[Federal Register Volume 84, Number 74 (Wednesday, April 17, 2019)]
[Notices]
[Pages 16079-16086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07707]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85637; File No. SR-NYSE-2018-34]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Amendment No. 1, to 
Amend NYSE Rule 104

April 12, 2019.

I. Introduction

    On July 31, 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 Rule 104 governing transactions by 
Designated Market Makers (``DMMs''). The proposed rule change was 
published for comment in the Federal Register on August 16, 2018.\3\
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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. 83821 (Aug. 10, 
2018), 83 FR 40808 (Aug. 16, 2018) (``Notice'').
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    On September 24, 2018, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission extended to November 14, 2018, the time period in which 
to approve, disapprove, or institute proceedings to determine whether 
to approve or disapprove, the proposed

[[Page 16080]]

rule change.\5\ On November 1, 2018, the Commission issued an order 
instituting proceedings, pursuant to Section 19(b)(2)(B) of the Act,\6\ 
to determine whether to approve or disapprove the proposed rule 
change.\7\ On February 11, 2019, the Commission extended to April 13, 
2019, the period for Commission action on proceedings to determine 
whether to approve or disapprove the proposed rule change.\8\ The 
Commission has received one comment letter on the proposal.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 84276 (Sep. 24, 
2018), 83 FR 49143 (Sep. 28, 2018).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 84515 (Nov. 1, 
2018), 83 FR 55763 (Nov. 7, 2018) (``Order Instituting 
Proceedings'').
    \8\ See Securities Exchange Act Release No. 85096 (Feb. 11, 
2019), 84 FR 4553 (Feb. 15, 2019).
    \9\ See Letter from Stephen John Berger, Managing Director, 
Government and Regulatory Policy, Citadel Securities, to Assistant 
Secretary, Commission (Nov. 28, 2018) (``Citadel Letter'').
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    On April 9, 2019, the Exchange filed Amendment No. 1 to the 
proposal, which supersedes the original filing in its entirety. 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.

