[Federal Register Volume 83, Number 154 (Thursday, August 9, 2018)]
[Notices]
[Pages 39488-39490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17004]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83768; File No. SR-NYSE-2018-26]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1, Amending the Exchange's Rules Relating to Reserve Orders, 
Primary Pegged Orders, and Setter Priority for UTP Securities Trading 
on the Exchange's Pillar Platform

August 3, 2018.

I. Introduction

    On June 1, 2018, 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 amend NYSE rules concerning Reserve Orders,\3\ 
Primary Pegged Orders,\4\ and setter priority.\5\ On June 8, 2018, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change in its entirety.\6\ 
The proposed rule change, as modified by Amendment No. 1, was published 
for comment in the Federal Register on June 20, 2018.\7\ The Commission 
has received no comments on the proposed rule change. This order 
approves the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See NYSE Rule 7.31(d)(1).
    \4\ See NYSE Rule 7.31(h)(2).
    \5\ See NYSE Rule 7.36(h) for the rules concerning setter 
priority.
    \6\ In Amendment No. 1, among other changes, the Exchange 
revised proposed Section 7.31(d)(1)(B) to clarify that the term 
``child'' order refers to each display quantity with a different 
working time. Amendment No. 1 was reflected in the notice of filing 
of proposed rule change that was published in the Federal Register. 
See infra note 7.
    \7\ See Securities Exchange Act Release No. 83432 (Jun. 14, 
2018), 83 FR 28701 (Jun. 20, 2018) (``Notice'').
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    The Exchange proposes several changes to the Reserve Order and the 
Primary Pegged Order, as set forth in NYSE Rule 7.31. The Exchange also 
proposes changes to the setter priority, as set forth in NYSE Rule 
7.36(h).

A. Reserve Orders

    The Exchange proposes several changes to the rules for Reserve 
Orders, in order to reduce the number of child orders associated with 
each Reserve Order, to codify existing functionality, and provide more 
clarity to existing Exchange rules. A ``Reserve Order'' is a limit 
order with a quantity displayed, ranked Priority 2--Display Orders, and 
a non-displayed quantity held in reserve, ranked Priority 3--Non-
Displayed.\8\ Both the display quantity and the reserve interest of an 
arriving marketable Reserve Order are eligible to trade with resting 
interest in the Exchange Book or to route to an Away Market.\9\
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    \8\ See Section II.C. infra for a description of the Exchange's 
setter priority.
    \9\ See NYSE Rule 7.31(d)(1). The term ``Exchange Book'' is 
defined in NYSE Rule 1.1(a) as the Exchange's electronic file of 
orders, containing all orders on the Exchange. The term ``Away 
Market'' is defined in NYSE Rule 1.1(ff) as any exchange, 
alternative trading systems or other broker-dealer with which the 
Exchange maintains an electronic linkage and that provides 
instantaneous responses to orders routed from the Exchange. The 
Exchange will designate from time to time those ATSs or other 
broker-dealers that qualify as Away Markets.
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    First, the Exchange proposes to change how the displayed quantity 
is replenished. Currently, the display

[[Page 39489]]

