
[Federal Register Volume 79, Number 194 (Tuesday, October 7, 2014)]
[Notices]
[Pages 60547-60552]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23841]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73282; File No. SR-NYSEArca-2014-04]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend NYSE Arca, Inc.'s Rules by Revising the Order of Priority of Bids 
and Offers When Executing Orders in Open Outcry

October 1, 2014.

I. Introduction

    On January 15, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') 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 revise the order of priority of bids and offers 
when executing orders in open outcry. The proposed rule change was 
published for comment in the Federal Register on February 3, 2014.\3\ 
On March 18, 2014, the Commission extended the time period for 
Commission action on the proposal to May 2, 2014.\4\ The Commission 
received ten comment letters from seven commenters regarding the 
proposal,\5\ as well as a response to the comment letters from NYSE 
Arca.\6\ On April 29, 2014, the Exchange filed Amendment No. 1 to the 
proposed rule change.\7\ On May 2, 2014, the Commission instituted 
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ to determine 
whether to approve or disapprove the proposed rule change.\9\ The Order 
Instituting Proceedings was published for comment in the Federal 
Register on May 8, 2014.\10\ The Commission received an additional 
response letter and data submission from NYSE Arca.\11\ This order 
approves the proposed rule change, as modified by Amendment No. 1.
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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. 71425 (January 28, 
2014), 79 FR 6258 (``Notice'').
    \4\ See Securities Exchange Act Release No. 71733 (March 18, 
2014), 79 FR 16072 (March 24, 2014).
    \5\ See Letter from Darren Story, dated January 29, 2014 
(``Story Letter I''); Letter from Abraham Kohen, AK FE Consultants 
LLC, dated January 31, 2014 (``Kohen Letter I''); Letter from David 
Spack, Chief Compliance Officer, Casey Securities, LLC, dated 
February 3, 2014 (``Casey Letter''); Letter from Abraham Kohen, AK 
FE Consultants LLC, dated February 4, 2014 (``Kohen Letter II''); 
Letter from Angel Alvira, dated February 12, 2014 (``Alvira 
Letter''); Letter from Donald Hart, dated February 12, 2014 (``Hart 
Letter I''); Letter from Doug Patterson, Chief Compliance Officer, 
Cutler Group, LP, dated February 13, 2014 (``Cutler Letter''); 
Letter from Donald Hart, dated February 18, 2014 (``Hart Letter 
II''); Letter from Gerald D. O'Connell, Chief Regulatory Officer, 
Susquehanna International Group, LLP (``SIG''), dated March 14, 2014 
(``SIG Letter''); and Letter from Darren Story, dated March 21, 2014 
(``Story Letter II'').
    \6\ See Letter from Martha Redding, Chief Counsel, NYSE 
Euronext, dated April 4, 2014 (``NYSE Arca Response I'').
    \7\ In Amendment No. 1, the Exchange revised the rule text for 
proposed Rule 6.47: (1) To clarify that Floor Brokers, when crossing 
two orders in open outcry, may not trade through any non-Customer 
bids or offers on the Consolidated Book that are priced better than 
the proposed execution price; and (2) to conform the term ``bids and 
offers'' to ``bids or offers'' in paragraphs (a) and (c) thereunder. 
Amendment No. 1 has been placed in the public comment file for SR-
NYSEArca-2014-04 at http://www.sec.gov/comments/sr-nysearca-2014-04/nysearca201404.shtml (see letter from Martha Redding, Chief Counsel, 
NYSE Euronext, to Kevin M. O'Neill, Deputy Secretary, Commission, 
dated April 30, 2014) and also is available on the Exchange's Web 
site at http://www.nyse.com/nysenotices/nysearca/rule-filings/pdf.action;jsessionid=FACF4F6772B1316D973F5D4E2D258ACE?file_no=SR-
NYSEArca-2014-04&seqnum=2.
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 72081 (May 2, 2014), 
79 FR 26474 (``Order Instituting Proceedings'').
    \10\ See Order Instituting Proceedings at 79 FR 26474. The 
comment period closed on May 29, 2014, and the rebuttal period 
closed on June 12, 2014. On July 29, 2014, the Commission extended 
the time period for the proceedings for the Commission to determine 
whether to approve or disapprove the proposed rule change to October 
1, 2014. See Securities Exchange Act Release No. 72703 (July 29, 
2014), 79 FR 45535 (August 5, 2014).
    \11\ See Letter from Martha Redding, Chief Counsel, New York 
Stock Exchange, dated September 11, 2014 (``NYSE Arca Response 
II''). The response letter included summary data concerning 
participation and competition in non-Customer-to-Customer open 
outcry crossing transactions on NYSE Arca and NYSE Amex Options and 
is available at http://www.sec.gov/comments/sr-nysearca-2014-04/nysearca201404.shtml.
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II. Description of the Proposal

