
[Federal Register Volume 80, Number 151 (Thursday, August 6, 2015)]
[Notices]
[Pages 47008-47014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19288]



[[Page 47008]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75578; File No. SR-NYSE-2015-26]


Self-Regulatory Organizations; New York Stock Exchange, LLC; 
Order Granting Approval of a Proposed Rule Change Making Permanent the 
Rules of the NYSE New Market Model Pilot and the NYSE Supplemental 
Liquidity Providers Pilot

July 31, 2015.

I. Introduction.

    On June 4, 2015, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to make permanent the rules of the Exchange's New 
Market Model (``NMM'') Pilot (``NMM Pilot'') and the Supplemental 
Liquidity Providers (``SLP'') Pilot (``SLP Pilot,'' and together with 
the NMM Pilot, the ``Pilots''). The proposed rule change was published 
in the Federal Register on June 17, 2015.\3\ The Commission received no 
comment letters regarding the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 75153 (June 11, 
2015), 80 FR 3417 (``Notice'').
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II. Description of the Proposal

A. Background of the Proposal

    In October 2008, the Exchange implemented the NMM, under which the 
Exchange's market currently operates. Historically, NYSE specialists 
were responsible for overseeing the execution of all orders coming into 
the Exchange, for conducting auctions on the NYSE Floor (the 
``Floor''), and for maintaining an orderly market in all assigned 
securities.\4\ Price discovery on the Exchange took place almost 
exclusively on the Floor in the form of face-to-face interactions among 
NYSE Floor brokers (``Floor brokers'') and specialists.\5\ In 2006, the 
Exchange began operating under the NYSE HYBRID MARKET, under which 
Exchange systems assumed the function of matching and executing 
electronically entered orders and the Exchange programmed its systems 
to provide its specialists with an order-by-order advance ``look'' at 
incoming orders.\6\ By 2008, however, the increase in electronic 
executions on the Exchange, as well as the increase in the use of smart 
order-routing engines by market participants, had reduced the 
advantages once enjoyed by Floor brokers and specialists.\7\ According 
to the Exchange at the time, informational advantages had shifted from 
Floor brokers and specialists to market participants trading 
electronically ``upstairs.'' \8\
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    \4\ See Securities Exchange Act Release No. 58845 (October 24, 
2008), 73 FR 64379, 64739 (October 29, 2008) (SR-NYSE-2008-46) 
(``NMM Approval Order'').
    \5\ See id.
    \6\ See id.
    \7\ See id.
    \8\ See id at 64379-80.
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    In response to the increased prevalence of electronic trading and 
the aforementioned shift in informational advantages among the 
Exchange's market participants, the Exchange proposed the NMM.\9\ Among 
other things, the NMM: (1) Eliminated the function of the Exchange's 
specialists and created a new category of market participant, 
Designated Market Makers (``DMMs'') under NYSE Rule 104; (2) 
implemented the DMM Capital Commitment Schedule (``CCS'') under NYSE 
Rule 1000; (3) and modified the Exchange's priority rules under NYSE 
Rule 72.\10\ In a subsequent filing and in connection with the NMM 
Pilot,\11\ the Exchange created an additional category of market 
participant, SLPs, under NYSE Rule 107B. The NMM Pilot was originally 
scheduled to end on October 1, 2009,\12\ and the SLP Pilot was 
originally scheduled to be a six-month pilot program.\13\ The Exchange 
filed to extend the operation of the Pilots on several occasions, most 
recently to extend the Pilot periods to July 31, 2015.\14\ In this 
proposal, the Exchange seeks to make the Pilots permanent.
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    \9\ See id.
    \10\ See id. at 64380-87.
    \11\ See Securities Exchange Act Release No. 58877 (October 29, 
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108) (``SLP 
Notice'').
    \12\ See NMM Approval Order, supra note 4, 73 FR at 64389.
    \13\ See SLP Notice, supra note 11, 73 FR at 6904.
    \14\ See Securities Exchange Act Nos. 73919 (December 23, 2014), 
79 FR 78930 (December 31, 2014) (SR-NYSE-2014-71) (citing prior 
filings to extend the NMM Pilot and extending the NMM Pilot until 
the earlier of Commission approval to make the NMM Pilot permanent 
or July 31, 2015) and 73945 (December 24, 2014), 80 FR 58 (January 
2, 2015) (SR-NYSE-2014-72) (citing prior filings to extend the SLP 
Pilot and extending the SLP Pilot until the earlier of Commission 
approval to make the SLP Pilot permanent or July 31, 2015).
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B. Description of the Exchange Rules Subject to the Pilots

