
[Federal Register Volume 81, Number 159 (Wednesday, August 17, 2016)]
[Notices]
[Pages 54867-54870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19577]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78546; File No. SR-NYSEARCA-2016-109]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Amending Rule 6.91(b) To Provide for the 
Rejection of Certain Electronic Complex Orders

August 11, 2016.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 3, 2016, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 Rule 6.91(b) to provide for the 
rejection of certain Electronic Complex Orders. The proposed rule 
change is available on the Exchange's Web site at

[[Page 54868]]

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 Exchange 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 these 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 aspects of such 
statements.

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

1. Purpose
    The Exchange is proposing to amend Rule 6.91(b) to provide for the 
rejection of certain Electronic Complex Orders (``ECOs'').\3\ 
Specifically, the Exchange proposes to reject certain ECOs that may 
undermine the effectiveness of risk limitation mechanisms designed to 
protect Market Makers.
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    \3\ Rule 6.62(e) defines a Complex Order as any order involving 
the simultaneous purchase and/or sale of two or more different 
option series in the same underlying security, for the same account, 
in a ratio that is equal to or greater than one-to-three (.333) and 
less than or equal to three-to-one (3.00) and for the purpose of 
executing [sic] particular investment strategy. Per Rule 6.91, an 
ECO is a Complex Order that has been entered into the NYSE Amex 
Options System (``System'') for execution. See Rule 6.91 (preamble).
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    The Exchange requires a Market Maker to utilize its risk limitation 
mechanisms, which automatically remove a Market Maker's quotes in all 
series of an options class when certain parameter settings are 
triggered.\4\ This functionality is designed to mitigate the risk of 
multiple executions on a Market Maker's quotes occurring simultaneously 
across multiple series and multiple option classes. Pursuant to Rule 
6.40, the Exchange establishes a time period during which the System 
calculates: (1) The number of trades executed by the Market Maker in a 
specified options class; (2) the volume of contracts traded by the 
Market Maker in a specified options class; or (3) the percentage of the 
Market Maker's quoted size in the specified class that has been 
executed (the ``risk settings'').\5\ When a Market Maker has breached 
its risk settings (i.e., has traded more than the contract or volume 
limit or cumulative percentage limit of a class during the specified 
measurement interval), the System will cancel all of the Market Maker's 
quotes in that class until the Market Maker notifies the Exchange it 
will resume submitting quotes.\6\ The purpose of the risk settings, 
therefore, is to allow Market Makers to provide liquidity across 
potentially thousands of options series without being at risk of 
executing the full cumulative size of all such quotes before being 
given adequate opportunity to adjust their quotes.
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    \4\ See Rule 6.40(b)(3), (c)(3) and (d)(3). Market Makers are 
required to utilize one of the three risk settings for their quotes. 
See Commentary .04 to Rule 6.40. Market Makers and OTP Holders may 
utilize the risk limitation mechanisms for certain orders, but they 
are not required to do so. See, e.g., Rule 6.40(b)(1), (2); (c)(1), 
(c)(2).
    \5\ See Rule 6.40(b)(3), (c)(3) and (d)(3). Market Makers are 
required to utilize one of the three risk settings for its quotes. 
See Commentary .04 to Rule 6.40.
    \6\ See Commentary .01 to Rule 6.40 (requiring that a Market 
Maker request that it be re-enabled after a breach of its risk 
settings).
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    An incoming ECO may execute against quotes or individual orders 
comprising the Complex Order (the ``leg markets'') or against ECOs 
resting in the Consolidated Book.\7\ An ECO trading against the leg 
markets is commonly referred to as ``legging out.'' Current Rule 
6.91(a)(2)(ii) provides that an incoming ECO will execute first with 
the leg markets, ahead of resting ECOs at the same price (i.e., the 
same total net debit or credit), provided the leg markets can execute 
the ECO in full or in a permissible ratio.
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    \7\ See Rule 6.91(a)(2)(ii).
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    The execution of certain ECOs against the leg markets can be 
problematic because ECOs that leg out may execute before triggering a 
Market Maker's risk settings. Specifically, because the execution of 
each leg of an ECO is contingent on the execution of the other legs, 
the execution of all individual leg markets is processed as a single 
transaction, not as a series of individual transactions. Thus, while 
the risk settings allow a Market Maker to manage the risks associated 
with providing liquidity across multiple series of an options class, 
the settings do not adequately provide this risk protection because the 
legs of an ECO execute in a single transaction package before 
processing any subsequent messages. The practical result is that 
because all legs of an ECO execute before a Market Marker has an 
opportunity to react, such ECO executions are essentially able to 
bypass the Market Maker's risk settings.
    Of particular concern to the Exchange are ECOs where two or more 
legs are buying (selling) calls (puts), which are commonly referred to 
as ``directional complex orders.'' Such directional complex orders are 
typically geared towards an aggressive directional capture of 
volatility. Specifically, through a combination of buying or selling of 
multiple option legs at once, a market participant using one of these 
strategies is aggressively buying or selling volatility. By contrast, 
other types of complex strategies are designed to gain exposure to a 
particular option class' movement.\8\ The Exchange has seen a recent 
increase in the use of directional complex orders as a way to trade 
against multiple series on the same side of the market without 
triggering Market Maker risk settings. If the same legs were sent as 
individual orders, rather than as components of a directional complex 
order, Market Maker risk settings may have been triggered.\9\ The 
Exchange is concerned that the use of directional complex orders is 
undermining the important purpose of the Market Makers risk settings, 
which the Exchange requires Market Makers to use for all quotes.
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    \8\ The Exchange notes that the majority of ECOs are calendar 
and vertical spreads, butterflies and straddles, which are designed 
to hedge the potential move of the underlying security or to capture 
premium from an anticipated market event.
    \9\ For example, if individual orders to buy 10 contracts for 
the Jan 30 call, Jan 35 call and Jan 40 call are entered, each is 
processed as it is received and the Market Maker risk settings are 
calculated following the execution of each 10-contract order. Thus, 
if either the first order or the second order trigger a Market 
Maker's risk settings, the System would cancel all of the Market 
Maker's quotes in that class until the Market Maker notifies the 
Exchange it will resume submitting quotes (see Commentary .01 to 
Rule 6.40). However, if an ECO to buy all three of these options 
with a quantity of 10 contracts is entered and is executed against 
the leg markets, the Market Maker risk settings for quotes in the 
leg market are calculated only after the execution of all 30 
contracts (the sum of the three legs of 10 contracts each) because 
the execution of all individual leg markets is processed as a single 
transaction, not as a series of individual transactions.
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    To address the potential for directional ECOs to undermine the 
purposes of the Market Maker risk settings, the Exchange proposes to 
amend Rule 6.91(b)(4). Specifically, the Exchange proposes to reject an 
ECO if:
    (i) Composed of two legs that are (a) both buy orders or both sell 
orders, and (b) both legs are calls or both legs are puts; or
    (ii) composed of three or more legs and (a) all legs are buy 
orders; or (b) all legs are sell orders.\10\
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    \10\ See proposed Rule 6.91(b). The Exchange also proposes to 
delete the words ``Types of'' in the first paragraph because sub-
paragraphs (1)-(4) of paragraph (d) do not describe the ``types of'' 
ECOs, but rather describe the requirements for such orders.
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    The proposed rule change would not impact the processing of ECOs 
trading against other ECOs or the priority and