    NYSE Arca proposed to amend its rules governing the priority of 
bids and offers on its Consolidated Book by revising the order of 
priority in open outcry to afford priority to bids and offers 
represented by Market Makers \12\ and Floor Brokers \13\ (collectively, 
``Crowd Participants'') \14\ over certain equal-priced bids and offers 
of non-Customers \15\ on the Consolidated Book \16\ during the 
execution of an order in open outcry on the Floor \17\ of the 
Exchange.\18\
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    \12\ See Rule 6.32 (Market Maker Defined).
    \13\ See Rule 6.43 (Options Floor Broker Defined).
    \14\ The term ``Crowd Participants'' means the Market Makers 
appointed to an option issue under Rule 6.35, and any Floor Brokers 
actively representing orders at the best bid or offer on the 
Exchange for a particular option series. See Rule 6.1(b)(38).
    \15\ A non-Customer is a market participant who does not meet 
the definition of Customer as defined in paragraph (c)(6) of Rule 
15c3-1 under the Securities Exchange Act of 1934, 17 CFR 240.15c3-1. 
See Rule 6.1(b)(29).
    \16\ The term ``Consolidated Book'' means the Exchange's 
electronic book of limit orders for the accounts of Public Customers 
and broker-dealers, and Quotes with Size. See Rule 6.1(b)(37).
    \17\ See Rule 1.1(i).
    \18\ The Exchange also proposed to make non-substantive changes 
to existing rule text contained in Rules 6.47 and 6.75. See Notice, 
79 FR at 6260 for a description of these non-substantive changes.
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    Current Rule 6.75(a) provides that any bids displayed on the 
Consolidated Book have priority over same-priced bids represented in 
open outcry. Such priority also is described in current Rule 6.47, 
which governs crossing orders in open outcry. Floor Broker crossing 
transactions, as described in Rule 6.47(a)(3), may not trade ahead of 
bids or offers on the Consolidated Book that are priced equal to or 
better than the proposed crossing price. The Exchange stated that, 
because of this priority afforded to the Consolidated Book, Crowd 
Participants who have negotiated a large transaction ultimately might 
not be able to participate in its execution.\19\
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    \19\ See Notice, 79 FR at 6258. The Exchange stated that Crowd 
Participants could negotiate a transaction with an understanding of 
the make-up of bids and offers on the Consolidated Book at the 
beginning of open outcry. However, as the trade is executed, the 
Consolidated Book could update with newly-arriving electronically-
entered bids and offers that have priority under current Rule 
6.75(a). The Exchange noted that, given the speed at which quotes 
can flicker in the Consolidated Book, Crowd Participants who have 
agreed to a transaction in open outcry do not know if they will 
actually participate on the trade until after execution. Id. at 
6258-59.
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    The Exchange proposed to restructure its priority rules so that 
bids and offers of Crowd Participants would have priority over equal-
priced bids and offers of non-Customers on the Consolidated Book that 
are ranked in time priority behind any equal-priced Customer bids and 
offers on the Consolidated Book. Equal-priced Customer \20\ interest 
would continue to be afforded priority over Crowd Participants in the 
execution of an open outcry transaction. In addition, consistent with 
the existing price/time priority presently applicable to bids and 
offers on the Consolidated Book, equal-priced non-Customer bids and 
offers ranked in time priority ahead of Customer interest also would be

[[Page 60548]]

