
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8465-8467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01609]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79830; File No. SR-NYSEMKT-2016-120]


Self-Regulatory Organizations; NYSE MKT LLC; Order Granting 
Accelerated Approval of a Proposed Rule Change To Amend NYSE MKT Rule 
971.1NY and Make Permanent the Aspects of Customer Best Execution 
Auction That Are Subject to a Pilot

January 18, 2017.

I. Introduction

    On December 16, 2016, NYSE MKT LLC (``Exchange'' or ``NYSE MKT'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to the provisions of 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 certain eligibility requirements of NYSE 
MKT Rule 971.1NY (``Rule 971.1NY'') that govern its Customer Best 
Execution Auction (``CUBE'' or ``CUBE Auction'') and to make permanent 
the provisions of Rule 971.1NY that currently operate on a pilot basis. 
The proposed rule change was published for comment in the Federal 
Register on December 23, 2016.\3\ The Commission received no comments 
regarding the proposal. This order approves the proposed rule change 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. 79599 (December 19, 
2016), 81 FR 94437 (``Notice'').
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II. Description of the Proposal

    CUBE is an electronic crossing mechanism for single-leg orders that 
is designed to provide the opportunity for price improvement for paired 
orders of any size.\4\ To commence a CUBE Auction, an ATP Holder 
(``Initiating Participant'') may electronically submit for execution a 
limit order that it represents as agent on behalf of a public customer, 
broker dealer, or any other entity (``CUBE Order''). The Initiating 
Participant agrees to guarantee the execution of the CUBE Order by 
submitting a contra-side order representing principal interest or 
interest that it has solicited to trade with the CUBE Order at a 
specified price (``single stop price'') or by utilizing the auto-match 
or auto-match limit features set forth in Rule 971.1NY.\5\
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    \4\ See Rule 971.1NY. See also Securities Exchange Act Release 
No. 72025 (April 25, 2014), 79 FR 24779 (May 1, 2014) (NYSEMKT-2014-
17).
    \5\ See Rule 971.1NY(c)(1)(A)-(C).
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    Two aspects of the CUBE were approved by the Commission on a pilot 
basis (``CUBE Pilot''): (1) Rule 971.1NY(b)(1)(B), which establishes 
the permissible range of executions for CUBE Auctions for fewer than 50 
contracts; \6\ and (2) Rule 971.1NY(b)(8), which establishes the 
minimum size for a CUBE Auction as one contract. In connection with the 
CUBE Pilot, the Exchange has provided certain data to the Commission to 
provide supporting evidence that, among other things, there is 
meaningful competition for all size orders within the CUBE Auction and 
that there is an active and liquid market functioning on the Exchange 
outside of the CUBE Auction.\7\ The CUBE Pilot is currently set to 
expire on January 18, 2017.\8\
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    \6\ Rule 971.1NY(b)(1) sets forth the permissible range of 
executions for a CUBE Order. Generally, a CUBE Order for 50 or more 
contracts may be executed at a price equal to or better than the 
National Best Bid and Offer (``NBBO'') on the contra side of the 
market and equal to or better than the NBBO on its own side of the 
market as long as there is no Customer order in the Exchange's 
Consolidated Book at that price on that side. See Rule 971.1NY(a) 
and (b)(1)(A). Pursuant to the CUBE Pilot, a CUBE Order for fewer 
than 50 contracts is subject to a tighter range of permissible 
executions. Specifically, if the CUBE Order is for fewer than 50 
contracts, the execution price must be at least $0.01 better than 
any displayed interest in the Exchange's Consolidated Book. See Rule 
971.1NY(a) and (b)(1)(B).
    \7\ See Commentary .01 to Rule 971.1NY.
    \8\ See Securities Exchange Act Release No. 78324 (July 14, 
2016), 81 FR 47196 (July 20, 2016) (SR-NYSEMKT-2016-69).
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    As described more fully below, the Exchange proposes to amend Rule 
971.1NY to provide that CUBE Orders for fewer than 50 contracts entered 
when the NBBO is $0.01 wide will be rejected, unless the Initiating 
Participant guarantees the CUBE Order price improvement. With this 
proposed modification to CUBE Auctions for fewer than 50 contracts, the 
Exchange proposes that the CUBE Pilot be made permanent. In support of 
its proposal, the Exchange has provided the Commission with data for 
CUBE executions for the period from January through June 2015 (``CUBE 
Data''),\9\ as analyzed in summary below.
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    \9\ See Exhibit 3 to SR-NYSEMKT-2016-120.
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A. Modification of CUBE Eligibility Requirements

