
[Federal Register Volume 78, Number 219 (Wednesday, November 13, 2013)]
[Notices]
[Pages 68116-68122]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27053]



[[Page 68116]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70824; File No. SR-NYSEArca-2013-107]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Establish a Retail Liquidity Program

November 6, 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 October 22, 2012, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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 [sic] a one-year pilot program that would 
add new Rule 7.44 to establish a Retail Liquidity Program (``Program'' 
or ``proposed rule change'') to attract additional retail order flow to 
the Exchange for NYSE Arca-listed securities and UTP Securities, 
excluding NYSE-listed (Tape A) securities, while also providing the 
potential for price improvement to such order flow. 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 a one-year pilot program that would add 
new NYSE Arca Equities Rule 7.44 to establish a Retail Liquidity 
Program to attract additional retail order flow to the Exchange for 
NYSE Arca-listed securities and UTP Securities, excluding NYSE-listed 
(Tape A) securities, while also providing the potential for price 
improvement to such order flow.
    Under the proposed rule change, the Exchange would create two new 
classes of market participants: (1) Retail Member Organizations 
(``RMOs''), which would be eligible to submit certain retail order flow 
(``Retail Orders'') to the Exchange, and (2) Retail Liquidity Providers 
(``RLPs''), which would be required to provide potential price 
improvement for Retail Orders in the form of non-displayed interest 
that is better than the best protected bid or the best protected offer 
(``PBBO'') \4\ (``Retail Price Improvement Order'' or ``RPI'') for 
securities to which they are assigned.\5\ Equity Trading Permit 
(``ETP'') Holders would also be permitted, but not required, to submit 
RPIs.
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    \4\ The terms protected bid and protected offer would have the 
same meaning as defined in Regulation NMS Rule 600(b)(57). The PBB 
is the best-priced protected bid and the PBO is the best-priced 
protected offer. Generally, the PBB and PBO and the national best 
bid (``NBB'') and national best offer (``NBO'') 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 PBB or PBO would be 
the best-priced protected bid or offer to which a market center must 
route interest pursuant to Regulation NMS Rule 611.
    \5\ RLPs would be permitted to submit RPIs for securities to 
which it was [sic] not assigned. For non-assigned securities, an RLP 
would be treated the same as other non-RLP ETP Holders.
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    The Exchange would submit a separate proposal to amend its Price 
List in connection with the proposed Retail Liquidity Program. Under 
that proposal, the Exchange expects to charge RLPs and other ETP 
Holders a fee for executions of their RPIs against Retail Orders and in 
turn would provide a credit or free executions to RMOs for executions 
of their Retail Orders against RPIs of RLPs and other ETP Holders. The 
fees and credits for liquidity providers and RMOs would be determined 
based on experience with the Program in the first several months.
Definitions
    The Exchange proposes to adopt the following definitions under 
proposed NYSE Arca Equities Rule 7.44(a). First, the term ``Retail 
Liquidity Provider'' would be defined as an ETP Holder that was 
approved by the Exchange to act as such and to submit RPIs according to 
certain requirements set forth in proposed Rule 7.44.
    Second, the term ``Retail Member Organization'' would be defined as 
an ETP Holder that has been approved by the Exchange to submit Retail 
Orders.
    Third, the term ``Retail Order'' would be defined as an agency 
order or a riskless principal order that met the criteria of FINRA Rule 
5320.03 that originated from a natural person and was submitted to the 
Exchange by an RMO, provided that no change was 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. Retail Orders must be priced in one cent increments in 
prices above $1.00 per share. In addition to interacting with RPIs, 
Retail Orders would interact with non-displayed liquidity priced better 
than the PBBO on the opposite [sic] of the Retail Order, excluding 
contra-side Retail Orders, in Exchange Systems, such as Passive 
Liquidity (``PL'') Orders and Mid-Point Passive Liquidity (``MPL'') 
Orders, would interact with displayable odd lot interest priced within 
the PBBO, and, depending upon how they are designated by an RMO, could 
interact with other interest in Exchange systems.
    Finally, the term ``Retail Price Improvement Order'' would be 
defined as non-displayed interest in NYSE Arca-listed securities and 
UTP Securities, excluding NYSE-listed (Tape A) securities, that was 
better than the best protected bid (``PBB'') or best protected offer 
(``PBO'') by at least $0.001 and that was identified as an RPI in a 
manner prescribed by the Exchange.\6\ The price