afforded priority over Crowd Participants in the execution of an open 
outcry transaction. In the Exchange's view, the proposed rule change 
strikes the appropriate balance between encouraging larger negotiated 
transactions in open outcry, while at the same time protecting Customer 
interest on the Consolidated Book, and any interest that has time 
priority over such protected Customer interest.\21\
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    \20\ See supra note 15.
    \21\ See Notice, 79 FR at 6259.
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    To effect this change to its floor priority rules, the proposal 
would amend the Exchange's rules as follows. As noted above, Rule 
6.75(a) presently states that the highest bid shall have priority but 
where two or more bids for the same option contract represent the 
highest price and one such bid is displayed on the Consolidated Book, 
such bid shall have priority over any bid at the post (i.e., the 
Trading Crowd \22\). The Exchange proposed to amend Rule 6.75(a) \23\ 
by limiting the priority of bids in the Consolidated Book over bids in 
the Trading Crowd solely to those bids for Customers along with non-
Customers that are ranked in time priority ahead of such Customers.\24\
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    \22\ The term ``Trading Crowd'' means all Market Makers who hold 
an appointment in the option classes at the trading post where such 
trading crowd is located and all Market Makers who regularly effect 
transactions in person for their Market Maker accounts at that 
trading post, but generally will consist of the individuals present 
at the trading post. See Rule 6.1(b)(30).
    \23\ The Exchange noted that the changes made to Rule 6.75(a) 
dealing with the priority of ``bids'' also would effect a 
corresponding change to the meaning of Rule 6.75(b) dealing with 
``offers,'' although there would be no change to the rule text in 
Rule 6.75(b). See Notice, 79 FR at 6259.
    \24\ See Notice, 79 FR at 6259-60 for examples illustrating how 
the Exchange's priority and allocation rules would be applied under 
the proposed rule change.
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    Rule 6.76 presently governs order ranking, display and allocation 
of orders on the NYSE Arca Options platform (``OX system''). The 
Exchange proposed new paragraph (d) to Rule 6.76 that would set forth 
the priority of bids and offers on the Consolidated Book against orders 
executed through open outcry in the Trading Crowd. The proposed text 
provides a step-by step-description of the order of priority to be 
afforded bids and offers of both Customers and non-Customers on the 
Consolidated Book. The Exchange noted that the priority scheme 
described in proposed Rule 6.76(d) is consistent with the proposed 
changes to Rule 6.75.\25\
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    \25\ See Notice, 79 FR at 6259. According to the Exchange, the 
inclusion of a description of open outcry priority procedures in 
Rule 6.76 would serve as a useful cross reference to Rule 6.75. The 
Exchange stated that including such a cross reference is consistent 
with similar rule structures by the Chicago Board Options Exchange, 
Inc. (``CBOE'') and NYSE MKT LLC (``NYSE MKT''). See id. (citing 
CBOE Rule 6.45A(b) and NYSE MKT Rule 964NY(e)).
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    The Exchange also proposed to include language in Rule 6.76(d)(4) 
that sets forth certain OTP Holder \26\ obligations under Section 11(a) 
of the Act.\27\ The proposed rule text states that, notwithstanding the 
priority scheme set forth in proposed Rule 6.76(d)(2), an OTP Holder 
effecting a transaction on the Floor for its own account, the account 
of an associated person, or an account with respect to which it or an 
associated person has investment discretion pursuant to the ``G Rule'' 
must still yield priority to any equal-priced non-OTP Holder bids or 
offers on the Consolidated Book.\28\
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    \26\ See Rule 1.1(q).
    \27\ Specifically, pursuant to Section 11(a)(1)(G) of the 
Exchange Act and Rule 11a1-1(T) thereunder (the ``G Rule''), an OTP 
Holder may effect transactions on the Floor for its own account, the 
account of an associated person, or an account with respect to which 
it or an associated person has investment discretion, provided that 
such transaction yields priority in execution to orders for the 
account of persons who are not OTP Holders or associated with OTP 
Holders. See 15 U.S.C. 78k(a)(1)(G) and 17 CFR 11a1-1(T). The 
Exchange stated that the proposed rule text is based on the rules of 
the CBOE and NYSE MKT on behalf of NYSE Amex Options. See Notice, 79 
FR at 6259 (citing CBOE Rule 6.45A(b)(i)(D) and NYSE MKT Rule 
910NY).
    \28\ According to the Exchange, at this time, no OTP Holder that 
currently operates on the Exchange's Floor as a Floor Broker enters 
orders for its own account, the account of an associated person, or 
an account with respect to which it or an associated person has 
investment discretion. The Exchange stated, however, that the 
Financial Industry Regulatory Authority, Inc. on behalf of NYSE 
Regulation, Inc., monitors whether Floor Brokers comply with Section 
11(a) of the Act. See id.
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    Rule 6.47 outlines the procedures used when a Floor Broker attempts 
to cross two orders in open outcry. Currently, Floor Brokers must trade 
against all equal-priced Customer and non-Customer bids and offers in 
the Consolidated Book before effecting a cross transaction in the 
Trading Crowd. The Exchange proposed to revise Rule 6.47 to conform the 
priority rules applicable to open outcry cross transactions to the 
proposed changes described above. Accordingly, the Exchange proposed to 
amend the procedures for the crossing scenarios described in Rule 6.47 
\29\ by stating that Floor Brokers, when crossing two orders in open 
outcry, must yield priority to: (1) Any Customer bids or offers on the 
Consolidated Book that are priced equal to or better than the proposed 
execution price and to any non-Customer bids or offers on the 
Consolidated Book that are ranked ahead of such equal or better-priced 
Customer bids or offers; and (2) to any non-Customer bids or offers on 
the Consolidated Book that are priced better than the proposed 
execution price.\30\ The Exchange noted that Floor Brokers would be 
required to trade against equal and better-priced Customer bids or 
offers on the Consolidated Book, any better-priced bids or offers of 
non-Customers on the Consolidated Book and any non-Customer bids or 
offers that are ranked ahead of equal-priced Customer bids or offers, 
before attempting a cross transaction.\31\ Consistent with proposed 
Rule 6.75(a), Floor Brokers would not be required to trade against 
equal-priced non-Customer bids and offers that are ranked behind such 
Customer and non-Customer bids and offers.\32\
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    \29\ The crossing scenarios described in Rule 6.47 are: (a) Non-
Facilitation (Regular Way) Crosses; (b) Facilitation Procedures; (c) 
Crossing Solicited Orders; (d) Mid-Point Cross; and (e) Customer-to-
Customer Cross. The Exchange did not propose any change to Rule 
6.47(d) relating to Mid-Point Cross, and thus Mid-Point Cross 
transactions would not be affected by the proposed rule change. 
Telephone conversation between Glenn Gsell, Managing Director, NYSE 
Arca and Commission staff, dated April 23, 2014.
    \30\ See Notice, 79 FR at 6259-60 for examples illustrating the 
proposed priority changes as applicable for Non-Facilitation and 
Facilitation Crosses. See also Amendment No. 1, supra note 7.
    \31\ See Notice, 79 FR at 6259.
    \32\ The Exchange stated its belief that affording priority to 
Crowd Participants ahead of such non-Customer interest on the 
Consolidated Book would create an increased incentive for block-
sized transactions on the Floor. See Notice, 79 FR at 6259.
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    The Exchange stated that it would announce the implementation date 
of the proposed rule change by Trader Update to be published no later 
than 90 days following approval \33\ and the implementation date would 
be no later than 90 days following the issuance of the Trader Update.
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    \33\ See Notice, 79 FR at 6260.
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III. Comment Letters and NYSE Arca's Responses