    The Exchange proposes to modify Rule 971.1NY to require price 
improvement for CUBE Orders for fewer than 50 contracts when the NBBO 
is $0.01 wide. Currently, Rule 971.1NY(b)(6) provides that CUBE Orders 
for fewer than 50 contracts that are submitted when the Exchange best 
bid and offer (``BBO'') is $0.01 wide will be rejected. This 
requirement will be retained. The Exchange, however, proposes to amend 
Rule 971.1NY(b)(6) to add that CUBE Orders for fewer than 50 contracts 
entered when the NBBO is $0.01 wide also will be rejected (i.e., 
whether or not the Exchange BBO is the same as the NBBO)--unless the 
Initiating Participant guarantees the execution of the CUBE Order to 
buy (sell) at a price that is equal to the NBO minus $0.01 (NBB plus 
$0.01), utilizing a single stop price, auto-match, or auto-match limit 
as specified in Rule 971.1NY(c)(1)(A)-(C).\10\
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    \10\ The proposal would not alter the separate price improvement 
requirement set forth in Rule 971.1NY(b)(1)(B), which, read in 
conjunction with Rule 971.1NY(a), establishes that the range of 
permissible execution prices for CUBE Orders of fewer than 50 
contracts would be equal to or better than the NBBO and at least 
$0.01 better than any displayed interest in the Exchange's 
Consolidated Book.
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    Although the Exchange continues to believe that the CUBE Auction 
provides opportunities for price improvement of CUBE Orders of fewer 
than 50 contracts when the NBBO has a bid/ask differential of $0.01, 
the Exchange states that the data have not demonstrated significant 
price improvement in this narrow circumstance.\11\ The Exchange notes 
that between January and June 2015, a total of 171,822 contracts were 
executed in CUBE Auctions for fewer than 50 contracts when the NBBO had 
a bid/ask differential of $0.01. According to the Exchange, only 1,660 
of those contracts received price improvement of $0.01. Thus, 
consistent with the Exchange's view that price improvement auctions 
should provide price improvement, particularly for small orders, the 
Exchange is proposing to require that Initiating Participants guarantee 
price improvement for CUBE Orders for fewer than 50 contracts when the 
NBBO is $0.01 wide; otherwise, the CUBE Order will be rejected.
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    \11\ See Notice, supra note 3 at 94439. See also Exhibit 3 to 
SR-NYSEMKT-2016-120.
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B. Making the CUBE Pilot Permanent

    The Exchange has analyzed the CUBE Data and believes that it 
indicates that there is meaningful competition in CUBE Auctions for all 
size orders, regardless of the size of the order or the bid/ask 
differential of the NBBO.\12\ Specifically, between January and June 
2015, a total of 4,493,429 contracts were executed in CUBE Auctions. 
According to the Exchange, Market Makers and other participants 
submitted competitive bids and offers during the CUBE Auction's 
Response Time Interval, and thereby indicated interest in participating 
in CUBE Auction trades. In addition, the Exchange believes that the 
allocation of orders executed in CUBE Auctions (either at a single 
price