[[Page 68117]]

of an RPI would be determined by an ETP Holder's entry of RPI buy or 
sell interest into Exchange systems. RPIs would remain undisplayed. An 
RPI that was not priced within the PBBO would be rejected upon entry. A 
previously entered RPI that became priced at or inferior to the PBBO 
would not be eligible to interact with incoming Retail Orders, and such 
an RPI would cancel if a Retail Order executed against all displayed 
interest ranked ahead of the RPI and then attempted to execute against 
the RPI. If not cancelled, an RPI that was no longer priced at or 
inferior to the PBBO would again be eligible to interact with incoming 
Retail Orders. An RPI must be designated as either a PL or MPL Order, 
and an order so designated would interact with only Retail Orders.
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    \6\ Exchange systems would prevent Retail Orders from 
interacting with an RPI if the RPI was not priced at least $0.001 
better than the PBBO. The Exchange notes, however, that price 
improvement of $0.001 would be a minimum requirement and RLPs and 
other ETP Holders could enter Retail Price Improvement Orders that 
better the PBBO by more than $0.001. 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 
undisplayed RPIs. 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 Janet M. 
McGinness, Corporate Secretary, Office of the General Counsel, NYSE 
Euronext to Elizabeth M. Murphy, Secretary, Securities and Exchange 
Commission dated October 22, 2013 (``Sub-Penny Rule Exemption 
Request''). The Exchange is also planning to submit a request for 
no-action relief from Rule 602 of Regulation NMS.
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    RLPs and other liquidity providers \7\ and RMOs could enter odd 
lots, round lots or mixed lots as RPIs and as Retail Orders, 
respectively. As discussed below, RPIs would be ranked and allocated 
according to price and time of entry into Exchange systems and 
therefore without regard to whether the size entered was an odd lot, 
round lot or mixed lot. Similarly, Retail Orders would interact with 
RPIs according to the priority and allocation rules of the Program and 
without regard to whether they were odd lots, round lots or mixed lots. 
Finally, Retail Orders could be designated as Type 1 or Type 2 without 
regard to the size of the lot. In accordance with CTA rules, executions 
less than a round lot would not print to the tape or be considered the 
last sale.
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    \7\ A Market Maker (``MM'') or Lead Market Maker (``LMM'') would 
be permitted to enter RPIs for securities in which they were not 
registered as an MM or LMM; however, the MM or LMM would not be 
eligible for execution fees that are lower than non-RLP rates for 
such securities.
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    RPIs would interact with Retail Orders as follows; a more detailed 
priority and order allocation discussion is below. An RPI would 
interact with Retail Orders at the level at which the RPI was priced as 
long as the minimum required price improvement was produced. 
Accordingly, if RPI sell interest was entered with a $10.098 offer 
while the PBO was $10.11, the RPI could interact with the Retail Order 
at $10.098, producing $0.012 of price improvement.
RMO Qualifications and Approval Process
    Under proposed NYSE Arca Equities Rule 7.44(b), any ETP Holder \8\ 
could qualify as an RMO if it conducted a retail business or handled 
retail orders on behalf of another broker-dealer. Any ETP Holder that 
wished to obtain RMO status would be required to submit: (1) An 
application form; (2) an attestation, in a form prescribed by the 
Exchange, that substantially all orders submitted by the ETP Holder as 
Retail Orders would meet the qualifications for such orders under 
proposed Rule 7.44; and (3) supporting documentation sufficient to 
demonstrate the retail nature and characteristics of the applicant's 
order flow.\9\
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    \8\ An RLP could also act as an RMO for securities to which it 
was not assigned, subject to the qualification and approval process 
established by the proposed rule.
    \9\ 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 
could 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 would only designate orders as 
Retail Orders if all requirements of a Retail Order were met. Such 
written policies and procedures must require the ETP Holder 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 represented Retail Orders from 
another broker-dealer customer, the RMO's supervisory procedures must 
be reasonably designed to assure that the orders it received from such 
broker-dealer customer that it designated as Retail Orders would 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 would 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.\10\
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    \10\ FINRA, on behalf of the Exchange, would 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 disapproved the application, the Exchange would 
provide a written notice to the ETP Holder. The disapproved applicant 
could appeal the disapproval by the Exchange as provided in proposed 
Rule 7.44(i), and/or reapply for RMO status 90 days after the 
disapproval notice was issued by the Exchange. An RMO also could 
voluntarily withdraw from such status at any time by giving written 
notice to the Exchange.
    Any ETP Holder that has qualified as an RMO pursuant to NYSE or 
NYSE MKT Rule 107C shall be deemed to be so qualified pursuant to this 
Rule.
RLP Qualifications
    To qualify as an RLP under proposed NYSE Arca Equities Rule 
7.44(c), an ETP Holder would be required to: (1) Already be registered 
as an MM or LMM; (2) demonstrate an ability to meet the requirements of 
an RLP; (3) have the ability to accommodate Exchange-supplied 
designations that identify to the Exchange RLP trading activity in 
assigned RLP securities; and (4) have adequate trading infrastructure 
and technology to support electronic trading.
    Because an RLP would only be permitted to trade electronically, an 
ETP Holder's technology must be fully automated to accommodate the 
Exchange's trading and reporting systems that are relevant to operating 
as an RLP. If an ETP Holder was unable to support the relevant 
electronic trading and reporting systems of the Exchange for RLP 
trading activity, it would not qualify as an RLP. An RLP may not use 
the Exchange supplied designations for non-RLP trading activity at the 
Exchange. Additionally, an ETP Holder will not receive credit for its 
RLP trading activity for which it does not use its designation.
RLP Approval Process
    Under proposed Rule 7.44(d), to become an RLP, an ETP Holder would 
be required to submit an RLP application form with all supporting 
documentation to the Exchange. The Exchange would determine whether an 
applicant was qualified to become an RLP as set forth above. After an 
applicant submitted an RLP application to the Exchange with supporting 
documentation, the Exchange would notify the applicant ETP Holder of 
its decision. The Exchange could approve one or more ETP Holders to act 
as an RLP for a particular security. The Exchange could also approve a 
particular ETP Holder to act as an RLP for one or more securities. 
Approved RLPs would be assigned securities according to requests made 
to, and approved by, the Exchange.