    The Commission received ten comment letters from seven 
commenters.\34\ NYSE Arca submitted a response to the comment letters 
and an additional letter and data submission in response to the Order 
Instituting Proceedings.\35\
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    \34\ See supra note 5.
    \35\ See supra notes 6 and 11.
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    Five of the commenters, four of whom identified themselves as Crowd 
Participants on NYSE Arca,\36\ generally were supportive of the 
proposal to revise the order of priority of bids and offers when 
executing orders in open outcry.\37\ Four of these commenters stated a 
view that the proposal would

[[Page 60549]]

allow NYSE Arca to compete with other exchanges that currently have 
similar priority rules.\38\ Three of these commenters stated that the 
proposal would allow Crowd Participants to compete with bids and offers 
of non-Customers on the Consolidated Book,\39\ and two of them stated 
that Crowd Participants were the market participants most likely to 
provide services during times of market duress.\40\ Two commenters also 
noted that the rule change would maintain priority for Customer orders 
resting on the Consolidated Book.\41\
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    \36\ See Casey Letter (Floor Broker); Alvira Letter (Market 
Maker); Hart Letters I and II (Market Maker); Cutler Letter (Crowd 
Participant), supra note 5.
    \37\ See Story Letters I and II; Casey Letter; Alvira Letter; 
Hart Letter I and II; and Cutler Letter.
    \38\ See Casey Letter (``The Proposal would still leave Arca 
Crowd Participants at a slight disadvantage to crowd participants on 
CBOE and Amex, but would go a long way towards leveling the playing 
field''); Alvira Letter (``I would like to see us in a competitive 
balance with the AMEX who have already implemented the change''); 
Cutler Letter (``AMEX and CBOE currently have similar rules in 
place''); and Hart Letter II (``This would enable the PCX to level 
the rules with other exchanges''). See also SIG Letter (``the 
proposal at least relates in part to a legitimate competitive 
concern'').
    \39\ See Casey Letter (``The current market structure leaves 
NYSE Arca Crowd Participants and their customers at a distinct 
disadvantage . . . to non-customer professional traders, including 
High Frequency Traders''); Hart Letter I (``This rule disadvantages 
floor based market makers, which are the only ones providing 
liquidity when the markets are under duress''); and Cutler Letter 
(``This Proposed Rule change will level the competitive balance 
between floor market makers and electronic non-customer professional 
traders'').
    \40\ See Hart Letter I (``market makers . . . are the only ones 
providing liquidity when the markets are under duress'') and Story 
Letter II (``Perhaps one of the most compelling arguments for floor 
based market-makers is that they are required to stand in and make 
two-sided markets in volatile environments. They cannot just turn 
off the machines and walk away'').
    \41\ See Story Letter I (``It will allow for price discovery and 
improvement, but at the same time maintaining protection for 
customer orders resting on the order book'') and Casey Letter (``As 
Crowd Participants will still be required to interact with any 
Customer orders in the Consolidated Book, public Customers will not 
be adversely affected'').
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    Two commenters stated their belief that the proposal would increase 
competition on the floor for orders,\42\ and one of these commenters 
noted that this competition would benefit the investing public.\43\ 
Similarly, two commenters stated their view that the proposal would 
improve investor executions on the floor.\44\ One commenter noted that 
the proposal would create an advantage for price improving 
customers.\45\
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    \42\ See Casey Letter (``The Proposal, by creating more uniform 
open outcry priority rules across floors, will increase competition 
for execution of these negotiated transactions'') and Story Letter 
II (``This filing will create an advantage for price improving 
CUSTOMER orders'') (emphasis in original).
    \43\ See Casey Letter (``Increasing competition in financial 
markets is nearly always beneficial for investors; the Proposal 
would increase competition among options floor brokers, and would 
ultimately benefit the investing public'').
    \44\ See Story Letter I (``This rule change will allow market 
participants to IMPROVE fills for customers without creating any 
disadvantage for other market participants'') and Casey Letter 
(``The execution of sizeable negotiated transactions in listed 
options is an important service provided to investors almost 
exclusively by the few remaining options Floor Brokers. The Proposal 
. . . will provide investors with greater flexibility, greater 
access to liquidity, and lower execution costs'') (emphasis in 
original).
    \45\ See Story Letter II.
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    Two commenters expressed concerns about the proposal.\46\ One 
commenter stated its view that the proposal would disenfranchise and 
disadvantage certain market participants, and suggested instead that 