1. NYSE Rule 72
    The Exchange's rules governing the priority of bids and offers, and 
the allocation of executions, are set forth in NYSE Rule 72. Under NYSE 
Rule 72(a), when a bid or offer, including pegging interest,\15\ is 
established as the only displayable \16\ bid or offer made at a 
particular price, and that bid or offer is the only displayable 
interest when its price is or becomes the Exchange Best Bid or Offer 
(``BBO''), that bid or offer is designated as the ``setting interest'' 
and is entitled to priority for allocation of executions at that price, 
as described in NYSE Rule 72 and subject to certain provisions set 
forth in NYSE Rule 72(a)(ii).
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    \15\ See NYSE Rule 13(f)(3). In 2012, the Exchange amended Rule 
72(a) to specify that pegging interest may be a setting interest. 
See Securities Exchange Act Release No. 68302 (November 27, 2012), 
77 FR 71658 (December 3, 2012) (SR-NYSE-2012-65).
    \16\ As used in NYSE Rule 72, the term ``displayable'' means 
that portion of interest that could be published as, or as part of, 
the Exchange BBO, including pegging interest. Displayable odd-lot 
orders are published as part of the Exchange 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 Exchange BBO, which may include one 
or more odd-lot orders. See NYSE Rule 72(a)(i).
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    NYSE Rule 72(b) sets forth the provisions governing how setting 
interest retains its priority. Specifically, once priority is 
established by setting interest, that setting interest retains its 
priority for any execution at its price when that price is at the 
Exchange BBO. If executions decrement the setting interest to an odd-
lot size,\17\ the remaining portion of the setting interest retains its 
priority. For any execution of setting interest that occurs when the 
price of the setting interest is not the Exchange BBO, the setting 
interest does not have priority and is executed on ``parity,'' as 
described below.\18\
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    \17\ NYSE Rule 72(a)(ii)(A) precludes odd lot orders from 
qualifying as a setting interest.
    \18\ See infra, notes 20-21 and accompanying text. Furthermore, 
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 has been invoked pursuant to NYSE Rule 
123D or NYSE 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 the 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. See NYSE Rule 72(b)(iii).
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    NYSE Rule 72(c) sets forth the Exchange's rules for the allocation 
of executions. An automatically executing order will trade first with 
displayable bids or offers and, if there is insufficient displayable 
volume to fill the order, will trade next with non-displayable 
interest. Displayable interest will trade on parity with other 
displayable interest, and non-displayable interest will trade on parity 
with other non-displayable

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interest.\19\ For the purpose of share allocation among market 
participants in an execution, (1) the DMM in a security counts as one 
``participant,'' (2) each NYSE Floor broker counts as a participant, 
and (3) orders represented in Exchange systems, including those of 
SLPs, collectively constitute a single participant (referred to as the 
``Book Participant''). The orders represented in the Book Participant 
are allocated shares among themselves by time priority with respect to 
entry.
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    \19\ After the Exchange filed this proposal and it was noticed 
for public comment, the Commission approved a separate proposed rule 
change under which the Exchange amended its rules governing order 
types and modifiers. See Securities Exchange Act Release No. 75444 
(July 13, 2015), 80 FR 42575 (July 17, 2015) (SR-NYSE-2015-15) 
(``NYSE Order Type Approval Order''). In the NYSE Order Type 
Approval Order, the Commission approved amendments to NYSE Rule 
72(c)(i) that: (1) Replaced the term ``reserve interest'' with the 
term ``non-displayable interest'' so that the rule now provides that 
all non-displayable interest, which includes certain types of 
reserve interest and Mid-Point Passive Liquidity (``MPL'') Orders, 
trades on parity in accordance with the order allocation provisions 
of NYSE Rule 72; and (2) changed the phrase ``the displayed bid 
(offer)'' to ``displayable bids (offers)'' and changed the phrase 
``displayed volume'' to ``displayable volume'' to specify that an 
automatically executing order will trade first with displayable bids 
(offers) and, if there is insufficient displayable volume to fill 
the order, will trade next with non-displayable interest. See NYSE 
Order Type Approval Order, 80 FR at 42577.
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    In any execution at the Exchange BBO, a participant who has 
established priority as the setting interest receives 15% of the volume 
of the executed amount or a minimum of one round lot, whichever is 
greater, until the 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 the 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. In general, 
parity provides all market participants the ability to receive 
executions on an equal basis with other interest available at that 
price.\20\ The participant with the setting interest is also included 
in the parity allocation.
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    \20\ See NMM Approval Order, supra note 4, 73 FR at 64384. In 
NYSE Rule 72(c)(iv) and (viii), the Exchange provides examples of 
how orders are executed on parity.
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    If there is no setting interest for an execution at the Exchange 
BBO, allocation of the executed volume is on parity by participant, 
except as otherwise set forth in NYSE Rule 72. When an execution occurs 
at the Exchange BBO, interest that is displayed in the Exchange BBO is 
allocated before any interest that is not displayed. In allocating an 
execution that involves setting interest, whether the execution takes 
place at the Exchange 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 among participants 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 is 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.
    On each trading day, the allocation wheel for each security is set 
to begin with the participant whose interest is entered or retained 
first in time. Thereafter, participants are added to the wheel as their 
interest joins existing interest at a particular price point. If a 
participant cancels its 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 when Exchange systems execute remaining displayable 
odd-lot interest prior to replenishing the displayable quantity of a 
participant.\21\
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    \21\ NYSE Rule 72(c)(viii) provides examples of how the 
Exchange's allocation wheel sets execution priority.
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    When an execution occurs outside the Exchange BBO, the interest 
that is displayable is allocated before any interest that is non-
displayable. All interest that is displayable is on parity with other 
individual participants' displayable interest. Similarly, all interest 
that is non-displayable is on parity with other individual 
participants' non-displayable interest. Incoming orders eligible for 
execution at price points between the Exchange BBO trade with all 
available interest at the price of the execution in between the 
Exchange BBO. All NYSE interest available to participate in the 
execution (e.g., d-quotes, s-quotes, Reserve Orders, Mid-Point Passive 
Liquidity (``MPL'') Orders, and CCS interest) will trade on parity with 
other such interest.\22\
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    \22\ In the NYSE Order Type Approval Order, the Commission 
approved a change to NYSE Rule 72(c)(x) that added MPL Orders to the 
list of orders identified as being eligible to trade at price points 
between the Exchange BBO. See NYSE Order Type Approval Order, supra 
note 19, 80 FR at 42577.
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    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, that is not executed during 
the transaction will be 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.
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    \23\ When the Exchange adopted the NMM Pilot in 2008, all DMM 
interest was allocated on parity. In 2009, the Exchange amended NYSE 
Rule 72 to eliminate parity allocations for DMM interest added intra 
day during a slow quote or when verbally trading with Floor brokers 
at the point of sale. See Securities Exchange Act Release No. 60287 
(July 10, 2009), 74 FR 34817 (July 17, 2009) (SR-NYSE-2009-69).
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    Under NYSE 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., orders of at least 10,000 shares or 
a quantity of stock having a market value of $200,000 or more, 
whichever is less) \24\--and are not for the account of the 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 Exchange BBO.\25\ 
The member's bid or offer shall be entitled to priority at the cross 
price, irrespective of pre-existing displayed bids or offers