portion is replenished following any execution. Under the proposed rule 
change, the displayed portion of a Reserve Order would be replenished 
only when the display quantity has been decremented to below one round 
lot. The replenish quantity would be the minimum display size of the 
order or the remaining quantity of the reserve interest if it is less 
than the minimum display quantity.\10\ According to the Exchange, this 
proposed change would reduce the number of child orders.\11\ The 
Exchange asserts that minimizing the number of child orders for a 
Reserve Order would reduce the potential for market participants to 
detect that a child order that appears on the Exchange's proprietary 
market data feeds is associated with a Reserve Order,\12\ and the 
Exchange further notes that the proposed change would be consistent 
with the functioning of reserve orders on other national securities 
exchanges.\13\
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    \10\ See Proposed NYSE Rule 7.31(d)(1)(A). This language 
replaces the current text that states ``[t]he Exchange will display 
the full size of the Reserve Order when the unfilled quantity is 
less than the minimum display size for the order,'' which the 
Exchange proposes to delete.
    \11\ See Notice, supra note 7, at 28702. The Exchange proposes 
to define the term ``child order'' in proposed NYSE Rule 
7.31(d)(1)(B). A ``child'' order would be each display quantity of a 
Reserve Order with a different working time.
    \12\ See Notice, supra note 7, at 28702.
    \13\ See Notice, supra note 7, at 28704.
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    Second, the Exchange proposes that when a Reserve Order is 
replenished from reserve interest and already has two child orders 
that, if combined, would equal less than one round lot, the child order 
with the later working time would rejoin the reserve interest and be 
assigned the new working time assigned to the next replenished 
quantity.\14\ According to the Exchange, the proposed addition would 
reduce the potential for market participants to detect that a child 
order is associated with a Reserve Order.\15\
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    \14\ See Proposed NYSE Rule 7.31(d)(1)(B)(i). The Exchange 
proposes to amend NYSE Rule 7.36(h)(3)(C) to treat child orders that 
fall under this provision consistent with the current NYSE rules 
which provide that odd-lot orders that are assigned new working 
times lose Setter Priority. See Proposed NYSE Rule 7.36(h)(3)(C).
    \15\ See Notice, supra note 7, at 28704.
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    Third, the Exchange proposes to amend its rules to reflect that, if 
a Reserve Order is not routable, the replenish quantity will be 
assigned a display and working price consistent with the instructions 
of the order.\16\ The Exchange asserts that the proposed rule text 
represents current functionality and would add transparency and clarity 
to the Exchange's rules.\17\
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    \16\ See Proposed NYSE Rule 7.31(d)(1)(B)(ii).
    \17\ See Notice, supra note 7, at 28702.
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    Fourth, the Exchange proposes new rules concerning routable Reserve 
Orders. Under the proposed rules, the Exchange would evaluate a 
routable Reserve Order for routing both on arrival and each time the 
displayed quantity is replenished.\18\ In cases where an order is 
required to be routed, the Exchange proposes that the routing quantity 
would route from the reserve interest before the display quantity is 
published.\19\ Further, if after routing from the reserve interest, 
less than one round lot remains that is available to display, the 
Exchange proposes to wait until the routed quantity returns (executed 
or unexecuted) before publishing the display quantity.\20\ According to 
the Exchange, this functionality would reduce the possibility of having 
multiple child orders.\21\
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    \18\ See Proposed NYSE Rule 7.31(d)(1)(D).
    \19\ See Proposed NYSE Rule 7.31(d)(1)(D)(i).
    \20\ Id.
    \21\ See Notice, supra note 7, at 28702.
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    Fifth, the Exchange proposes to amend its rules to reflect how it 
currently treats the quantity of a routed Reserve Order that is 
returned unexecuted.\22\ According to the Exchange, such interest joins 
the working time of the existing reserve interest.\23\ If there is no 
reserve interest, the returned quantity is assigned a new working time 
as reserve interest.\24\ The Exchange asserts that this treatment is 
appropriate because at the time the unexecuted routed interest returns 
to the Exchange, the order may not be eligible to replenish the display 
quantity.\25\ In either case, the reserve interest would replenish the 
display quantity under the circumstances described above.\26\
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    \22\ See Notice, supra note 7, at 28703.
    \23\ See Proposed NYSE Rule 7.31(d)(1)(D)(ii).
    \24\ Id.
    \25\ See Notice, supra note 7, at 28703.
    \26\ See Proposed NYSE Rule 7.31(d)(1)(D)(ii).
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    Finally, the Exchange proposes to add rule text specifying that 
requests to reduce the size of a Reserve Order will result in the 
cancellation of the reserve interest before the cancellation of the 
display quantity.\27\ The Exchange also proposed that, if there is more 
than one child order, the child order with the later working time will 
be canceled first.\28\
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    \27\ See Proposed NYSE Rule 7.31(d)(1)(E).
    \28\ Id.
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B. Primary Pegged Order

