
[Federal Register Volume 79, Number 41 (Monday, March 3, 2014)]
[Notices]
[Pages 11849-11852]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04552]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71609; File Nos. SR-NYSE-2013-72; SR-NYSEMKT-2013-91]


Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE 
MKT LLC; Order Instituting Proceedings to Determine Whether To 
Disapprove Proposed Rule Changes To Establish an Institutional 
Liquidity Program on a One-Year Pilot Basis

February 25, 2014.

I. Introduction

    On November 7, 2013, New York Stock Exchange LLC (``NYSE'') and 
NYSE MKT LLC (``NYSE MKT'' and together with NYSE, the ``Exchanges'') 
each filed with the Securities and Exchange Commission (``Commission'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
establish an Institutional Liquidity Program (``ILP'' or ``Program'') 
on one-year pilot basis. The proposed rule changes were published for 
comment in the Federal Register on November 27, 2013.\3\ The Commission 
received three comments on the NYSE Proposal.\4\ On January 9, 2014, 
the Commission designated a longer period for Commission action on the 
proposed rule changes, until February 25, 2014.\5\ The Exchanges 
submitted a consolidated response letter on January 14, 2014.\6\ This 
order institutes proceedings under Section 19(b)(2)(B) of the Act to 
determine whether to disapprove the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 70909 (November 21, 
2013), 78 FR 71002 (SR-NYSE-2013-72) (``NYSE Proposal''); and 70910 
(November 21, 2013), 78 FR 70992 (SR-NYSEMKT-2013-91) (``NYSE MKT 
Proposal'') (collectively, the ``Proposals'').
    \4\ See Letters to the Commission from James Allen, Head, and 
Rhodri Pierce, Director, Capital Markets Policy, CFA Institute (Dec. 
18, 2013) (``CFA Letter''); Clive Williams, Vice President and 
Global Head of Trading, Andrew M. Brooks, Vice President and Head of 
U.S. Equity Trading, and Christopher P. Hayes, Vice President and 
Legal Counsel, T. Rowe Price Associates, Inc. (Dec. 18, 2013) (``T. 
Rowe Price Letter''); and Theodore R. Lazo, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (Dec. 20, 2013) (``SIFMA Letter''). The Commission notes 
that these comment letters address the NYSE Proposal only. However, 
since the Proposals are nearly identical, the Commission will 
consider the letters to address the NYSE MKT Proposal as well.
    \5\ See Securities Exchange Act Release No. 71267, 79 FR 2738 
(January 15, 2014).
    \6\ See Letter to the Commission from Janet McGinnis, EVP & 
Corporate Secretary, NYSE Euronext (Jan. 14, 2014) (``Response 
Letter'').
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II. Description of the Proposals

A. Overview

    Each Exchange is proposing to establish, for a pilot term of one 
year, an Institutional Liquidity Program intended to attract buying and 
selling interest in greater size to the NYSE for NYSE-listed securities 
and to NYSE MKT for NYSE MKT-listed securities and securities listed on 
the Nasdaq Stock Market and traded pursuant to unlisted trading 
privileges. To do so, the Program would introduce two new order types 
to facilitate interactions between market participants with block-size 
trading interest and liquidity providers that submit orders that meet 
certain size thresholds. The Exchanges have characterized the Program 
as a ``targeted size discovery mechanism'' that would enable market 
participants to execute trades that are larger than the average size of 
trades executed on the Exchanges or in most dark pools.\7\
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    \7\ See, e.g., NYSE Proposal, 78 FR at 71002.
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B. Proposed New Order Types--ILOs and OLOs

