable order. Instead, 
pursuant to proposed Rule 6.60(a)(4)(A), the Exchange will display the 
incoming marketable order at a price equal to the NBO minus one Trading 
Collar for sell orders or the NBB plus one Trading Collar for buy 
orders (the ``collared order''). The Exchange will then attempt to 
execute or route the collared order to buy (sell) against any contra 
interest priced within one Trading Collar above (below) the displayed 
price of the collared order.\10\ As set forth in proposed Rule 
6.60(a)(4)(C)(iii), should market conditions prevent the order from 
trading or recalculating for a period of one second,\11\ the order will 
improve its displayed price by an amount equal to an additional Trading 
Collar. In accordance with proposed Rule 6.60(a)(D), if the order 
subject to Trade Collar Protection is a limit order, the order will not 
be posted at a price beyond its limit. Once the limit price is reached 
through the re-pricing of a collared order, the order will be posted 
and displayed at its limit price in the Consolidated Book. Until there 
is an opportunity to execute consistent with the parameters of Trade 
Collar Protection, the Exchange will not execute or route market orders 
or eligible limit orders that would execute outside it. As new prices 
are calculated, the Exchange will continue to evaluate whether the 
marketable orders may execute consistent with Trade Collar Protection.
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    \10\ See, proposed Rule 6.60(a)(4)(B).
    \11\ The Exchange believes that displaying the order for one 
second before recalculating to the next Trading Collar provides an 
appropriate length of time to attract additional contra-side 
liquidity for that option.
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    In the above example of the NBBO for XYZ being $0.75 bid and $1.75 
offer with a $0.25 Trading Collar, an incoming market order to sell 
will be displayed at $1.50 (i.e., $1.75 offer minus the $0.25 Trading 
Collar). For a period of one second, the Exchange will attempt to 
execute the sell order against any contra interest (on any market) 
priced $1.25 or greater (i.e., $1.50 offer minus the $0.25 Trading 
Collar). At the expiration of one second, the Exchange will redisplay 
the market sell order subject to Trade Collar Protection at the next 
Trading Collar value of $1.25. For a period of one second, the Exchange 
will then attempt to execute the sell order against any contra interest 
priced $1.00 or greater ($1.25 offer minus the $0.25 Trading Collar). 
At the expiration of another one second, the Exchange will redisplay 
the market sell order subject to Trade Collar Protection at $1.00. 
Assuming the hypothetical market remained unchanged, the new market 
would be $0.75-$1.00. Since the market would now equal the $0.25 bid-
ask differential guidelines established pursuant to Rule 6.37(b)(1), 
Trade Collar Protection would no longer apply and the market order 
would immediately execute against the $0.75 bid.
    The collared order will re-price before the expiration of one 
second as a result of certain changes in the market. Pursuant to 
proposed Rule 6.60(a)(4)(C)(i), an update to the NBBO (based on another 
market center or an inbound quote or order on the Exchange) that 
improves the same side of the market as the collared order will cause 
the collared order to be redisplayed at the same price as the updated 
NBBO. In accordance with proposed Rule 6.60(a)(4)(C)(ii), an inbound 
limit order (which is not an IOC Order, AON Order, FOK Order or NOW 
Order) on the same side of the market priced better than one Trading 
Collar from the collared order will also become subject to Trade Collar 
Protection and will cause the collared order to improve by one Trading 
Collar (which will redisplay at the new price and additional size of 
the new limit

[[Page 46394]]

order). A new incoming market order on the same side as a collared 
order will not cause the order subject to Trade Collar Protection to be 
recalculated (but will redisplay with the additional size of the new 
market order).\12\ As set forth in proposed Rule 6.60(a)(6), the order 
that has been held subject to the Trading Collar retains priority over 
later arriving quotes and all orders, except those with execution 
conditions IOC, AON, FOK or NOW.\13\
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    \12\ See, proposed Rule 6.60(a)(4)(C)(iv).
    \13\ As stated above, orders with execution conditions IOC, AON, 
FOK and NOW are not eligible for Trade Collar Protection. As such, 
marketable orders with these conditions will receive an immediate 
execution (even if there is an order held subject to the Trading 
Collar).
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    As an example, if the NBBO is $0.25 bid and $2.00 offer with a 
$0.25 Trading Collar, a new incoming market order to buy 100 contracts 
will be displayed at $0.50. If the NBBO becomes a $1.00 bid and $2.00 
offer (via an updated quote from a market maker or another market 
center), the market order subject to the Trading Collar will redisplay 
at $1.00. If, instead, a limit order to buy was received with a limit 
price of $1.00, the market order and the limit order will redisplay 
with combined size at $0.75 (for which the market order will have 
priority over the later arriving limit order). If, however, the limit 
order to buy was received with a limit price of $0.60, the market order 
and the limit order will redisplay with combined size at $0.60 (for 
which the market will have priority over the later arriving limit 
order).
    The purpose of Trade Collar Protection in the second scenario, set 
forth in proposed Rule 6.60(a)(1)(ii), is to prevent an order from 
executing at prices away from the market after exhausting interest at 
or near the top of the book. Trade Collar Protection seeks to provide 
an opportunity for liquidity to reenter the market creating tighter 
spreads by displaying the partially executed marketable order instead 
of allowing it to further execute. When the difference between the NBB 
and NBO is within the bid-ask differential guidelines and after an 
incoming marketable order executes against the NBB or NBO, Trade Collar 
Protection prevents execution of the balance of that incoming order at 
prices that are a Trading Collar above the NBO for buy orders (or at 
prices that are a Trading Collar below the NBB for sell orders). 
Essentially, the Exchange will permit the immediate execution of an 
incoming marketable order up to a Trading Collar away from the NBBO. 
Pursuant to proposed Rule 6.60(a)(5), the balance of the partially 
executed order will be subject to Trade Collar Protection and will 
display at the last sale price. However, if there is an opportunity for 
trading within one Trading Collar of the last sale price, the order 
will continue to be displayed at the NBB (NBO) established at the time 
of the initial execution. Once subject to Trade Collar Protection, the 
order will follow the re-pricing mechanism described above.
    As an example, assume the Exchange received a 1000 contract buy 
market order for ABC when the NBBO is $1.50-$1.60 with a $0.25 Trading 
Collar. The incoming 1000 contract buy market order would immediately 
execute against the $1.60 offer. If there is insufficient interest at 
the $1.60 offer to fill the order, the buy market order would execute 
against subsequently higher offer prices. Pursuant to Trade Collar 
Protection, the order would execute against all available interest up 
to and including $1.85 ($1.60 offer added with the $0.25 Trading 
Collar). The remaining balance of the order that could not be executed 
up to and including $1.85 would then be subject to Trade Collar 
Protection. The balance of the order will display at $1.85 so long as 
there are no offers at $2.10 or less ($1.85 plus the $0.25 Trading 
Collar). If, however, there is an offer at $2.10 or less, the balance 
of the order will display at $1.60.
    The Exchange believes that Trade Collar Protection applicable to 
certain incoming marketable orders (i.e., orders that do not include a 
time in force indicator) supports a fair and orderly market because it 
prevents the execution of orders that may be potentially erroneous 
while at the same time displaying such interest at sequentially tighter 
increments in an effort to attract contra-side interest at prices 
closer to the bid-ask differential for the option.