    A ``Primary Pegged Order'' is a pegged order to buy (sell) with a 
working price that is pegged to the PBB (PBO),\29\ with no offset 
allowed.\30\ These orders are rejected on arrival, or canceled when 
resting, if there is no PBB (PBO) against which to peg. Current NYSE 
Rule 7.31(h)(2)(B) provides that a Primary Pegged Order will be 
rejected when the PBBO is locked or crossed. The Exchange proposes 
that, in addition, if the PBBO is locked or crossed when the display 
quantity of the Primary Pegged Reserve Order is to be replenished, the 
entire order will be canceled.\31\
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    \29\ The terms ``PBB'' and ``PBO'' are defined in NYSE Rule 
1.1(dd) as highest protected bid or best protected bid and lowest 
protected offer or best protected offer, respectively.
    \30\ See NYSE Rule 7.31(h)(2).
    \31\ See Proposed NYSE Rule 7.31(h)(2)(B).
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C. Setter Priority

    On the Exchange, setter priority means that the market participant 
that sets the best bid or offer on the Exchange while either 
establishing a new NBBO \32\ or joining an Away Market NBBO \33\ 
receives priority in the allocation of executions over other interest 
at the same price level.\34\ On the Exchange, only one order is 
eligible for setter priority at each price.\35\ The market participant 
with the setter priority receives 15% of each trade at that price 
(after unexecuted market orders with the same working price have 
executed),\36\ plus its parity share, until the setter's order is 
filled.\37\
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    \32\ See NYSE Rule 1.1(dd). The term ``NBBO'' means the national 
best bid or offer.
    \33\ See id. for definition of ``NBBO.'' See NYSE Rule 1.1(ff) 
for a definition of ``Away Market.''
    \34\ See NYSE Rules 7.36(h) and 7.37(b).
    \35\ See NYSE Rules 7.36(h)
    \36\ See NYSE Rule 7.36(e) (stating that unexecuted market 
orders have first priority (Orders ranked Priority 1--Market 
Orders), non-marketable limit orders with a displayed working price 
have second priority (Orders ranked Priority 2--Display Orders), and 
non-marketable limit orders with no displayed working price have 
third priority (Orders ranked Priority 3--Non-Display Orders). 
Setter priority would be assigned to an order with second priority 
(Priority 2--Display Orders). See NYSE Rule 7.36(h).
    \37\ See NYSE Rule 7.37(b) for order allocation, including, but 
not limited to, the Exchange's allocation wheel, parity allocation, 
and Exchange book participant allocation, and floor broker 
participation.
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    The Exchange proposes to amend the setter priority rule to reflect 
the existing operation of this function, under which an order is not 
eligible for setter priority if there is an odd-lot sized order with 
setter priority at that price.\38\ The Exchange states that this change 
is consistent with current functionality and asserts that the change 
would add transparency and clarity to its rules.\39\
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    \38\ See Proposed NYSE Rule 7.36(h).
    \39\ See Notice, supra note 7, at 28703.
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    The Exchange proposes to add similar language to NYSE Rule 
7.36(h)(1)(D) to specify that, during a Short Sale Period, if an odd-
lot child of a short sale

[[Page 39490]]

