
[Federal Register Volume 81, Number 84 (Monday, May 2, 2016)]
[Notices]
[Pages 26269-26271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10149]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77708; File No. SR-NYSE-2016-16]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend NYSE Rule 98 To Provide That, When Designated Market Makers Enter 
Interest for the Purpose of Facilitating the Execution of Customer 
Orders, Those Orders Would Not Be Required To Be Designated as DMM 
Interest

April 26, 2016.

I. Introduction

    On March 4, 2016, New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend NYSE Rule 98 governing the operation of a 
Designated Market Maker (``DMM'') Unit. The proposed rule change was 
published for comment in the Federal Register on March 15, 2016.\3\ The 
Commission received no comments on the proposed rule change. On April 
15, 2016, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on Amendment No. 1 from interested persons and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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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. 77332 (Mar. 9, 
2016), 81 FR 13851 (``Notice'').
    \4\ Amendment No. 1 is publicly available at http://www.sec.gov/comments/sr-nyse-2016-16/nyse2016-16.shtml. Amendment No. 1 replaced 
the original filing in its entirety. In Amendment No. 1, the 
Exchange proposes: (1) To clarify that a DMM unit must have received 
a customer order before it enters a ``customer-driven order'' in DMM 
securities at the Exchange; (2) to specify that a DMM unit entering 
a customer-driven order in DMM securities may do so only if the 
order is entered on a riskless principal basis or if the order is 
entered on a principal basis to provide price improvement to the 
customer; and (3) to provide that a mnemonic used to identify a 
DMM's customer-driven orders in DMM securities may not be used for 
trading activity at the Exchange in DMM securities that are not 
customer-driven order, but may be used for trading activities in 
securities not assigned to the DMM. Furthermore, the Exchange has 
also added additional text to the filing to explain the revisions 
contained in Amendment No. 1; to clarify the application of 
Regulation SHO to DMM orders marked as ``customer-driven orders,'' 
see infra note 15; and to clarify other aspects of the proposed rule 
change.
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange proposes to amend NYSE Rule 98 to provide that when 
DMMs \5\ enter interest on a proprietary basis for the purpose of 
facilitating the execution of customer orders, that interest would not 
be required to be designated as DMM interest.
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    \5\ As defined in NYSE Rule 2(i), the term ``DMM'' means an 
individual member, officer, partner, employee or associated person 
of a Designated Market Maker Unit who is approved by the Exchange to 
act in the capacity of a DMM.
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A. Background