[[Page 47010]]

on the Exchange at that price. NYSE Rule 72(d) also sets forth the 
rules and procedures for executing these types of transactions.
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    \24\ See NYSE Rule 72.10.
    \25\ In 2011, the Exchange amended NYSE Rule 72(d) regarding 
agency cross transactions and added NYSE Rule 72.10 to: (1) Change 
the minimum size of a block order under the rule from 25,000 shares 
or more to 10,000 shares or a quantity of stock having a market 
value of $200,000 or more, whichever is less; and (2) conform NYSE 
Rule 72(d) to NYSE Rule 90 to permit a Floor broker to represent an 
NYSE 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).
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2. NYSE Rule 104
    NYSE Rule 104 sets forth the obligations of DMMs. Under NYSE 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. NYSE Rule 104(a) also enumerates 
specific responsibilities and duties of a DMM, including: (1) A 
continuous two-sided quoting requirement, which mandates that each DMM 
maintain a bid or an offer at the National Best Bid (``NBB'') and 
National Best Offer (``NBO,'' together the ``NBBO'') for a certain 
percentage of the trading day \26\ and (2) the facilitation of 
openings, re-openings, the Exchange's Midday Auction, and the close of 
trading for the DMM's assigned securities, all of which may include 
supplying liquidity as needed.\27\ NYSE Rule 104(e) further provides 
that 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 that 
remain unpaired after the DMM has paired all other eligible round lot 
sized interest.
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    \26\ See NYSE Rule 104(a)(1). NYSE Rule 104(a)(1) requires the 
DMM to maintain a bid or offer at the NBB and NBO 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, and at least 10% of the trading day for securities 
in which the DMM unit is registered with a CADV equal to or greater 
than one million shares.
    \27\ See NYSE Rule 104(a)(2)-(3). In 2015, the Exchange 
implemented its Trading Collar price protection under Rule 1000(c) 
and simultaneously eliminated liquidity replenishment points 
(``LRP'') and the ``gap'' quote procedures. See Securities Exchange 
Act Release No. 74063 (January 15, 2015), 80 FR 3269 (January 22, 
2015) (SR-NYSE-2015-01). The Exchange also amended NYSE Rule 104(a) 
to eliminate a DMM's obligations to facilitate trading when an LRP 
was reached or the gap quote procedure was being used. See id.
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    NYSE Rule 104(b) permits DMM units to use algorithms for quoting 
and trading, sets forth the provisions governing how a DMM unit's 
systems may employ algorithms, and lists the order types that a DMM 
unit may not enter.\28\ Furthermore, under NYSE 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 Exchanges 
BBO through the use of CCS interest under Rule 1000.\29\
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    \28\ In the NYSE Order Type Approval Order, the Commission 
approved the following changes to NYSE Rule 104(b): (1) The addition 
of text stating that the Exchange systems will prevent incoming DMM 
interest from trading with resting DMM interest; and (2) the 
addition of text specifying the order types and modifiers that a DMM 
unit may not enter, such as Market Orders, as defined under NYSE 
Rule 13. See NYSE Order Type Approval Order, supra note 19, 80 FR 
42577-78.
    \29\ See infra Section II.B.3 for a discussion of a DMM's CCS 
interest.
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    Under NYSE Rule 104(c), a DMM unit may maintain reserve interest 
consistent with Exchange rules governing Reserve Orders,\30\ and such 
reserve interest is eligible for execution in manual transactions.
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    \30\ See NYSE Rule 13(d)(2). Reserve interest is the portion of 
a Reserve Order that is not displayed. See NYSE Rule 13(d)(2)(C).
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    NYSE Rule 104(f) sets forth the functions of DMMs, such as: (1) 
Mandating that a DMM maintain, insofar as reasonably practicable, a 
fair and orderly market on the Exchange in the stocks in which he or 
she is so acting and (2) stating that DMMs are designated as market 
makers on the Exchange for all purposes under the Act and the rules and 
regulations thereunder.
    NYSE Rule 104(g) governs transactions by DMMs. NYSE Rule 104(g) 
states that 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. 
NYSE Rule 104(g) describes certain permitted transactions, including 
neutral transactions and Non-Conditional Transactions, as defined 
therein. NYSE Rule 104(g)(A)(III) provides that, except as otherwise 
permitted by NYSE Rule 104, during the last ten minutes prior to the 
close of trading, a DMM with a long or short position in a security is 
prohibited from making a purchase or sale, respectively, in such 
security that results in a new high or low price, respectively, on the 
Exchange for the day at the time of the DMM's transaction. Furthermore, 
NYSE Rule 104(h) addresses DMM transactions in securities that 
establish or increase the DMM's position. NYSE Rule 104(h)(ii) permits 
certain ``Conditional Transactions'' \31\ 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.\32\ 
However, NYSE Rule 104(h)(iv) permits certain other Conditional 
Transactions without restriction as to price, and NYSE Rule 104(i) 
provides that re-entry obligations following such Conditional 
Transactions would be the same as the re-entry obligations for Non-
Conditional Transactions pursuant to NYSE Rule 104(g).
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    \31\ Under NYSE Rule 104(h)(i), 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.
    \32\ NYSE Rule 104(h)(iii) sets forth the Exchange's re-entry 
obligations for Conditional Transactions.
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    NYSE Rule 104(j), which was added in 2013,\33\ permits a DMM to 
perform the following Trading Floor functions:
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    \33\ See Securities Exchange Act Release No. 71175 (December 23, 
2013), 78 FR 79534 (December 30, 2013) (SR-NYSE-2013-21).
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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 
canceling 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.\34\
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    \34\ NYSE Rule 104(j)(ii) permits the Exchange to make systems 
available to a DMM at the post displaying the following information 
about securities in which the DMM is registered: (1) Aggregated 
buying and selling interest; (2) 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 (3) 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. Under NYSE Rule 104(j)(iii), a DMM may provide market 
information that is available to the DMM at the post to (1) respond 
to an inquiry from a Floor broker in the normal course of business 
or (2) visitors to the Trading Floor for the purpose of 
demonstrating methods of trading. However, a Floor broker may not 
submit an inquiry pursuant to NYSE Rule 104(j)(iii) 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 NYSE Rule 104(j)(iii).
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    Finally, NYSE 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, an NYSE 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.

