
[Federal Register Volume 79, Number 246 (Tuesday, December 23, 2014)]
[Notices]
[Pages 77077-77079]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29971]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73859; File No. SR-NYSEArca-2014-14]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change Amending Exchange Rule 6.60 To Enhance the 
Functionality of the Trade Collar Protection Mechanism

December 17, 2014.

I. Introduction

    On October 24, 2014, NYSE Arca, Inc., (``NYSE Arca'' 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 Exchange Rule 6.60 relating to the 
Exchange's ``Trade Collar Protection'' mechanism for options. The 
proposed rule change was published for comment in the Federal Register 
on November 13, 2014.\3\ The Commission received no comments on the 
proposal. 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. 73543 (November 6, 
2014), 79 FR 67488 (``Notice'').
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II. Description of the Proposal

    The Exchange applies Trade Collar Protection to prevent the 
immediate execution of certain orders at prices outside of a specified 
parameter (referred to as a ``Trading Collar'').\4\ This Trade Collar 
Protection mechanism is set forth in Exchange Rule 6.60(a), but the 
Exchange has proposed to amend Exchange Rule 6.60(a) so that the rule 
accurately reflects how the mechanism operates.\5\
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    \4\ See id. Trading Collars are determined by the Exchange on a 
class-by-class basis and, unless announced otherwise via Trader 
Update, are the same value as the bid-ask differential guidelines 
established pursuant to Exchange Rule 6.37(b)(1). See id. The 
Exchange also notes that that the Trade Collar Protection mechanism 
is not available for quotes or for orders with execution conditions 
immediate-or-cancel (``IOC''), all-or-none (``AON''), fill-or-kill 
(``FOK'') and NOW. See id.; see also Exchange Rule 6.60(a)(3).
    \5\ See id.

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[[Page 77078]]