[[Page 54869]]

allocation of ECOs. The following examples illustrate the types of ECOs 
that would be rejected under proposed Rule 6.91(b):
Example #1: Illustrating Proposed Rule 6.91(b)(4)(i)
 Buy Call 1, Buy Call 2
 Sell Call 1, Sell Call 2
 Buy Put 1, Buy Put 2
 Sell Put 1, Sell Put 2
Example #2: Illustrating Proposed Rule 6.91(b)(4)(ii)
 Buy Call 1, Buy Call 2, Buy Put 1
 Buy Put 1, Buy Put 2, Buy Put 3
 Buy Call 1, Buy Call 2, Buy Call 3
 Buy Put 1, Buy Put 2, Buy Call 3
 Sell Put 1, Sell Put 2, Sell Call 1
    As proposed, the specified directional complex orders would be 
automatically rejected. Market participants would continue to be able 
to enter each leg of such complex orders as separate orders. The 
Exchange believes that the potential risk of these types of directional 
complex orders undermining the effectiveness of Market Maker risk 
settings outweighs any potential benefit to OTP Holders or OTP Firms 
submitting such orders.
    Finally, the Exchange notes that both the Chicago Board Options 
Exchange, Inc. (``CBOE'') and International Securities Exchange, LLC 
(``ISE'') have recently received Commission approval to revise their 
rules governing complex orders to implement functionality designed to 
prevent complex orders from effectively bypassing market maker risk 
parameters.\11\
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    \11\ See Securities Exchange Act Release Nos. 73023 (September 
9, 2014) 79 FR 55033 (September 15, 2014) (SR-ISE-2014-10) and 72986 
(September 4, 2014) 79 FR 53798 (September 10, 2014) (SR-CBOE-2014-
017) (Approval Order). See also Securities Exchange Act Release Nos. 
76106 (October 8, 2015) 80 FR 62125 (October 15, 2015) (SR-CBOE-
2014-081); 77297 (March 4, 2016), 81 FR 12764 (March 10, 2016) (SR-
CBOE-2016-014) (further amending the complex order rule, as modified 
by the Approval Order, to limit a potential source of unintended 
market maker risk). The Exchange acknowledges that, unlike this 
proposal, CBOE and ISE do not reject the offending ECOs outright.
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Implementation
    The Exchange will announce the implementation date of the proposed 
rule change by Trader Update.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\12\ in 
general, and furthers the objectives of section 6(b)(5) of the Act,\13\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change would prevent fraudulent and manipulative 
acts and practices and would remove impediments to and perfect the 
mechanism of a free and open market because it would enable the 
Exchange to reject (and therefore prevent the execution of) certain 
directional complex order strategies that may undermine important 
Market Maker risk settings, which are required for all Market Maker 
quotes. The Exchange believes that rejecting the specified directional 
orders outright provides clarity as to the disposition of ECOs 
submitted by market participants and assures that the Market Maker risk 
settings will operate as intended. The Exchange notes that other 
markets have amended their rules to prevent directional complex orders 
from undermining market maker risk settings and do not allow such 
orders to leg out.\14\ Because of the non-traditional nature of these 
directional complex orders, the Exchange believes it unlikely that they 
would execute against complex interest. Accordingly, the Exchange 
believes rejecting the orders outright (as opposed to simply preventing 
them from legging out) would have the same practical impact for the 
order-sending firms and would be the most effective and transparent 
means of handling these orders. Furthermore, the Exchange believes that 
the risk of the specified directional complex orders undermining the 
efficacy of Market Maker risk settings outweighs any potential benefit 
to OTP Holders or OTP Firms submitting such orders packaged as ECOs. 
The Exchange notes that market participants would continue to be able 
to enter each leg of such complex orders as separate orders. The 
Exchange also believes this proposal would protect investors and the 
public interest because it would help eliminate a degree of unnecessary 
risk borne by Market Makers when fulfilling their quoting obligations 
to the markets and would encourage them to contribute liquidity on the 
Exchange. The Exchange believes the strengthened risk settings would 
encourage Market Makers to provide tighter and deeper markets, to the 
benefit of all market participants.
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    \14\ See supra n. 11.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change would prevent fraudulent and manipulative 
acts and practices and would remove impediments to and perfect the 
mechanism of a free and open market because, by rejecting (and 
therefore preventing the execution of) certain directional complex 
