
[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Notices]
[Pages 3904-3906]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01250]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71329; File No. SR-NYSEMKT-2013-84]


Self-Regulatory Organizations; NYSE MKT LLC; Order Approving 
Proposed Rule Change Amending NYSE MKT Rules 13--Equities, 70.25--
Equities, 107C--Equities and 1000--Equities To Adopt a New Order Type 
Called a Midpoint Passive Liquidity Order

January 16, 2014.

I. Introduction

    On November 18, 2013, NYSE MKT LLC (``NYSE MKT'' or ``Exchange'') 
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 
amend: (1) NYSE MKT Rules 13--Equities to adopt a new order type called 
a Midpoint Passive Liquidity (``MPL'') Order; (2) NYSE MKT Rule 1000--
Equities to specify that the proposed MPL Orders may interact with 
Capital Commitment Schedule (``CCS'') interest; (3) NYSE MKT Rule 
70.25--Equities to permit d-Quotes to be designated with a midpoint 
modifier in order to set the discretionary price to the midpoint of the 
protected best bid or best offer (``PBBO''); and (4) NYSE MKT Rule 
107C--Equities to incorporate the proposed MPL Order into the Retail 
Liquidity Program. The proposed rule change was published for comment 
in the Federal Register on December 4, 2013.\3\ The Commission received 
no comment letters on the proposed rule change. 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. 70955 (November 27, 
2013), 78 FR 72965.
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II. Description of the Proposed Rule Change

A. Proposed MPL Order

    The Exchange proposes the MPL Order as an undisplayed limit order 
that would automatically execute at the mid-point of the protected best 
bid (``PBB'') and the protected best offer (``PBO''). An MPL Order 
could interact with any incoming order, including another MPL Order, 
and could execute at prices out to four decimal places.
    The proposed rule specifies certain limitations on the usage and 
execution of an MPL Order. First, an MPL Order would not be eligible to 
trade if it would trade at a price below $1.00 or if the execution 
price would be out to five decimal places above $1.00. Second, an MPL 
Order could not be designated as Good Till Cancelled. Finally, an MPL 
Order would not execute if the market were locked or crossed. When a 
market that had been locked or crossed becomes no longer locked or 
crossed, the Exchange would execute all eligible MPL Orders and other 
hidden interest eligible to execute at the midpoint of the PBBO.
    With regards to order allocation, MPL Orders would be allocated on 
a parity-by-agent basis, consistent with NYSE MKT Rule 72--Equities. 
Moreover, an MPL Order's time priority would be based on its time of 
entry into Exchange systems and would not reset when an MPL Order's 
price shifted due to changes in the PBBO.
    Under the proposal, an MPL Order could also include a Minimum 
Triggering Volume (``MTV''), in which case the MPL Order would not be 
eligible to trade unless the aggregated contra-side quantity of all 
interest marketable at the midpoint of the PBBO were equal to or 
greater than the MPL Order's MTV. There would be no guaranteed trade 
size based on the MTV. Exchange systems would enforce an MTV 
restriction even if the unexecuted portion of an MPL Order with an MTV 
were less than the MTV.
    An MPL Order that included an MTV would be rejected if it also 
included a Self Trade Prevention (``STP'') Modifier. As proposed, STP 
Modifiers could be used with MPL Orders that do not include an MTV. An 
MPL Order with an STP Modifier, however, might be cancelled depending 
on the type of order on the contra-side. An MPL Order with an STP 
Modifier would not execute against another MPL Order or against a non-
MPL Order with an STP Modifier with the same market participant 
identifier (``MPID'').
    Further, under the proposal, users could designate an MPL Order 
with an add-liquidity-only (``ALO'') modifier (``MPL-ALO Order''). An 
MPL-ALO Order would not execute on arrival, even if marketable, but 
would remain non-displayed in the book until triggered to trade by 
arriving contra-side marketable interest. An incoming non-marketable 
MPL-ALO Order, however, could trigger a discretionary trade.\4\ An MPL-
ALO Order would only be eligible to trade against incoming contra-side 
interest and would not interact with contra-side interest resting in 
the book. A resting MPL-ALO Order would not be eligible to trade when 
arriving same-side interest triggered a trade with contra-side 
interest. An MPL-ALO Order would have to be at least one round lot.
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    \4\ Under the proposal, an MPL-ALO Order triggering a 
discretionary trade would be the ``liquidity provider,'' and the 
triggered discretionary order would be the ``liquidity taker.''
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    An MPL Order would not be eligible for manual executions, including 
openings, re-openings, or closing transactions. As such, MPL Orders 
would not be available to be designated as Limit ``On-the-Open'' 
(``LOO'') or Limit ``At-the-Close'' (``LOC'') Orders. As fully 
undisplayed interest, MPL Orders would not be visible to the DMM on the 
Floor under any circumstances.

