
[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34717-34727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14827]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75153; File No. SR-NYSE-2015-26]


Self-Regulatory Organizations; New York Stock Exchange, LLC; 
Notice of Filing of Proposed Rule Change Making Permanent the Rules of 
the New Market Model Pilot and the Supplemental Liquidity Providers 
Pilot

June 11, 2015.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on June 4, 2015, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to make permanent the rules of the New Market 
Model Pilot and the Supplemental Liquidity Providers Pilot. The text of 
the proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make permanent the rules of New Market 
Model Pilot (``NMM Pilot'') and the Supplemental Liquidity Providers 
Pilot (``SLP Pilot,'' collectively ``Pilots''). The Pilots are 
currently scheduled to expire upon the earlier of July 31, 2015 or 
Securities and Exchange Commission (``SEC'' or ``Commission'') approval 
to make the Pilots permanent.\4\
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    \4\ See Securities Exchange Act Nos. 73919 (December 23, 2014), 
79 FR 78930 (December 31, 2014) (SR-NYSE-2014-71) (``NMM Pilot 
extension filing''); 73945 (December 24, 2014), 80 FR 58 (January 2, 
2015) (SR-NYSE-2014-72) (``SLP Pilot extension filing'').
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Background
    In October 2008, the NYSE implemented significant changes to its 
market rules, execution technology, and the rights and obligations of 
its market participants, all of which were designed to improve 
execution quality on the Exchange. Certain of the enhanced market model 
changes were implemented through the NMM Pilot.\5\ Specifically, and as 
described in greater detail below, Rules 72, 104 and the provisions of 
Rule 1000 relating to the Capital Commitment Schedule are the pilot 
rules associated with the NMM Pilot.
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    \5\ See Securities Exchange Act No. 58845 (October 24, 2008), 73 
FR 64379 (October 29, 2008) (SR-NYSE-2008-46) (``NMM Pilot Approval 
Order'').
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    As part of the NMM Pilot, NYSE eliminated the function of 
specialists on the Exchange and created a new category of market 
participant, the Designated Market Maker (``DMM'').\6\ DMMs, like 
specialists, have affirmative obligations to make an orderly market, 
including continuous quoting requirements and obligations to re-enter 
the market when reaching across to execute against trading interest. 
Unlike specialists, DMMs have a minimum quoting requirement \7\ in 
their assigned securities and no longer have negative obligations. DMMs 
are also no longer agents for public customer orders.\8\ DMM 
obligations under the NMM Pilot are set forth in Rule 104.
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    \6\ See Rule 103.
    \7\ See Rule 104.
    \8\ See Rule 60; see also Rules 104 and 1000.
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    In addition, the Exchange implemented a system change that allowed 
a DMM to create a schedule of additional non-displayed liquidity at 
various price points where the DMM is willing to interact with interest 
and provide price improvement to orders in the Exchange's system. This 
schedule is known as the DMM Capital Commitment Schedule (``CCS'') and 
is set forth in Rule 1000. CCS provides the Exchange systems, formerly 
referred to as the ``Display Book[reg]'' \9\ with the amount of shares 
that the DMM is willing to trade at price points outside,

[[Page 34718]]

at, and inside the Exchange Best Bid or Best Offer (``BBO''). CCS 
interest is separate and distinct from other DMM interest in that it is 
generally interest of last resort.
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    \9\ The Exchange's Display Book system is an order management 
and execution facility. The Display Book system receives and 
displays orders to the DMMs, contains the order information, and 
provides a mechanism to execute and report transactions and publish 
the results to the Consolidated Tape. The Display Book system is 
connected to a number of other Exchange systems for the purposes of 
comparison, surveillance, and reporting information to customers and 
other market data and national market systems. Because the Exchange 
has retired the actual system referred to as the ``Display Book,'' 
but not the functionality associated with the Display Book, the 
Exchange proposes to replace all references to the term ``Display 
Book'' in Rules 104 and 1000 with references either to the term (i) 
``Exchange systems'' when use of the term refers to the Exchange 
systems that receive and execute orders, or (ii) ``Exchange book'' 
when use of the term refers to the interest that has been entered 
and ranked in Exchange systems.
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    The NMM Pilot further modified the priority of trading interest, 
set forth in Rule 72, which rewards displayed orders that establish the 
BBO by giving such orders priority in execution against incoming 
orders. During the operation of the NMM Pilot, an order or portion 
thereof that establishes priority, retains that priority until such 
order or portion of such order is exhausted. Where no one order has 
established priority, shares are distributed among all market 
participants on parity.
    In addition, the NMM Pilot modified how orders are allocated among 
market participants. Before the NMM Pilot, the Exchange operated on a 
parity allocation model whereby executed orders were allocated on 
parity among market participants, which included each Floor broker and 
the orders collectively represented in Exchange systems. Because 
specialists on the Exchange had both agency obligations to public 
customer orders and negative obligations, their executions yielded to 
public customer orders. Under the NMM Pilot, because DMMs do not have 
either agency obligations or negative obligations, DMMs are an 
individual market participant eligible for allocation under the 
Exchange's parity allocation. Accordingly, for purposes of share 
allocation in an execution, Rule 72(c)(ii) provides that each Floor 
broker, the DMM, and orders collectively represented in Exchange 
systems (i.e., ``Book Participant'') \10\ constitute individual 
participants for purposes of parity allocation of executed orders.
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    \10\ The orders represented in the Book Participant in aggregate 
constitute a single participant.
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    In connection with the DMM Pilot, the NYSE established the SLP 
Pilot, which established SLPs as a new class of market participants to 
supplement the liquidity provided by DMMs.\11\ Rule 107B governs the 
SLP Pilot.
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    \11\ See Securities Exchange Act No. 58877 (October 29, 2008), 
73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) (Notice of 
Filing'' [sic]).
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    The Pilots were originally scheduled to end on October 1, 2009, or 
such earlier time as the Commission determined to make the Pilots' 
rules permanent. The Exchange filed to extend the operation of the 
Pilots on several occasions in order to prepare this rule filing.\12\
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    \12\ See NMM pilot extension filing and SLP pilot extension 
filing, supra n. 3 [sic].
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Description of Pilot Rules That Would Become Permanent
Rule 104
    Current Rule 104, as amended since 2008, sets forth DMM 
obligations. Under Rule 104(a), DMMs registered in one or more 
securities traded on the Exchange are required to engage in a course of 
dealings for their own account to assist in the maintenance of a fair 
and orderly market insofar as reasonably practicable. The 
responsibilities and duties of a DMM include:
     Assisting the Exchange by providing liquidity as needed to 
provide a reasonable quotation and by maintaining continuous two-sided 
quotes with a displayed size of at least one round lot that meets 
certain metrics as set forth in the rule;
     Facilitating openings and re-openings in assigned 
securities, which may include supplying liquidity as needed; and
     Facilitating the close of trading for assigned securities, 
which may include supplying liquidity as needed.\13\
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    \13\ In 2015, the Exchange eliminated liquidity replenishment 
points (``LRP'') and the ``gap'' quote procedures and amended Rule 
104(a) to eliminate the former DMM obligations to facilitate trading 
when an LRP was reached or the gap quote procedure was being used. 
See Securities Exchange Act Release No. 74063 (Jan. 15, 2015), 80 FR 
3269 (Jan. 22, 2015) (Notice of Filing).
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    The Rule 104(a)(1) quoting requirements applicable to DMMs are two-
fold. First, with respect to maintaining a continuous two-sided quote 
with reasonable size, DMM units must maintain a bid or an offer at the 
National Best Bid (``NBB'') and National Best Offer (``NBO'') 
(collectively, ``inside'') at least 15% of the trading day for 
securities in which the DMM unit is registered with a consolidated 
average daily volume (``CADV'') of less than one million shares (``Less 
Active Securities''), and at least 10% for securities in which the DMM 
is registered with a CADV equal to or greater than one million shares 
(``More Active Securities'').\14\ These DMM quoting obligations set 
forth in Rule 104(a)(1)(A) are unique to the Exchange. Second, DMM 
units are subject to the two-sided quoting obligations set forth in 
Rule 104(a)(1)(B), which are the pricing obligations applicable to all 
equity market makers market-wide to maintain a bid and offer a 
designated percentage away from the NBB and NBO at all times.\15\
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    \14\ In 2009, the Exchange amended Rule 104(a)(1) to increase 
the amount of time that a DMM unit must maintain a bid and offer at 
the inside from 10% to 15% for Less Active Securities and from 5% to 
10% for More Active Securities. See Securities Exchange Act Release 
No. 60595 (August 31, 2009), 74 FR 46261 (September 8, 2009) (SR-
NYSE-2009-91) (Notice of Filing) (``DMM quoting requirement 
filing''). In 2011, the Exchange amended Rule 104(a)(1) to specify 
that the quoting percentage would be based on the consolidated 
average daily volume of a security, rather than the average daily 
volume of the security on the Exchange. See Securities Exchange Act 
Release No. 65865 (December 2, 2011), 76 FR 76799 (December 8, 2011) 
(SR-NYSE-2011-58) (Notice of Filing).
    \15\ See Securities Exchange Act Release No. 63255 (November 5, 
2010), 75 FR 69484 (November 12, 2010) (SR-NYSE-2010-69) (Notice of 
Filing).
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    Under Rule 104(b), DMM units are permitted to use algorithms for 
quoting and trading consistent with NYSE and SEC rules. Exchange 
systems enforce the proper sequencing of incoming orders and 
algorithmically-generated messages. Except as provided for in the rule, 
the DMM unit's system employing algorithms has access to information 
with respect to orders entered on the Exchange, Floor Broker agency 
interest files or reserve interest, to the extent such information is 
publicly available. DMM unit algorithms receive the same information 
with respect to orders entered on the Exchange, Floor Broker agency 
interest files or reserve interest as is disseminated to the public by 
the Exchange and receive such information no sooner than it is 
available to other market participants.\16\ A DMM unit's algorithm may 
submit trading interest via CCS interest in accordance with Rule 1000.
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    \16\ In 2013, the Exchange amended Rules 104 and 123C to specify 
that closings may be effectuated manually or electronically. See 
Securities Exchange Act Release No. 71086 (December 16, 2013), 78 FR 
77186 (December 20, 2013) (SR-NYSE-2013-79) (Notice of Filing). As 
part of that filing, the Exchange amended Rules 104(a)(3) and 104(b) 
to provide that the DMM algorithm would have access to aggregate 
order information relating to Reserve Interest eligible to 
participate in a manual execution.
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    Under Rule 104(c), a DMM unit may maintain reserve interest 
consistent with Exchange rules governing Reserve Orders. Such reserve 
interest is eligible for execution in manual transactions.
    Under Rule 104(d), a DMM unit may provide algorithmically generated 
price improvement to all or part of an incoming order that can be 
executed at or within the BBO through the use of CCS interest. Any 
orders eligible for execution in the Exchange's book at the price of 
the DMM unit's interest trade on parity with such interest, as does any 
displayed interest representing a d-Quote enabling such interest to 
trade at the same price as the DMM unit's interest.
    Under Rule 104(e), DMM units must provide contra-side liquidity as 
needed for the execution of odd-lot quantities that are eligible to be 
executed as part of the opening, re-opening, and closing transactions 
but remain unpaired after