[[Page 47011]]

    In addition to making the current provisions of NYSE Rule 104 
permanent, the Exchange also proposes to: (1) Replace the reference to 
``NYSE Regulation's Division of Market Surveillance'' in Rule 104(k) 
with a reference to ``the Exchange'' because, pursuant to NYSE Rule 0, 
Exchange Rules that refer to NYSE Regulation, Inc. (``NYSE 
Regulation''), NYSE Regulation staff or departments, Exchange staff, 
and Exchange departments should be understood as also referring to the 
Financial Industry Regulatory Authority (``FINRA'') staff and FINRA 
departments acting on behalf of the Exchange pursuant to the regulatory 
services agreement between the Exchange and FINRA, as applicable; (2) 
delete the Supplementary Material to NYSE Rule 104--NYSE Rule 104.05--
because NYSE Rule 104.05 states that its provisions apply ``until no 
later than October 31, 2009;'' and (3) delete NYSE Rule 104T, which, by 
its express terms, sets forth the rule for dealings by DMMs until no 
later than ten weeks after the Commission issued the NMM Approval 
Order.\35\
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    \35\ Additionally, in NYSE Rules 104 and 1000, the Exchange 
proposes to replace all references to the term ``Display Book'' with 
references either to the term (1) ``Exchange systems'' when use of 
the term refers to the Exchange systems that receive and execute 
orders, or (2) ``Exchange book'' when use of the term refers to the 
interest that has been entered and ranked in Exchange systems. The 
Exchange represents that it has retired the actual system referred 
to as the ``Display Book,'' but not the functionality associated 
with the Display Book. See Notice, supra note 3, 80 FR 34717 n.9.
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3. The DMM Capital Commitment Schedule
    The provisions of NYSE Rule 1000 relating to the CCS, and which are 
operating as part of the NMM Pilot, are set forth in NYSE Rules 
1000(d)--1000(g). In general, the CCS allows a DMM to create a schedule 
of additional non-displayed liquidity at various price points at which 
the DMM is willing to interact with other trading interest (i.e., 
outside, at, and inside the Exchange BBO) and provide price improvement 
to orders in the Exchange's systems. CCS interest is separate and 
distinct from other DMM interest and the Exchange characterizes CCS 
interest as ``generally interest of last resort.'' \36\
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    \36\ See Notice, supra note 3, 80 FR at 34718.
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    Under NYSE Rule 1000(d), a DMM unit may, for each security in which 
it is registered, place within Exchange systems a pool of liquidity--
the CCS--to be available to fill or partially fill \37\ incoming orders 
in automatic executions.\38\ NYSE Rule 1000(d) also provides that CCS 
interest is used to trade at the Exchange BBO, at prices better than 
the Exchange BBO, and at prices outside the Exchange BBO. 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 Exchange BBO. NYSE 
Rule 1000(e) governs executions at and outside the Exchange BBO and 
specifies how CCS interest would interact with such executions.
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    \37\ 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).
    \38\ CCS interest supplements displayed and non-displayed 
interest of the DMM in Exchange systems.
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    NYSE Rule 1000(f) specifies how CCS interest may provide price 
improvement inside the Exchange BBO with interest arriving in the 
Exchange market that: (1) Will be eligible to trade at or through the 
Exchange BBO; (2) 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 (3) will be eligible to route 
to away market interest for execution, if 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 Exchange 
BBO. In such an instance, the Exchange systems determine the price 
point inside the BBO at which the maximum volume of CCS interest will 
trade, taking into account the volume, if any, available from Floor 
broker d-Quotes and hidden interest. The arriving interest is executed 
at that price, with all interest trading on parity.
    Under NYSE Rule 1000(g), CCS interest may trade with non-marketable 
\39\ interest if the non-marketable interest betters the Exchange BBO 
(or cancels in the case of an arriving IOC order) and if the incoming 
interest may be executed in full by all available trading interest on 
the Exchange, including CCS interest and d-quotes. Such a trade would 
take 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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    \39\ Under NYSE Rule 1000(g)(1), ``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 NYSE Rule 1000(g)(1).
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4. NYSE Rule 107B
    NYSE Rule 107B sets forth the rules governing SLPs. Under NYSE Rule 
107B(a), an SLP is defined as a member organization that electronically 
enters proprietary orders or quotes from off the Floor into the systems 
and facilities of the Exchange and is obligated: (1) To maintain a bid 
or an offer at the NBB or NBO in each assigned security in round lots 
for at least 10% of the trading day, on average, and for all assigned 
SLP securities; \40\ and (2) to add liquidity of an average daily 