    The two proposed order types are the ``Institutional Liquidity 
Order'' (``ILO'') and the ``Oversize Liquidity Order'' (``OLO''). 
Generally, ILOs would represent non-displayed block-size interest: a 
limit order of at least 5,000 shares with a market value of at least 
$50,000 or a ``child'' order of an original ``parent order'' meeting 
these size requirements.\8\ OLOs would represent non-displayed orders 
of at least 500 shares (or at least 300 shares for less liquid 
securities) submitted to provide liquidity to ILOs. ILOs could be 
submitted with a Minimum Triggering Volume (``MTV'') instruction and 
would interact first with displayed interest at the Exchanges before 
interacting with other interest in the Program (i.e., OLOs and other 
resting ILOs) or routing to other markets. OLOs would interact only 
with ILOs. Orders within the Program would be executed according to 
price-size-time priority, rather than the Exchanges' parity allocation.
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    \8\ Where an ILO represented the child order of recorded parent 
instructions, the parent instruction would not need to be submitted 
in whole to the Program; instead, parts of the recorded parent order 
instruction could be executed in the Program, on the Exchanges 
outside of the Program, or at other venues.
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    To qualify as an ILO, an order would need to be submitted to 
establish, increase, liquidate, or decrease a position in the subject 
security and could not be part of an expression of two-sided (i.e., 
market making) interest

[[Page 11850]]

on the part of the account that originated the order. An ILO, or the 
recorded parent instruction of a child order, would need to satisfy 
applicable size requirements independently, meaning that interest could 
not be aggregated across multiple member organizations \9\ to become 
eligible for participation in the Program. An ILO, or recorded parent 
order instruction, that initially met the minimum size requirements 
would not become ineligible to stay in the Program if it received a 
partial execution that reduced its size below the minimum size 
requirements. If an ILO or its recorded parent instruction were 
partially cancelled so that it became smaller than the Program's 
minimum size requirements, the ILO would no longer be eligible to 
participate in the Program but would maintain its time priority in the 
Exchanges' systems.
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    \9\ The term ``member organization'' is defined in NYSE Rule 
2(b) and NYSE MKT Rule 2(b)--Equities, respectively, and includes 
Floor brokers acting as agents.
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    An ILO could be designated Immediate-or-Cancel or entered as a 
Reserve Order, in which case the order or any residual unexecuted 
portion would remain executable against contra-side interest in 
accordance with the Program's rules. An ILO could also be submitted 
with an MTV requirement that would be a necessary condition for the 
order's execution.
    ILOs could be submitted with one of two designations to dictate how 
and where they could execute. A Type-1 designated ILO would interact 
with other interest at the Exchange to which it was submitted, but it 
would not route to other markets. A Type-1 ILO would interact, at each 
price level, first with displayed interest in the respective Exchange's 
systems, then available contra-side OLOs and ILOs in size-time 
priority, and then with any remaining non-displayed interest in the 
Exchange's systems--except that a Type 1-designated ILO would not trade 
through a protected quotation.\10\
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    \10\ Any remaining portion of a Type-1 ILO would be cancelled if 
designated as a Regulation NMS-compliant Immediate or Cancel Order 
pursuant to NYSE Rule 13 or NYSE MKT Rule 13--Equities, or if it 
were designated as a Reserve Order, it would rest on the Exchange's 
book and be available to interact with other incoming contra-side 
OLOs, ILOs, and other available interest in the Exchange's systems, 
provided it does not trade through a protected quotation.
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    A Type-2 ILO would interact with other interest at the Exchange to 
which it was submitted, but it could also route to away markets. The 
Type-2 ILO would interact, at each price level, first with displayed 
interest in the respective Exchange's systems, then available contra-
side OLOs and ILOs in size-time priority, and then with any remaining 
non-displayed interest in the Exchange's systems; it would then route 
to away markets as necessary to avoid trading through a protected 
quotation.\11\
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    \11\ Any remaining portion of a Type-2 ILO would be cancelled if 
designated as an Immediate or Cancel Order pursuant to NYSE Rule 13 
or NYSE MKT Rule 13--Equities, or if designated as a Reserve Order, 
rest on the Exchange's book and be available to interact with other 
incoming contra-side OLOs, ILOs, and other available interest in the 
Exchange's systems.
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    The Program would require member organizations that submit ILOs to 
maintain policies and procedures reasonably designed to ensure that 
applicable Program requirements are satisfied. The member organizations 
would further need to maintain records sufficient to reconstruct, in a 
time-sequenced manner, all orders routed to the Exchanges as ILOs, 
including how parent order instructions from which child-order ILOs 
were derived met the Program's size requirements and related to the 
child-order ILOs.
    The Exchanges would allow a member organization to presume that an 
account's intent to establish, increase, liquidate, or decrease a 
position was bona fide, absent concrete indications to the contrary. 
According to the Exchanges, examples of such contrary indications 
include: (1) An account attempting to enter contemporaneous orders in 
the same security on both sides of the market; (2) An account entering 
a pattern of orders and cancellations apparently designed to implement 
a market-making or spread-trading strategy; and (3) An account entering 
a pattern of cancellations that consistently produced positions that 
were smaller that the Program's minimum size requirements.
    In addition to the ILO, the Program would create a second new order 
type, the OLO. The OLO would be a non-displayed limit order with a 
minimum size of 500 shares, except for securities that trade with an 
Average Daily Volume of less than one million shares, in which case the 
minimum size would be 300 shares. An OLO that met the minimum size 
requirement and received a partial execution that reduced its size 
below the size requirement would still be eligible to interact with 
incoming ILOs. An OLO would become size ineligible if the size of the 
OLO was reduced below the minimum size requirement because of a partial 
cancellation. An OLO could be priced at, inside, or outside the 
Exchange's protected best bid or offer (``PBBO''), or as non-displayed 
Primary Pegging Interest pursuant to NYSE Rule 13 or NYSE MKT Rule 13--
Equities. As noted above, OLOs would be eligible to interact only with 
ILOs.
    The Exchanges, along with the Financial Industry Regulatory 
Authority (``FINRA''), would monitor activity in the Program and 
conduct surveillance for non-compliance with Program rules. The 
Exchanges would exclude non-compliant member organizations from 
participation in the Program when necessary to ensure that the Program 
functions properly.