[[Page 34719]]

the DMM has paired all other eligible round lot sized interest.
    Rule 104(f) sets forth the functions of DMMs. First, any member who 
expects to act as a DMM in any listed stock must be registered as a DMM 
in accordance with Rule 103. Second, a DMM must maintain, insofar as 
reasonably practicable, a fair and orderly market on the Exchange in 
the stocks in which he or she is so acting. Third, the Exchange 
supplies DMMs with suggested Depth Guidelines for each security in 
which a DMM is registered, and DMMs are expected to quote and trade 
with reference to the Depth Guidelines. Finally, DMMs are designated as 
market makers on the Exchange for all purposes under the Act and the 
rules and regulations thereunder.
    Rule 104(g) governs transactions by DMMs. Transactions on the 
Exchange by a DMM for the DMM's account must be effected in a 
reasonable and orderly manner in relation to the condition of the 
general market and the market in the particular stock. Rule 104(g) 
describes certain permitted transactions, including neutral 
transactions and non-conditional transactions, but prohibits certain 
other transactions. Specifically, except as otherwise permitted by Rule 
104, during the last ten minutes prior to the close of trading, a DMM 
with a long (short) position in a security is prohibited from making a 
purchase (sale) in such security that results in a new high (low) price 
on the Exchange for the day at the time of the DMM's transaction.
    Rule 104(h) addresses DMM transactions in securities that establish 
or increase the DMM's position. A ``Conditional Transaction'' is a 
DMM's transaction in a security that establishes or increases a 
position and reaches across the market to trade as the contra-side to 
the Exchange-published bid or offer. Certain Conditional Transactions 
may be made by a DMM without restriction as to price if they are 
followed by appropriate re-entry on the opposite side of the market 
commensurate with the size of the DMM's transaction. The Exchange 
issues guidelines, called price participation points (``PPP''), that 
identify the price at or before which a DMM is expected to re-enter the 
market after effecting a Conditional Transaction. Immediate re-entry is 
required after certain Conditional Transactions. However, certain other 
Conditional Transactions may be made without restriction as to price 
and Rule 104(i) provides that the re-entry obligations following such 
Conditional Transactions would be the same as the re-entry obligations 
for non-conditional transactions,'' as set forth in Rule 104(g).
    Rule 104(j), which was added in 2013,\17\ permits a DMM to perform 
the following Trading Floor functions:
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    \17\ See Securities Exchange Act Release No. 71175 (December 23, 
2013), 78 FR 79534 (December 30, 2013) (SR-NYSE-2013-21) (Order 
approving adoption of Rule 104(j)).
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     Maintain order among Floor brokers manually trading at the 
DMM's assigned panel;
     Bring Floor brokers together to facilitate trading, which 
may include the DMM as a buyer or seller;
     Assist a Floor broker with respect to an order by 
providing information regarding the status of a Floor broker's orders, 
helping to resolve errors or questioned trades, adjusting errors, and 
cancelling or inputting Floor broker agency interest on behalf of a 
Floor broker; and
     Research the status of orders or questioned trades on his 
or her own initiative or at the request of the Exchange or a Floor 
broker when a Floor broker's handheld device is not operational, when 
there is activity indicating that a potentially erroneous order was 
entered or a potentially erroneous trade was executed, or when there 
otherwise is an indication that improper activity may be occurring.
    The rule also permits the Exchange to make systems available to a 
DMM at the post that display the following information about securities 
in which the DMM is registered: (A) Aggregated buying and selling 
interest; (B) the price and size of any individual order or Floor 
broker agency interest file and the entering and clearing firm 
information for such order, except that the display excludes any order 
or portion thereof that a market participant has elected not to display 
to a DMM; and (C) post-trade information. A DMM may not use any such 
information in a manner that would violate Exchange rules or federal 
securities laws or regulations. The DMM may provide market information 
that is available to the DMM at the post to (i) respond to an inquiry 
from a Floor broker in the normal course of business or (ii) visitors 
to the Trading Floor for the purpose of demonstrating methods of 
trading. However, a Floor broker may not submit an inquiry pursuant to 
this provision by electronic means and the DMM may not use electronic 
means to transmit market information to a Floor broker in response to a 
Floor broker's inquiry pursuant to this provision.
    Rule 104(k) provides that in the event of an emergency, such as the 
absence of the DMM, or when the volume of business in the particular 
stock or stocks is so great that it cannot be handled by the DMMs 
without assistance, a Floor Governor may authorize a member of the 
Exchange who is not registered as a DMM in such stock to act as 
temporary DMM for that day only.
Rule 1000
    The provisions of current Rule 1000 relating to CCS, as amended 
since 2008, and which are operating as part of the NMM Pilot, are set 
forth sections (d)-(g) of Rule 1000.
    Rule 1000(d) provides that for each security in which it is 
registered, a DMM unit may place within Exchange systems a pool of 
liquidity to be available to fill or partially fill \18\ incoming 
orders in automatic executions, which is CCS. CCS is designed to be a 
DMM unit's commitment to trade a specified number of shares at 
specified price points in reaction to incoming contra-side interest. As 
noted above, CCS interest is used to trade at the BBO, at prices better 
than the BBO, and at prices outside the BBO. CCS interest supplements 
displayed and non-displayed interest of the DMM in Exchange systems. 
CCS interest must be for a minimum of one round lot of a security and 
entered at price points that are at, inside, or away from the BBO.
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    \18\ The original NMM Pilot permitted CCS to participate only if 
it would fill an incoming order. In 2009, the Exchange amended Rule 
1000 to provide that Exchange systems would access CCS interest to 
participate in executions when the incoming order would only be 
partially executed. See Securities Exchange Act Release No. 60671 
(September 15, 2009), 74 FR 48327 (September 22, 2009) (SR-NYSE-
2009-71) (``CCS Partial Fill Approval Order'').
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    Rule 1000(e) governs executions at and outside the BBO, and 
specifies how CCS interest would interact with such executions. For 
executions at the BBO, CCS interest would yield to all other interest 
at that price point. For executions outside the BBO, i.e., sweeps, Rule 
1000(e)(iii) specifies how CCS interest could participate to provide 
price improvement to the residual of an order that sweeps. As provided 
for in the rule, if an order is not executed at full at the Exchange 
BBO, Exchange systems will calculate the unfilled volume of the contra-
side order and review the additional displayed and non-displayed 
interest, including CCS interest and protected quotes on away markets, 
to determine the price at which the remaining volume of the contra-side 
order can be executed in full (the ``completion price''). Exchange 
systems will evaluate the price at which the maximum volume of CCS 
interest exists to trade, and execute the incoming order one