volume (``ADV'') of more than a specified percentage of CADV in all 
NYSE-listed securities, as set forth in the Exchange's Price List, on a 
monthly basis.\41\ An SLP can be either a proprietary trading unit of a 
member organization (``SLP-Prop'') or a registered market maker at the 
Exchange (``SLMM'').\42\
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    \40\ The SLP Pilot originally required an SLP to maintain a bid 
or offer at the NBB or NBO in each assigned security 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 or offer at the NBB or NBO in each assigned security 
averaging 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) (``SLP 2010 Filing'').
    \41\ In the SLP 2010 Filing, the Exchange introduced a monthly 
volume requirement for SLPs of an ADV of more than 10 million 
shares. See SLP 2010 Filing, supra note 40. Effective September 1, 
2012, the Exchange amended the monthly volume requirement to require 
instead that SLPs meet an ADV that is more than 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).
    \42\ The SLP Pilot was originally available only for a 
proprietary trading unit of a member organization. In 2012, the 
Exchange amended NYSE Rule 107B to add the SLMMs as 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).
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    Under NYSE Rule 107B(b), when an SLP posts liquidity on the 
Exchange and that liquidity is executed against an inbound order, the 
SLP receives a financial rebate for the executed transaction as set 
forth in the Exchange's Price List, subject to the non-regulatory 
penalty provision described in NYSE Rule 107B(k).\43\ The SLP receives 
credit toward the financial rebate for executions of displayed and

[[Page 47012]]

non-displayed liquidity posted in round lots in its assigned securities 
only.
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    \43\ Currently, NYSE Rule 107B(b) incorrectly references 
subparagraph (j) when referring to the non-regulatory penalties 
provisions of NYSE Rule 107B. The Exchange proposes to correct that 
errant cross-reference by changing the reference to subparagraph (k) 
of NYSE Rule 107B.
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    NYSE Rule 107B(c) sets forth the criteria to qualify as an SLP-
Prop, which includes having a quoting and volume performance that 
demonstrates an ability to meet the SLP's quoting requirements under 
NYSE Rule 107B(a). Under NYSE Rule 107B(d), 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. If approved as an SLMM, the member 
organization must: (1) Maintain continuous, two-sided trading interest 
in assigned securities and meet certain pricing obligations as set 
forth in NYSE Rule 107B; (2) maintain minimum net capital in accordance 
with SEC Rule 15c3-1; \44\ and (3) 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. 
NYSE Rule 107B(e) sets forth the application process for SLPs, and NYSE 
Rule 107B(f) describes how an SLP may voluntarily withdraw from such 
status.
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    \44\ See 17 CFR 240.15c3-1.
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    NYSE Rules 107B(g) and (h) set forth how the Exchange calculates 
whether an SLP is meeting its 10% quoting requirement and monthly 
volume requirements under NYSE Rule 107B(a), respectively. For 
instance, under NYSE Rule 107B(g)(1)(D)(ii), an SLP may post non-
displayed liquidity, but such liquidity is not counted as credit toward 
the 10% quoting requirement.
    NYSE Rule 107B(i) governs the how securities are assigned to SLPs. 
NYSE Rule 107B(j) provides that SLPs may only enter orders 
electronically from off the Floor and may only enter such orders 
directly into Exchange systems and facilities designated for this 
purpose. NYSE Rule 107B(j) further provides that SLMM quotes and orders 
may be for the account of the SLMM in either a proprietary or principal 
capacity on behalf of an affiliated or unaffiliated person and SLP-Prop 
orders must only be for the proprietary account of the SLP-Prop member 
organization. NYSE Rule 107B(k) sets forth non-regulatory penalties 
that apply if an SLP fails to meet its quoting requirements. Among 
other things, the rule provides that if an SLP fails to meet its 10% 
quoting requirement for three consecutive calendar months in any 
assigned security, the SLP will be in danger of losing its SLP status. 
The rule also sets forth the reapplication process for member 
organizations whose SLP applications have been denied or who have been 
disqualified as an SLP. Rule 107B(l) sets forth provisions for 
appealing non-regulatory penalties.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\45\ which requires, among 
other things, that an exchange have rules that are designed to promote 
just and equitable principles of trade; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and in general, to protect investors and the public interest 
and that are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.\46\ The Commission also finds 
that the proposed rule change is consistent with Section 6(b)(8) of the 
Act,\47\ which requires that the rules of an exchange not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \45\ 15 U.S.C. 78f(b)(5).
    \46\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \47\ 15 U.S.C. 78f(b)(8).
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A. NMM Pilot