B. MPL Order Interaction With CCS Interest

    The CCS is a liquidity schedule setting forth various price points 
at which the DMM is willing to interact with incoming orders. CCS 
interest will either execute at the price at which the full size of the 
order can be satisfied (``completion price'') or at the next price that 
is one minimum price variation (``MPV'') higher (in the case of an 
order to sell) or lower (in the case of an order to buy). The Exchange 
has stated that it believes that CCS interest cannot be designated as 
an MPL Order because MPL Orders are priced at the midpoint of the PBBO 
and could be priced less than one MPV above or below the completion 
price.
    While, under the proposal, CCS interest cannot be designated as an 
MPL

[[Page 3905]]

Order, CCS interest would be eligible to interact with MPL Orders. 
Currently, CCS interest is eligible to trade inside the Exchange BBO at 
a price representing (1) the non-displayable reserve interest of 
Reserve Orders \5\ or (2) the reserve interest of Floor broker agency 
interest files. The Exchange is proposing to expand this list by 
amending NYSE MKT Rule 1000(f)(1)(B)--Equities to include MPL Orders.
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    \5\ A Reserve Order means a limit order entered into Exchange 
systems that may contain displayable and non displayable interest. 
See NYSE MKT Rule 13--Equities.
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C. Proposed MPL Order Interaction With d-Quotes

    MPL Orders would not be available for d-Quotes \6\ since the 
Exchange proposes to allow d-Quotes with a mid-point modifier as 
described below. MPL Orders would not be available for pegging interest 
since pegging interest is set to track the PBB or the PBO as the PBBO 
changes, while MPL Orders would always be priced at the midpoint of the 
PBBO.
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    \6\ See NYSE MKT Rule 70.25--Equities (defining d-Quotes as 
discretionary instructions with respect to a Floor broker's agency 
interest file (e-Quotes)).
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    The Exchange proposes to make a midpoint modifier available for d-
Quotes that would have a discretionary range up to the midpoint of the 
PBBO.\7\
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    \7\ The Exchange notes that the MPL Order and the midpoint 
modifier are distinct functionalities. An MPL Order would always be 
priced at the midpoint of the PBBO and would execute at that price. 
A d-Quote designated with a midpoint modifier would use its 
discretion to execute up to the midpoint but could execute at a 
less-aggressive price. As such, a d-Quote with a midpoint modifier 
would operate as a d-Quote that updated with changes in the PBBO to 
set the discretionary price range to the midpoint of the PBBO.
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    In order to accommodate the use of a midpoint modifier, the 
Exchange is proposing to amend Rule 70.25(b)(ii)--Equities, which 
states that the minimum price range for a d-Quote is the minimum price 
variation set forth in Exchange Rule 62--Equities. Rule 62--Equities 
sets the minimum price variation at $0.01 for stocks priced greater 
than $1.00. However, with the midpoint modifier, a d-Quote can have a 
minimum price variation of $0.005. Therefore, the Exchange is proposing 
to amend this restriction by excepting d-Quotes with a midpoint 
modifier.