the Exchange give size preference for equal bid prices.\47\ The 
commenter believed that such preference would be a more fair way of 
revising the priority of bids and offers.\48\ This commenter further 
noted that, under the Exchange's proposal, even small bids from Crowd 
Participants would take priority over electronic non-Customer bids.\49\ 
The same commenter also noted its belief that best execution is not 
enhanced by allowing more exchanges to disadvantage other traders.\50\ 
The commenter suggested that, regardless of the merits of high 
frequency trading, there was no reason to disadvantage all non-
Customers by giving priority to one class of traders that would allow 
them to jump ahead of the queue.\51\ One commenter who supported the 
proposal took issue with views expressed by this commenter and noted 
that current NYSE Arca rules are structured so as to disadvantage on-
floor market makers.\52\
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    \46\ See Kohen Letters I and II; and SIG Letter.
    \47\ See Kohen Letter I.
    \48\ See Kohen Letter I.
    \49\ See Kohen Letter I (``otherwise Crowd Participants' 1 
contract or 100 share bid will always take priority'').
    \50\ See Kohen Letter II.
    \51\ See Kohen Letter II.
    \52\ See Story Letter II.
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    Another commenter also raised concerns with the proposal.\53\ The 
commenter acknowledged that the proposal would reduce the number of 
instances where high-frequency, non-Customer orders arriving on to the 
book could cause Crowd Participants to be ``scaled-back'' from agreed-
upon negotiated amounts. The commenter acknowledged that this ``scaling 
back'' currently presented certain operational and hedging challenges 
to Crowd Participants.\54\ The commenter remarked, however, that the 
proposal apparently was focused on attracting block cross volume to the 
Exchange.\55\
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    \53\ See SIG Letter.
    \54\ See SIG Letter at 1.
    \55\ See SIG Letter at 1 (``This focus is made apparent by Arca 
when it asserts that the new rule . . . will provide greater 
opportunity for bids and offers of crowd participants to participate 
in open outcry transaction [sic] and therefore promote larger-sized 
negotiated transactions'').
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    The commenter noted that when NYSE Arca uses the term ``Crowd 
Participants,'' it appears to refer to off-floor trading houses that 
attempt to internalize, in large part, block orders from institutional 
customers (i.e., clean cross orders). The commenter acknowledged that 
this term also includes option market makers on the NYSE Arca Floor, 
but stated its view that the market maker participation in such orders 
is often minimal as a percentage of the total order size.\56\ The 
commenter stated that the majority of available market maker liquidity 
at the Exchange is represented by a group of off-floor market maker 
firms that are collectively responsible for over 90% of displayed 
liquidity in multiply traded options, rather than on-floor market 
makers.\57\
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    \56\ See SIG Letter at 2.
    \57\ See SIG Letter at 2. The commenter remarked that, due to 
the off-floor market makers, electronic crossing systems for block 
sized orders generally have shown to be a better alternative to 
floor crosses, at least on a transparency and price competition 
basis. Id.
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    The commenter further stated its view that the proposal would 
attract more clean-cross type orders that it believes would further 
insulate customer interest from competition by parties other than crowd 
participants.\58\ In its view, because such negotiations usually occur 
outside the view of off-floor market makers, the crosses often occur at 
prices that have not been sufficiently vetted by those most likely to 
offer price improvement.\59\ Given its concerns, the commenter believed 
that the proposal would be detrimental to investors, as the opportunity 
for price improvement would be significantly diminished.\60\
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    \58\ See SIG Letter at 2.
    \59\ See SIG Letter at 2. The commenter also noted that it had 
submitted a Petition for Rulemaking filed with the Commission in 
April 2013. The commenter represented that, in that petition, 
several market making firms (including the commenter) asserted their 
belief that exchanges with trading floors would generate better 
priced executions for customers if they required crosses to be 
auctioned through electronic systems that included off-floor 
registered market makers in the respective option classes. See 
Petition for Rulemaking Regarding Option Floor Crosses, File No. 4-
662 (April 22, 2013), available at http://www.sec.gov/rules/petitions/2013/petn4-662.pdf.
    \60\ See SIG Letter at 2-3.
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    The commenter stated that the proposal did not provide an 
explanation regarding how more crowd participation in larger-sized 
block floor crosses would benefit customers or the market in 
general.\61\ The commenter acknowledged that, as other floor exchanges 
have rules that place booked

