
[Federal Register Volume 80, Number 46 (Tuesday, March 10, 2015)]
[Notices]
[Pages 12664-12666]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-05497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74441; File No. SR-NYSEArca-2014-150]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend Rule 6.60 and To Adopt Rule 6.61, Which Was Previously Reserved, 
To Provide Price Protection for Market Maker Quotes

March 4, 2015.

I. Introduction

    On December 29, 2014, NYSE Arca, Inc. (``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 (Price Protection) and to adopt Exchange Rule 6.61 to provide 
price protection for Market Maker quotes. The proposed rule change was 
published for comment in the Federal Register on January 14, 2015.\3\ 
The Commission received no comment letters on the proposal. On March 2, 
2015, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ This order approves the proposed rule change, as modified by 
Amendment No. 1 thereto.
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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. 74018 (January 8, 
2015), 80 FR 1982 (``Notice'').
    \4\ In Amendment No. 1, the Exchange clarified that it believes 
that Market Maker bids should not be priced the same as or higher 
than the corresponding benchmark, which would be the price of the 
underlying security for call options and the strike price for put 
options. Amendment No. 1 does not change any of the proposed rule 
text that was submitted in the original filing. Amendment No. 1 is 
technical in nature and, therefore, the Commission is not publishing 
it for comment.
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II. Description of the Proposal

    The Exchange proposed to amend Exchange Rule 6.60 and to adopt 
Exchange Rule 6.61, which was previously Reserved, to provide price 
protection for Market Maker quotes. Exchange Rule 6.60 currently 
applies and will continue to apply solely to orders. Exchange Rule 
6.60(b), provides a price protection filter for incoming limit orders, 
pursuant to which the Exchange rejects limit orders priced a specified 
percentage \5\ through the National Best Bid (``NBB'') or National Best 
Offer (``NBO'') (``Limit Order Filter''). To clarify that Exchange Rule 
6.60 applies only to orders, the Exchange proposed to append the word 
``Orders'' to the Exchange Rule 6.60 header to provide ``Rule 6.60. 
Price Protection--Orders.'' \6\


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    \5\ Pursuant to Exchange Rule 6.60(b), unless determined 
otherwise by the Exchange and announced to OTP Holders and OTP Firms 
via Trader Update, the specified percentage is 100% for the contra-
side NBB or NBO priced at or below $1.00 and 50% for contra-side NBB 
or NBO priced above $1.00. See Notice, supra note 3, at 1983.
    \6\ See Notice, supra note 3, at 1983.
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A. Proposed Market Maker Quote Price Protection

    The Exchange proposed to adopt new Exchange Rule 6.61 to provide 
for a price protection mechanism for quotes entered by a Market Maker. 
Exchange Rule 6.61(a) will provide price protection filters applicable 
only for quotes entered by a Market Maker pursuant to Rule 6.37B and 
will not be applicable to orders entered by a Market Maker. The 
Exchange proposed to provide for two layers of price protection that 
will be applicable to all incoming Market Maker quotes.\7\ The first 
layer of price protection will assess incoming sell quotes against the 
NBB and incoming buy quotes against the NBO.\8\ The second layer of 
price protection will assess the price of call or put bids against a 
specified benchmark.
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    \7\ The Exchange states that the proposal will assist with the 
maintenance of fair and orderly markets by averting the risk of 
Market Maker quotes sweeping through multiple price points resulting 
in executions at prices that are through the last sale price or 
National Best Bid or Best Offer (``NBBO''). See Notice, supra note 
3, at 1983.
    \8\ The Exchange represents that this proposed price protection 
mechanism is similar to the Exchange's Limit Order Filter. See 
Notice, supra note 3, at 1983.
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1. NBBO Price Reasonability Check
    Proposed Exchange Rule 6.61(a)(1) sets forth the Exchange's 
proposed NBBO price reasonability check, which will compare Market 
Maker bids with the NBO and Market Maker offers with the NBB. 
Specifically, provided that an NBBO is available, a Market Maker quote 
will be rejected if it is priced a specified dollar amount or 
percentage through the contra-side NBBO as follows:
    (A) $1.00 for Market Maker bids when the contra-side NBO is priced 
at or below $1.00; or
    (B) 50% for Market Maker bids (offers) when the contra-side NBO 
(NBB) is priced above $1.00.
    The Exchange will reject inbound Market Maker quotes that exceed 
the parameters set forth in proposed Exchange Rule 6.61(a)(1)(A)-
(B).\9\ The