C. Proposed Priority and Allocation of Proposed Order Types

    The Exchanges have proposed that, in the Program, competing OLOs 
and ILOs would be ranked and allocated according to price, then size, 
then the time of their entry into each Exchange's systems. The size 
priority of OLOs and ILOs would be based upon their initial size at 
time of entry, but any partial cancellations of OLOs or ILOs would 
reduce their original size for priority purposes.
    Displayed orders would have priority over equally priced ILOs and 
OLOs. An incoming ILO would execute first against displayed interest, 
then against contra-side ILOs and OLOs, and finally against any non-
displayed interest in Exchange systems. Any remaining unexecuted ILO 
interest would remain available to interact with other incoming OLOs or 
ILOs if that ILO interest were at an eligible price, unless that 
interest were designated IOC.

D. Proposed Liquidity Identifier

    The presence of OLOs or the remainder of partially executed ILOs in 
Exchange systems would be advertised with a new indicator, the 
Liquidity Identifier (``Identifier''), which would be disseminated 
through the Consolidated Quotation System. The Identifier would 
communicate only the presence of liquidity in a symbol and would not 
state the side, size, or price. The Exchanges have stated that the 
Identifier would be disseminated first by the Exchanges' proprietary 
data feeds. The Exchanges have represented that the Identifier would be 
disseminated through the publicly-available Consolidated Quotation 
System as soon as practicable.

E. Fees for the Program

    The Exchanges have represented that, after approval of the Program 
by the Commission, they would each submit a proposed rule filing to set 
fees for the Program. The Exchanges have represented that the 
anticipated fee schedule would charge member organizations for 
executions of their

[[Page 11851]]

ILOs against OLOs and, conversely, would provide credits or free 
executions to member organizations for executions of their OLOs against 
the ILOs of other member organizations. If two ILOs executed against 
each other, the Exchanges expect that they would charge both member 
organizations.