    The Exchange represents that in 2014 it amended NYSE Rule 98 to 
adopt a principles-based approach to prohibit the misuse of material 
nonpublic information by a member organization that operates a DMM unit 
and to make conforming changes to other Exchange rules.\6\ According to 
the Exchange, those rule changes provide member organizations operating 
DMM units with the ability to integrate DMM unit trading with other 
trading units, while maintaining tailored restrictions to address that 
DMMs, while on the Trading Floor,\7\ may have access to certain Floor-
based non-public information. The Exchange states that, by removing 
prescriptive restrictions, the 2014 Filing was designed to enable a 
member organization that engages in market-making operations on 
multiple exchanges to house its DMM operations together with the other 
market-making operations, even if those operations are customer-facing, 
or to enable a member organization to consolidate all of its equity 
trading, including customer-facing operations and the DMM unit, within 
a single independent trading unit.
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    \6\ See Securities Exchange Act Release Nos. 72534 (July 3, 
2014), 79 FR 39019 (July 9, 2014) (Approval Order) and 71837 (Apr. 
1, 2014), 79 FR 19146 (Apr. 7, 2014) (SR-NYSE-2014-12) (``2014 
Filing'').
    \7\ See NYSE Rule 6A for the definition of ``Trading Floor.''
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    The Exchange states that NYSE Rule 98(c) sets forth specific 
restrictions on the operation of a DMM unit.\8\ Among other 
requirements, NYSE Rule 98(c)(4) provides that any interest entered 
into Exchange systems by the DMM unit in DMM securities \9\ must be 
identifiable as DMM unit interest. NYSE Rule 98(c)(5) provides that a 
member organization must provide the Exchange, at such times and in the 
manner prescribed by the Exchange, with real-time net position 
information for trading in DMM securities by the DMM unit and any 
independent trading unit of which it is a part. NYSE Rule 98(d) further 
specifies that the DMM rules \10\ will apply only to a DMM unit's 
quoting or trading in its DMM securities for its own accounts at the 
Exchange. Accordingly, the Exchange states, the DMM rules do not apply 
to any customer orders that a member organization that operates a DMM 
unit sends to the Exchange as agent.\11\
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    \8\ As defined in NYSE Rule 98(b)(1), the term ``DMM unit'' 
means a trading unit within a member organization that is approved 
pursuant to NYSE Rule 103 to act as a DMM unit.
    \9\ As defined in NYSE Rule 98(b)(2), the term ``DMM 
securities'' means any securities allocated to the DMM unit pursuant 
to NYSE Rule 103B or other applicable rules.
    \10\ As defined in NYSE Rule 98(b)(3), the term ``DMM rules'' 
means any rules that govern DMM or DMM unit conduct or trading.
    \11\ See 2014 Filing, supra note 6 at 19152 (specifying that 
Rule 98(d) was added because DMM rules are not applicable to any 
customer orders routed to the Exchange by a member organization as 
agent).
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    According to the Exchange, because NYSE Rule 98(c)(4) currently 
requires that any interest entered into Exchange systems by the DMM 
unit in DMM securities be identifiable as DMM interest, a DMM unit that 
is integrated with a customer-facing unit and that sends customer 
orders in DMM securities to the Exchange in a proprietary capacity must 
identify those customer orders as DMM interest. As a result, although 
agency orders are not subject to DMM rules, customer-driven interest 
entered by a DMM unit on a proprietary basis is subject to all DMM 
rules.
    The Exchange states that none of its member organizations operating 
a DMM have integrated a DMM unit with a customer-facing trading unit. 
The Exchange believes that the current rule requiring customer-driven 
orders that are represented on a proprietary basis to be designated as 
DMM interest has served as a barrier to achieving such integration.\12\ 
Specifically, according to

[[Page 26270]]

the Exchange, there are certain scenarios when the rules governing DMMs 
may conflict with a member organization's obligations with respect to 
its customers' orders. For example, DMMs are not permitted to enter 
Market Orders, MOO Orders, CO Orders, MOC Order, LOC Orders, or orders 
with Sell ``Plus''--Buy ``Minus'' Instructions.\13\ However, the 
Exchange represents that, to comply with customer instructions, a 
customer-driven order entered by a member organization on a proprietary 
basis may need to use one of these order types. As another example, the 
Exchange states that DMMs are restricted from engaging in specified 
trading in the last ten minutes of trading before the close of 
trading.\14\ But, according to the Exchange, a member organization may 
have a best-execution obligation to route a customer-driven order to 
the Exchange in the last ten minutes of trading.
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    \12\ According to the Exchange, it is a common practice among 
market makers that operate as wholesalers, and thus have their own 
customer orders as well as retail order flow from another broker 
dealer, to facilitate the execution of customer order flow by 
representing it on a proprietary basis when those orders are routed 
to an exchange. Once a customer-driven order that has been 
represented on a proprietary basis on the Exchange has been 
executed, the market maker uses the position acquired on the 
Exchange to fill the customer order either on a riskless-principal 
basis or with price improvement to the customer.
    \13\ See NYSE Rule 104(b)(vi).
    \14\ See NYSE Rule 104(g)(i)(A)(III) (defining Prohibited 
Transactions). Specifically, according to the Exchange, a DMM with a 
long position in a security is prohibited from making a purchase in 
a security that results in a new high price on the Exchange for the 
day, and a DMM with a short position in a security is prohibited 
from making a sale in that security that results in a new low price 
for the day.
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B. Proposed Modifications