[[Page 34720]]

minimum price variation (as the term is defined in Rule 62) better than 
that price, which is how CCS provides price improvement. If an order 
cannot be executed in full because of the order's limit price, or 
because of an immediate-or-cancel time-in-force, CCS interest is 
available to partially fill the incoming order.
    Rule 1000(f) specifies how CCS interest may provide price 
improvement inside the BBO with interest arriving in the Exchange 
market that:
     Will be eligible to trade at or through the BBO;
     Will be eligible to trade at the price of interest in 
Exchange systems representing non-displayable reserve interest of 
Reserve Orders and Floor broker agency interest files reserve interest 
(``hidden interest'') or MPL Orders; or
     Will be eligible to route to away market interest for 
execution if [sic] the total volume of CCS interest, plus d-Quote 
interest in Floor broker agency interest files, plus any interest 
represented by hidden interest, would be sufficient to fully complete 
the arriving interest at a price inside the BBO. In such an instance, 
the Exchange systems determine the price point inside the BBO at which 
the maximum volume of CCS interest trades, taking into account the 
volume, if any, available from d-Quotes and hidden interest. The 
arriving interest is executed at that price, with all interest (CCS, d-
Quote, hidden interest) trading on parity.
    Under Rule 1000(g), CCS interest may trade with non-marketable \19\ 
interest where such non-marketable interest betters the BBO (or cancels 
in the case of an arriving IOC order) if the incoming interest may be 
executed in full by all interest available in the Exchange's book, 
including CCS interest and d-quotes. Such trade takes place at the 
limit price of the arriving non-marketable interest. All interest 
trading with the incoming interest trades on parity.
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    \19\ ``Non-marketable'' means trading interest (i.e., 
displayable and non-displayable) that is at a price higher than the 
current Exchange bid (but below the current Exchange offer) or lower 
than the current Exchange offer (but above the current Exchange 
bid), including better bids and offers on other market centers. See 
Rule 1000(g)(1).
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Rule 72
    The priority of bids and offers and allocation of executions is 
governed by Rule 72, as amended since 2008. Under Rule 72(a), when a 
bid or offer, including pegging interest,\20\ is established as the 
only displayable \21\ bid or offer made at a particular price and such 
bid or offer is the only displayable interest when such price is or 
becomes the BBO (the ``setting interest''), such setting interest is 
entitled to priority for allocation of executions at that price as 
described in the rule, subject to the provisions below:
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    \20\ In 2012, the Exchange amended Rule 72(a) to specify that 
pegging interest may be considered setting interest. See Securities 
Exchange Act Release No. 68302 (November 27, 2012), 77 FR 71658 
(December 3, 2012) (SR-NYSE-2012-65) (Notice of Filing) (``Pegging 
filing'').
    \21\ As used in this rule, the term ``displayable'' means that 
portion of interest that could be published as, or as part of, the 
BBO, including pegging interest. Displayable odd-lot orders are 
published as part of the BBO if, when aggregated with other interest 
available for execution at that price point, the sum of the odd-lot 
order and other interest available at that price point would be 
equal to or greater than a round lot. The term ``displayed 
interest'' includes that part of an order that is published as, or 
as part of, the BBO, which may include one or more odd-lot orders.
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    (A) Odd-lot orders, including aggregated odd-lot orders that are 
displayable, are not eligible to be setting interest.\22\
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    \22\ In 2010, the Exchange amended its rules, including Rule 72, 
to incorporate the receipt and execution of odd-lot interest in the 
round-lot market and decommission the former Odd Lot System. See 
Securities Exchange Act Release No. 62578 (July 27, 2010), 75 FR 
45185 (August 2, 2010) (SR-NYSE-2010-43 and SR-NYSEAmex-2010-53) 
(``Odd-lot Approval Order'').
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    (B) If at the time displayable interest of a round lot or greater 
becomes the BBO, there is other displayable interest of a round lot or 
greater, including aggregated odd-lot orders that are equal to or 
greater than a round lot, at the price that becomes the BBO, no 
interest is considered to be a setting interest, and, therefore, there 
is no priority established.
    (C) If at the time displayable interest of a round lot or greater 
becomes the BBO, there is other displayable interest, the sum of which 
is less than a round lot, at the price that becomes the BBO, the 
displayable interest of a round lot or greater is considered the only 
displayable bid or offer at that price point and is therefore 
established as the setting interest.
    (D) If executions decrement the setting interest to an odd-lot 
size, a round lot or partial round lot order that joins such remaining 
odd-lot size order is not eligible to be the setting interest.
    (E) If as a result of cancellation, interest is or becomes the 
single displayable interest of a round lot or greater at the BBO, it 
becomes the setting interest.
    (F) Only the portion of setting interest that is or has been 
published in the BBO is entitled to priority allocation of an 
execution. That portion of setting interest that is designated as 
reserve interest and therefore not displayed at the BBO (or not 
displayable if it becomes the BBO) is not eligible for priority 
allocation of an execution irrespective of the price of such reserve 
interest or the time it is accepted into Exchange systems. However, if, 
following an execution of part or all of setting interest, such setting 
interest is replenished from any reserve interest, the replenished 
volume of such setting interest is entitled to priority if the setting 
interest is still the only interest at the BBO.
    (G) If non-pegging interest becomes the BBO, it is considered the 
setting interest even if pegging interest is pegging to such non-
pegging interest, and it retains its priority even if subsequently 
joined at that price by a pegging interest.
    Under Rule 72(b), once priority is established by the setting 
interest, such setting interest retains that priority for any execution 
at that price when that price is at the BBO. If executions decrement 
the setting interest to an odd-lot size, such remaining portion of the 
setting interest retains its priority for any execution at that price 
when that price is the BBO. For any execution of setting interest that 
occurs when the price of the setting interest is not the BBO, the 
setting interest does not have priority and is executed on parity.
    Priority of setting interest is not retained after the close of 
trading on the Exchange or following the resumption of trading in a 
security after a trading halt in such security has been invoked 
pursuant to Rule 123D or following the resumption of trading after a 
trading halt invoked pursuant to the provisions of Rule 80B. Priority 
of the setting interest is not retained on any portion of the priority 
interest that is routed to an away market and is returned unexecuted 
unless such priority interest is greater than a round lot and the only 
other interest at the price point is odd-lot orders, the sum of which 
is less than a round lot.
    Under Rule 72(c), executions are allocated as follows. An 
automatically executing order trades first with the displayed bid 
(offer) and, if there is insufficient displayed volume to fill the 
order, trades next with reserve interest. All reserve interest trades 
on parity. For the purpose of share allocation in an execution, each 
single Floor broker, the DMM and orders collectively represented in 
Exchange systems (referred to as ``Book Participant'') constitute 
individual participants. The orders represented in the Book Participant 
in aggregate constitute a single participant and are allocated