II. Self-Regulatory Organization's Description of the Proposal, as 
Modified by Amendment No. 1

    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 those statements may be examined at the places specified in 
Item V 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 consolidate and restructure subsections 
(g), (h) and (i) of Rule 104 governing DMM transactions and make a 
related change to Rule 98(c)(5) (Operation of a DMM Unit). This 
Amendment No. 1 supersedes the original filing its entirety.\10\
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    \10\ In this Amendment No. 1, the Exchange proposes to amend the 
original filing by modifying proposed Rule 104(g)(1)(B) relating to 
Aggressing Transactions prior to the close. In the original filing, 
the Exchange proposed that Aggressing Transactions in the last ten 
seconds of trading would be prohibited if they would result in a new 
consolidated high or low price of the day unless such transaction 
would bring the price of that security into parity with an 
underlying or related security or asset. As amended, the Exchange 
proposes that Aggressing Transactions in the last ten minutes of 
trading would be prohibited if they would result in a new Exchange 
high or low price of the day, with three exceptions for matching 
another market's better bid or offer, bringing the price of that 
security into parity with an underlying or related security or 
asset, or liquidating or decreasing the DMM unit's position. This 
Amendment No. 1 also proposes to amend Rule 98(c)(5).
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Background
    Rule 104 sets forth the obligations of Exchange DMMs. Under Rule 
104(a), DMMs registered in one or more securities traded on the 
Exchange are required to engage in a course of dealings for their own 
account to assist in the maintenance of a fair and orderly market 
insofar as reasonably practicable. Rule 104(a) also enumerates the 
specific responsibilities and duties of a DMM, including: (1) 
Maintenance of a continuous two-sided quote, which mandates that each 
DMM maintain a bid or an offer at the National Best Bid (``NBB'') and 
National Best Offer (``NBO,'' together the ``NBBO'') for a certain 
percentage of the trading day,\11\ and (2) the facilitation of, among 
other things, openings, re-openings, and the close of trading for the 
DMM's assigned securities, all of which may include supplying liquidity 
as needed.\12\ Rule 104(f) imposes an affirmative obligation on DMMs to 
maintain, insofar as reasonably practicable, a fair and orderly market 
on the Exchange in assigned securities, including maintaining price 
continuity with reasonable depth and trading for the DMM's own account 
when lack of price continuity, lack of depth, or disparity between 
supply and demand exists or is reasonably to be anticipated.
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    \11\ See Rule 104(a)(1).
    \12\ See Rule 104(a)(2)-(3). Rule 104(e) further provides that 
DMM units must provide contra-side liquidity as needed for the 
execution of odd-lot quantities eligible to be executed as part of 
the opening, reopening, and closing transactions but that remain 
unpaired after the DMM has paired all other eligible round lot sized 
interest.
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    Rule 104(g) provides that transactions on the Exchange by a DMM for 
the DMM's account must be effected in a reasonable and orderly manner 
in relation to the condition of the general market and the market in 
the particular stock. More particularly, Rule 104(g) describes certain 
transactions that are permitted to render the DMM's position adequate 
to the market's needs, including Neutral and Non-Conditional 
Transactions, and certain DMM transactions that are prohibited.
    Rule 104(g)(i)(A)(I) defines Neutral Transactions as a purchase or 
sale by which a DMM liquidates or decreases a position. Neutral 
Transactions may be made without restriction as to price. However, the 
DMM's obligation to maintain a fair and orderly market may require re-
entry on the opposite side of the market trend after effecting one or 
more Neutral Transactions. Such re-entry transactions should be in 
accordance with the immediate and anticipated needs of the market.
    Rule 104(g)(i)(A)(II) defines Non-Conditional Transactions as a 
DMM's bid or purchase and offer or sale that establishes or increases a 
position, other than a transaction that reaches across the market to 
trade with the Exchange BBO. Non-Conditional Transactions may be made 
without restriction as to price in order to (i) match another market's 
better bid or offer price; (ii) bring the price of a security into 
parity with an underlying or related security or asset; (iii) add size 
to an independently established bid or offer on the Exchange; (iv) 
purchase at the published bid price on the Exchange; (v) sell at the 
published offer price on the Exchange; (vi) purchase or sell at a price 
between the Exchange BBO; and (vii) purchase below the published bid or 
sell above the published offer on the Exchange. As with Neutral 
Transactions, the DMM's obligation to maintain a fair and orderly 
market may also require re-entry on the opposite side of the market 
trend after effecting one or more Non-Conditional Transactions. Such 
re-entry transactions should be commensurate with the size of the Non-
Conditional Transactions and the immediate and anticipated needs of the 
market.
    Rule 104(g)(i)(A)(III) provides that, except as otherwise permitted 
by Rule 104, during the last ten minutes prior to the close of trading, 
a DMM with a long or short position in a security is prohibited from 
making a purchase or sale in such security that results in a new high 
or low price, respectively, on the Exchange for the day at the time of 
the DMM's transaction (``Prohibited Transactions'').\13\
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    \13\ Rule 104(g)(i)(A)(III) contains two exceptions to 
Prohibited Transactions: (1) Matching another market's better bid or 
offer price, and (2) bringing the price of a security into parity 
with an underlying or related security or asset.
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    Finally, Rule 104(h) addresses DMM transactions in securities that 
establish or increase the DMM's position. Rule 104(h)(i) defines a 
Conditional Transaction as a DMM transaction in a security that 
establishes or increases a position and reaches across the market

[[Page 16081]]