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or multiple prices) supports competitive bidding and offering.
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    \12\ See Notice, supra note 3 at 94439.
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    The Exchange also believes that the CUBE Data reveals that there is 
an active and liquid market functioning on the Exchange outside of the 
CUBE Auction.\13\ The Exchange points out that competitive bidding and 
offering occurs outside of the CUBE Auction and participants can submit 
bids/offers at improved prices or join a bid or offer (thus improving 
liquidity at that price) regardless of the bid/ask differential of the 
NBBO.
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    \13\ From January through June 2015, the Exchange executed a 
total of 152,193,516 contracts outside of CUBE Auctions, which the 
Exchange believes is indicative of an active and liquid market 
functioning on the Exchange outside of CUBE Auctions.
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    As discussed above, the Exchange continues to believe that the CUBE 
Auction provides opportunities for price improvement of CUBE Orders of 
fewer than 50 contracts when the NBBO has a bid/ask differential of 
$0.01 (for one reason, because the market conditions may change during 
the CUBE Auction). However, because the data have not demonstrated 
significant price improvement in this circumstance,\14\ the Exchange 
has proposed to require that Initiating Participants guarantee price 
improvement for CUBE Orders for fewer than 50 contracts when the NBBO 
has a bid/ask differential of $0.01.
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    \14\ See Notice, supra note 3 at 94439.
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    The Exchange believes, however, that CUBE Auctions for fewer than 
50 contracts have served as a valuable tool in providing price 
improvement when the NBBO has a bid/ask differential of greater than 
$0.01. The Exchange notes that, for CUBE Auctions of fewer than 50 
contracts, the CUBE Data indicates that when the NBBO has a bid/ask 
differential between $0.02 and $0.05, contracts executed in CUBE 
Auctions received, on average, price improvement of $0.0114, and, in 
wider markets (i.e., bid/ask differentials greater than $0.05), 
contracts executed in CUBE Auctions received, on average, price 
improvement of more than $0.0759.\15\
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    \15\ See id. See also Exhibit 3 to SR-NYSEMKT-2016-120.
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    Based on its analysis of the CUBE Data, including the data 
regarding CUBE Auctions where the NBBO spread is $0.01, the Exchange 
believes that the CUBE Auction, as modified by the proposed revision to 
Rule 971.1NY(b)(6), would allow the Exchange to continue to provide 
meaningful competition for all size orders--including small orders--as 
well as to continue to offer an active and liquid market outside of the 
CUBE Auction.\16\ Thus, the Exchange believes that it would be 
beneficial to customers and to the options market to make permanent the 
CUBE Pilot, with the modification for CUBE Auctions of fewer than 50 
contracts where the NBBO spread is $0.01. Once permanent, the CUBE 
Auction would continue to accept orders of fewer than 50 contracts, 
provided such orders comply with amended Rule 971.1NY(b)(6), which 
should continue to attract small orders and promote competition and 
price improvement opportunities for such CUBE Orders.
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    \16\ See Notice, supra note 3 at 94439.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\17\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\18\ 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 regulating, clearing, settling, processing 
information with respect to, and 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 customers, issuers, brokers and dealers.
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    \17\ 15 U.S.C. 78f(b). 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).
    \18\ 15 U.S.C. 78f(b)(5).
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    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2015, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the auction, in particular for orders of 
fewer than 50 contracts; the degree of competition for order flow in 
such auctions; and a comparison of liquidity in the auctions with 
liquidity on the Exchange generally.\19\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\20\ Recognizing this, the Exchange 
has proposed to amend the auction eligibility requirements to reject 
any CUBE Order where the NBBO has a bid/ask differential of $0.01, 
whether or not the Exchange BBO is the same as the NBBO, unless the 
Initiating Participant guarantees at least $0.01 of price 
improvement.\21\
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    \19\ See Exhibit 3 to SR-NYSEMKT-2016-120.
    \20\ See Notice, supra note 3 at 94439.
    \21\ The Exchange will continue to reject CUBE Orders for fewer 
than 50 contracts when the BBO is $0.01 wide. See Rule 
971.1NY(b)(6).
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    The Exchange's proposal to modify the auction eligibility 
requirements for orders of fewer than 50 contracts and seek permanent 
approval of the CUBE Pilot, as amended with the new provision, will, in 
the Commission's view, promote opportunities for price improvement for 
such orders when the NBBO is $0.01 wide, while continuing to provide 
opportunities for price improvement when spreads are wider than $0.01.
    The Commission believes that, particularly for auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the CUBE 
Pilot permanent. The data demonstrate that the auction generally 
provides price improvement opportunities to orders, including orders of 
retail customers and particularly when the bid/ask differential is 
wider than $0.01, that there is meaningful competition for orders on 
the Exchange; and that there exists an active and liquid market 
functioning on the Exchange outside of the auction.\22\ The Commission 
further believes that the proposed revision to the eligibility 
requirements for orders of fewer than 50 contracts with respect to 
circumstances when the NBBO is no more than $0.01 wide should help to 
enhance the operation of the auction by providing meaningful 
opportunities for price improvement in such circumstances, and should 
benefit investors and others in a manner that is consistent with the 
Act. Thus, the Commission has determined to approve the Exchange's 
proposed revisions to Rule 971.1NY(b)(6) and Commentary .01 to Rule 
971.1NY and to approve the

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CUBE Pilot, as proposed to be modified, on a permanent basis.
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    \22\ See Exhibit 3 to SR-NYSEMKT-2016-120.
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IV. Accelerated Approval of Proposed Rule Change

    The Exchange has requested that the Commission find good cause for 
approving the proposed rule change prior to the 30th day after 
publication of the notice thereof in the Federal Register. The Exchange 
stated that accelerated approval of its proposal would allow the 
applicable rules to remain in effect following the expiration of the 
CUBE Pilot on January 18, 2017, which would avoid any potential 
investor confusion that could result from a suspension or temporary 
interruption in the CUBE Pilot. For this reason, the Commission 
believes that good cause exists for accelerated approval of the 
proposed rule change. The Commission further notes that the original 
proposal was subject to a 21 day comment period and no comments were 
received on the proposal. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\23\ to approve the proposed 
rule change prior to the 30th day after the date of publication of the 
notice of filing thereof in the Federal Register.
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    \23\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSEMKT-2016-120), be and 
hereby is approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01609 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P