[[Page 12665]]

Exchange states that it has proposed a specific dollar threshold for 
when the NBO is priced at or below $1.00 because, for such low-priced 
NBOs, the Exchange believes it is appropriate to provide Market Makers 
with the ability to enter quotes at least $1.00 higher than the 
prevailing NBO.\10\ For example, if the NBO were $0.06, when using a 
100% filter, the Exchange would be required to reject any bids priced 
$0.12 or more. In addition, the Exchange proposed that pursuant to 
proposed Exchange Rule 6.61(a)(1)(A), Market Maker offers that arrive 
when the NBB is priced at or below $1.00 will not be subject to this 
filter. The Exchange notes that when the NBB is priced at or below 
$1.00, the price of an offer will be bound by $0.00, and therefore an 
offer will always be less than $1.00 away from the NBB.\11\
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    \9\ The Exchange states that the proposed percentages are 
appropriate because they are based on the percentages established 
for the Limit Order Filter. See Notice, supra note 3, at 1983.
    \10\ See Notice, supra note 3, at 1983.
    \11\ The Exchange states that such offer prices would likely not 
be erroneous and therefore the Exchange does not believe it 
necessary to reject such Market Maker offers. See Notice, supra note 
3, at 1983.
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    Because there may be market scenarios that require the proposed 
parameters to be adjusted, for example, during periods of extreme price 
volatility, the Exchange has further proposed that the Exchange may 
revise these parameters, provided such revised parameters are announced 
to OTP Holders or OTP Firms via a Trader Update.\12\
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    \12\ See proposed Exchange Rule 6.61(a)(1)(A)-(B) (setting forth 
the specified dollar amount or percentages ``unless determined 
otherwise by the Exchange and announced to OTP Holders and OTP Firms 
via Trader Update'').
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    The Exchange also proposed that if a Market Maker quote is rejected 
pursuant to paragraph (a)(1) of the proposed rule, the Exchange will 
also cancel any resting same-side quote in the affected series from 
that Market Maker.\13\ According to the Exchange, even if the new quote 
is rejected because it is priced a specified dollar amount or 
percentage through the contra-side NBBO, in violation of proposed 
Exchange Rule 6.61(a)(1), the Market Maker's implicit instruction to 
cancel the resting quote remains valid nonetheless.\14\
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    \13\ See proposed Exchange Rule 6.61(b). The Exchange states 
that it believes it is appropriate to reject any resting same-side 
quote because when a Market Maker submits a new quote, that Market 
Maker is implicitly instructing the Exchange to cancel any resting 
quote in that same series. See Notice, supra note 3, at 1983.
    \14\ See Notice, supra note 3, at 1984 for examples illustrating 
how proposed Exchange Rule 6.61(a) will operate.
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2. Underlying Stock Price/Strike Price Check
    The Exchange also has proposed new Exchange Rule 6.61(a)(2) and (3) 
which will set forth the Exchange's proposed second layer of price 
protection filters for Market Maker quotes. These price protection 
mechanisms will be applicable when either there is no NBBO available, 
for example, during pre-opening or prior to conducting a re-opening 
after a trading halt, or if the NBBO is so wide as to not to reflect an 
appropriate price for the respective options series. Proposed Exchange 
Rule 6.61(a)(2) will also provide price protection for Market Maker 
bids in call options. As proposed, if such bids equal or exceed the 
price of the underlying security, the Market Maker bid will be 
rejected.\15\
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    \15\ See proposed Exchange Rule 6.61(a)(2). With a call bid, a 
Market Maker is bidding to buy an option that would be exercised 
into the right to acquire the underlying security. The Exchange 
states that it does not believe that a derivative product, which 
conveys the right to purchase a security underlying the derivative, 
should ever be priced the same as or higher than the prevailing 
price of the underlying security itself. Accordingly, the Exchange 
believes it is appropriate to reject Market Maker bids for call 
options that are equal to or in excess of the price of the 
underlying security. See Notice, supra note 3, at 1984. See also 
Amendment No. 1, supra note 4.
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    Under new Exchange Rule 6.61(a)(2)(A), before the underlying 
security is open, the Exchange will use the previous day's closing 
price to determine the price of the underlying security.\16\ Under new 
Exchange Rule 6.61(a)(2)(B), once the underlying security has opened, 
the Exchange will use the consolidated last sale price to determine the 
price of the underlying security. Under new Exchange Rule 
6.61(a)(2)(C), during a trading halt of the underlying security, the 
Exchange will use the consolidated last sale reported immediately prior 
to the trading halt to determine the price of the underlying 
security.\17\ New Exchange Rule 6.61(a)(3) will provide for price 
protection for Market Maker bids in put options. In particular, any 
Market Maker bid for put options will be rejected if the price of the 
bid is equal to or greater than the strike price of the option.\18\
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    \16\ According to the Exchange, although the underlying 
securities may trade in the equities markets outside of 9:30 a.m. ET 
to 4:00 p.m. ET, the equities market is generally not as liquid 
during this time and equity market makers generally do not have 
quoting obligations in after-hours trading. Therefore, the Exchange 
believes that using the previous day's closing price--based on 
trading during Core Trading Hours, when the market is most liquid--
provides a more accurate benchmark and thus a more precise price 
protection filter for underlying securities that have not yet 
opened. See Notice, supra note 3, at 1984.
    \17\ The Exchange believes that the consolidated last sale price 
for an underlying security that has already opened will provide the 
most accurate benchmark because the market is most liquid during 
Core Trading Hours. See Notice, supra note 3, at 1984.
    \18\ The Exchange states that the value of a put can never 
exceed the strike price of the option, even if the stock goes to 
zero. For example, a put with a strike price of $50 gives the holder 
the right to sell the underlying security for $50 (no more, or no 
less), therefore the Exchange states that it would be illogical to 
pay $50 or more for the right to sell that underlying security, no 
matter what the price of the underlying security. See Notice, supra 
note 3, at 1984. See also Amendment No. 1, supra note 4.
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    The Exchange also has proposed that when a Market Maker quote is 
rejected pursuant to paragraph (a)(2) or (a)(3) of the proposed rule, 
the Exchange will also cancel all resting quote(s) in the affected 
class(es) from that Market Maker and will not accept new quote(s) in 
the affected class(es) until the Market Maker submits a message (which 
may be automated) to the Exchange to enable the entry of new 
quotes.\19\
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    \19\ See proposed Exchange Rule 6.61(b). The Exchange believes 
that this temporary suspension from quoting in the affected option 
class(es) would operate as a safety valve that forces Market Makers 
to re-evaluate their positions before requesting to re-enter the 
market. See Notice, supra note 3, at 1984. See also Notice, supra 
note 3, at 1984-5 for examples illustrating how proposed Exchange 
Rule 6.61(a)(2) and (a)(3) would operate.
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B. Implementation