to trade as the contra-side to the Exchange published bid or offer.\14\
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    \14\ A DMM reaches across the market when the DMM buys from the 
NYSE offer or sells to the NYSE bid.
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    Rule 104(h)(ii) permits ``Conditional Transactions'' without 
restriction as to price if they are followed by appropriate re-entry on 
the opposite side of the market commensurate with the size of the DMM's 
transaction. Thus, if a DMM establishes or increases a long position by 
buying from the Exchange best offer, or establishes or increases a 
short position by selling to the Exchange best bid, such transaction 
would be followed by the DMM quoting on the opposite side of the last 
transaction in order to dampen the impact of that transaction on the 
market.
    The re-entry obligations for Conditional Transactions are set forth 
in Rule 104(h)(iii). Under Rule 104(h)(iii)(A), DMMs must re-enter 
within certain Exchange issued guidelines, called price participation 
points (``PPP''), that identify the price at or before which a DMM is 
expected to re-enter the market after effecting a Conditional 
Transaction. PPPs are only minimum guidelines and compliance with them 
does not guarantee that a DMM is meeting its obligations.
    Notwithstanding that a security may not have reached the PPP, the 
DMM may be required to re-enter the market immediately after a 
Conditional Transaction based on the price and/or volume of the DMM's 
trading in reference to the market in the security at the time of such 
trading. In such situations DMMs may or may not rely on the fact and 
circumstance that there may have been one or more independent trades 
following the DMM's trading to justify a failure to re-enter the 
market. As set forth in Rule 104(h)(iii)(C)(I) and (II), immediate re-
entry is required after the following Conditional Transactions:
     a purchase that (1) reaches across the market to trade 
with an Exchange published offer that is above the last differently 
priced trade on the Exchange and above the last differently priced 
published offer on the Exchange, (2) is 10,000 shares or more or has a 
market value of $200,000 or more, and (3) exceeds 50% of the published 
offer size; and
     a sale that (1) reaches across the market to trade with an 
Exchange published bid that is below the last differently priced trade 
on the Exchange and below the last differently priced published bid on 
the Exchange, (2) is 10,000 shares or more or has a market value of 
$200,000 or more, and (3) exceeds 50% of the published bid size.\15\
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    \15\ For purposes of subsections (h)(iii)(C)(I) and 
(h)(iii)(C)(II), a Sweep is viewed as a transaction with the 
published bid or offer.
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    Rule 104(h)(iv) permits certain other Conditional Transactions 
without restriction as to price. Specifically, under subsection 
(h)(iv)(A), a DMM's purchase from the Exchange published offer that is 
priced above the last differently-priced trade on the Exchange or above 
the last differently-priced published offer on the Exchange. Similarly, 
under subsection (h)(iv)(B), a DMM's sale to the Exchange published bid 
that is priced below the last differently-priced trade on the Exchange 
or below the last differently-priced published bid on the Exchange.
    Rule 104(i) provides that re-entry obligations following such 
Conditional Transactions would be the same as the re-entry obligations 
for Non-Conditional Transactions pursuant to Rule 104(g).
    Finally, paragraph (c)(5) of Rule 98 provides that the member 
organization operating a DMM unit must provide the Exchange with real-
time net position information in DMM securities by the DMM unit and any 
independent trading unit of which it is part at such times and in the 
manner prescribed by the Exchange.
Proposed Rule Change
    The Exchange proposes to consolidate and restructure current Rules 
104(g), (h) and (i), which would be deleted and incorporated as 
modified into a new subsection (g) titled ``Transactions by DMMs.''
    As discussed below, proposed Rule 104(g) would revise the 
requirements for DMM transactions based on the type of trading by the 
DMM, rather than by reference to the DMM's position. Rule 98(c)(5) 
would be amended to require DMMs to provide net position information to 
the Exchange daily. The Exchange also proposes certain technical and 
conforming changes.\16\
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    \16\ The Exchange proposes the following technical and 
conforming changes: (1) romanettes (i) through (vi) in Rule 104(b) 
and (i) through (iv) in Rule 104(f) would be replaced with numbers 1 
through 6 and 1 through 4, respectively; (2) current subsection (j) 
would become new subsection (h); and (3) current subsection (k) 
would become new subsection (i).
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    As restructured, proposed Rule 104 would replace the four current 
types of DMM transactions based on the DMM's position (Neutral, Non-
conditional, Conditional and Prohibited) with a single, enhanced DMM 
transaction called an ``Aggressing Transaction'' that would retain 
existing re-entry requirements. During the ten minutes before the 
scheduled close of trading, Aggressing Transactions that would result 
in a new high (low) price for a security on the Exchange for the day at 
the time of the DMM's transaction would be prohibited with three 
exceptions discussed below.
Proposed Rule 104(g)(1)
    Proposed Rule 104(g)(1) would be based on current Rule104(g)(i). 
Like current Rule 104(g)(i), proposed Rule 104(g)(1) would specify that 
transactions on the Exchange by a DMM unit for the DMM unit's account 
are to be effected in a reasonable and orderly manner in relation to 
the condition of the general market and the market in the particular 
stock. Proposed Rule 104(g)(1) would eliminate the definitions of 
Neutral and Non-Conditional Transactions \17\ and retain Conditional 
Transactions, which would be enhanced and renamed ``Aggressing 
Transactions.''
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    \17\ As discussed below, the re-entry obligations for Neutral 
and Non-Conditional Transactions would be retained and incorporated 
into proposed subsection (g)(2).
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Aggressing Transactions
    In proposed Rule 104(g)(1)(A), the Exchange would define an 
Aggressing Transaction as a DMM unit transaction that:
    (i) is a purchase (sale) that reaches across the market to trade as 
the contra-side to the Exchange published offer (bid); and
    (ii) is priced above (below) the last differently-priced trade on 
the Exchange and above (below) the last differently-priced published 
offer (bid) on the Exchange.
    The proposed definition of Aggressing Transaction would be the same 
as the current definition of Conditional Transaction in Rule 104(h)(i) 
and (ii), except that Aggressing Transaction would not be defined by 
reference to whether the transaction increases or decreases the DMM's 
position. Accordingly, a DMM unit Aggressing Transaction would be any 
trade where the DMM both reaches across the market and aggressively 
moves the price of the security.
Prohibited Transactions
    The Exchange proposes to retain certain of the existing 
prohibitions on specified DMM transactions during the final ten minutes 
of the trading day and the current exceptions to Prohibited 
Transactions, which are described in current Rule 104(g)(i)(A)(III). 
With this proposed rule change, the Exchange proposes a substantive 
difference for determining whether a DMM transaction should be 
prohibited in the last ten minutes of trading. Rather than