[[Page 34721]]

shares among such orders by means of time priority with respect to 
entry.
    In any execution at the BBO, a participant who is the setting 
interest receives 15% of the volume of such executed amount or a 
minimum of one round lot, whichever is greater, until such setting 
interest has received a complete execution of its eligible priority 
interest. Setting interest that is decremented to an odd-lot size 
receives 15% of the volume of such incoming interest rounded up to the 
size of the setting interest, or the size of the incoming interest, 
whichever is less. Following the allocation of an execution to setting 
interest as provided above, the remainder of the executed volume is 
allocated to each participant on parity. The participant with the 
priority interest (the setting interest) is included in such parity 
allocation. If there is no setting interest for an execution at the 
BBO, allocation of the executed volume is on parity by participant 
except as otherwise set forth in the rule. When an execution occurs at 
the BBO, interest that is displayed in the BBO is allocated before any 
interest that is not displayed. In allocating an execution that 
involves setting interest, whether such execution takes place at the 
BBO or otherwise, the volume allocated to the setting interest is 
allocated to the interest in the setting interest that is entitled to 
priority first.
    Shares are allocated in round lots or the size of the order if less 
than a round lot. If the number of shares to be executed at a price 
point is insufficient to allocate round lots to all the participants 
eligible to receive an execution at that price point, or the size of 
the order if less than a round lot, Exchange systems create an 
allocation wheel of the eligible participants at that price point and 
the available round lot shares are distributed to the participants in 
turn. If an odd-lot sized portion of the incoming order remains after 
allocating all eligible round lots, the remaining shares are allocated 
to the next eligible participant in less than a round lot. On each 
trading day, the allocation wheel for each security is set to begin 
with the participant whose interest is entered or retained first on a 
time basis. Thereafter, participants are added to the wheel as their 
interest joins existing interest at a particular price point. If a 
participant cancels interest and then rejoins, that participant joins 
as the last position on the wheel at that time. If an odd-lot 
allocation completely fills the interest of a participant, the wheel 
moves to the next participant. The allocation wheel also moves to the 
next participant where Exchange systems execute remaining displayable 
odd-lot interest prior to replenishing the displayable quantity of a 
participant.
    When an execution occurs outside the BBO, the interest that is 
displayable is allocated before any interest that is non-displayable 
(i.e., reserve interest). All interest that is displayable is on parity 
among individual participants' displayable interest. All interest that 
is non-displayable is on parity among individual participants' non-
displayable interest. Incoming orders eligible for execution at price 
points between the BBO trade with all available interest at the price. 
All NYSE interest available to participate in the execution (e.g., d-
quotes, s-quotes, Reserve Orders, and CCS interest) trade on parity.
    DMM interest added intra-day to participate in a verbal transaction 
with a Floor broker or during a slow quote is allocated shares only 
after all other interest eligible for execution at the price point is 
executed in full. DMM interest added at the time of the slow quote or 
when verbally trading with a Floor broker not executed during the 
transaction is cancelled.\23\ However, s-Quotes, if any, representing 
DMM interest present at the price point prior to the verbal transaction 
with a Floor broker or during a slow quote receive an allocation on 
parity as described above. An order that is modified to reduce the size 
of the order retains the time stamp of original order entry. An order 
modified in any other way, such as increasing the size or changing the 
price of the order, receives a new time stamp.\24\
---------------------------------------------------------------------------

    \23\ When the Exchange adopted the NMM Pilot in 2008, all DMM 
interest was on parity. In 2009, the Exchange amended Rule 72 to add 
new subsection (c)(xi) to the rule to remove parity for DMM interest 
that verbal transactions with a Floor broker or during a slow quote. 
See Securities Exchange Act Release No. 60287 (July 10, 2009), 74 FR 
34817 (July 17, 2009) (SR-NYSE-2009-69) (Notice of Filing).
    \24\ See Pegging Filing, supra n. 18 [sic] (amending Rule 72(c) 
to specify how order modifications impact the time stamp of an 
order).
---------------------------------------------------------------------------

    Under Rule 72(d), when a member has an order to buy and an order to 
sell an equivalent amount of the same security, and both orders are 
``block'' orders (i.e., at least 10,000 shares or a quantity of stock 
having a market value of $200,000 or more, whichever is less) and are 
not for the account of such member or member organization, an account 
of an associated person, or an account with respect to which the 
member, member organization, or associated person thereof exercises 
investment discretion, then the member may ``cross'' those orders at a 
price at or within the BBO.\25\ The member's bid or offer is entitled 
to priority at such cross price, irrespective of pre-existing displayed 
bids or offers on the Exchange at that price. The member must follow 
the crossing procedures of Rule 76, and another member may trade with 
either the bid or offer side of the cross transaction only to provide a 
price which is better than the cross price as to all or part of such 
bid or offer. A member who is providing a better price to one side of 
the cross transaction must trade with all other displayed market 
interest on the Exchange at that price before trading with any part of 
the cross transaction. Following a transaction at the improved price, 
the member with the agency cross transaction must follow the crossing 
procedures of Rule 76 and complete the balance of the cross. No member 
may break up the proposed cross transaction, in whole or in part, at 
the cross price. No DMM may effect a proprietary transaction to provide 
price improvement to one side or the other of a cross transaction 
effected pursuant Rule 72(d). A transaction effected at the cross price 
in reliance on this provision is printed as ``stopped stock.'' When a 
member effects a transaction under this provision, the member must, as 
soon as practicable after the trade is completed, complete 
documentation of the trade as the Exchange requires.
---------------------------------------------------------------------------

    \25\ In 2011, the Exchange amended Rule 72(d) regarding agency 
cross transactions to (i) change the minimum size of a block order 
under the rule from 25,000 to 10,000 shares or a quantity of stock 
having a market value of $200,000 or more, whichever is less, and 
(ii) conform Rule 72(d) to Rule 90 to permit a Floor broker to 
represent a Rule 72(d) crossing transaction on behalf of an 
unaffiliated member or member organization. See Securities Exchange 
Act Release No. 64334 (April 25, 2011), 76 FR 24078 (April 29, 2011) 
(SR-NYSE-2011-18) (Notice of Filing).
---------------------------------------------------------------------------