Reserve Order has setter priority, and the Permitted Price at which the 
order would be replenished would be a different price, the replenish 
quantity would not be eligible for setter priority.\40\
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    \40\ See Proposed NYSE Rule 7.36(h)(1)(D).
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    The Exchange also proposes to add two circumstances in which an 
order would be evaluated for setter priority. Currently, an order will 
be evaluated for setter priority on arrival (including any portion that 
has been routed and returns unexecuted) and when the order becomes 
eligible to trade for the first time upon transitioning to a new 
trading session.\41\ First, NYSE proposes that an order would be 
evaluated for setter priority when resting and assigned a new display 
price.\42\ If multiple orders reprice at the same time, none of the 
orders would be eligible for setter priority unless one order is equal 
to or greater than a round lot and the sum of the other orders at the 
same price is less than one round lot.\43\ Second, the Exchange 
proposes that an order would be evaluated for setter priority when the 
display quantity of a Reserve Order is replenished.\44\ The Exchange 
asserts that, if a repriced resting or replenished Reserve Order meets 
the conditions for establishing setter priority,\45\ then that order is 
aggressively displaying liquidity on the Exchange, which the Exchange 
seeks to encourage by providing a setter priority allocation.\46\
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    \41\ See NYSE Rule 7.36(h)(1)(A)-(B).
    \42\ See Proposed NYSE Rule 7.36(h)(1)(C).
    \43\ Id.
    \44\ See Proposed NYSE Rule 7.36(h)(1)(D). In connection with 
this proposed change, the Exchange also proposed to delete current 
NYSE Rule 7.36(h)(4)(B), which states that setter priority is not 
available when the reserve quantity replenishes the display quantity 
of a Reserve Order.
    \45\ The requirements for an order to achieve setter priority 
are that it is an order ranked Priority 2--Display Orders with a 
display quantity of at least one round lot, that it establishes a 
new BBO, and that it either establishes a new NBBO or joins an Away 
Market NBBO. See NYSE Rule 7.36(h).
    \46\ See Notice, supra note 7, at 28704-05.
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III. Discussion and Commission Findings

    After careful review of the proposal, as modified by Amendment No. 
1, the Commission finds that the proposed rule change is consistent 
with the requirements of the Act \47\ and the rules and regulations 
thereunder applicable to a national securities exchange.\48\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\49\ which requires that the 
rules of an 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 investors and the public 
interest.
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    \47\ 15 U.S.C. 78f.
    \48\ 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).
    \49\ 15 U.S.C. 78f(b)(5).
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    The proposal would alter how UTP Securities trade on the Exchange's 
Pillar trading platform with respect to two order types--reserve orders 
and primary pegged orders--and would also amend the rules that 
determine when orders are eligible for setter priority. The proposed 
changes relating to Reserve Orders would seek to reduce the quantity of 
child orders and the potential for information leakage. The Commission 
believes that the proposal to replenish the displayed quantity when it 
falls below one round lot is consistent with reserve order functioning 
on other national securities exchanges that the Commission has found to 
be consistent with the Exchange Act.\50\ The Commission also believes 
that the proposal is consistent with Section 6(b)(5)--with respect to 
replenishing a Reserve Order that has two existing child orders 
totaling less than one round lot, routing from reserve interest before 
publishing the display quantity, and aligning the Exchange's rule text 
to the existing treatment of Reserve Orders that are not routable and 
of routed Reserve Orders that return unexecuted--because the proposed 
changes are reasonably designed to encourage the provision of liquidity 
on the exchange by reducing the likelihood of adverse selection against 
liquidity providers through information leakage and providing clarity 
to market participants, while not permitting unfair discrimination on 
the exchange.
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    \50\ See Notice, supra note 7, at 28704.
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    The proposed changes relating to Primary Pegged Reserve Orders 
would provide that, if the PBBO is locked or crossed when the display 
quantity of the order is to be replenished, the entire order would be 
canceled. The Commission believes that the proposal is reasonably 
designed to prevent the display of locked or crossed quotations in NMS 
securities.
    The rules relating to the setter priority would change in two ways. 
First, the rules would be amended to reflect that, under existing order 
function, an order is not eligible for setter priority if there is an 
odd-lot sized order with setter priority at that price. Second, orders 
would be evaluated for setter priority under two additional 
circumstances--when an order is resting and assigned a new display 
price, and when the display quantity of a Reserve Order is replenished. 
The Commission believes that these proposed changes are reasonably 
designed to provide incentives for market participants to display 
liquidity on the Exchange.
    Accordingly, the Commission finds that the proposal is consistent 
with the requirements of the Act, and is 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.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\51\ that the proposed rule change (SR-NYSE-2018-26), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \51\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17004 Filed 8-8-18; 8:45 am]
 BILLING CODE 8011-01-P