[[Page 68118]]

    If an applicant was approved by the Exchange to act as an RLP, the 
applicant would be required to establish connectivity with relevant 
Exchange systems before the applicant would be permitted to trade as an 
RLP on the Exchange.
    If the Exchange disapproves the application, the Exchange would 
provide a written notice to the ETP Holder. The disapproved applicant 
could appeal the disapproval by the Exchange as provided in proposed 
Rule 7.44(i) and/or reapply for RLP status 90 days after the 
disapproval notice was issued by the Exchange.
Voluntary Withdrawal of RLP Status
    An RLP would be permitted to withdraw its status as an RLP by 
giving notice to the Exchange under proposed NYSE Arca Equities Rule 
7.44(e). The withdrawal would become effective when those securities 
assigned to the withdrawing RLP were reassigned to another RLP. After 
the Exchange received the notice of withdrawal from the withdrawing 
RLP, the Exchange would reassign such securities as soon as 
practicable, but no later than 30 days after the date the notice was 
received by the Exchange. If the reassignment of securities took longer 
than the 30-day period, the withdrawing RLP would have no further 
obligations and would not be held responsible for any matters 
concerning its previously assigned RLP securities.
RLP Requirements
    Under proposed NYSE Arca Equities Rule 7.44(f), an RLP would only 
be permitted to enter RPIs electronically and directly into Exchange 
systems and facilities designated for this purpose and could only 
submit RPIs in their role as an RLP for the securities to which it is 
assigned as RLP.\11\ In order to be eligible for execution fees that 
are lower than non-RLP rates, an RLP would be required to maintain (1) 
an RPI that was better than the PBB at least five percent of the 
trading day for each assigned security; and (2) an RPI that was better 
than the PBO at least five percent of the trading day for each assigned 
security.
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    \11\ An ETP Holder acting as an RLP for a security could enter 
RPIs into Exchange systems and facilities for securities to which it 
was not assigned; however, the ETP Holder would not be eligible for 
execution fees that are lower than non-RLP rates for securities to 
which it was not assigned.
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    An RLP's five-percent requirements would be calculated by 
determining the average percentage of time the RLP maintained an RPI in 
each of its RLP securities during the regular trading day, on a daily 
and monthly basis. The Exchange would determine whether an RLP met this 
requirement by calculating the following:
    (1) The ``Daily Bid Percentage'' would be calculated by determining 
the percentage of time an RLP maintained an RPI with respect to the PBB 
during each trading day for a calendar month;
    (2) The ``Daily Offer Percentage'' would be calculated by 
determining the percentage of time an RLP maintained an RPI with 
respect to the PBO during each trading day for a calendar month;
    (3) The ``Monthly Average Bid Percentage'' would be calculated for 
each RLP security by summing the security's ``Daily Bid Percentages'' 
for each trading day in a calendar month then dividing the resulting 
sum by the total number of trading days in such calendar month; and
    (4) The ``Monthly Average Offer Percentage'' would be calculated 
for each RLP security by summing the security's ``Daily Offer 
Percentage'' for each trading day in a calendar month and then dividing 
the resulting sum by the total number of trading days in such calendar 
month.
    Finally, only RPIs would be used when calculating whether an RLP 
was in compliance with its five-percent requirements.
    The Exchange would determine whether an RLP met its five-percent 
requirement by determining the average percentage of time an RLP 
maintained an RPI in each of its RLP securities during the regular 
trading day on a daily and monthly basis. The lower fees would not 