    The Trade Collar Protection mechanism applies in two scenarios: (1) 
The mechanism prevents the execution of certain orders when the 
difference between the National Best Offer (``NBO'') and the National 
Best Bid (``NBB'') is greater than one Trading Collar; \6\ and (2) the 
mechanism prevents the execution of the balance of a buy order if it 
were to execute at a price that is the NBO plus a Trading Collar (or a 
price that is the NBB minus a Trading Collar for an eligible sell 
order).\7\ In the first scenario, the Exchange will display the order 
at a price equal to the NBO minus one Trading Collar for sell orders or 
the NBB plus one Trading Collar for buy orders (the ``collared 
order'').\8\ The Exchange will then attempt to execute or route the 
collared order to buy (sell) against any contra interest priced within 
one Trading Collar above (below) the displayed price of the collared 
order.\9\ After a period of one second, if the collared order has not 
been executed or its price has not been recalculated due to changes in 
the market, the Trade Collar Protection mechanism will improve the 
collared order's displayed price by an amount equal to an additional 
Trading Collar.\10\ The Exchange notes that the collared order will re-
price before the expiration of one second as a result of certain 
changes in the market; specifically, an update to the NBBO that 
improves the same side of the market as the collared order will cause 
the collared order to be redisplayed at the same price as the updated 
NBBO.\11\ A Limit Order (which is not an IOC Order, AON Order, FOK 
Order or NOW Order) on the same side of the market priced better than 
one Trading Collar from the collared order will also become subject to 
Trade Collar Protection and will cause the collared order to improve by 
one Trading Collar (which will redisplay at the new price and 
additional size of the new Limit Order).\12\
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    \6\ See Exchange Rule 6.60(a)(1)(i).
    \7\ See Exchange Rule 6.60(a)(1)(ii).
    \8\ See Exchange Rule 6.60(a)(4)(A).
    \9\ See Exchange Rule 6.60(a)(4)(B).
    \10\ See Exchange Rule 6.60(a)(4)(C)(iii).
    \11\ See Notice, supra note 3, at 67488.
    \12\ See id.
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    The second scenario arises when the difference between the NBB and 
NBO is within the bid-ask differential guidelines and an incoming 
market order or marketable limit order is partially executed upon entry 
but execution of the balance of the order would be at a price that is 
more than a Trading Collar away from the NBBO at entry.\13\ Pursuant to 
Exchange Rule 6.60(a)(5), the balance of the partially executed order 
will be subject to Trade Collar Protection and displayed at the last 
sale price,\14\ and thereafter handled the same way as an order 
collared in the first scenario.\15\
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    \13\ See Notice, supra note 3, at 67489.
    \14\ See id.; see also Exchange Rule 6.60(a)(5). However, if 
there is an opportunity for trading within one Trading Collar of the 
last sale price, the buy (sell) order will be displayed at the NBB 
(NBO) established at the time of the initial execution. See id.
    \15\ See id.
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    The Exchange has proposed to amend Exchange Rule 6.60(a) so that 
the description of the Trade Collar Protection mechanism conforms to 
its function. First, Exchange Rule 6.60(a)(1)(i) provides that the 
Exchange will prevent the immediate execution of market orders and 
marketable limit orders if the width of the bid-ask differential of the 
NBBO is greater than one Trading Collar. However, the Exchange states 
that it only prevents the immediate execution of market orders (and not 
marketable limit orders) when the width of the bid-ask differential of 
the NBBO is greater than one Trading Collar.\16\ According to the 
Exchange, marketable limit orders (i.e., orders with limit prices that 
are executable against the NBB or NBO), execute immediately regardless 
of the width of the bid-ask differential of the NBBO.\17\ Accordingly, 
the Exchange proposes to delete the reference to marketable limit 
orders in Exchange Rule 6.60(a)(1)(i).
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    \16\ See Notice, supra note 3, at 67489.
    \17\ The Exchange states that it believes that an order with a 
limit price evidences specific interest at which the submitting 
market participant is willing to trade and, therefore, does not need 
the protection of the Trade Collar Protection mechanism. See id. The 
Exchange notes that marketable limit orders remain subject to the 
protections of the Exchange's ``Limit Order Filter'' as provided in 
in Exchange Rule 6.60(b). See id.
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    Second, the Exchange proposes to delete Exchange Rule 
6.60(a)(4)(C)(iv), which provides that a market order that arrives on 
the same side of the market as a collared order will also be subject to 
Trade Collar Protection and will be displayed at the same price as the 
collared order. The Exchange has not yet deployed this functionality 
and, as such, Exchange Rule 6.60(a)(4)(C)(iv) is not an accurate 
reflection of the Trade Collar Protection mechanism's current operation 
in this regard.\18\ Instead of joining the resting collared order at 
its displayed price, an incoming market order to buy (sell) on the same 
side of the market as a resting collared order actually results in both 
orders being displayed at a price equal to one Trading Collar above 
(below) the resting collared order's displayed price.\19\ The Exchange 
notes that this is what occurs when a marketable limit order to buy 
(sell) is received on the same side of the market as a resting collared 
order and priced more than one Trading Collar above (below) the resting 
collared order's displayed price.\20\ This handling of later-arriving 
marketable limit orders is currently set forth in Exchange Rule 
6.60(a)(4)(C)(ii). Since market orders are actually handled the same 
way, in connection with the proposed deletion of Exchange Rule 
6.60(a)(4)(C)(iv), the Exchange also proposes to amend Exchange Rule 
6.60(a)(4)(C)(ii) to broaden its applicability to all marketable 
orders, which include both marketable limit orders and market 
orders.\21\
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    \18\ See id. The Exchange states that it intends to incorporate 
this functionality in the near future as it believes that the 
functionality would be beneficial to the market. See id.
    \19\ See id.
    \20\ See Notice, supra note 3, at 67489.
    \21\ See proposed Exchange Rule 6.60(a)(4)(C)(ii).
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    Third, the Exchange proposes to delete a cross reference to 
Exchange Rule 6.37(b)(1) in Exchange Rule 6.60(a)(2), which provides 
the bid-ask differentials used to determine the applicable value of the 
Trading Collar. Exchange Rule 6.37(b)(1) provides that the bid price 
for an option contract be used as the reference price for the bid-ask 
differential applicable to both buy and sell orders, but the Trade 
Collar Protection mechanism instead uses the NBO as the reference price 
for the value of the Trade Collar applicable to sell orders (and uses 
the NBB as the reference price for the Trade Collar applicable to buy 
orders).\22\ Accordingly, in place of the current cross reference to 
Exchange Rule 6.37(b)(1) in Exchange Rule 6.60(a)(2), the Exchange 
proposes to adopt new subparagraphs (a)(2)(A) and (a)(2)(B), which 
codify the same numerical values as provided currently in Exchange Rule 
6.37(b)(1) but make clear that the reference price for the applicable 
Trading Collar is the NBB for buy orders and the NBO for sell orders 
(rather than both values being keyed off of the NBB as Exchange Rule 
6.37(b)(1) provides).\23\
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    \22\ See Notice, supra note 3, at 67489. The Exchange states 
that it bases the value of the Trade Collar on the NBB for buy 
orders because it believes that a market participant that is looking 
to buy would derive its price off of what other market participants 
are willing to pay (i.e., the prevailing bid), and similarly bases 
the value of the Trade Collar on the NBO for sell orders because it 
believes that a market participant that is looking to sell would 
derive its price off of what other market participants are willing 
to sell (i.e., the prevailing offer). See id.
    \23\ See id.
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    The Exchange also proposes some additional clarifying changes. The 
Exchange proposes to amend Exchange

