
[Federal Register Volume 81, Number 61 (Wednesday, March 30, 2016)]
[Notices]
[Pages 17749-17751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07100]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77441; File No. SR-NYSEArca-2016-44]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Amending NYSE Arca Equities Rule 7.31P(h) To 
Add a New Discretionary Pegged Order

March 24, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on March 11, 2016, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. 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 amend NYSE Arca Equities Rule 7.31P(h) 
(Orders and Modifiers) to add a new Discretionary Pegged Order. 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 amend NYSE Arca Equites Rule 7.31P(h) 
(Orders and Modifiers) (``Rule 7.31P'') to add a new Discretionary 
Pegged Order. The proposed new order is based on the Discretionary Peg 
Order as proposed by Investors' Exchange, LLC (``IEX'') in its Form 1 
Application seeking registration as a national securities exchange 
under Section 6 of the Act (``IEX Form 1 Application'').\4\ The 
Exchange proposes to adopt the Discretionary Pegged Order for its 
Pillar trading platform only.
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    \4\ See proposed IEX Rules 11.190(a)(10) and 11.190(g) in 
Exhibit B to IEX's Form 1 Application and Securities Exchange Act 
Release No. 75925 (Sept. 15, 2015), 80 FR 57261 (Sept. 22, 2015) 
(File No. 10-222).
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    As proposed, Rule 7.31P(h)(3) would provide that a Discretionary 
Pegged Order would be a Pegged Order \5\ to buy (sell) that upon entry 
to the NYSE Arca Marketplace \6\ would be assigned a working price \7\ 
equal to the lower (higher) of the midpoint of the PBBO \8\ (``Midpoint 
Price'') or the limit price of the order. Any untraded shares of such 
order would be assigned a working price equal to the lower (higher) of 
the PBB (PBO) or the order's limit price and would automatically be 
adjusted in response to changes to the PBB (PBO) for buy (sell) orders 
up (down) to the order's limit price. In order to trade with contra-
side orders on the NYSE Arca Book, a Discretionary Pegged Order to buy 
(sell) would exercise the least amount of price discretion necessary 
from its working price to its discretionary price (defined as the lower 
(higher) of the Midpoint Price or the Discretionary Pegged Order's 
limit price), except during periods of quote instability, as defined in 
proposed Rule 7.31P(h)(3)(D), as described in greater detail below. 
This proposed rule text is based on proposed IEX Rule 11.190(a)(10), 
but with non-substantive differences to use Pillar terminology to 
describe how the Discretionary Pegged Order would operate on the 
Exchange. Unlike IEX, the Exchange proposes to price a Discretionary 
Pegged Order based on the PBBO rather than the NBBO, which is the 
reference price that the Exchange uses for its Pegged Orders under Rule 
7.31P(h).
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    \5\ A ``Pegged Order'' is defined in Rule 7.31P(h) as a Limit 
Order that does not route with a working price that is pegged to a 
dynamic reference price. If the designated reference price is higher 
(lower) than the limit price of a Pegged Order to buy (sell), the 
working price will be the limit price of the order.
    \6\ The term ``NYSE Arca Marketplace'' is defined in Rule 1.1(e) 
as the electronic securities communications and trading facility 
designated by the Board of Directors through which orders of Users 
are consolidated for execution and/or display.
    \7\ The term ``working price'' is defined in Rule 7.36P(a)(3) as 
the price at which an order is eligible to trade at any given time, 
which may be different from the limit price or display price of the 
order. The term ``limit price'' is defined in Rule 7.36P(a)(2) as 
the highest (lowest) specified price at which a Limit Order to buy 
(sell) is eligible to trade.
    \8\ The term ``PBBO'' is defined in Rule 1.1(dd) as the highest 
Protected Bid and the lowest Protected Offer.
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    Proposed Rule 7.31P(h)(3)(A) would provide that Discretionary 
Pegged Orders would not be displayed, must be designated Day, and would 
be eligible to be designated for the Core Trading Session only. 
Accordingly, the proposed rule would provide that Discretionary Pegged 
Orders that include a designation for the Early Trading Session or Late 
Trading Session would be rejected. This proposed rule text is based on 
proposed IEX Rules 11.190(a)(10)(F) (a Discretionary Peg Order is 
eligible to trade only during IEX's Regular Market Session) and 
11.190(a)(10)(H) (a Discretionary Peg Order is not eligible to 
display). Unlike IEX, the Exchange proposes that a Discretionary Pegged 
Order be Day time-in-force and not include any other time-in-force 
instruction. The descriptions set forth in proposed IEX Rule 
11.190(a)(10)(A), (C), and (E) are set forth in current Rule 7.31P(h), 
which defines Pegged Orders as a Limit Order that does not route. 
Therefore, the Exchange proposes not to specify these requirements 
separately for the proposed Discretionary Pegged Order. Unlike IEX's 
proposed Discretionary Peg Order, the Exchange's proposed Discretionary 
Pegged Order would have to include a limit price.
    Proposed Rule 7.31P(h)(3)(B) would provide that when exercising 
discretion, Discretionary Pegged Orders would maintain their time 
priority at their working price as Priority 3--Non-Display Orders and 
would be prioritized behind Priority 3--Non-Display Orders with a 
working price equal to the discretionary price of a Discretionary 
Pegged Order at the time of execution. If multiple Discretionary Pegged 
Orders are exercising price discretion during the same book processing 
action, they would maintain their relative time priority at the 
discretionary price. This proposed rule text is based on the last two 
full sentences of proposed IEX Rule 11.190(a)(10), with non-substantive 
differences to use Pillar terminology to describe the relative ranking 
and priority of Discretionary Pegged Orders.