Rule 107B
    Rule 107B, as amended, governs the SLP Pilot. Under current Rule 
107B(a), an SLP is defined as a member organization that electronically 
enters proprietary orders or quotes from off the Floor of the Exchange 
into the systems and facilities of the Exchange and is obligated to 
maintain a bid or an offer at the National Best Bid (``NBB'') or the 
National Best Offer (``NBO'') in each assigned security in round lots 
averaging at least 10% of the trading day and for all assigned SLP 
securities \26\ and to add liquidity of an ADV of more than a specified 
percentage of

[[Page 34722]]

consolidated average daily volume (``CADV'') in all NYSE-listed 
securities, as set forth in the Exchange's Price List, on a monthly 
basis.\27\ An SLP can be either a proprietary trading unit of a member 
organization (``SLP-Prop'') or a registered market maker at the 
Exchange (``SLMM'').\28\
---------------------------------------------------------------------------

    \26\ The SLP Pilot originally required an SLP to maintain a bid 
and/or offer at the NBB or NBO averaging at least 5% of the trading 
day. Effective September 25, 2010, the Exchange increased this 
quoting requirement to require SLPs to maintain a bid and/or offer 
at the NBB or NBO at least 10% of the trading day. See Securities 
Exchange Act Release No. 62791 (August 30, 2010) 75 FR 54411 
(September 7, 2010) (SR-NYSE-2010-60) (Notice of Filing) (``SLP 2010 
Filing'').
    \27\ In the SLP 2010 Filing, the Exchange introduced a monthly 
volume requirement for SLPs of an average daily volume (``ADV'') of 
more than 10 million shares. See SLP 2010 Filing, supra n. 26. 
Effective September 1, 2012, the Exchange amended the monthly volume 
requirement to require instead that SLPs meet an ADV that is a 
specified percentage of the NYSE CADV and amended the Exchange's 
Price List to specify the applicable percentage of NYSE CADV for the 
monthly volume requirement. See Securities Exchange Act Release No. 
67759 (August 30, 2012), 77 FR 54939 (September 6, 2012) (SR-NYSE-
2012-38) (Notice of Filing).
    \28\ The SLP Pilot was originally available only for a 
proprietary trading unit of a member organization. In 2012, the 
Exchange amended Rule 107B to add a class of SLPs that are 
registered as market makers on the Exchange and subject to the 
market-wide equity market maker quoting obligations. See Securities 
Exchange Act Release No. 67154 (June 7, 2012), 77 FR 35455 (June 13, 
2012) (SR-NYSE-2012-10) (Approval Order).
---------------------------------------------------------------------------

    Under Rule 107B(b), when an SLP posts liquidity on the Exchange and 
such liquidity is executed against an inbound order, the SLP receives a 
financial rebate for that executed transaction as set forth in the 
Exchange's Price List, subject to the non-regulatory penalty provision 
described in Rule 107B(k).\29\ The SLP receives credit toward the 
financial rebate for executions of displayed and non-displayed 
liquidity (e.g., reserve and dark orders) posted in round lots in its 
assigned securities only.
---------------------------------------------------------------------------

    \29\ In the SLP 2010 Filing, the Exchange modified the non-
regulatory penalties to align them to the changes in the quoting and 
volume requirements for SLPs. See SLP 2010 Filing, supra no. 26. The 
Exchange proposes a non-substantive amendment to Rule 107B(b) to 
correct the cross-reference in the Rule from subparagraph (j) to 
subparagraph (k).
---------------------------------------------------------------------------

    Under Rule 107B(c), to qualify as an SLP-Prop, a member 
organization must have:
    (1) Adequate technology to support electronic trading through the 
systems and facilities of the Exchange;
    (2) mnemonics that identify to the Exchange SLP-Prop trading 
activity in assigned SLP securities;
    (3) adequate trading infrastructure and staff to support SLP 
trading activity;
    (4) quoting and volume performance that demonstrates an ability to 
meet the 10% average quoting requirement in each assigned security and 
the ADV requirement of more than a specified percentage of CADV in all 
NYSE-listed securities for all assigned SLP securities on a monthly 
basis;
    (5) a disciplinary history that is consistent with just and 
equitable business practices; and
    (6) the business unit of the member organization acting as an SLP-
Prop must have in place adequate information barriers between the SLP-
Prop unit and the member organization's customer, research, and 
investment banking business.
    A member organization may register as an SLMM in one or more 
securities traded on the Exchange in order to assist in the maintenance 
of a fair and orderly market insofar as reasonably practicable. To 
qualify as an SLMM, a member organization must meet the all of the 
requirements for an SLP-Prop set forth above, except item (2) relating 
to mnemonics. If approved as an SLMM, the member organization must (i) 
maintain continuous, two-sided trading interest in assigned securities 
(``Two-Sided Obligation'') and meet certain pricing obligations as set 
forth in the rule; (ii) maintain minimum net capital in accordance with 
SEC Rule 15c3-1; and (iii) maintain unique mnemonics specifically 
dedicated to SLMM activity, which may not be used for trading in 
securities other than SLP securities assigned to the SLMM.
    Rule 107B(e) sets forth the application process for SLPs. If an 
applicant is disapproved or disqualified, such applicant may request an 
appeal of such disapproval or disqualification by the SLP Panel as 
provided in the rule and/or reapply for SLP status three months after 
the month in which the applicant received the disapproval or 
disqualification notice. Rule 107B(f) describes how an SLP may 
voluntarily withdraw from such status.
    Rule 107B(g) and (h) set forth the calculations for determining 
whether an SLP is meeting its 10% quoting requirement and monthly 
volume requirement. An SLP may post non-displayed liquidity; however, 
such liquidity is not counted as credit toward the 10% quoting 
requirement. In addition, tick sensitive orders (i.e., ``Sell Plus'', 
``Buy Minus'' and ``Buy Minus Zero Plus'') do not count as credit 
toward the 10% quoting requirement.
    Rule 107B(i) governs the assignment of securities to SLPs. Rule 
107B(j) provides that SLPs may only enter orders electronically from 
off the Floor of the Exchange and may only enter such orders directly 
into Exchange systems and facilities designated for this purpose. SLMM 
quotes and orders may be for the account of the SLMM in either a 
proprietary or principal capacity on behalf of affiliated or 
unaffiliated persons and SLP-Prop orders must only be for the 
proprietary account of the SLP-Prop member organization. Rule 107B(k) 
sets forth non-regulatory penalties that apply if an SLP fails to meet 
its quoting requirements and sets forth procedures for reapplication. 
Rule 107B(l) sets forth provisions for appealing non-regulatory 
penalties.
Rationale for Making Pilots Permanent
    The Exchange adopted the NMM Pilot in part to adapt the Exchange's 
model to the equities market environment in place in 2008. At that 
time, the more electronic market had fundamentally altered the 
Exchange's traditional trading environment, in which price discovery 
had taken place largely, and almost exclusively, on the Floor of the 
Exchange. As the trading information that was previously only available 
on the Floor of the Exchange shifted to become widely available via 
electronic means, together with increased fragmentation in the market, 
the Exchange believed that the NMM Pilot would provide a more robust 
trading model on the Floor where market participants could compete on 
more equal footing relative to their responsibilities to the 
market.\30\ With the NMM Pilot, the Exchange would continue to provide 
a quality market that maintains both a competitive market maker 
responsible for providing liquidity to the market and the element of 
human judgment that is particularly valuable in less liquid securities, 
re-openings, and closings. The Exchange sought, and believes it has 
attained, the appropriate balance among market participants that 
retains a role for liquidity providers responsible for maintaining fair 
and orderly markets, i.e., DMMs, together with agents on the Floor and 
off-Floor participants. The Exchange adopted the SLP Pilot to encourage 
an additional pool of liquidity at the Exchange.
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 58184 (July 17, 
2009 [sic]), 73 FR 42853 (July 23, 2008) (NMM Pilot Filing).
---------------------------------------------------------------------------