III. Comments Letters and the Exchanges' Response

    As noted above, the Commission has received three comment letters 
on the proposed Program. One commenter was supportive of the 
Proposals.\12\ This commenter stated its belief that the Program should 
improve the executions of institutional investors trading in large size 
and reduce transaction costs in such trades.\13\ Additionally, the 
commenter stated its belief that the ability of ILOs to interact with 
displayed orders should not negatively affect, and may even positively 
affect, the incentives to use displayed markets.\14\
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    \12\ See CFA Letter.
    \13\ Id. at 2.
    \14\ Id.
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    The two remaining commenters expressed concern with the Program. 
Both commenters suggested that the Program would add undue complexity 
to the public equity markets. For instance, one commenter argued that 
the Program's introduction of new order types would create another 
layer of quoting, additional messaging, and undue complexity to order 
routing.\15\ The other commenter questioned whether it is appropriate 
to add additional message traffic to the Securities Information 
Processor, particularly message traffic that serves only one market and 
not the investing public at large.\16\
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    \15\ See T. Rowe Price Letter at 1.
    \16\ See SIFMA Letter at 5. This commenter also took the 
position that the Program's use of the Liquidity Identifier could 
implicate the same concerns that the Commission voiced in 2009 when 
it proposed a rule that would, among other things, address the use 
of privately transmitted actionable ``indications of interest.'' See 
id. at 4 (citing Securities Exchange Act Release No. 60997 (November 
13, 2009), 74 FR 61208 (November 23, 2009) (``Regulation of Non-
Public Trading Interest'')).
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    The two commenters also argued that the Program could segment order 
flow in a way that is inconsistent with the role that public exchanges 
are supposed to play in the marketplace. One commenter stated its 
belief that the Proposals would further chip away at the statutory 
mandate that exchanges provide fair, equal, non-discriminatory, and 
open access and that the Program would reflect a departure from the 
idea that exchanges are meant to provide interaction among all types of 
orders.\17\ In this commenter's view, exchanges and dark pools serve 
distinct purposes and the Program could ``further blur the lines'' 
between exchanges and dark pools in a way that ``will unnecessarily 
increase market fragmentation and dilute an investor's ability to gauge 
best execution.'' \18\ The other commenter raised similar issues and 
stated its belief that the Commission should address how permitting an 
exchange to segment order flow is consistent with the exchanges' 
obligation under Section 6(b)(5) of the Act to prevent unfair 
discrimination among market participants.\19\
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    \17\ See T. Rowe Price Letter at 1-2.
    \18\ Id. at 1.
    \19\ See SIFMA Letter at 3.
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    Additionally, both commenters disagreed with the Exchanges about 
the extent to which the Program could provide public benefit. One 
commenter questioned whether the Program would in fact encourage lit 
markets and increased price discovery, since the new order types would 
not be displayed.\20\ The other commenter expressed doubt that the 
Program could attract block-size interest and instead thought it was 
more likely that the Program would only receive child orders from 
larger block-size parent orders.\21\ The commenter then stated its 
belief that the goal of increasing exchange execution volumes does not 
support a change in legal and regulatory policy.\22\
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    \20\ See T. Rowe Price Letter at 2.
    \21\ See SIFMA Letter at 3.
    \22\ See id.
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    In response to these comments, the Exchanges' Response Letter 
contended that the Program is justified by the potential benefits it 
could provide to the public markets. According to the Exchanges, the 
Program would improve market structure by addressing three concerns: 
(1) The migration toward dark venues of orders entered by investors who 
are less informed with respect to short-term price movements; (2) The 
related isolation of such orders from displayed liquidity; and (3) The 
selective pre-trade transparency and inadequate post-trade transparency 
of broker internalization venues and dark pools.\23\ The Response 
Letter asserted that competition with dark pools would provide a more 
transparent and price-competitive environment for the interaction of 
large orders and would reduce transaction costs; in the Exchanges' 
view, Section 11A of the Act promotes such competition. Additionally, 
the Exchanges noted that the dissemination of the Identifier could 
bolster pre-trade transparency and stimulate further the expression of 
institutional interest and the interest of liquidity providers that 
seek to interact with institutional orders.\24\
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    \23\ See Response Letter at 5.
    \24\ See id. at 1.
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    The Exchanges further argued that, because ILO's must first 
interact with displayed orders, ``the Program offers balanced and 
limited segmentation to enhance the discovery of size on the Exchanges 
and potentially increases the incentives for public price discovery.'' 
\25\ Ultimately, the Exchanges argued, the Program ``has the potential 
to enhance the transparency and price competition associated with the 
execution of larger orders and should be considered in the current 
competitive and regulatory context rather than deferred until the 
fundamental structural issues referenced [by the commenters] are 
addressed.'' \26\
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    \25\ Id. at 5-6.
    \26\ Id. at 8. The Exchanges also responded to the point raised 
in the SIFMA Letter about whether the Liquidity Identifier could 
implicate the same concerns that the Commission has raised with 
respect to privately transmitted actionable indications of interest. 
The Exchanges noted that the Identifier is different than an 
actionable indication of interest because it communicates only the 
symbol, not the side, size or price of an OLO or ILO. Furthermore, 
the Exchanges noted that the identifier would not be private or 
limited to select market participants; rather, the Exchanges noted 
their intent to disseminate the identifier through the publicly 
available Consolidated Quotation System. See id. at 6-7.
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IV. Proceedings To Determine Whether to Disapprove SR-NYSE-2013-72 and 
SR-NYSEMKT-2013-91 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \27\ to determine whether the Proposals should 
be disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the Proposals. 
Institution of disapproval proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described in greater detail below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the Proposals.
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    \27\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B),\28\ the Commission is providing 
notice of the grounds for disapproval under consideration. The 
Commission believes that the Program, which would seek to attract 
larger trading interest to the Exchanges, raises important market-
structure issues that warrant further public comment and Commission 
consideration. The Program would create a separate liquidity pool 
within