    The Exchange stated that it would announce the implementation date 
of the proposed rule change in a Trader Update and publish such 
announcement at least 30 days prior to implementation.

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 
and, in particular, with Section 6(b) of the Act.\20\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Sections 6(b)(5) of the Act,\21\ 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 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

[[Page 12666]]

general, to protect investors and the public interest.
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    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change provides a price protection mechanism for 
quotes entered by a Market Maker when an NBBO is available that are 
priced a specified dollar amount or percentage through the last sale or 
prevailing contra-side market, which the Exchange believes is evidence 
of error. The Commission believes that the proposed price protection 
mechanism is reasonably designed to promote just and equitable 
principles of trade by preventing potential price dislocation that 
could result from erroneous Market Maker quotes sweeping through 
multiple price points resulting in executions at prices that are 
through the last sale price or NBBO.\22\
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    \22\ See Notice, supra note 3, at 1985.
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    The Exchange's proposed use of benchmarks to check the 
reasonability of Market Maker bids for call and put options affords a 
second layer of price protection to Market Maker quotes. The Commission 
believes that the additional price reasonability check on Market Maker 
bids that are priced equal to or greater than the price of the 
underlying security for call options, and equal to or greater than the 
strike price for put options, is reasonably designed to operate in 
manner that would remove impediments to and perfect the mechanism of a 
free and open market and protect investors and the public interest. 
Further, the Commission notes the Exchange's belief that the additional 
risk controls that result in the cancellation of a Market Maker's 
resting same side quote and/or the temporary suspension a Market 
Maker's quoting activity in the affected option class(es), as 
applicable, provide market participants with additional protection from 
anomalous executions.\23\
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    \23\ See Notice, supra note 3, at 1985.
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    Accordingly, the Commission believes that the proposed price 
protection for Market Maker quotes is reasonably designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in 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.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSEArca-2014-150), as 
modified by Amendment No. 1, be, and hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-05497 Filed 3-9-15; 8:45 am]
 BILLING CODE 8011-01-P