    As noted in the NMM Pilot approval order, the Commission had 
concerns regarding certain aspects of the Exchange's proposal and 
approved it on a pilot basis. The Commission further stated that before 
it would decide to make the NMM Pilot permanent, the Exchange must 
provide data and analysis on the impact of the NMM Pilot. The metrics 
requested by the Commission include: (i) DMM time at the NBBO by 
security; (ii) the effective spread by security; (iii) the DMM volume 
broken out by DMM interest type (e.g., CCS, s-Quote); (iv) the average 
depth at the NBBO by market participant (DMMs, Floor brokers, and 
orders represented in the Exchange's book); (v) the ratio of (i) shares 
not executed in Exchange systems due to

[[Page 34723]]

DMM execution due to (ii) the shares executed by the DMM; and (vi) 
effective spread for (a) orders that involve DMM liquidity provisions 
and (b) orders that are executed without DMM liquidity (for similar 
order size categories).\31\ In compliance with this requirement, the 
Exchange has been providing the above-described metrics to the 
Commission's Division of Trading and Markets and Office of Economic and 
Risk Analysis on a monthly basis.
---------------------------------------------------------------------------

    \31\ See NMM Pilot Approval Order, supra n. 5 at 64387.
---------------------------------------------------------------------------

    Since adopting the NMM Pilot, the Exchange believes that the 
equities market has continued to undergo significant changes that 
require a fresh look at the basis for whether the NMM Pilot should be 
approved on a permanent basis. Rather than looking at the specific 
metrics identified above, the Exchange believes that looking more 
holistically at the Exchange's performance relative to the equities 
market in general demonstrates the continued value of the NMM and SLP 
Pilots and basis for permanent approval of the pilots. In particular, 
the continued impact of Regulation NMS, which had been in effect for 
only one year when the Exchange filed for the NMM Pilot, together with 
additional technological advancements and competitive forces since 2008 
have fundamentally altered the way the market functions and how market 
participants interact. Some of the major developments include the 
significant rise in off-exchange trading from 22% in 2009 to 34% in 
2014; the proliferation of over 50 trading venues, including four 
additional registered equities exchanges since October 2008; and the 
increasing segmentation of client order flow onto private dark 
markets.\32\
---------------------------------------------------------------------------

    \32\ In a speech on October 2, 2013, Chair Mary Jo White noted 
that ``[a] steadily increasing percentage of trading occurs in 
`dark' venues, which now appear to execute more than half of the 
orders of long-term investors,'' Mary Jo White, Chair, Securities 
and Exchange Commission, Speech at Securities Traders Association 
80th Annual Market Structure Conference (Oct. 2, 2013) (available at 
http://www.sec.gov/News/Speech/Detail/Speech/1370539857459#.VNoXc_nF_AQ). The Commission also noted the 
fragmentation of the equities markets in its 2010 Concept Release on 
Equity Market Structure. See Securities Exchange Act Release No. 
61358, 75 FR 3594 (Jan. 21, 2010). See also, Staff of the Division 
of Trading and Markets, Commission, Equity Market Structure 
Literature Review, Part I: Market Fragmentation, Oct. 7, 2013, 
(available at: http://www.sec.gov/marketstructure/research/fragmentation-lit-review-100713.pdf) and Tuttle, Laura, Alternative 
Trading Systems: Description of ATS Trading in National Market 
System Stocks (available at http://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf.)
---------------------------------------------------------------------------

    The Exchange believes that the shifts in market share of traded 
volume among venues demonstrate the robust competition among markets. 
In particular, the following chart shows a snapshot of how market share 
of traded volume on registered exchanges has declined since 2009 and 
shifted to the TRF, which reports transactions that occur off of 
registered exchanges.\33\
---------------------------------------------------------------------------

    \33\ The market share percentages set forth in Table 1 are based 
on trades reported to the Consolidated Tape Association and via 
Crossing Session II on the Exchange pursuant to Rule 902(a)(iii).

                                                                            Table 1--Tape A Market Share Developments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  NYSE      FINRA
                          F                             NYSE      Arca      TRI *    Nasdaq    Nasdaq    Nasdaq    BATS Z    BATS Y    EDGA *    EDGX **  ISE  (%)  NSX  (%)  CHX  (%)    CBSX
                                                         (%)       (%)       (%)       (%)     BX  (%)  PSX  (%)     (%)       (%)       (%)       (%)                                     (%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2009................................................      25.0      13.4      22.5      15.5       1.9       0.0       8.5       0.0       0.0      10.4       1.9       0.6       0.3       0.1
2010................................................      24.4      11.9      27.3      13.6       3.6       0.1       7.5       0.2       2.0       7.6       0.8       0.5       0.3       0.1
2011................................................      24.3      10.5      29.8      13.3       2.3       0.7       6.9       2.3       3.6       5.5       0.0       0.5       0.2       0.1
2012................................................      21.4      10.0      32.3      12.8       2.6       0.7       7.5       3.1       2.4       6.3       0.0       0.3       0.3       0.4
2013................................................      22.1       8.4      35.3      11.6       2.3       0.5       7.1       1.9       2.8       6.9       0.0       0.4       0.4       0.4
2014................................................      22.4       8.3      34.7      13.1       2.4       0.4       6.8       3.0       2.5       5.9       0.0       0.1       0.4       0.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Includes ADF and adjusted for EDGA/EDGX launch.
* EDGA and EDGX are combined into EDGX for Jan. 2009 through July 2010, as Direct Edge didn't break them out prior to receiving exchange status.

    While these statistics demonstrate that all exchanges, including 
the Exchange, have faced challenges in the last six years, the Exchange 
believes that the NMM and SLP Pilots have enabled the Exchange to 
remain competitive during this period. As demonstrated in the chart 
above, notwithstanding the competing market forces, the Exchange's 
market share has remained relatively stable.
    The Exchange further notes that it adopted the NMM and SLP Pilots 
during a period of high trading volumes. Since the global financial 
crisis of 2008-2009, there has been a significant drop in volume and 
volatility in cash equities markets. A case in point, Tape A CADV fell 
41% from 5.64 billion in 2009 to 3.33 billion shares in 2014. 
Additionally, the VIX volatility index, which is an industry-standard 
measure of market volatility, fell from a daily average of 31.5% in 
2009 to 14.2 in 2014.

                 Table 2--Tape A Volume and VIX[supreg]
------------------------------------------------------------------------
                                                      CADV   VIX[supreg]
------------------------------------------------------------------------
2009..............................................     5.68       31.5
2010..............................................     4.87       22.6
2011..............................................     4.37       24.3
2012..............................................     3.66       17.8
2013..............................................     3.40       14.2
2014..............................................     3.39       14.2
------------------------------------------------------------------------

    As overall trading volume and volatility falls, the demand for the 
liquidity continuously provided by market makers' [sic] falls, which 
leads to thinner profit margins for market makers. This impact can be 
demonstrated, in part, by the significant changes in the firms 
operating as DMMs since the Exchange adopted the NMM Pilot. In October 
2008, the Exchange had six firms operating as specialists: Bank of 
America Corp. (``BAC''), Barclays Capital, Inc. (``Barclays''), Bear 
Wagner Specialists, LLC (``Bear Wagner''), Goldman, Sachs and Co 
(``Goldman Sachs,'' operating Spear, Leads & Kellogg, LLC), Kellogg 
Specialist Group (``Kellogg), and LaBranche & Company (``Labranche''). 
Six years later, only one of those firms still operates as a DMM, 
Barclays. Below are key changes within the NYSE DMM universe:
     In March 2009, Barclays acquired Bear Wagner's DMM 
business, with Bear Wagner exiting the business.
     In January 2010, Barclays acquired LaBranche's DMM 
business, with LaBranche exiting the business.
     In February 2010, Getco Securities, LLC (``Getco'') became 
an NYSE DMM.
     In December 2010, Knight Capital Group, Inc. (``Knight'') 
acquired Kellogg's NYSE and NYSE MKT DMM business, with Kellogg exiting 
the business.
     In November 2011, Getco acquired BAC's DMM business, with 
BAC exiting the business.
     In December 2011, J. Streicher & Co, an NYSE MKT DMM, 
became an NYSE DMM.
     In April 2012, Virtu Financial (``Virtu'') became a NYSE 
DMM (in