Limit Order Filter

    As set forth in proposed Rule 6.60(b), the Exchange also employs a 
filter for incoming limit orders, pursuant to which the Exchange 
rejects limit orders priced a specified percentage away from the NBB or 
NBO. As the Exchange receives limit orders, the Exchange System will 
check the price of the limit order against the contra-side NBB or NBO 
at the time of the order entry to determine whether the limit order is 
within the specified percentage.
    Unless determined otherwise by the Exchange and announced to OTP 
Holders via Trader Update, the specified percentage will be 100% for 
the contra-side NBB or NBO priced at or below $1.00 and 50% for contra-
side NBB or NBO priced above $1.00. If the limit order is priced 
outside of the specified percentage, the limit order will be rejected. 
For example, if the NBB is $4.00, a sell order priced at or below 
$2.00, which is 50% below the NBB, would be rejected. Likewise, if the 
NBO is $0.75, a buy order priced at or above $1.50, which is 100% above 
the NBO, would be rejected.
    The Exchange believes that this mechanism will prevent the entry of 
limit orders that have similar market impact as market orders because 
they are priced so far away from the prevailing market price that 
execution of such orders could cause significant price dislocation in 
the market. The Exchange also believes that this mechanism will further 
serve to mitigate the occurrence of executions that are potentially 
erroneous.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Securities Exchange Act of 1934 (the ``Act''), in general, and 
furthers the objectives of Section 6(b)(5) \14\ which requires the 
rules of an exchange 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. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) \15\ of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Exchange believes that the proposed 
rule assists with the maintenance of fair and orderly markets by 
helping to mitigate the potential risks associated with orders sweeping 
through multiple price points, thereby resulting in executions at 
prices that are away from the last sale price or best bid or offer and 
that are potentially erroneous, thereby protecting investors from 
receiving executions away from the prevailing prices at any given time. 
Specifically, the Exchange believes that holding and displaying certain 
incoming marketable orders for options with a bid-ask differential 
wider than one Trading Collar at successive Trading Collar prices 
removes impediments to and perfects the mechanism of a free and open 
market by preventing executions at potentially erroneous prices while 
at the same time seeking to attract contra-side liquidity for a tighter 
market. The Exchange believes that the maintenance of fair and orderly 
markets is further enhanced by

[[Page 46395]]

the ability to adjust the thresholds of Trade Collar Protection to 
react to market conditions. In addition, the Exchange believes that 
preventing executions of incoming marketable orders at prices that are 
not [sic] more than one Trading Collar outside of the NBBO and 
rejecting incoming limit orders that are priced specified parameters 
away from the NBBO also assures that executions will not occur at 
erroneous prices, thereby promoting a fair and orderly market. 
Similarly, the Exchange believes that rejecting limit orders priced a 
specified percentage away from the NBBO removes impediments to and 
perfects the mechanism of a free and open market by reducing the 
potential for executions at erroneous prices.
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78k-1(a)(1).
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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 not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposal will provide market participants with additional protection 
from anomalous executions. Thus, the Exchange does not believe the 
proposal creates any significant impact on competition.

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 \16\ and Rule 19b-4(f)(6) thereunder.\17\ 
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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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
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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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2013-72 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-NYSEArca-2013-72. 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 Section, 100 F Street 
NE., Washington, DC 20549-1090. Copies of the filing will also be 
available for inspection and copying at the NYSE's principal office and 
on its Internet Web site at www.nyse.com. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2013-72 and should be submitted 
on or before August 21, 2013.

    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).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-18346 Filed 7-30-13; 8:45 am]
BILLING CODE 8011-01-P