[[Page 16082]]

the current rule, which looks at the DMM's position (long or short) and 
then determines whether the trade should be prohibited based on whether 
it results in a new Exchange high or low, as proposed, a DMM 
transaction in the last ten minutes of trading would be prohibited if 
it is an Aggressing Transaction, i.e., reaches across the market, and, 
as a result, creates a new Exchange high or low. The Exchange also 
proposes exceptions to this prohibition, which are based on exceptions 
to prohibited transactions in the current rule.
    To effect this change, proposed Rule 104(g)(1)(B) would define 
``Prohibited Transactions'' as Aggressing Transactions during the last 
ten minutes prior to the scheduled close of trading that would result 
in a new high (low) price for a security on the Exchange for the day at 
the time of the DMM's transaction. The proposed three exceptions to 
this prohibition would be if the trade:
     matches another market's better bid or offer price;
     brings the price of that security into parity with an 
underlying or related security or asset; or
     liquidates or decreases the position of the DMM unit.
    The first two exceptions are in current Rule 104(g)(i)(A)(III) and 
the Exchange proposes to retain these exceptions in the proposed 
rule.\18\ The third exception is based in part on the position-based 
review of whether a transaction would be prohibited under current 
rules. Current Rule 104(g)(i)(A)(III)(1) prohibits a DMM with a long 
position in a security from making a purchase in that security during 
the last ten minutes that results in a new high price; the rule does 
not prohibit a DMM with a long position from selling or decreasing 
their position in the security. Likewise, current Rule 
104(g)(i)(A)(III)(2) prohibits a DMM with a short position in a 
security from making a sale in that security during the last ten 
minutes prior to the close of trading that results in a new low price, 
but the rule does not prohibit a DMM with a short position from 
purchasing or liquidating their position in that security. Because 
looking at the DMM's position would be an exception rather than the 
basis for the prohibition, the Exchange proposes to restate the rule as 
an exception that permits a DMM to liquidate or decrease a position of 
the DMM unit, rather than focus on what is prohibited when the DMM is 
long or short. This proposed rule text is also based on Rule 
104(g)(i)(A)(I), which has no restrictions as to price for ``Neutral 
Transactions,'' i.e., transactions when the DMM liquidates or decreases 
a position.
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    \18\ See Rule 104(g)(i)(A)(III) (referencing Rules 
104(g)(i)(A)(II)(2)(i) through (g)(i)(A)(II)(2)(ii)).
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    With this proposed difference for Prohibited Transactions, in the 
last ten minutes of trading, DMMs would be able to trade at prices 
lower than the published offer, or higher than the published bid, even 
if such trade would result in a new Exchange high or low for the day. 
The Exchange believes that this proposed change would support DMMs in 
meeting their affirmative obligations while at the same time continuing 
to prevent DMMs from aggressively taking liquidity and moving prices on 
the Exchange by trading with the published bid or offer in the final 
ten minutes before the closing auction \19\ For example, if the 
Exchange best bid and offer were $10.01 x $10.05, the DMM has a long 
position, and the DMM posts a bid at $10.04 to try and tighten that 
spread, under the current rules, if that $10.04 bid were to trade with 
non-displayed sell liquidity at that price and that trade resulted in a 
new high price on the Exchange for the day, that trade would be 
prohibited. Under the proposed change to Prohibited Transactions, this 
trade would no longer be prohibited because the DMM is not reaching 
across the market.
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    \19\ See Rule 104(g)(i)(A)(III).
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    Finally, the Exchange notes that the proposal is consistent with, 
and in no way diminishes or relieves the DMM of, the other obligations 
regarding the quality of the markets in securities to which DMMs are 
assigned under Rule 104.\20\
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    \20\ In general, as noted above, transactions on the Exchange by 