apply during a month in which the RLP had not satisfied the five-
percent requirements. Additionally, beginning with the third month of 
operation as an RLP, an RLP's failure to satisfy the five-percent 
requirements described above for each of its assigned securities could 
result in action taken by the Exchange, as described below.
    The Exchange would not begin calculating whether an RLP met the 
quoting requirement during the first two calendar months that the RLP 
participated in the Program. If the Program was implemented mid-month, 
the Exchange would begin calculating the quoting requirement two 
calendar months after the end of the month in which the program was 
implemented.
Failure of RLP To Meet Requirements
    Proposed NYSE Arca Equities Rule 7.44(g) addresses an RLP's failure 
to meet its requirements. If, after the first two months an RLP acted 
as an RLP, an RLP failed to meet any of the requirements of proposed 
Rule 7.44(f) for any assigned RLP security for three consecutive 
months, the Exchange could, in its discretion, take one or more of the 
following actions \12\: (1) Revoke the assignment of any or all of the 
affected securities from the RLP; (2) revoke the assignment of 
unaffected securities from the RLP; or (3) disqualify the ETP Holder 
from its status as an RLP.
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    \12\ As discussed previously, an RLP's failure to satisfy its 
requirement would result in the RLP no longer being charged the 
lower fees for execution of its Retail Price Improvement Orders.
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    The Exchange, in its sole discretion, would determine if and when 
an ETP Holder was disqualified from its status as an RLP. One calendar 
month prior to any such determination, the Exchange would notify an RLP 
of such impending disqualification in writing. When disqualification 
determinations were made, the Exchange would provide a written 
disqualification notice to the ETP Holder.
    A disqualified RLP could appeal the disqualification as provided in 
proposed Rule 7.44(i) and/or reapply for RLP status 90 days after the 
disqualification notice was issued by the Exchange.\13\
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    \13\ The Exchange notes that the RPI executions of an ETP Holder 
disqualified from acting as an RLP would thereafter be subject to 
the transaction pricing applicable to non-RLP ETP Holders.
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Failure of RMO To Abide by Retail Order Requirements
    Proposed NYSE Arca Equities Rule 7.44(h) addresses an RMO's failure 
to abide by Retail Order requirements. If an RMO designated orders 
submitted to the Exchange as Retail Orders and the Exchange determined, 
in its sole discretion, that those orders failed to meet the 
requirements of Retail Orders, the Exchange could disqualify an ETP 
Holder from its status as an RMO. When disqualification determinations 
were made, the Exchange would provide a written disqualification notice 
to the ETP Holder. A disqualified RMO could appeal the disqualification 
as provided in proposed Rule 7.44(i) and/or reapply for RMO status 90 
days after the disqualification notice was issued by the Exchange.\14\
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    \14\ As above for RLPs, the Retail Order executions of an ETP 
Holder disqualified from RMO status would thereafter be subject to 
the transaction pricing applicable to non-RMO ETP Holders.
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Appeal of Disapproval or Disqualification
    Proposed NYSE Arca Equities Rule 7.44(i) provides appeal rights to 
ETP Holders. If an ETP Holder disputed the Exchange's decision to 
disapprove it under Rule 7.44(b) or (d) or disqualify it under Rule 
7.44(g) or (h), such ETP Holder (``appellant'') could request, within 
five business days after notice of the decision was issued by the 
Exchange, that the Retail Liquidity

[[Page 68119]]