    When the Commission approved the NMM, it approved the following key 
provisions on a pilot basis: \48\ (i) the changes to NYSE's priority 
and order allocation structure under NYSE Rule 72; (ii) the dealings 
and responsibilities of DMMs, including the affirmative obligation to 
market quality, the quoting obligation, the re-entry requirements 
following certain transactions for a DMM's own account, and, 
implicitly, the elimination of the ``negative obligation'' \49\ set 
forth in NYSE Rule 104; and (iii) the provisions related to DMM CCS 
interest set forth in NYSE Rule 1000.
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    \48\ See NMM Approval Order, supra note 4, 73 FR at 64390.
    \49\ The ``negative obligation'' was set forth in the prior 
version of NYSE Rule 104(a). As the Commission noted in the NMM 
Approval Order, former ``NYSE Rule 104(a) reflect[ed] NYSE's 
adoption of the negative obligation and state[d] that `no specialist 
shall effect on the Exchange purchases or sales of any security in 
which such specialist is registered, for any account in which he or 
his member organization . . . is directly or indirectly interested, 
unless such dealings are reasonably necessary to permit such 
specialist to maintain a fair and orderly market . . . .'' See NMM 
Approval Order, supra note 4, 73 FR at 64379 n.10.
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    The Commission approved these provisions on a pilot basis, stating 
that, ``to be able to take any further action on an NYSE proposal with 
regard to the [NMM] Pilot, NYSE must provide to [the Commission] on a 
regular, ongoing basis, statistics relating to market quality and 
trading activity'' and that analysis of the requested statistics would 
assist the Commission ``in evaluating the effects of the [NMM] Pilot 
provisions on NYSE's market quality, and in determining whether the 
[NMM] Pilot should be permanently approved . . . consistent with the 
Act.'' \50\ By requiring the Exchange to submit statistics relating to 
market quality and trading activity throughout the duration of the NMM 
Pilot, the Commission sought to determine whether implementation of the 
NMM Pilot would have a detrimental effect on investors or other market 
participants.\51\
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    \50\ See NMM Approval Order, supra note 4, 73 FR at 64390. 
Specifically, the Commission required the Exchange to provide the 
following monthly data during the term of the NMM Pilot: (1) DMM 
time at the NBBO by security; (2) the effective spread by security; 
(3) the DMM volume broken out by ``DMM interest type'' (e.g., CCS, 
s-Quote) and the total shares traded expressed in twice total volume 
where both the buy and the sell shares are counted for each trade; 
(4) the average depth at the NBBO by market participant (DMMs, Floor 
brokers, and orders represented in the Exchange's book); (5) the 
ratio of (i) shares not executed in Exchange systems due to DMM 
execution to (ii) the shares executed by the DMM; and (6) effective 
spread for (i) orders that involve DMM liquidity provisions and (ii) 
orders that are executed without DMM liquidity (for similar order 
size categories). See id. at 64387.
    \51\ See NMM Approval Order, supra note 4, 73 FR at 64391.
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    Since it first adopted the Pilots, the Exchange has provided the 
Commission, on an ongoing basis, with statistics relating to market 
quality and trading activity. Furthermore, in its current proposal, the 
Exchange has provided its own analysis, based on those statistics, of 
the effect of the Pilots on market quality for investors and other 
market participants.\52\ The Exchange also asserts that the Pilots have 
enabled the Exchange to remain competitive and to maintain relatively 
stable market share over the past six years, which, the Exchange notes, 
have been a period during which traded volume for equities securities 
has generally shifted away from registered exchanges.\53\
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    \52\ See Notice, supra note 3, 80 FR at 34722-25.
    \53\ See Notice, supra note 3, 80 FR at 34723.
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1. NYSE's Priority and Order Allocation Structure Under NYSE Rule 72
    As explained above,\54\ under the NMM Pilot, all market 
participants receive executions on parity. The setting