a DMM for the DMM's account must be effected in a reasonable and 
orderly manner in relation to the condition of the general market 
and the market in the particular stock, and DMMs must refrain from 
causing or exacerbating excessive price movements. DMMs have 
affirmative obligations under Rule 104(a) to engage in a course of 
dealings for their own account to assist in the maintenance of a 
fair and orderly market insofar as reasonably practicable. 
Specifically, Rule 104(f)(ii) sets forth the DMM's obligation to act 
as reasonably necessary to ensure appropriate depth and maintain 
reasonable price variations between transactions (also known as 
price continuity) and prevent unexpected variations in trading. 
Further, under Rule 123D(a), openings and reopenings must be fair 
and orderly, reflecting the DMM's professional assessment of market 
conditions at the time, and appropriate consideration of the balance 
of supply and demand as reflected by orders represented in the 
market. The Exchange supplies DMMs with suggested Depth Guidelines 
for each security in which a DMM is registered, and DMMs are 
expected to quote and trade with reference to the Depth Guidelines. 
See Rule 104(f)(iii).
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Proposed Rule 104(g)(2)
    Proposed subsection (g)(2) would set forth the re-entry obligations 
for DMM transactions, which would be based on the current rule's re-
entry obligations. Specifically, proposed Rule 104(g)(2) would provide 
that a DMM unit's obligation to maintain a fair and orderly market may 
require re-entry on the opposite side of the market after effecting one 
or more transactions. The proposed rule would provide that such re-
entry should be commensurate with the size of the transaction(s) and 
the immediate and anticipated needs of the market, which are the same 
re-entry requirements specified in current Rules 104(g)(i)(A)(I)(3) and 
104(g)(i)(A)(II)(3) for Neutral and Non-Conditional Transactions, 
respectively, as well as the types of Conditional Transactions 
referenced in current Rules 104(h)(iv) and 104(i).\21\ Accordingly, 
these re-entry obligations would be applicable to DMM transactions 
other than Aggressing Transactions.
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    \21\ Current Rule 104(h)(iv) provides that two types of 
Conditional Transactions may be made without restriction as to 
price: (1) A DMM's purchase from the Exchange published offer that 
is priced above the last differently-priced trade on the Exchange or 
above the last differently-priced published offer on the Exchange 
((h)(iv)(A)); and (2) a DMM's sale to the Exchange published bid 
that is priced below the last differently-priced trade on the 
Exchange or below the last differently-priced published bid on the 
Exchange ((h)(iv)(B)). Current Rule 104(i) provides that the re-
entry obligations following transactions defined in Rule 
104(h)(iv)(A) and (h)(iv)(B) are the same as for Non-Conditional 
Transactions pursuant to Rule 104(g) (i)(A)(3).
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    Proposed Rule 104(g)(2)(A) and (B) would specify the re-entry 
obligations for Aggressing Transactions. Following an Aggressing 
Transaction, proposed Rule 104(g)(2)(A) would require the DMM unit to 
re-enter the opposite side of the market at or before the applicable 
PPP for that security commensurate with the size of the Aggressing 
Transaction. The re-entry requirement for Aggressing Transactions set 
forth in proposed Rule 104(g)(2)(A) is based on the current re-entry 
requirements for certain Conditional Transactions set forth in current 
Rule 104(h)(iii).
    Under proposed Rule 104(g)(2)(B), if the Aggressing Transaction (i) 
is 10,000 shares or more or has a market value of $200,000 or more, and 
(ii) exceeds 50% of the published offer (bid) size, immediate re-entry 
on the opposite side of the market at or before the applicable PPP for 
the security commensurate with the size of the Aggressing Transaction 
would be required. The re-entry requirement for block-sized Aggressing 
Transactions set forth in proposed Rule 104(g)(2)(B) is based the 
current re-entry requirements for block-sized Conditional Transactions 
under Rule 104(h)(iii)(C). The Exchange proposes a clarifying amendment 
in proposed Rule 104(g)(2)(B), as compared to current Rule 
104(h)(iii)(C), to provide that such