Program Panel (``RLP Panel'') review the decision to determine if it 
was correct.\15\
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    \15\ In the event an ETP Holder was disqualified from its status 
as an RLP pursuant to proposed Rule 7.44(g), the Exchange would not 
reassign the appellant's securities to a different RLP until the RLP 
Panel informed the appellant of its ruling.
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    The RLP Panel would consist of the NYSE's Chief Regulatory Officer 
(``CRO''), or a designee of the CRO, and two officers of the Exchange 
designated by the Co-Head of U.S. Listings and Cash Execution. The RLP 
Panel would review the facts and render a decision within the time 
frame prescribed by the Exchange. The RLP Panel could overturn or 
modify an action taken by the Exchange and all determinations by the 
RLP Panel would constitute final action by the Exchange on the matter 
at issue.
Retail Liquidity Identifier
    Under proposed NYSE Arca Equities Rule 7.44(j), the Exchange would 
disseminate an identifier through the Consolidated Quotation System 
(``CQS''), the UTP Quote Data Feed, and the Exchange's proprietary data 
feed when RPI interest priced at least $0.001 better than the PBB or 
PBO for a particular security was available in Exchange systems 
(``Retail Liquidity Identifier''). The Retail Liquidity Identifier 
would reflect the symbol and the side (buy or sell) of the RPI 
interest, but would not include the price or size of the RPI interest. 
In particular, CQS, UTP Quote Data Feed, and proprietary data feed 
outputs would be modified to include a field for codes related to the 
Retail Liquidity Identifier. The codes would indicate RPI interest that 
was priced better than the PBBO by at least the minimum level of price 
improvement as required by the Program.
Retail Order Designations
    Under proposed NYSE Arca Equities Rule 7.44(k), an RMO could 
designate how a Retail Order would interact with available contra-side 
interest as follows.
    As proposed, a Type 1-designated Retail Order would be a limit 
order that would interact only with available contra-side RPIs and 
other non-displayed liquidity and displayable odd lot interest priced 
better than the PBBO on the opposite side of the Retail Order, 
excluding contra-side Retail Orders,\16\ but would not interact with 
other available contra-side interest in Exchange systems or route to 
other markets. The portion of a Type 1-designated Retail Order that 
would not execute against contra-side RPIs or other price-improving 
liquidity would be immediately and automatically cancelled.
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    \16\ PL Orders, MPL Orders, and all other non-displayed price 
improving liquidity would be available to interact with incoming 
Retail Orders. Non-displayed price improving liquidity and RPIs 
entered at the same price would be ranked according to time of 
entry. Furthermore, PL Orders and MPL Orders may be entered in 
conjunction with RPIs, and orders designated as such would be 
available to interact with only Retail Orders. Displayable odd lot 
interest would also be available to interact with incoming Retail 
Orders. Displayable odd lot interest would be ranked according to 
time of entry and would be ranked ahead of RPIs and non-displayed 
price improving liquidity entered at the same price.
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    A Type 2-designated Retail Order could be marked as Immediate or 
Cancel (``IOC''), Day, or Market. A Type 2-designated Retail Order 
marked as IOC would be a limit order that would interact first with 
available contra-side RPIs and other non-displayed liquidity and 
displayable odd lot interest priced better than the PBBO on the 
opposite side of the Retail Order, excluding contra-side Retail Orders, 
and then any remaining portion of the Retail Order would be executed as 
a limit order marked as an IOC, pursuant to Rule 7.31(e)(2). A Type 2-
designated Retail Order marked as IOC would not trade through Protected 
Quotations and would not route. A Type 2-designated Retail Order marked 
as Day would be a limit order that would interact first with available 
contra-side RPIs and other non-displayed liquidity and displayable odd 
lot interest priced better than the PBBO on the opposite side of the 
Retail Order, excluding contra-side Retail Orders, and then any 
remaining portion of the Retail Order would interact with the Arca Book 
and would route to Protected Quotations. Any unfilled balance of such 
an order would post to the Arca Book. A Type 2-designated Retail Order 
marked as Market would interact first with available contra-side RPIs 
and other non-displayed liquidity and displayable odd lot interest 
priced better than the PBBO on the opposite side of the Retail Order, 
excluding contra-side Retail Orders, and then any remaining portion of 
the Retail Order would be executed as a Market Order.\17\
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    \17\ Retail Orders marked as Market would be subject to trading 
collars. See NYSE Arca Equities Rule 7.31(a).
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    A Retail Order designated with a ``No Midpoint Execution'' 
modifier, pursuant to Rule 7.31(h)(5), would not execute against 
resting MPL Orders but would execute against eligible RPIs that are 
also designated as MPL Orders.
Priority and Order Allocation
    Under proposed NYSE Arca Equities Rule 7.44(l), the Exchange 
proposes that competing RPIs in the same security would be ranked and 
allocated together with all other non-displayed interest according to 
price then time of entry into Exchange systems. Any displayable odd lot 
interest priced between the PBBO would be ranked ahead of any RPIs and 
other non-displayed interest at any given price point. The Exchange 
further proposes that executions would occur in price/time priority in 
accordance with NYSE Arca Equities Rule 7.36. Any remaining unexecuted 
RPI interest would remain available to interact with other incoming 
Retail Orders if such interest was at an eligible price. Any remaining 
unexecuted portion of the Retail Order would cancel, execute, or post 
to the NYSE Arca Book in accordance with proposed Rule 7.44(k). The 
following examples illustrate this proposed method:

PBBO for security ABC is $10.00-$10.05
RLP 1 enters a Retail Price Improvement Order to buy ABC at $10.01 
for 500
RLP 2 then enters a Retail Price Improvement Order to buy ABC at 
$10.02 for 500
RLP 3 then enters a Retail Price Improvement Order to buy ABC at 
$10.03 for 500

    An incoming Type 1-designed Retail Order to sell ABC for 1,000 
would execute first against RLP 3's bid for 500 at $10.03, because it 
was the best priced bid, then against RLP 2's bid for 500 at $10.02, 
because it was the next best priced bid. RLP 1 would not be filled 
because the entire size of the Retail Order to sell 1,000 would be 
depleted. The Retail Order would execute against RPI Orders in price/
time priority, and would not execute at the single clearing price that 
completes the order's execution.
    However, assume the same facts above, except that RLP 2's RPI to 
buy ABC at $10.02 was for 100. The incoming Retail Order to sell 1,000 
would execute first against RLP 3's bid for 500 at $10.03, because it 
was the best priced bid, then against RLP 2's bid for 100 at $10.02, 
because it was the next best priced bid. RLP 1 would then receive an 
execution for 400 of its bid for 500 at $10.01, at which point the 
entire size of the Retail Order to sell 1,000 would be depleted.
    Assume the same facts as above, except that RLP 3's order was not 
an RPI to buy ABC at $10.03, 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 would execute 
first against RLP 3's non-displayed bid for 500 at $10.03, because it 
was the best priced bid, then against RLP 2's bid for 100 at $10.02, 
because it was the next best priced bid. RLP 1 then receives an 
execution for 400 of its bid for 500 at $10.01, at which point the 
entire size of

[[Page 68120]]

the Retail Order to sell 1,000 would be depleted.
    As a final example, assume the original facts, except that LMT 1 
entered a displayable odd lot limit order to buy ABC at $10.02 for 60. 
The incoming Retail Order to sell for 1,000 would execute first against 
RLP 3's bid for 500 at $10.03, because it was the best priced bid, then 
against LMT 1's bid for 60 at $10.02, because it was the next best 
priced bid and displayable odd lot interest would have priority over 
equally priced RPIs and non-displayed interest. RLP 2 would then 
receive an execution for 440 of its bid for 500 at $10.02, at which 
point the entire size of the Retail Order to sell 1,000 would be 
depleted.
    To demonstrate how the different types of Retail Orders would 
interact with available Exchange interest, assume the following facts:

PBBO for security DEF is $19.99-$20.01 (100 x 100)
LMT 1 enters a Limit Order to buy DEF at $20.00 for 100
RLP 1 then enters a Retail Price Improvement Order to buy DEF at 
$20.003 for 100
MPL 1 then enters a Midpoint Passive Liquidity Order to buy DEF at 
$21.00 for 100

    An incoming Type 2-designated IOC Retail Order to sell DEF for 300 
at $20.00 would execute first against MPL 1's bid for 100 at $20.005, 
because it was the best priced bid, then against RLP 1's bid for 100 at 
$20.003, because it was the next best priced bid, and then against LMT 
1's bid for 100 at $20.00 because it was the next best priced bid, at 
which point the entire size of the Retail Order to sell 300 would be 
depleted.
    Assume the same facts as above except the incoming order was a Type 
2-designated Day Retail Order to sell DEF for 500 at $20.00. The Retail 
Order would execute first against MPL 1's bid for 100 at $20.005, 
because it was the best priced bid, then against RLP 1's bid for 100 at 
$20.003, because it was the next best priced bid, and then against LMT 
1's bid for 100 at $20.00 because it was the next best priced bid. The 
remaining balance of the Retail Order would post to the NYSE Arca Book 
at $20.00, resulting in a PBBO of $19.99-$20.00 (100 x 200).
    Assume the same facts as above except the incoming order was a Type 
1-designated Retail Order to sell DEF for 300. The Retail Order would 
execute first against MPL 1's bid for 100 at $20.005, because it was 
the best priced bid, and then against RLP 1's bid for 100 at $20.003. 
The remaining balance of the Retail Order would be cancelled and not 
execute against LMT 1 because Type 1-designated Retail Orders would not 
interact with interest on the NYSE Arca Book other than non-displayed 
liquidity and displayable odd lot interest priced better than the PBBO 
on the opposite side of the Retail Order.
    Finally, to demonstrate the priority of displayed interest over 
RPIs, assume the following facts:

PBBO for security GHI is $30.00-$30.05
RLP 1 enters a Retail Price Improvement Order to buy GHI at $30.02 
for 100
LMT 1 then enters a Limit Order to buy GHI at $30.02 for 100
New PBBO of $30.02-$30.05
RLP 2 then enters a Retail Price Improvement Order at $30.03 for 100

    An incoming Type 2-designated IOC Retail Order to sell GHI for 300 
at $30.01 would execute first against RLP 2's bid for 100 at $30.03, 
because it was the best priced bid, then against LMT 1 for 100 at 
$30.02 because it was the next best priced bid. The Retail Order would 
then attempt to execute against RLP 1, but because RLP 1 was priced at 
the PBBO and no longer price improving, RLP 1 would cancel. At that 
point, the remaining balance of the Retail Order would cancel because 
there were no remaining orders within its limit price.
    Assume the same facts as above except the incoming Retail Order was 
for 200. The Retail Order would execute against RLP 2's bid for 100 at 
$30.03, because it was the best priced bid, then against LMT 1 for 100 
at $30.02 because it was the next best priced bid. RLP 1 does not 
cancel because the incoming Retail Order was depleted before attempting 
to execute against RLP 1. RLP 1 would be eligible to interact with 
another incoming Retail Order because it would be priced better than 
the PBBO.
Implementation
    The Exchange proposes that all NYSE Arca-listed securities and UTP 
Securities, excluding NYSE-listed (Tape A) securities, would be 
eligible for inclusion in the Retail Liquidity Program. In order to 
provide for an efficient implementation, the Retail Liquidity Program 
would initially cover only a certain specified list of NYSE Arca-listed 
securities to which RLPs would be assigned, as announced by the 
Exchange via Information Memo. The Exchange anticipates that the 
securities included within the Retail Liquidity Program would be 
expanded periodically as demand for RLP assignments developed in 
response to increased Retail Order activity on the Exchange.\18\ The 
Retail Liquidity Program would be available for the Core Trading 
Session only. The Exchange would accept Retail Orders and RPIs only 
after the official opening price for the security had been 
disseminated.
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    \18\ The Exchange would announce any such expansions via 
Information Memo.
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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, 
and similarly, Retail Orders and RPIs could not be priced below $1.00. 
Toward that end, Exchange trade validation systems would prevent the 
interaction of RPI buy or sell interest and Retail Orders at a price 
below $1.00 per share and would reject Retail Orders and RPIs priced 
below $1.00. However, if the Retail Order was a Type 2-designated 
Market Retail Order,\19\ it would be able to interact at prices below 
$1.00 with liquidity outside the Program in the Exchange's regular 
order book. In addition to facilitating an orderly \20\ and 
operationally intuitive pilot, the Exchange believes that limiting the 
Program to trades equal to or greater $1.00 per share during the pilot 
would enable it better to focus its efforts to monitor price 
competition and to assess any indications that data disseminated under 
the Program was potentially disadvantaging retail orders. As part of 
that review, the Exchange would produce data throughout the pilot, 
which would 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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    \19\ Type 2-designated Market Retail Orders would not be entered 
with a price and therefore would not implicate rules preventing the 
pricing of Retail Orders and RPIs below $1.00.
    \20\ 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 
undisplayed 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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    The Exchange will announce via Trader Update the implementation 
date of the Program.
Comparison to Existing Programs
    Proposed NYSE Arca Equities Rule 7.44 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.\21\

[[Page 68121]]