D. Incorporation of MPL Orders Into Retail Liquidity Program

    Retail Orders or Retail Price Improvement Interest, as defined in 
NYSE MKT Rule 107C--Equities, could not be designated as MPL Orders. 
MPL Orders, however, could interact with incoming Retail Orders.
    The Exchange proposed that MPL Orders be available to interact with 
Retail Orders within the Retail Liquidity Program (``Retail Program''), 
a pilot program.\8\ The Exchange proposes to permit all Retail Orders 
to interact with, in addition to available contra-side RPIs, available 
contra-side MPL Orders. When determining the price to execute a Retail 
Order, Exchange systems would consider all eligible RPIs and MPL 
Orders. If the only interest were MPL Orders, the Retail Order would 
execute against one or more MPL Orders at the midpoint of the PBBO. If 
the only interest were RPIs, then the execution would occur against one 
or more RPIs at the price level that completes the incoming order's 
execution. If both RPIs and MPL Orders were present on the book, then 
Exchange systems would determine the price level at which the incoming 
Retail Order could be executed in full (``clean-up price''). If the 
clean-up price were equal to the midpoint of the PBBO, RPIs would 
receive priority over MPL Orders, and Retail Orders would execute 
against both RPIs and MPL Orders at the midpoint. If the clean-up price 
were worse than the midpoint of the PBBO, the Retail Order would 
execute first with the MPL Orders at the midpoint of the PBBO, and any 
remaining quantity of the Retail Order would execute with the RPIs at 
the clean-up price. If the clean-up price were better than the midpoint 
of the PBBO, then the Retail Order would execute against the RPIs at 
the clean-up price and would ignore the MPL Orders.
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    \8\ Under the Retail Program, retail liquidity providers 
(``Providers'') are able to provide potential price improvement in 
the form of a non-displayed order that is priced better than the 
PBBO, called a Retail Price Improvement Order (``RPI''). Retail 
Member Organizations (``RMOs'') can submit a Retail Order to the 
Exchange, which interacts, to the extent possible, with available 
contra-side RPIs. Retail Orders may be designated as Type 1, Type 2, 
or Type 3. A Type 1 Retail Order interacts with available contra-
side RPIs and does not interact with other available contra-side 
interest in Exchange systems or route to other markets. A Type 2 
Retail Order interacts with available contra-side RPIs and any 
remaining portion of the Retail Order is executed as a Regulation 
NMS-compliant Immediate or Cancel Order pursuant to NYSE MKT Rule 
13--Equities. A Type 3 Retail Order interacts first with available 
contra-side RPIs and any remaining portion of the Retail Order is 
executed as an NYSE MKT Immediate or Cancel Order pursuant to Rule 
13-- Equities.
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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 the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\9\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\10\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest and that the rules of a national securities exchange 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \9\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act. The Commission believes that the 
proposed MPL Order is designed to enhance order execution opportunities 
on the Exchange by providing market participants with an additional 
order type to interact with other trading interests. The Commission 
also believes that the proposed MPL Orders is designed to allow for 
additional opportunities for investors to trade at the midpoint of the 
PBBO, which may provide price improvement to incoming orders. 
Additionally, the Commission believes that the proposed introduction of 
the MPL Order could provide market participants with better control 
over their execution costs and with a means to offer price improvement 
opportunities. The Commission notes that other exchanges offer similar 
functions as the MPL Order.\11\
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    \11\ See e.g., NYSE Arca Equities Rule 7.31(h)(5). See also EDGA 
Exchange, Inc. Rule 11.5(c)(7); BATS Exchange, Inc. Rule 11.9(c)(9); 
and NASDAQ Stock Market LLC Rule 4751(f)(4).
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    The Commission believes that it is appropriate for the Exchange not 
to allow DMMs to enter MPL Orders through CCS, because CCS interest 
must observe the MPV in certain circumstances, but MPL Orders would be 
tied to the midpoint of the protected NBBO and could therefore have 
prices that do not observe the MPV. Further, the Commission believes 
that it is appropriate not to allow d-Quotes to enter MPL Orders, as d-
Quotes would have a mid-point modifier that would provide a 
functionality similar to MPL Orders.\12\ Finally, the Commission

[[Page 3906]]

believes that allowing MPL Orders to interact with retail orders in the 
Retail Program is designed to expand the potential for price 
improvement to retail investors.
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    \12\ The Commission notes that pegging interests would also 
conflict with the nature of MPL Order, since pegging interests are 
orders that are pegged to the PBB or PBO as the PBBO changes. See 
NYSE MKT Rule 13--Equities.
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    Therefore, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NYSEMKT-2013-84) be, and it 
hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01250 Filed 1-22-14; 8:45 am]
BILLING CODE 8011-01-P