[[Page 47013]]

interest that establishes the Exchange BBO is entitled to priority and 
receives the first 15% of any incoming order (subject to a minimum of 
one round lot) in advance of the regular allocation of that order. For 
executions outside the Exchange BBO, all displayable interest is 
executed before any non-displayable interest. Also, under the NMM 
Pilot, DMMs no longer yield to off-Floor participants. More 
importantly, while the DMM and each Floor Broker are counted as 
separate market participants, all off-Floor participants and SLPs are 
aggregated together and counted as a single market participant.
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    \54\ See supra Section II.B.1.
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    In the NMM Approval Order, the Commission raised questions about 
the effects that the Exchange's parity rule might have on market 
quality, book depth, and execution rates of public customer orders.\55\ 
In seeking to make the Pilots permanent, the Exchange asserts that the 
monthly statistics provided by the Exchange to the Commission 
demonstrate that the NMM Pilot has improved market quality by numerous 
measures.\56\ Specifically, based on the statistics the Exchange 
assembled for the Commission, the Exchange asserts that the rules under 
the NMM Pilot have been effective at improving the Exchange's spread on 
marketable orders and the percentage of time that DMMs quote at the 
NBBO.\57\ Additionally, the Exchange argues that, among registered 
exchanges in what has become a fragmented equity market, the Exchange 
continues to be a leading liquidity provider because of the diverse 
population of market participants under the Pilots (i.e., DMMs, SLPs, 
Floor Brokers, and other off-Floor market participants).\58\ In support 
of these assertions, the Exchange's proposal provides statistics for, 
and analysis of, six market quality metrics for NYSE-listed Securities, 
such as the average quoted spread, displayed shares at the NBBO, and 
time alone at the NBBO.\59\
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    \55\ See NMM Approval Order, supra note 4, 73 FR at 64389.
    \56\ See Notice, supra note 3, 80 FR at 34726.
    \57\ See Notice, supra note 3, 80 FR at 34725.
    \58\ See Notice, supra note 3, 80 FR at 34724.
    \59\ See id.
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    The Commission has reviewed the data analysis provided by the 
Exchange and believes that the Exchange has shown that the NMM Pilot, 
which includes the parity provisions under NYSE Rule 72, has produced 
sufficient execution quality to attract volume and sufficient 
incentives to liquidity providers to supply this execution quality. 
Accordingly, the Commission finds that making the parity rules under 
NYSE Rule 72 permanent is consistent with the requirements of the Act.
2. Dealings and Responsibilities of DMMs and the Provisions Related to 
DMM CCS Interest
    As explained above,\60\ under the NMM Pilot, specialists on the 
NYSE were eliminated and DMMs were introduced as market participants on 
the Exchange. DMMs have an affirmative obligation to engage in a course 
of dealings for their own accounts to assist in the maintenance, so far 
as reasonably practicable, of a fair and orderly market. Specifically, 
DMMs have an obligation to use their own capital to contribute to the 
maintenance of a fair and orderly market, are subject to depth 
guidelines, and must maintain a bid or an offer at the NBB and NBO for 
a certain percentage of the trading day. Further, DMMs are required to 
facilitate transactions in their assigned securities during the 
opening, reopening, NYSE Midday Auction, and closing transactions. DMMs 
are no longer given the advance ``look'' at incoming orders that the 
Exchange's prior Hybrid Market provided to specialists.
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    \60\ See supra Sections II.B.2 & .3.
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    In return for incurring these obligations, DMMs are permitted to 
trade freely for their own accounts on parity with other market 
participants. Further, the CCS--in which a DMM sets forth additional 
liquidity that it commits to provide in its assigned securities at 
specific price points--allows DMMs to trade in their assigned 
securities with incoming orders at a price inside the Exchange BBO with 
minimal risk and without contributing to visible depth of the 
market.\61\ Because the NMM provides DMMs with the advantages of being 
on parity with market participants and of CCS executions, the 
Commission, in approving these aspects of the NMM as a pilot program, 
noted that it was ``seeking further evidence that the benefits proposed 
for DMMs are not disproportionate to their obligations.'' \62\
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    \61\ See NMM Approval Order, supra note 4, 73 FR at 64389.
    \62\ See id.
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    As noted above, in seeking to make the NMM Pilot permanent, the 
Exchange asserts that the monthly statistics provided by the Exchange 
to the Commission demonstrate that the NMM Pilot has improved market 
quality by numerous measures.\63\ Specifically, the Exchange asserts 
that the NMM Pilot has allowed the Exchange's former specialists and 
new DMMs to compete, and to contribute to market quality, in a fully 
electronic trading environment despite challenging conditions over the 
past several years. The Exchange notes that, between 2009 and 2014, 
there was a significant decrease in trading volume in the cash equities 
markets, which resulted in thinner profit margins for market makers and 
caused turnover among the Exchange's new DMMs and former 
specialists.\64\ The Exchange also argues that the operation of the NMM 
Pilot has been instrumental in attracting new DMMs to the Exchange at a 
time when former specialists were exiting the Exchange's market maker 
business.\65\
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    \63\ See Notice, supra note 3, 80 FR at 34726.
    \64\ See Notice, supra note 3, 80 FR at 34723-24.
    \65\ See id. at 34724.
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    Additionally, the Exchange asserts that DMMs--as well as SLPs--have 
been important contributors to the Exchange's ability to set the NBBO. 
The Exchange represents that, during 2014, DMMs quoted at the inside of 
the NBBO almost 30% of the time on average and that, during the same 
period, an average of 8.3% of DMM execution volume improved the NBBO at 
the time the executed quotes were entered.\66\ Further, the Exchange 
asserts that its statistics and analysis demonstrate that the rules 
under the NMM Pilot have been effective at improving the percentage of 
time that DMMs quote at the NBBO and the percentage of DMM 
participation in total trading volume.\67\
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    \66\ See id.
    \67\ See id. at 34725. Specifically, the Exchange represents 
that the percentage of the 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. See id.
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    The Commission has reviewed the data analysis provided by the 
Exchange and believes that the Exchange has shown that the NMM Pilot, 
which includes the DMM dealings and responsibilities provisions and the 
CCS interest provisions of NYSE Rules 104 and 1000, respectively, has 
produced sufficient execution quality to attract volume and sufficient 
incentives to liquidity providers to supply this execution quality. 
Accordingly, the Commission finds that making NYSE Rule 104 and the CCS 
provisions under NYSE Rule 1000 permanent is consistent with the 
requirements of the Act.