Proposed Rule 7.44 is similar to NYSE Rule 107C with three key 
distinctions. The first distinction between proposed Rule 7.44 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 and displayable odd lot interest priced better 
than the PBBO on the opposite side of the Retail Order to maximize the 
price improvement available to the incoming Retail Order. As proposed, 
the Exchange would maintain its price/time priority model and would 
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.\22\ In contrast, 
pursuant to NYSE Rule 107C(k)(1), a Type 1-designated Retail Order 
``will interact only with available contra-side RPIs and will not 
interact with other available contra-side interest in Exchange 
systems.'' Accordingly, other non-displayed orders and displayable odd 
lot interest offering price improvement at prices better than resting 
RPI interest do not have an opportunity to interact with incoming 
Retail Orders pursuant to NYSE Rule 107C. 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 would always interact with available contra-side RPI Orders and 
any other non-displayed liquidity and displayable odd lot interest 
priced better than the PBBO on the opposite side of the Retail Order, 
in price/time priority consistent with the Exchange's Rule 7.36. Such 
other non-displayed price-improving contra-side liquidity would of 
course remain available to all participants, as it is today, while RPI 
Orders would only be available to RMOs, as described above.
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    \21\ 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. For ease of 
reference, the comparisons made in this section only refer to NYSE 
Rule 107C, but apply equally to NYSE MKT Rule 107C--Equities.
    \22\ The Exchange notes that this functionality aligns with the 
functionality offered by BATS Y-Exchange, Inc. (``BYX'') for its 
Retail Price Improvement Program. See Securities Exchange Act 
Release No. 68303 (Nov. 27, 2012) (SR-BYX-2012-19). BYX's Program 
permits Retail Orders to interact with not only contra-side RPI 
Orders but also other contra-side price improving liquidity. See BYX 
Rules 11.24(f)(1) and (2).
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    Second, as proposed, the Exchange would provide applicable price 
improvement to incoming Retail Orders at potentially multiple price 
levels.\23\ 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 RLP 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 RLP 3's bid for 500 shares, because it is the best priced bid, 
then against RLP 2's bid for 100 shares, because it is the next best 
priced bid, then against 400 of the 500 shares bid by RLP 1. However, 
rather than executing at each of these price levels for the number of 
shares available, as it would under proposed NYSE Arca Equities Rule 
7.44, 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 $10.01 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.
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    \23\ Again, the Exchange notes that this aspect of the 
Exchange's Program aligns with that of BYX's Program. BYX's Program 
executes Retail Orders and RPIs at multiple price levels rather than 
a single clearing price. See BYX Rule 11.24(g).
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    Third, as proposed, RPIs would not be entered to track the PBBO, 
but instead would be entered at a single price.\24\ In contrast, 
pursuant to NYSE Rule 107C, the price of an RPI is determined by an 
RLP's entry of the following into NYSE systems: (1) RPI buy or sell 
interest; (2) an offset, if any; and (3) a ceiling or floor price. The 
offset is a predetermined amount by which the RLP is willing to improve 
the PBBO, subject to a ceiling or floor price. The ceiling or floor 
price is the amount above or below which the RLP does not wish to 
trade. As such, pursuant to NYSE Rule 107C, an RPI typically tracks the 
PBBO. The Exchange would not offer the ability for RPIs to track the 
PBBO due to technological limitations and the complexity of offering 
such functionality. The Exchange further notes that because RPI 
interest will not peg to the PBBO, it will encourage ETP Holders to 
enter RPI interest that improves the price of the PBBO.
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    \24\ The only exception is that MPL RPI orders would re-price 
with changes in the PBBO since an MPL RPI order is priced at the 
midpoint of the PBBO.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\25\ in general, and furthers the objectives of Section 
6(b)(5),\26\ in particular, 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.\27\ The 
Exchange believes that it is appropriate to create a financial 
incentive to bring more retail order flow to a public market.
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    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 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.
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    The Exchange understands that Section 6(b)(5) of the Act 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.
    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 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 
Retail Liquidity Program on an exchange market would

[[Page 68122]]

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 would monitor the Program in 
an effort to identify and address any such behavior.
    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 7.44. The Program shall expire on [Date 
will be determined upon adoption of Rule 7.44]. 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 would 
impose any burden on competition that was not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change 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. The Exchange believes that it is appropriate 
to create a financial incentive to bring more retail order flow to a 
public market.
    Additionally, as previously stated, 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 Retail Liquidity Program on an exchange 
market would result in better prices for retail investors.

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

    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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 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-2013-107 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-2013-107. 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 the 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 publicly available. All 
submissions should refer to File Number SR- NYSEArca-2013-107 and 
should be submitted on or before December 4, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-27053 Filed 11-12-13; 8:45 am]
BILLING CODE 8011-01-P