[[Page 77079]]

Rule 6.60(a) to delete the terms ``inbound'' and ``incoming'' where 
currently used in the rule because Trade Collar Protection applies to 
resting orders as well as inbound or incoming orders.\24\ The Exchange 
also proposes to delete the reference in Exchange Rule 6.60(a)(3) to 
the cancellation of IOC Orders, AON Orders, FOK Orders and NOW Orders 
if not immediately executed, as AON orders do not cancel if they are 
not immediately executed.\25\ Finally, the Exchange proposes to amend 
Exchange Rule 6.37(b)(1)(E) to rectify a typographical error--Exchange 
Rule 6.37(b)(1)(E) states that the bid-ask differential should be no 
more than $1 when the last bid is $20.10 or more, but the rule should 
refer instead to a last bid of $20.01 or more.\26\
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    \24\ See id.; see also proposed Exchange Rule 6.60(a).
    \25\ See proposed Exchange Rule 6.60(a)(3); see also Notice, 
supra note 3, at 67489. The Exchange also proposes to capitalize the 
term ``limit order'' as used in Exchange Rule 6.60(a)(4)(D) to 
conform with the use of that term in the rest of the rule. See id. 
at 67489-67490.
    \26\ See proposed Exchange Rule 6.37(b)(1)(E); see also Notice, 
supra note 3, at 67489.
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III. Discussion and Commission 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.\27\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\28\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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.
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    \27\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange believes that the proposal 
assists with the maintenance of fair and orderly markets and protects 
investors by correcting inaccurate language in Exchange Rule 6.60(a) 
and clarifying the existing Trade Collar Protection functionality so 
that market participants can better understand how the Exchange handles 
certain orders in times of market dislocation. In addition, the 
Commission notes that the Exchange believes that the proposed 
functionality of the Trade Collar Protection components is consistent 
with the Act. In particular, the Exchange believes that its proposal to 
base Trading Collar values on the NBB for buy orders and the NBO for 
sell orders could remove impediments to and perfect the mechanism of a 
free and open market by using a benchmark from which a market 
participant would most likely derive its price.\29\
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    \29\ See Notice, supra note 3, at 67490; see also supra note 22.
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    The Commission believes that the operation of the Trade Collar 
Protection mechanism set forth in the proposal is consistent with the 
Act. In addition, the Commission believes that the revised description 
of this mechanism should increase transparency with respect to how the 
mechanism operates and enhance investors' understanding of how the 
mechanism may affect their orders in certain market conditions. 
Accordingly, the Commission believes that the proposal is reasonably 
designed to help prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors and the 
public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-NYSEArca-2014-14) be, and it 
hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29971 Filed 12-22-14; 8:45 am]
BILLING CODE 8011-01-P