    The Exchange proposes to replace the phrase ``any interest'' with 
the phrase ``proprietary interest'' in NYSE Rule 98(c)(4) to clarify 
that the existing rule only governs proprietary interest of a DMM unit, 
i.e., interest for the account of the member organization. As further 
proposed, the Exchange would amend NYSE Rule 98(c)(4) to provide that 
proprietary interest entered into Exchange systems by the DMM unit in 
DMM securities would not be required to be identifiable as DMM unit 
interest if that interest is (1) represented on a riskless principal 
basis, or on a principal basis to provide price improvement to the 
customer; and (2) for the purpose of facilitating the execution of an 
order received from a customer (whether the DMM unit's own customer or 
the customer of another broker-dealer). The Exchange proposes to define 
such interest as a ``customer-driven order.'' A member organization 
entering a customer-driven order would need to have received a customer 
order before entering a customer-driven order at the Exchange.
    The Exchange also proposes to amend NYSE Rule 98(c)(4) to specify 
that a DMM unit must use a unique mnemonic that identifies to the 
Exchange its customer-driven orders in DMM securities. Such mnemonics 
may not be used for trading activity at the Exchange in DMM securities 
that are not customer-driven orders, but may be used for trading 
activities in securities not assigned to the DMM. The Exchange believes 
that requiring a separate mnemonic for customer-driven orders would 
assist the Exchange in monitoring DMM unit compliance with the proposed 
rule.
    The Exchange further proposes to amend NYSE Rule 98(d) to specify 
that the rules, fees, or credits applicable to DMM quoting or trading 
activity would apply only to a DMM unit's quoting or trading in its DMM 
securities that is for its own account at the Exchange and that has 
been identified as DMM interest. In addition, the Exchange proposes to 
add text to NYSE Rule 98(d) to state that (1) customer-driven orders 
for the account of a DMM unit that have not been identified as DMM 
interest would not be subject to DMM rules or be eligible for any fees 
or credits applicable to DMM quoting or trading activity; and (2) 
customer-driven orders not designated as DMM interest would not be 
subject to DMM rules, which include restrictions on the availability of 
certain order types and the entry of specified orders during the last 
ten minutes of trading.
    The Exchange represents that the NYSE Rule 98(c)(5) obligation to 
provide the Exchange with real-time net position information in DMM 
securities would continue to be applicable to the DMM unit's position 
in DMM securities together with any position of a Regulation SHO 
independent trading unit of which the DMM unit may be included, 
regardless of whether they are positions resulting from trades in away 
markets, trades as a result of DMM interest entered at the Exchange, or 
customer-driven orders routed to the Exchange that were not identified 
as DMM interest.\15\ The Exchange also proposes a non-substantive 
amendment to NYSE Rule 98(c)(5) to delete the term ``for trading,'' 
which the Exchange believes is extraneous rule text.
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    \15\ Under Regulation SHO, determination of a seller's net 
position is based on the seller's position in the security in all of 
its accounts, absent aggregation unit treatment under Rule 200(f) of 
Regulation SHO. See Securities Exchange Act Release No. 50103 (July 
28, 2004), 69 FR 48008, 48010, n.22 (Aug. 6, 2004); see also 
Securities Exchange Act Release Not 48709 (Oct. 29, 2003), 68 FR 
62972, 62991 and 62994 (Nov. 6, 2003); Letter from Richard R. 
Lindsey, Director, Division of Market Regulation, to Roger D. Blanc, 
Wilkie Farr & Gallagher, SEC No-Action Letter, 1998 SEC No-Act. 
LEXIS 1038, p. 5 (Nov. 23, 1998); Securities Exchange Act Release 
No. 30772 (June 3, 1992), 57 FR 24415, 24419 n.47 (June 9, 1992); 
Securities Exchange Act Release No. 27938 (Apr. 23, 1990), 55 FR 
17949, 17950 (Apr. 30, 1990). The Commission adopted a narrow 
exception to Regulation SHO's ``locate'' requirement only for market 
makers engaged in bona-fide market making in the security at the 
time they effect the short sale. See 17 CFR 242.203(b)(2)(iii); see 
also Securities Exchange Act Release No. 50103 (July 28, 2004), 69 
FR 48008, 48015 (Aug. 6, 2004); Securities Exchange Act Release No. 
58775 (Oct. 14, 2008), 73 FR 61690, 61698-9 (Oct. 17, 2008). Broker-
dealers would not be able to rely on the Exchange's or any self-
regulatory organization's designation of market marking for 
eligibility for the bona-fide market making exception to the 
``locate'' requirement, as such designations are distinct and 
independent from Regulation SHO. Further, the Exchange's designation 
of proprietary interest or any exclusion from proprietary interest 
for purposes of NYSE rules is not relevant for purposes of 
Regulation SHO. Eligibility for the bona-fide market making 
exception depends on the facts and circumstances and a determination 
of bona-fide market making is based on the Commission's factors 
outlined in the aforementioned Regulation SHO releases. It should 
also be noted that a determination of bona-fide market making is 
relevant for the purposes of the close-out obligations under Rule 
204 of Regulation SHO. See 17 CFR 242.204(a)(3).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\16\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\17\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in 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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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change will help to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and to protect investors and the 
public interest, because the Exchange has proposed a mechanism that is 
reasonably designed to distinguish a DMM unit's own proprietary trading 
on the Exchange in its assigned securities from a DMM unit's activity 
in representing customer orders as principal. In light of the market-
making privileges and obligations of DMMs, the Exchange has