[[Page 60550]]

parity interest behind crowd participants, NYSE Arca's proposal at 
least relates in part to a legitimate competitive concern for the 
Exchange.\62\ However, the commenter stated that it was important that 
exchanges give sufficient reason why a proposed rule is not injurious 
to customers or the market in general, and that the Exchange's proposal 
fails to give such reasons, perhaps, as the commenter opined, because 
there were none to give.\63\ The commenter requested that the 
Commission establish the reasoning behind the Exchange's desire to 
increase block-cross volume and the reasons, if any, for NYSE Arca's 
belief that more (and cleaner) block floor crosses were good for 
investors.\64\
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    \61\ See SIG Letter at 3.
    \62\ See SIG Letter at 3 (``No doubt, Arca relies heavily on 
open outcry crosses for transaction volume. And, no doubt, the more 
often that high-frequency professional booked orders break-up 
`matched' floor crosses, the more likely it becomes that off-floor 
facilitating firms will send their orders to other exchanges to be 
crossed'').
    \63\ See SIG Letter at 3.
    \64\ See SIG Letter at 3.
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    One commenter who supported the proposal raised issues with the 
arguments made by the commenter who expressed several concerns 
regarding the proposal.\65\ The commenter who supported the proposal 
stated that the other commenter's concerns were misguided and unfounded 
because the proposal would allow for price improvement on any size 
order, whether large or not. The commenter who supported the proposal 
also noted that the proposal would allow large market-making groups 
like itself to continue to provide inside markets and actually trade at 
those prices on NYSE Arca.\66\ The commenter who supported the proposal 
disagreed with the suggestion that the proposal was necessarily about 
attracting clean-crosses outside the view of off-floor market makers, 
and stated its belief that the rule was designed to provide opportunity 
to improve markets.\67\
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    \65\ See Story Letter II.
    \66\ See Story Letter II.
    \67\ See Story Letter II.
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    NYSE Arca provided a response letter addressing issues raised by 
the commenters.\68\ NYSE Arca emphasized that the proposal would align 
the rules of the Exchange with other U.S. options exchange trading 
floors, but with a unique caveat that any non-Customer electronic 
interest with time priority over a Customer order in the Book also 
would maintain priority over floor participants.\69\
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    \68\ See NYSE Arca Response Letter I.
    \69\ See NYSE Arca Response Letter I at 1-4.
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    In response to one commenter's suggestion that the Exchange adopt a 
pure size priority model,\70\ NYSE Arca stated that a wholesale 
restructuring of its priority model was beyond the scope of the current 
proposal.\71\ NYSE Arca further noted its view that such a model would 
unduly disadvantage small size retail customer orders by allowing 
later-arriving professional participants willing to trade a larger 
quantity to be accorded priority.\72\
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    \70\ See Kohen Letters I and II.
    \71\ See NYSE Arca Response Letter I at 2.
    \72\ See NYSE Arca Response Letter I at 2.
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    In response to one commenter who expressed several concerns 
regarding the proposal, NYSE Arca stated that the concerns about the 
practice of crossing institutional orders without electronic 
participants providing price improvement was unrelated to the proposal 
to allocate priority among participants at the same price.\73\ NYSE 
Arca noted that its rules would continue to give priority to 
participants who display an improved price.\74\
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    \73\ See NYSE Arca Response Letter I at 2.
    \74\ See NYSE Arca Response Letter I at 2.
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    NYSE Arca disagreed with that commenter's suggestion that the 
proposal would attract more clean-cross type orders, noting that the 
proposal was intended to promote liquidity and price discovery, and 
stated that nothing would ``insulate customer interest from competition 
by parties other than crowd participants.'' \75\ NYSE Arca stated that 
the proposal is intended to promote liquidity and price discovery on 
the Exchange by adopting a priority structure that would be similar to, 
but more favorable for electronic non-Customer participants than, the 
priority structure that exists on other U.S. options trading 
floors.\76\ The Exchange pointed out that the execution price would 
have to be equal to or better than the NBBO and that Crowd Participants 
would have to yield to superior electronic bids or offers.\77\ NYSE 
Arca stated further that the proposal would not reduce the ability or 
incentive for any participant to improve its displayed quote 
electronically, as the proposal only would impact the allocation of 
orders among multiple participants at the same price.\78\
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    \75\ See NYSE Arca Response Letter I at 2-3.
    \76\ See NYSE Arca Response Letter I at 3.
    \77\ See NYSE Arca Response Letter I at 3.
    \78\ See NYSE Arca Response Letter I at 3.
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    In response to the commenter's request that the Exchange explain 
why more (and cleaner) block floor crosses are good for investors, the 
Exchange noted its view that institutional trading desks provide a 
valuable service by providing liquidity to their customers for block-
size orders.\79\ The Exchange stated, however, that it did not believe 
that the total level of larger-size block floor crosses in the industry 
would increase as a result of its proposal.\80\ The Exchange noted that 
other trading floors currently execute existing institutional block 
cross volume, and the Exchange's goal was to offer an alternative venue 
for such executions.\81\
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    \79\ See NYSE Arca Response Letter I at 3.
    \80\ See NYSE Arca Response Letter I at 3.
    \81\ See NYSE Arca Response Letter I at 3. The Exchange also 
provided examples where a firm looking to facilitate its customer 
order might choose to send the order to an exchange other than NYSE 
Arca under the Exchange's current priority rules. Id.
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    After the Commission issued the Order Instituting Proceedings, NYSE 
Arca submitted a second comment letter, which concerned participation 
in open outcry crossing transactions on NYSE Arca.\82\ According to the 
Exchange, it believed that comparing data relating to non-Customer-to-
Customer Floor crossing transactions on NYSE Arca with similar data for 
NYSE Amex Options, the Exchange's affiliated options market that 
provides priority to Floor participants over non-Customers on its 
electronic book, would support the argument that the proposed rule 
change would create a more robust open outcry market and benefit 
investors who choose to send orders to the Exchange.\83\
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    \82\ See NYSE Arca Response Letter II.
    \83\ See NYSE Arca Response Letter II at 1-2. The data provided 
by the Exchange showed that floor market makers and/or book 
participants participated in only 34.5% of the total crossing 
contracts executed on the NYSE Arca Floor, whereas on NYSE Amex 
Options, such participants participated in 53.4% of the total 
crossing contracts executed. See id. at 2. Although the data did not 
describe the actual contract execution participation percentages for 
either floor market makers or book participants, the Exchange 
believed that the data showed that, if it had rules similar to other 
options exchange trading floors, the Exchange would see an increase 
in Floor market maker participation in Floor crossing transactions. 
See id.
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IV. Discussion and Commission Findings