[[Page 16083]]

re-entry must be at or before the applicable PPP for that security. The 
Exchange believes that this proposed change will provide greater detail 
in the rule regarding the price at which the re-entry would be 
required.
Proposed Rule 104(g)(3)
    Finally, proposed Rule 104(g)(3)(A) would provide that the Exchange 
would periodically issue PPP Guidelines that identify the price at or 
before which a DMM unit is expected to re-enter the market following an 
Aggressing Transaction. PPPs are only minimum guidelines and compliance 
with them does not guarantee that a DMM unit is meeting its 
obligations. This portion of the proposed Rule is based on Rule 
104(h)(iii)(A) without any differences.
    Proposed Rule 104(g)(3)(B) would provide that, notwithstanding that 
a security may not have reached the PPP, the DMM unit may be required 
to re-enter the market immediately after an Aggressing Transaction 
based on the price and/or volume of the DMM unit's trading in reference 
to the market in the security at the time of such trading. In such 
situations, DMM units may or may not rely on the fact and circumstance 
that there may have been one or more independent trades following the 
DMM unit's trading to justify a failure to re-enter the market. 
Subsection (B) of the proposed rule is based on current Rule 
104(h)(iii)(B).
Proposed Amendment to Rule 98(c)(5)
    As noted above, except for an exception to Prohibited Transactions, 
the Exchange proposes to eliminate reliance on the DMM's position to 
determine DMM trading requirements under proposed Rule 104(g). The 
Exchange proposes a related change to Rule 98(c)(5) to require DMMs to 
provide the Exchange with net position information daily. The Exchange 
proposes a further clarifying change to require DMM to provide net 
position information ``for'' such time ``periods,'' rather than ``at'' 
such times, prescribed by the Exchange. The Exchange does not believe 
that DMM net position information would need to be provided in real 
time in order for the Exchange to effectively monitor for compliance 
with the proposed exception to Rule 104(g)(1)(B).\22\ Rather, the 
Exchange believes it would be able to effectively monitor for 
compliance with the proposed exception utilizing DMM position 
information provided on a same-day basis for its automated 
surveillances. The Exchange would publish regulatory guidance setting 
forth the requirement that DMMs provide net position on a daily basis 
but in no event later than trading day plus one (T+1). To implement 
this change, the Exchange proposes to delete the term ``real time'' in 
Rule 98(c)(5) and add the word ``daily'' after ``must'' and before 
``provide.'' The Exchange would also replace ``for'' for ``at'' before 
``such times,'' delete the ``s'' in times, and add ``periods'' 
immediately following in order to clarify that the Exchange may request 
DMM net position information for specific time periods on a daily 
basis.
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    \22\ The Exchange currently provides DMMs with a technology 
interface that supports the submission of DMM real-time position 
information. In extremely limited circumstances, the Exchange relies 
on that position information to assist the DMMs in marking certain 
manual orders as sell short or sell long. When the Exchange 
transitions NYSE-listed securities to its Pillar trading system, it 
will no longer support this technology interface; nor will it be 
marking orders on behalf of the DMM.
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Rule Implementation
    Subject to approval of this proposed rule change, the Exchange 
proposes to implement these changes concurrent with the transition of 
Exchange-listed securities to the Pillar trading system, which is 
currently anticipated to begin in the third quarter of 2019.\23\
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    \23\ The Exchange has announced that, subject to rule approvals, 
the Exchange will begin transitioning Exchange-listed securities to 
Pillar on July 15, 2019, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/Pillar_Update_NYSE_Tape_A_NGW_February_2019.pdf. The Exchange will 
publish by separate Trader Update a complete symbol migration 
schedule.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\24\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\25\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest.
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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that revising the requirements 
for DMM transactions based on the type of DMM trading rather than the 
DMM's position and introducing a new, enhanced DMM transaction called 
an ``Aggressing Transaction'' would remove impediments to and perfect 
the mechanism of a free and open market and a national market system by 
simplifying and streamlining the requirements for DMM transactions. The 
proposal would eliminate four separate types of DMM transactions and 
introduce a simplified framework whereby all DMM transactions would be 
subject to general re-entry requirements based on the current re-entry 
obligations for Neutral, Non-Conditional and Conditional transactions, 
and specific re-entry requirements for Aggressing Transactions, except 
for Aggressing Transactions during the final ten minutes of trading 
that result in a new high (low) price for a security on the Exchange 
for the day at the time of the DMM's transaction, which would continue 
to be prohibited unless subject to a specified exception.
    The Exchange believes that the proposal would not be inconsistent 
with the public interest and the protection of investors. As noted, the 
proposed rule would carry over the requirement that all DMM 
transactions be effected in a reasonable and orderly manner in relation 
to the condition of the general market and the market in the particular 
stock. Further, DMM Aggressing Transactions would continue to require 
re-entry on the opposite side of the market at or before the applicable 
PPP for the security as warranted. Aggressing Transactions in the final 
ten minutes of trading that result in a new high (low) price for a 
security on the Exchange for the day at the time of the DMM's 
transaction would continue to be prohibited. These safeguards would 
reasonably ensure that DMM transactions continue to bear a reasonable 
relationship to overall market conditions and that DMMs cannot 
destabilize, inappropriately influence or manipulate a security going 
into the close. In addition, the prohibition on Aggressing Transactions 
that would create a new high or low price on the Exchange would 
maintain the current bright-line rule that prohibits DMM transactions 
that aggressively take liquidity during the final ten minutes prior to 
the close.
    The Exchange believes that the proposed substantive difference to 
Prohibited Transactions in the last ten minutes of trading to permit 
DMM trades between the Exchange BBO, even if such trades resulted in a 
new Exchange high or low and regardless of the DMM's position at the 
time, would promote fair and orderly markets and not be inconsistent 
with the public interest and the protection of investors because this 
proposed change would promote the display of liquidity by enabling DMMs 
to post bids and offers that would tighten the Exchange published bid 
and offer. The Exchange further believes that retaining the current 
exceptions for Prohibited Transactions, and permitting Aggressing 
Transactions that would liquidate or