[[Page 17750]]

    Proposed Rule 7.31P(h)(3)(C) would provide that a Discretionary 
Pegged Order would be eligible to exercise price discretion to its 
discretionary price, except during periods of quote instability, as 
specified in proposed Rule 7.31P(h)(3)(D). Proposed Rule 
7.31P(h)(3)(C)(i) would provide that if the Corporation \9\ determines 
the PBB for a particular security to be an unstable quote in accordance 
with proposed Rule 7.31P(h)(3)(D), it would restrict buy Discretionary 
Pegged Orders in that security from exercising price discretion to 
trade against interest above the PBB. Proposed Rule 7.31P(h)(3)(C)(ii) 
would provide that if the Corporation determines the PBO for a 
particular security to be an unstable quote in accordance with proposed 
Rule 7.31P(h)(3)(D), it would restrict sell Discretionary Pegged Orders 
in that security from exercising price discretion to trade against 
interest below the PBO. This rule text is based on proposed IEX Rule 
11.190(a)(10)(K) with non-substantive differences to refer to the 
Corporation instead of the ``System'' and to measure the PBBO rather 
than the NBBO for quote instability.
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    \9\ The term ``Corporation'' is defined in Rule 1.1(k) to mean 
NYSE Arca Equities, as described in NYSE Arca Equities' Certificate 
of Incorporation and Bylaws.
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    Proposed Rule 7.31P(h)(3)(D) would set forth how the Exchange would 
determine quote stability, i.e., crumbling quote, of the PBBO. This 
proposed rule text is based on proposed IEX Rule 11.190(g) with non-
substantive differences to use the term ``Corporation'' instead of 
``System,'' and as described above, to measure the stability of the 
PBBO rather than the NBBO. As proposed, when the Corporation determines 
a quote, either the PBB or the PBO, is unstable, the determination 
would remain in effect at that price level for ten (10) milliseconds. 
As further proposed, the Corporation would only treat one side of the 
PBBO as unstable in a particular security at any given time.
    The Exchange would determine quote instability or a crumbling quote 
when the following factors occur:
     The PBB and PBO are the same as the PBB and PBO one (1) 
millisecond ago (proposed Rule 7.31P(h)(3)(D)(i)(A)); and
     the PBBO spread is less than or equal to the thirty (30) 
day median PBBO spread during the Core Trading Session (proposed Rule 
7.31P(h)(3)(D)(i)(B)); and
     there are more protected quotations on the far side, i.e. 
more protected quotations on the PBO than the PBB for buy orders, or 
more protected quotations on the PBB than the PBO for sell orders 
(proposed Rule 7.31P(h)(3)(D)(i)(C)); and
     the quote instability factor result from the quote 
stability calculation is greater than the defined quote instability 
threshold (proposed Rule 7.31P(h)(3)(D)(i)(D).
    The Exchange proposes that the quote stability calculation used to 
determine the current quote instability factor would be defined by the 
following formula that utilizes the quote stability coefficients and 
quote stability variables defined below:

1/ (1 + e [supcaret] -(C0 + C1 * N + C2 * F + C3 * N-1 + C4 * F-1))

    (See proposed Rule 7.31P(h)(3)(D)(i)(D)(1)).

    As set forth in proposed Rule 7.31P(h)(3)(D)(i)(D)(1)(a), the 
Exchange proposes to utilize the values below for the quote stability 
coeffecients:

C0 = -2.39515; (ii) C1 = -0.76504; (iii) C2 = 0.07599; (iv) C3 = 
0.38374; and (v) C4 = 0.14466.

    As set forth in proposed Rule 7.31P(h)(3)(D)(i)(D)(1)(b), the 
Exchange proposes to utilize the following quote stability variables to 
calculate the current quote instability factor: (i) N = the number of 
protected quotations on the near side of the market, i.e. PBB for buy 
orders and PBO for sell orders; (ii) F = the number of protected 
quotations on the far side of the market, i.e. PBO for buy orders and 
PBB for sell orders; (iii) N-1 = the number of protected quotations on 
the near side of the market one (1) millisecond ago; and (iv) F-1 = the 
number of protected quotations on the far side of the market one (1) 
millisecond ago.
    As set forth in proposed Rule 7.31P(h)(3)(D)(i)(D)(2), the Exchange 
proposes to utilize a quote instability threshold of 0.32. Finally, as 
set forth in proposed Rule 7.31P(h)(3)(D)(i)(D)(3), the Exchange 
reserves the right to modify the quote instability coeffecients or 
quote instability threshold at any time, subject to a filing of a 
proposed rule change with the SEC.
    Because of the technology changes associated with this proposed 
rule change, the Exchange will announce by Trader Update the 
implementation date.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\10\ in general, and 
furthers the objectives of Section 6(b)(5),\11\ 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 facilitating 
transactions in securities, to remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system and, 
in general, to protect investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposed rule change 
would remove impediments to and perfect the mechanism of a free and 
open market and a national market system by promoting transparency in 
Exchange rules by adopting a new order type that is designed to 
exercise discretion in order to provide price improvement to contra-
side orders. Similar to how MPL Orders operate, the Discretionary 
Pegged Order is designed to be a non-displayed order that could execute 
at the midpoint of the PBBO, and thus would enhance order execution 
opportunities at the Exchange that provide price improvement 
opportunities over the PBBO. However, unlike an MPL Order, the Exchange 
would monitor the quality of the PBBO to assess whether a Discretionary 
Pegged Order would be eligible to exercise its discretion. As proposed, 
the Exchange would use a mathematical calculation (the ``quote 
instability calculation'') to assess the probability of an imminent 
change to the current PBB to a lower price or the PBO to a higher price 
for a particular security (``quote instability factor''). When the 
quoting activity meets predefined criteria and the quote instability 
factor calculated is greater than the Exchange's proposed threshold 
(``quote instability threshold''), the Exchange would treat the quote 
as not stable (``quote instability'' or ``crumbling quote'').
    The Exchange believes that using the proposed quote instability 
calculation to determine quote instability would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system because the Exchange would be monitoring the PBBO on 
behalf of its members in an objective and transparent manner to assess 
the quality of the PBBO and whether it is appropriate for a 
Discretionary Pegged Order to exercise its discretion. The Exchange 
further believes that it would remove impediments to and perfect the 
mechanism of a free and open market and a national market system for 
the Exchange to monitor the quote stability because it would assist ETP 
Holders in obtaining best execution for their