    After careful review of the proposed rule change as well as the 
comment letters and the NYSE Arca response letter received on the 
proposal, 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 
and, in particular, with Section 6(b) of the Act.\84\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\85\ which requires, among other things, 
that the rules of a national securities exchange be designed to

[[Page 60551]]

prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.\86\
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    \84\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \85\ 15 U.S.C. 78f(b)(5).
    \86\ The Exchange represented that the proposed rule change is 
consistent with Section 11(a) of the Act and the rules thereunder 
and would not limit in any way the obligations of OTP Holders to 
comply with Section 11(a) or the rules thereunder. See Notice, 79 FR 
at 6261. The Exchange also represented that the proposed rule change 
raises no novel issues under Section 11(a) and the rules thereunder 
from a compliance, surveillance or enforcement perspective. See id. 
The Commission notes that each member of the Exchange is responsible 
for ensuring that its conduct is in compliance with the requirements 
of Section 11(a) of the Act and the rules promulgated thereunder.
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    As noted above, the Commission received ten comment letters from 
seven commenters in response to the proposed rule change.\87\ Five of 
the commenters supported the proposed rule change,\88\ while two other 
commenters raised concerns about whether the Exchange's proposed 
revisions to its rules governing priority during open outcry were 
appropriate, as more fully described above.\89\ In its review of the 
proposal, the Commission has carefully considered all of the comments 
received. The Commission acknowledges the concerns raised by one 
commenter, as detailed above,\90\ about the potential impact on 
competition resulting from the proposed change in the Exchange's rules 
governing priority and order allocation for open outcry transactions. 
At the same time, the Commission also acknowledges the Exchange's 
belief that this proposal will lead to greater competition for orders 
and will create a more robust open outcry market and its belief that, 
without the proposal, the Exchange would be at a competitive 
disadvantage compared to other exchanges that operate trading 
floors.\91\
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    \87\ See supra note 5.
    \88\ See Story Letters I and II; Casey Letter; Alvira Letter; 
Hart Letters I and II; and Cutler Letter.
    \89\ See Kohen Letters I and II; and SIG Letter. See also notes 
46-64 and accompanying text describing the issues and concerns 
raised by these comments.
    \90\ See supra notes 53-64 and accompanying text.
    \91\ See Notice, 79 FR at 6261.
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    Rule 6.75(a), as proposed to be revised, describes NYSE Arca's 
priority and order allocation for open outcry transactions, including 
procedures to be followed when there is interest at the same price in 
the Consolidated Book as on the Floor. Rule 6.76(d), as proposed to be 
revised, describes NYSE Arca's order ranking, display and allocation of 
orders on the OX system, and the priority described in proposed Rule 
6.76(d) is consistent with the changes to Rule 6.75(a). The proposed 
rules governing priority during open outcry transactions on the 
Exchange's floor are similar to the priority rules at other exchanges 
with trading floors.\92\ Rule 6.47, as proposed to be revised, 
describes priority and order allocation for crossing orders in open 
outcry transactions. The proposed rules governing open outcry during 
crossing transactions on the Exchange floor are similar to the rules 
governing priority in crossing transactions at other exchanges.\93\ 
Given that other options exchanges currently have rules that provide 
lower priority to non-priority customer orders on the electronic book 
during floor transactions on those exchanges, including during crossing 
transactions, the Exchange's proposed revisions to its priority scheme 
for floor transactions will allow NYSE Arca to compete with other 
floor-based exchanges that have substantially similar rules. 
Accordingly, the Commission believes that it would be appropriate and 
consistent with the Act to approve the Exchange's proposed rule 
change.\94\
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    \92\ See, e.g., CBOE Rule 6.45A; NYSE MKT Rules 963NY and 964NY. 
CBOE Rule 6.45A(b)(i) provides that, after public customer orders in 
the electronic book, in-crowd market participants shall have second 
priority and broker-dealer orders in the electronic book and 
electronic quotes of Market-Makers shall have third priority. NYSE 
MKT Rule 963NY(a)-(b) provides that, after Customer orders displayed 
on the Consolidated Book, an order in the crowd shall have priority 
over a non-Customer order displayed in the Consolidated Book. NYSE 
MKT Rule 964NY(e) further requires that for Floor Brokers manually 
representing orders in the trading crowd, Customer orders in the 