[[Page 16084]]

decrease the DMM unit's position during the ten minutes prior to the 
scheduled close of trading even if they would result in a new Exchange 
high or low price, would remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because DMMs would be able to quote appropriately in their assigned 
securities during the period of the prohibition. The Exchange further 
believes that not restricting Aggressing Transactions in the last ten 
minutes of trading that result in a new Exchange high or low price for 
the day if such trade is the result of the DMM liquidating or 
decreasing a position would remove impediments to and perfect the 
mechanisms of a free and open market and a national market system 
because this exception is based on the current position-based review of 
whether a transaction would be prohibited, which does not prohibit such 
transactions, as well the current definition of ``Neutral 
Transactions'' which have no restrictions as to price. Further, the 
Exchange believes that the proposed exception would remove impediments 
to and perfect the mechanisms of a free and open market and a national 
market system because a DMM that reaches across the market when 
liquidating or decreasing a position is generally not doing so to favor 
a position leading into the close.
    Moreover, the numerous obligations currently imposed by Rule 104 
would in no way be altered or diminished by the proposal. The Exchange 
does not believe that the balance of benefits and obligations under 
Rule 104 would be impacted by this proposed rule change. DMMs would 
continue to be prohibited from engaging in specified transactions in 
the final ten minutes prior to the close. Moreover, the proposed rule 
would carry over the requirement that all DMM transactions be effected 
in a reasonable and orderly manner in relation to the condition of the 
general market and the market in the particular stock. These safeguards 
would reasonably ensure that DMM transactions bear a reasonable 
relationship to overall market conditions and that DMMs cannot 
destabilize, inappropriately influence or manipulate a security going 
into the close. For the same reasons, the proposed prohibition would 
not alter or disrupt the balance between DMM benefits and obligations 
of being an Exchange DMM.
    Finally, revising the requirements for DMM transactions based on 
the type of DMM trading rather than the DMM's position, and amending 
Rule 98 to require that DMM units provide net position information to 
the Exchange on a daily basis and for such time periods as prescribed 
by the Exchange, would remove impediments to and perfect the mechanism 
of a free and open market and a national market system by simplifying 
and streamlining the requirements for DMM transactions. The Exchange 
further believes that the proposed rule change would promote just and 
equitable principles of trade and is designed to prevent fraudulent and 
manipulative acts and practices because DMMs would be required to 
provide net position information daily to the Exchange and the Exchange 
would be able to conduct automated surveillances monitoring for 
compliance with the amended rule for this exception.
    For the foregoing reasons, the Exchange believes that the proposal 
is consistent with the Act.

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 proposes 
amendments to the rule governing DMM obligations to simplify and 
streamline the requirements for DMM transactions. The Exchange believes 
that the proposal would promote competition by allowing DMMs to quote 
more aggressively in the final minutes of trading, thereby permitting 
DMMs to remain competitive with other traders both on the Exchange and 
on other trading venues, thereby enhancing the ability of DMMs to meet 
their affirmative obligation under Rule 104. The Exchange further 
believes that its proposed rules governing DMMs would not impose any 
burden on competition that is not necessary or appropriate because the 
proposed rules are designed to foster a fair and orderly marketplace 
without diminishing the balance of benefits and obligations under Rule 
104 or altering or diminishing the numerous obligations currently 
imposed by Rule 104 on DMMs.