[[Page 34724]]

2011, Virtu entered the DMM business by acquiring Cohen Capital Group, 
an NYSE MKT DMM).
     In November 2012, Brendan Cryan & Co, an NYSE MKT DMM, 
became an NYSE DMM.
     In July 2013, Knight and Getco merged to become KCG 
Americas.
     In August 2014, IMC Financial Markets acquired Goldman's 
DMM business, with Goldman exiting the business.
    In this challenging environment, the Exchange believes that the 
operation of the NMM Pilot has helped the Exchange better serve the 
needs of investors by maintaining high market-quality standards. 
Specifically, the NMM Pilot allowed the Exchange's former specialists 
to compete in today's fully electronic trading environment, continuing 
to provide contribute to market quality. Moreover, while there has been 
turnover in who comprises the DMM community, the Exchange believes that 
the operation of the NMM Pilot has been instrumental in attracting new 
entrants to the business as the former specialists have exited.\34\
---------------------------------------------------------------------------

    \34\ The Exchange notes that in 2008, it also amended its rules 
governing the operation of DMMs, in particular, Rule 98, to enable 
specialists, and now DMMs, to better integrate their NYSE market-
making operations with market-making activities on other markets. 
See Securities Exchange Act Release No. 58328 (Aug. 7, 2008), 73 FR 
48260 (Aug. 18, 2008) (SR-NYSE-2008-45) (Approval Order); see also 
Securities Exchange Act Release No. 72534 (July 3, 2014), 79 FR 
39019 (July 9, 2014) (SR-NYSE-2014-12) (Order approving amendments 
to Rule 98 to adopt a principles-based approach to prohibit the 
misuse of material non-public information).
---------------------------------------------------------------------------

    With respect to how DMMs operate, the Exchange believes that the 
NMM Pilot strikes the appropriate balance between DMM benefits and 
obligations. Importantly, while DMMs do not need to yield to orders on 
the Book, under the NMM Pilot, DMMs continue to be subject to Exchange-
specific affirmative obligations to maintain a fair and orderly market 
that are not imposed on any other cash equity market participant. These 
obligations include maintaining a quote at the inside a specified 
percentage of the day,\35\ supplying liquidity as needed to facilitate 
openings and closings,\36\ maintaining price continuity with reasonable 
depth in all of their registered securities,\37\ and re-entering the 
market if taking liquidity to increase a trading position.\38\ 
Similarly, the SLP Pilot has created a separate class of liquidity 
providers at the Exchange, with differing incentives, to supplement the 
liquidity provided by the DMMs, which further supports the Exchange's 
market quality.
---------------------------------------------------------------------------

    \35\ See NYSE Rule 104(a)(1)(A).
    \36\ See NYSE Rule 104(a)(2)-(3).
    \37\ See NYSE Rule 104(f)(ii).
    \38\ See NYSE Rule 104(h).
---------------------------------------------------------------------------

    The Exchange believes that by operating under its NMM and SLP 
Pilots, it offers a diverse and unique population of market 
participants, including DMMs, SLPs, Floor brokers, and other off-Floor 
market participants, that allow it to more effectively compete for 
order flow, with superior market quality. The Exchange believes that an 
important market quality measure is how much liquidity an exchange 
provides. In today's fragmented equity model, the market quality of 
displayed venues varies widely. The Exchange believes, however, that it 
continues to be a leader in liquidity providing among registered 
exchanges, which is due to the ongoing operation of the NMM and SLP 
Pilots.
    The chart below highlights six key market-quality metrics that 
measure best price and liquidity in Exchange-listed securities. Best 
prices are measured by assessing Exchange bid/ask spreads, percentage 
of time at best prices, and percentage time alone at the best prices. 
Liquidity is measured by looking at market share, most displayed shares 
at the best prices, and percentage of time at the best prices with the 
greatest displayed size. As set forth in the table below, the Exchange 
ranks first in each of these metrics.

                                 NYSE-Listed Securities (Tape A)--December 2014
----------------------------------------------------------------------------------------------------------------
                                         All securities (equal weighted)
-----------------------------------------------------------------------------------------------------------------
                                                   Average
                                       Market       quoted     Displayed                % Time best     % Time
                                       share        spread     shares at    % Time at     price &      alone at
                                      (volume       (time         NBBO         NBBO       largest        NBBO
                                     weighted)    weighted)                                 size
----------------------------------------------------------------------------------------------------------------
NYSE..............................         23.4         48.5       1071.9         74.0         45.8         19.6
Nasdaq............................         13.6        311.6        451.6         47.3         17.5          4.2
NYSE Arca.........................          8.0        710.4        409.6         42.9         12.0          3.0
BZX...............................          7.7        463.8        294.3         31.2          6.7          1.5
EDGX..............................          5.0        382.1        326.6         29.5          9.4          3.1
BYX...............................          3.6        551.1        107.7         21.2          2.5          0.6
Nasdaq BX.........................          1.8         68.7         59.2         15.7          2.0          0.2
EDGA..............................          2.8        850.6         94.9         19.2          2.0          0.3
----------------------------------------------------------------------------------------------------------------

    The Exchange notes that DMMs and SLPs have been important 
contributors to the Exchange's performance, particularly at setting the 
NBBO. For example, during September 2014, DMMs and SLPs (including 
SLMMs) accounted for over 38% of the liquidity-providing volume on the 
Exchange. In addition, during 2014, DMMs have averaged quoting at the 
inside almost 30% of the time and DMMs provided an average of 14.6% of 
the Exchange's size. In 2014, 8.3% of DMM volume executed was from 
quotes that improved the NBBO at the time the quote was entered. This 
represents an improvement since 2009, when only 2.7% of DMM volume 
improved the NBBO.
    The Exchange believes that key changes to the NMM Pilot support the 
continued operation of the pilot in the ever-changing equities 
environment. For example, as noted above, in 2009, the Exchange amended 
Rule 104(a)(1) to increase the amount of time that a DMM unit must 
maintain a bid and offer at the inside from 10% to 15% for Less Active 
Securities and from 5% to 10% for More Active Securities.\39\ During 
the same period, the Exchange also amended Rule 1000 to permit CCS to 
provide a partial fill to an incoming order.\40\
---------------------------------------------------------------------------

    \39\ See DMM quoting requirement filing, supra n. 14.
    \40\ See CCS Partial Fill Approval Order, supra n. 18.
---------------------------------------------------------------------------

    After the DMM's quoting requirement was increased, DMM share of 
intraday provide activity increased, from 18.82% in July 2009, before 
the quoting change,