B. SLP Pilot

    The Exchange represents that it adopted the SLP Pilot to encourage 
an additional pool of liquidity at the Exchange following the approval 
of the NMM Pilot.\68\ As explained above,\69\

[[Page 47014]]

SLPs are obligated to: (1) Maintain a bid or an offer at the NBB or NBO 
in each assigned security in round lots at least 10% of the trading day 
on average; and (2) add a certain volume of liquidity for all assigned 
SLP securities. SLMMs have continuous two-sided quoting obligations and 
must meet certain pricing obligations for those quotes. As a benefit 
for incurring these obligations, SLPs receive a financial rebate for 
each transaction when liquidity that the SLP posts on the Exchange is 
executed against an inbound order. When it adopted the SLP Pilot, the 
Exchange represented that it would use the SLP Pilot period to identify 
and address any administrative or operational problems prior to 
expanding it.\70\ The Exchange also opined that the Pilot period would 
provide SLPs with ``essential practical experience with the new program 
and enable the SLPs to become proficient in the SLP role before 
expanding the assigned securities to all NYSE-listed securities.'' \71\
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    \68\ See Notice, supra note 3, 80 FR at 34722.
    \69\ See supra Section II.B.4.
    \70\ See SLP Notice, supra note 11, 73 FR at 65905.
    \71\ See id.
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    In seeking to make the SLP Pilot permanent, the Exchange has 
explained that the number of stocks quoted by at least one SLP has 
increased substantially since it first launched the SLP Pilot.\72\ The 
Exchange represents that: (1) Through December 2014, SLPs represented 
25.2% of liquidity-providing execution; and (2) SLPs currently account 
for 13.3% of the liquidity-providing volume in issues outside of the 
Exchange's 1,000 most active issues.\73\ The Exchange also states that 
SLPs--along with DMMs--have been important contributors to the 
Exchange's ability to set the NBBO.\74\
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    \72\ See Notice, supra note 3, 80 FR at 34725. The Exchange 
represents that when it first launched the SLP Pilot, only 497 
symbols were covered by an SLP and that, 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 once SLP quoting in it.'' See id.
    \73\ See id.
    \74\ See id. at 34724.
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    The Commission has reviewed the data analysis provided by the 
Exchange and believes that the Exchange has shown that the SLP Pilot, 
as part of the NMM Pilot, has produced sufficient execution quality to 
attract volume and sufficient incentives to liquidity providers to 
supply this execution quality. Accordingly, the Commission finds that 
making the provisions governing SLPs set forth in NYSE Rule 107B 
permanent is consistent with the requirements of the Act.

C. Additional Proposed Rule Changes

    The Exchange proposes to delete: (1) NYSE Rule 104T, which is no 
longer operative because the Commission approved the NMM Pilot; (2) 
NYSE Rule 104.05, which was only intended to be effective through 
October 31, 2009; and (3) a related reference to NYSE Rule 104.05. The 
Commission finds that these proposed deletions from the Exchange's rule 
text are consistent with the Act because they remove text from the 
Exchange's rulebook that is extraneous, particularly now that the 
Commission is approving the NMM and SLP programs on a permanent basis.
    Furthermore, the Exchange proposes to: (1) Replace the term 
``Display Book'' with either the term ``Exchange systems'' or 
``Exchange book'' throughout NYSE Rules 104 and 1000; (2) in NYSE Rule 
104(k), replace the term ``NYSE Regulation's Division of Market 
Surveillance'' with the term ``the Exchange'' pursuant to NYSE Rule 0; 
and (3) correct an errant cross reference in NYSE Rule 107B(b). The 
Commission finds that these additional changes are consistent with the 
Act because they will provide additional clarity and consistency 
throughout the current NMM rules.

IV. Conclusion

    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Act,\75\ the proposed rule change (SR-NYSE-2015-26) be, and hereby is, 
approved.
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    \75\ 15 U.S.C. 78s(b)(2).
    \76\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19288 Filed 8-5-15; 8:45 am]
BILLING CODE 8011-01-P