[[Page 17751]]

customers by limiting executions at the midpoint of the PBBO when the 
PBBO is not stable, thereby providing a more conservative alternative 
for investors seeking to passively participate with contra-side order 
flow. The proposed rule change would therefore facilitate transactions 
in securities and improve trading within the national market system.
    As discussed above, the proposed rule change is based on the 
proposed rules of IEX, which has not yet been approved as a registered 
securities exchange. In a letter commenting on IEX's Form 1 
Application, the Exchange previously stated that it did not oppose 
IEX's proposed quote instability feature, but noted that it offers a 
feature typically performed by broker-dealers.\12\ Generally, an 
exchange's function is to reprice orders based on direction from its 
members and input from market data, e.g., a Pegged Order is repriced 
based on changes to the PBBO. By contrast, broker dealers generally 
perform the function of evaluating the quality of the market to 
determine whether to trade and at what price. The proposed quote 
stability calculation would perform a similar function by monitoring 
the quality of the market in order to assess whether to exercise price 
discretion, and therefore the Exchange would be making pricing 
decisions for its members based on the Exchange's evaluation of the 
quality of the PBBO. In a separate context, the Commission has 
disapproved a registered exchange from performing the same services as 
a broker-dealer.\13\ While the Exchange believes that the proposal is 
consistent with the Act for the reasons described above, the Exchange 
respectfully requests that the Commission clearly articulate the 
boundaries of when an exchange may and may not offer services that are 
otherwise performed by broker dealers and, when it is appropriate for 
an exchange to monitor the quality of the prices in a market to 
determine how to price an order.
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    \12\ See Letter from Elizabeth K. King, General Counsel & 
Secretary, New York Stock Exchange to Brent J. Fields, Secretary, 
Commission, dated November 12, 2015.
    \13\ See Securities Exchange Act Release No. 68629 (Jan. 11, 
2013), 78 FR 3928, 3931 (Jan. 17, 2013) (SR-NASDAQ-2012-059) (Order 
disapproving proposal to establish ``benchmark orders'' because, in 
part, the proposed functionality would create regulatory disparities 
that would give Nasdaq an inappropriate advantage over broker-
dealers providing the same services and therefore the Commission 
could not find that the proposal would be consistent with Section 
6(b)(8) of the Act).
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    To this end, the Exchange believes that the proposed rule change 
would achieve efficiency and cost savings for market participants that 
rely on the Exchange to manage the price-discovery process on their 
behalf because it presents an option for ETP Holders to have the 
Exchange monitor the quality of the PBBO. Specifically, the 
Discretionary Pegged Order will be an option to assist market 
participants to achieve best execution on behalf of their customers by 
reducing the potential to execute at a stale price. The manner by which 
the Exchange would monitor the quality of the quote would be objective 
and transparent, as specified in proposed Rule 7.31P(h)(3)(D). Market 
participants that use the Discretionary Pegged Order would thus be able 
to serve their customers better, thereby protecting investors and the 
public interest.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed Discretionary Pegged Order and related quote instability 
would promote competition because it is based on the proposed rules of 
IEX, which would implement the Discretionary Peg Order and related 
quote instability if approved as a registered securities exchange under 
Section 6 of the Act.

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 within 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 such 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-NYSEArca-2016-44 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-NYSEArca-2016-44. 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 office 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-NYSEArca-2016-44 and should 
be submitted on or before April 20, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-07100 Filed 3-29-16; 8:45 am]
BILLING CODE 8011-01-P