[[Page 26271]]

imposed certain restrictions on a DMM unit's trading in assigned 
securities, but those restrictions, according to the Exchange, may 
cause a conflict with a DMM unit's obligations to its customer when 
representing that customer's order as principal. The Commission 
believes that the proposal is reasonably designed to permit DMM units 
to comply with their obligations when engaging in proprietary trading 
on the Exchange in assigned securities, while also allowing a DMM unit 
to comply with customer instructions and the duty of best execution 
when representing customer orders as principal.
    The Commission also notes that the Exchange's proposal includes 
certain safeguards that should help to prevent potential mismarking of 
orders as ``customer-driven orders'' and to assist the Exchange in 
monitoring for compliance by DMM units with Rule 98 as amended. The 
Commission notes that, under the proposal, all proprietary interest 
entered into Exchange systems by the DMM unit in DMM securities will be 
considered DMM unit interest unless that interest is (1) for the 
purpose of facilitating the execution of an order that has already been 
received from a customer (whether the DMM unit's own customer or the 
customer of another broker-dealer); and (2) represented on a riskless 
principal basis, or on a principal basis to provide price improvement 
to the customer. Moreover, the Commission notes that a DMM unit must 
use a unique mnemonic that identifies to the Exchange its customer-
driven orders in DMM securities.
    Finally, the Commission notes that the Exchange represents that 
this proposed rule change would not alter in any way a member 
organization's existing obligations under Section 15(g) of the Act,\18\ 
Regulation SHO,\19\ NYSE Rule 5320, or to maintain policies and 
procedures to ensure that a member organization does not engage in any 
frontrunning of customer order information in violation of Exchange, 
FINRA, or federal securities laws.
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    \18\ 15 U.S.C. 78o(g).
    \19\ 17 CRF 242.201.
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    For the above reasons, the Commission finds that the proposal, as 
modified by Amendment No. 1, is consistent with the requirements of the 
Act.

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-2016-16 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-2016-16. 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-NYSE-2016-16 and should be 
submitted on or before May 23, 2016.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of Amendment No. 1 in the Federal 
Register. In Amendment No. 1, the Exchange proposes: (1) To clarify 
that a DMM unit must have received a customer order before it enters a 
``customer-driven order'' in DMM securities at the Exchange; (2) to 
specify that a DMM unit entering a customer-driven order in DMM 
securities may do so only if the order is entered on a riskless 
principal basis or if the order is entered on a principal basis to 
provide price improvement to the customer; and (3) to provide that a 
mnemonic used to identify a DMM's customer-driven orders in DMM 
securities may not be used for trading activity at the Exchange in DMM 
securities that are not customer-driven order, but may be used for 
trading activities in securities not assigned to the DMM.
    The Commission believes that the revisions proposed in Amendment 
No. 1 are designed to prevent abuse and facilitate surveillance of the 
new rules. Therefore, the Commission finds that Amendment No. 1 is 
consistent with the protection of investors and the public interest.
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\20\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (NYSE-2016-16), as modified by 
Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \21\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10149 Filed 4-29-16; 8:45 am]
 BILLING CODE 8011-01-P