[[Page 34725]]

to 20.03% in September 2009. The Exchange noted a concurrent decline in 
DMM CCS volume during this same time from 9.32% to 6.94% of DMM 
activity. The Exchange believes that the decrease in CCS activity was 
related to a corresponding increase in the DMM displayed quoting 
activity. During the same period, the Exchange experienced a drop in 
NYSE shares routed to away markets from 7.8% in July 2009 to 7.1% in 
September 2009, to 6.6 in October 2009. The Exchange believes that the 
decline in shares routed away is attributable in part to both to the 
increased quoting requirement, because DMMs represented the best quote 
in the market more frequently, and the ability for CCS to partially 
fill incoming orders, thereby obviating the need to route such orders 
to away markets. Accordingly, the Exchange believes that these changes 
to the NMM Pilot contributed to the ongoing market quality at the 
Exchange.
    SLPs likewise represent a substantial share of the Exchange's 
intraday liquidity-providing volume. Participation in the SLP Pilot has 
grown steadily since inception. When first launched, only 497 symbols 
were covered by an SLP. By the end of September 2014, nearly every 
Exchange symbol, including operating companies, preferred stocks, 
warrants, rights and all other issue types, had at least one SLP 
quoting in it. In December 2014, approximately 45% of these symbols had 
at least one SLP quoting at the inside at least 10% of the time.
    Through December 2014, SLPs represented 25.2% of liquidity-
providing execution. The Exchange notes that SLPs have been a solid 
contributor to liquidity in less-active issues, and now account for 
13.3% of the liquidity-providing volume in issues outside of the 
Exchange's 1,000 most active issues.
    The following chart shows both the increase in number of symbols 
assigned to SLPs during the course of the pilot, and the number of SLP 
symbols in which at least one SLP is at the NBB or NBO at least 10% of 
the time. The first two columns represent a count of all SLP/symbol 
pairs where the average time at the NBB or NBO (referred to in the 
chart as NBBO) was 10%. For example, if symbol XYZ were assigned to 
three SLPs, of which two met the 10% NBBO quoting requirement, the 
count for ``Total'' column would be three, and the count for the ``NBBO 
>10%'' column would be two. The right two columns show the number of 
distinct symbols that are covered by and reached 10% NBBO by at least 
one SLP.

                                             SLP Symbols and Quoting
----------------------------------------------------------------------------------------------------------------
                                                                                     Distinct      Distinct NBBO
                                                       Total         NBBO>10%         symbols          >10%
----------------------------------------------------------------------------------------------------------------
Dec-08..........................................             501             332             497             335
Dec-09..........................................           4,328           2,864           1,242           1,199
Dec-10..........................................           6,509           4,079           1,404           1,302
Dec-11..........................................           6,599           3,293           1,478           1,019
Dec-12..........................................           7,971           3,340           1,909           1,377
Dec-13..........................................          10,352           2,845           3,218           1,125
Dec-14..........................................           8,572           3,458           3,262           1,481
----------------------------------------------------------------------------------------------------------------

    The Exchange notes that notwithstanding the significant changes the 
U.S. equities market has undergone since 2008, the statistics the 
Exchange committed to track in connection with the NMM Pilot 
demonstrate that the pilot rules have been effective at improving the 
Exchange's effective spread on marketable orders, the percentage of 
time that the DMMs quote at the NBBO and the percentage of DMM 
participation in total trading volume. Specifically,
     Effective spreads on all marketable orders, which ranged 
from 10 to 18.5 basis points from August to December 2008, have 
remained below 10 basis points since September 2009 and ranged from 6.7 
to 8.2 basis points from November 2013 to November 2014. Effective 
spreads have declined for all order size categories from 100-9999 
shares.
     The percentage of time that DMMs were quoting at the NBBO, 
which ranged from 9.9% to 19% from August to December 2008, have 
exceeded 20% since that time and ranged from 31.3% to 39.2% in the 
period from November 2013 to November 2014.
    For these reasons, the Exchange believes that the Pilots' rules, as 
amended, should be made permanent. The Exchange also proposes to delete 
Rule 104T, which is the pre-NMM Pilot version of Rule 104. Rule 104T 
remains in the Exchange's rule book, but is not operational. With 
permanent approval of current Rule 104, the need to retain Rule 104T is 
mooted. The Exchange also proposes to delete Supplementary Material to 
Rule 104, and related reference to that Supplementary Material in Rule 
104(a)(2), because that rule text was intended to be in effect only 
through October 30, 2009.\41\ Finally, the Exchange proposes to replace 
the reference to ``NYSE Regulation's Division of Market Surveillance'' 
in Rule 104(k) with a reference to the Exchange. Pursuant to Rule 0, 
references to the Exchange may mean references to NYSE Regulation or 
FINRA, which performs certain regulatory services to the Exchange 
pursuant to a Regulatory Services Agreement.
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    \41\ See Securities Exchange Act Release No. 60573 (Aug. 26, 
2009), 74 FR 45500 (Sept. 2, 2009) (SR-NYSE-2009-86) (Notice of 
Filing).
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    The Exchange notes that the proposed change is not otherwise 
intended to address any other issues and the Exchange is not aware of 
any problems that member organizations would have in complying with the 
proposed rule change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\42\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\43\ in particular, because it 
is 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 mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair

[[Page 34726]]

discrimination between customers, issuers, brokers, or dealers.
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    \42\ 15 U.S.C. 78f(b).
    \43\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change is consistent with 
these principles because it seeks to make permanent Pilots and 
associated rule changes that were previously approved by the Commission 
as pilots, that the Exchange has subsequently provided data and 
analysis to the Commission, and that this data and analysis, as well as 
the further analysis in this filing, clearly shows that the Pilots have 
operated as intended and are consistent with the Act.
    The Exchange also believes the proposed rule change is designed to 
facilitate transactions in securities and to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system because making the Pilots permanent would provide market 
participants with a trading venue that encourages the addition of 
liquidity, facilitates the trading of larger orders more efficiently, 
and operates to reward aggressive liquidity providers. The monthly 
statistics provided by the Exchange to the Commission staff over more 
than five years demonstrate that the NMM Pilot has improved market 
quality by numerous measures. Similarly, the Exchange believes the data 
show that the SLP program has appropriately rewarded aggressive 
liquidity providers in the market. The Exchange believes that making 
both of these Pilots permanent would encourage the additional 
utilization of, and interaction with, the NYSE and provide customers 
with the premier venue for price discovery, liquidity, competitive 
quotes, and price improvement.
    In addition, the Exchange believes that making the NMM and SLP 
Pilots permanent would promote just and equitable principles of trade 
and remove impediments to and perfect the mechanism of a free and open 
market because the rules strike the appropriate balance between the 
obligations and benefits of the Exchange's market participants. For 
example, while DMMs no longer have agency responsibilities to the Book, 
they retain a number of affirmative obligations that are unique to the 
Exchange, including meeting Exchange-only quoting requirements, 
supplying liquidity as needed when facilitating openings and closings, 
and maintaining depth and continuity in their listed securities. Given 
these obligations, the Exchange believes it is appropriate to classify 
DMMs as a separate participant in the parity allocation wheel. The 
Exchange notes that it has been operating under this model since 2009, 
and the above-cited market statistics demonstrate that within the 
highly competitive cash equities market, the Exchange's model, 
including DMM parity, has enabled the Exchange to maintain execution 
quality for all investors on the Exchange.
    Finally, the Exchange believes that it is subject to significant 
competitive forces, as described below in the Exchange's statement 
regarding the burden on competition. For these reasons, the Exchange 
believes that the proposal is consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\44\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The Exchange believes that making the Pilots 
permanent would continue to foster competition among liquidity 
providers and maintain execution quality on the Exchange. The Exchange 
believes that the data supplied to the Commission and experience gained 
over more than six years have demonstrated the efficacy of the Pilots, 
and as such, they should be made permanent. Finally, the Exchange notes 
that it operates in a highly competitive market in which market 
participants can easily direct their orders to competing venues, 
including off-exchange venues. In such an environment, the Exchange 
must continually review, and consider adjusting the services it offers 
and the requirements it imposes to remain competitive with other U.S. 
equity exchanges. For the reasons described above, the Exchange 
believes that the proposed rule change reflects this competitive 
environment.
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    \44\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register, or such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2015-26 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2015-26. 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. Copies of the filing also will be available 
for inspection and copying at the principal offices of the Exchange. 
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 available 
publicly. All submissions should refer to File Number SR-NYSE-2015-26, 
and should be submitted on or before July 8, 2015.


[[Page 34727]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-14827 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P