order strategies that may undermine important Market Maker risk 
settings, which are required for all Market Maker quotes. The Exchange 
believes that rejecting the specified directional orders outright 
provides clarity as to the disposition of ECOs submitted by market 
participants and assures that the Market Maker risk settings will 
operate as intended. The Exchange notes that other markets have amended 
their rules to prevent directional complex orders from undermining 
market maker risk settings and do not allow such orders to leg out.\15\ 
Because of the non-traditional nature of these directional complex 
orders, the Exchange believes it unlikely that they would execute 
against complex interest. Accordingly, the Exchange believes rejecting 
the orders outright (as opposed to simply preventing them from legging 
out) would have the same practical impact for the order-sending firms 
and would be the most effective and transparent means of handling these 
orders. Furthermore, the Exchange believes that the risk of the 
specified directional complex orders undermining the efficacy of Market 
Maker risk settings outweighs any potential benefit to OTP Holders or 
OTP Firms submitting such orders packaged as ECOs. The Exchange notes 
that market participants would continue to be able to enter each leg of 
such complex orders as separate orders. The Exchange also believes this 
proposal would protect investors and the public interest because it 
would help eliminate a degree of unnecessary risk borne by Market 
Makers when fulfilling their quoting obligations to the markets and 
would encourage them to contribute liquidity on the Exchange. The 
Exchange believes the strengthened risk settings would encourage Market 
Makers to provide tighter and deeper markets, to the benefit of all 
market participants.
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    \15\ See supra n. 11.

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[[Page 54870]]

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

    The Exchange believes that the proposal qualifies for accelerated 
effectiveness in accordance with section 19(b)(2) of the Act. The 
Exchange believes that there is good cause for the Commission to 
accelerate effectiveness because the proposed rule change is consistent 
with the rules of at least two competing options markets, which have 
amended their rules to prevent directional complex orders from 
undermining market maker risk settings and do not allow such orders to 
leg out.\16\ The Exchange would like to similarly enhance the 
protection it provides to Market Makers. Because of the non-traditional 
nature of these directional complex orders, the Exchange believes it 
unlikely that they would execute against complex interest. Accordingly, 
the Exchange believes rejecting the orders outright (as opposed to 
simply preventing them from legging out) would have the same practical 
impact for the order-sending firms and would be the most effective and 
transparent means of handling these orders. Thus, accelerated approval 
of this proposal would enable the Exchange to implement the rule change 
without delay, thereby strengthening market maker risk settings and 
enhancing the competitiveness of the Exchange.
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    \16\ See supra n. 11.
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    In addition, the Exchange believes that the proposed rejection of 
the specified directional complex orders would prevent such orders from 
executing before triggering (and thus, bypassing) the Market Maker risk 
settings. The Exchange believes that the potential risk of these types 
of directional complex orders undermining the effectiveness of Market 
Maker risk settings outweighs any potential benefit to OTP Holders or 
OTP Firms submitting such orders. Market participants would continue to 
be able to enter each leg of such complex orders as separate orders. 
Thus, the Exchange believes good cause exists to accelerate 
effectiveness of this proposal because it would help eliminate a degree 
of unnecessary risk borne by Market Makers when fulfilling their 
quoting obligations to the markets, which would in turn benefit all 
market participants because Market Makers would be encouraged to 
provide tighter and deeper markets.
    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 the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEARCA-2016-109 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-2016-109. 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 will also 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-2016-109 and should 
be submitted on or before September 7, 2016.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19577 Filed 8-16-16; 8:45 am]
 BILLING CODE 8011-01-P