Consolidated Book have first priority, ATP Holders of the trading 
crowd have second priority and broker-dealers, Professional 
Customers (including Quotes with Size and orders of Market Makers) 
in the Consolidated Book have third priority.
    \93\ See, e.g., CBOE Rule 6.74; NYSE MKT Rule 934NY. CBOE Rule 
6.74 provides that for purposes of establishing priority at the same 
price, bids and offers of In Crowd Market Participants have first 
priority, except with respect to public customer orders resting in 
the electronic book; and all other bids and offers (including bids 
and offers of broker-dealer orders in the electronic book and 
electronic quotes of Market-Makers) have second priority. NYSE MKT 
Rule 934NY(b)(3) provides that, for a non-facilitation cross, if 
there are bids or offers in the Consolidated Book better than the 
proposed execution price or Customer Orders in the Consolidated Book 
priced at the proposed execution price, the Floor Broker must trade 
against such bids or offers in the Consolidated Book. Once bids or 
offers in the Book are satisfied, the Floor Broker may cross the 
balance of the orders, if any, to be crossed.
    \94\ As noted above, the Exchange's proposal is intended to 
bring its floor priority rules for crossing orders in line with the 
floor priority rules of certain other options exchanges. However, 
the Commission is aware of the concerns, as expressed by commenters, 
that the rules of an options trading floor should allow for 
sufficient competition for orders. This concern is one that the 
Commission staff intends to continue to evaluate in the context of 
its ongoing empirical consideration of market structure. For 
example, there currently is relatively little information available 
about the extent and nature of floor crossing transactions. The 
Commission staff, however, expects that an exchange with a trading 
floor, as part of its regulatory obligations, will monitor the 
extent to which competition is maintained in floor crossing 
transactions. One way an exchange could do so would be to assess 
periodically the level of participation in such crossing 
transactions by market makers and other market participants, aside 
from the firm that initiated the cross, and review whether its rules 
appropriately allow for such competition. In addition, the 
Commission reminds broker-dealers that the duty of best execution 
requires them to assess periodically the quality of competing 
markets to assure that order flow is directed to the markets 
providing the most beneficial terms for their customer orders. See, 
e.g., Order Execution Obligations, Securities Exchange Act Release 
No. 37619A (September 6, 1996), 61 FR 48290 at 48322-33 (September 
12, 1996). Broker-dealers must examine their procedures for seeking 
to obtain best execution in light of market and technology changes 
and modify those practices if necessary to enable their customers to 
obtain the best reasonably available prices. See id. at 48323. In 
doing so, broker-dealers must take into account price improvement 
opportunities, and whether different markets may be more suitable 
for different types of orders or particular securities. See id.
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    As noted above, one commenter remarked that it had submitted a 
Petition for Rulemaking with the Commission that asserts that exchanges 
with trading floors would generate better priced executions for 
customers if they required crosses to be auctioned through electronic 
systems that included off-floor registered market makers in their 
respective option classes.\95\ Although the Petition for Rulemaking 
raises concerns involving how orders are crossed on options exchange 
floors, the recommendations in the Petition for Rulemaking \96\ are 
beyond the scope of the Commission's consideration in connection with 
the instant proposed rule change. However, Commission staff will 
evaluate the Petition for Rulemaking and how best to address the 
concerns raised therein.
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    \95\ See supra note 59 and accompanying text.
    \96\ The Petition for Rulemaking requests, among other things, 
that the Commission require each floor-based U.S. options exchange 
to provide an electronic-cross auction mechanism for all multiply-
listed options traded on its trading floor and ensure that the 
mechanism is made electronically accessible from on and off the 
trading floor by qualified members and that all block-sized matched 
option crosses involving customer orders be auctioned through such 
mechanism. See Petition for Rulemaking regarding Option Floor 
Crosses, supra note 59.

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[[Page 60552]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\97\ that the proposed rule change, as modified by Amendment No. 1, 
(SR-NYSEArca-2014-04) is approved.
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    \97\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\98\
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    \98\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23841 Filed 10-6-14; 8:45 am]
BILLING CODE 8011-01-P