[[Page 11852]]

each Exchange that would not be accessible to all market participants, 
and the Commission believes that proceedings are appropriate to 
consider (1) Whether the Program's segmentation of order flow would 
inhibit price discovery and order interaction on an exchange, (2) 
Whether the potential complexity of the Program would detract from the 
efficient execution of securities transactions or the maintenance of 
fair and orderly markets, (3) Whether the Program would permit unfair 
discrimination, and (4) Whether the Program would create an unnecessary 
or inappropriate burden on competition.
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    \28\ See id.
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    Accordingly, the Commission is instituting proceedings to allow for 
additional analysis of the proposed rule changes' consistency with 
Section 6(b)(5) of the Act,\29\ which requires that the rules of a 
national securities exchange promote just and equitable principles of 
trade, perfect the mechanism of a free and open market and a national 
market system, protect investors and the public interest, and not 
permit unfair discrimination, and with Section 6(b)(8) of the Act,\30\ 
which requires that the rules of an exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.
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    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78f(b)(8).
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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
Proposals. In particular, the Commission invites the written views of 
interested persons concerning whether the proposed rule changes are 
inconsistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulation thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\31\
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    \31\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule changes should be 
disapproved by March 24, 2014. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 7, 
2014.
    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-NYSE-2013-72 or SR-NYSEMKT-2013-91 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-NYSE-2013-72 or SR-
NYSEMKT-2013-91. 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. 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-NYSE-2013-72 or SR-NYSEMKT-
2013-91 and should be submitted on or before March 24, 2014. Rebuttal 
comments should be submitted by April 7, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04552 Filed 2-28-14; 8:45 am]
BILLING CODE 8011-01-P