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. Summary of Comments Received

    The Commission received one comment letter in support of the 
proposal as initially filed by the Exchange. The commenter asserts that 
the proposal materially increases the obligations of DMMs because the 
proposal would impose re-entry obligations on DMMs throughout the 
trading day, including following transactions that reduce or liquidate 
the DMM's position.\26\ The commenter asserts that the proposed 
prohibition prior to the close of trading is also strengthened because 
it would eliminate reference to the DMM's position.\27\ The commenter 
also states that it supports the proposed changes to the NYSE rule 
regarding prohibited transactions because it would modernize the rule 
to reflect market structure changes, retain a bright line rule negative 
obligation, and maintain an appropriate balance of benefits and 
obligations for DMMs.\28\
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    \26\ See Citadel Letter, supra note 9, at 1.
    \27\ See id. at 2. This commenter also asserted that the 
prohibition would be strengthened because the rule would reference 
the consolidated high or low price of a security, rather than the 
high or low price on the NYSE, but Amendment No. 1, which was filed 
after this comment letter was submitted, changed the Exchange's 
proposal so that it no longer changed the reference price. See id.
    \28\ See id. The proposed rule change with respect to Prohibited 
Transactions was substantially altered by Amendment No. 1, which was 
filed after this comment letter was submitted.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the proposal, as modified by Amendment No. 
1, and the comments received, 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.\29\ In particular, the 
Commission finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act,\30\ 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; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. The Commission also finds that the proposed rule change, as 
amended, is consistent with Section 6(b)(8) of the

[[Page 16085]]

Act, which provides that the rules of a national securities exchange 
must not ``impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of'' the Act.\31\
---------------------------------------------------------------------------

    \29\ 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).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ 15 U.S.C. 78(f)(8).
---------------------------------------------------------------------------

    The Exchange has proposed to substantially modify the provisions of 
NYSE Rule 104(g) and (h) that govern the obligations of DMMs to re-
enter the market after certain transactions in assigned securities and 
that prohibit certain transactions by DMMs in assigned securities near 
the end of the trading day.\32\ Currently, whether a DMM's re-entry 
obligation is triggered depends, in the first instance, on whether the 
DMM's transaction establishes or increases the DMM's position or 
instead liquidates or decreases the DMM's position, and this 
distinction is reflected in the existing definitions in NYSE Rule 
104(g) and (h) of Neutral Transactions, Non-Conditional Transactions, 
and Conditional Transactions.\33\
---------------------------------------------------------------------------

    \32\ The Exchange has also proposed to make non-substantive 
changes to renumber provisions within NYSE Rule 104 and to relocate 
existing rule text regarding Price Participation Points.
    \33\ See Section II.A.1, supra. Non-Conditional Transactions are 
distinguished from Conditional Transactions by whether a DMM has 
reached across the market to trade as the contra-side to an Exchange 
bid or offer. See id.
---------------------------------------------------------------------------

    NYSE now proposes to eliminate these transaction-type definitions 
and replace them with a single transaction type called an Aggressing 
Transaction, which would be a DMM unit purchase (sale) that reaches 
across the market to trade with the Exchange's published offer (bid) 
and is priced above (below) both the last differently priced trade on 
the Exchange and the last differently priced offer (bid) on the 
Exchange. An Aggressing Transaction would be similar to a Conditional 
Transaction, which also involves a DMM reaching across the market, and 
the same re-entry obligations that apply to Conditional Transactions 
under current NYSE Rule 104 would apply to Aggressing Transactions 
under amended NYSE Rule 104. But, while Conditional Transactions by 
definition establish or increase a DMM position, whether a transaction 
is an Aggressing Transaction would not depend on the DMM's position.
    The Commission believes that triggering DMM re-entry obligations 
based solely on whether the DMM is aggressively taking liquidity--
rather than also considering a DMM's position at the time of trading--
is consistent with the Act, because those re-entry obligations are 
based on price movement, rather than on the DMM's position. The 
Commission further notes that, while the Exchange proposes to eliminate 
the definitions of Neutral Transactions and Non-Conditional 
Transactions, which currently have their own re-entry obligations, 
those re-entry obligations are not substantially different from the 
DMMs' general obligations under NYSE Rule 104(a) to ``engage in a 
course of dealings for their own account to assist in the maintenance 
of a fair and orderly market'' and under NYSE Rule 104(f) to maintain 
``price continuity with reasonable depth.'' Thus, the Commission does 
not believe that the Exchange's proposal to replace the existing 
categories of Neutral Transactions, Non-Conditional Transactions, and 
Conditional Transactions with a newly defined Aggressing Transaction 
would substantially alter the balance of DMM benefits and obligations 
previously approved by the Commission.\34\
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 58845 (Oct. 24, 
2008), 73 FR 64379, 64388-89 (Oct. 29, 2008) (SR-NYSE-2008-46) 
(approving NYSE New Market Model pilot and finding that it reflected 
``an appropriate balance of DMM obligations against the benefits 
provided to DMMs''). See also Citadel Letter, supra note 9, at 1 
(asserting that the proposal materially increases the obligations on 
DMMs during the trading day because the proposal would impose 
obligations following transactions that reduce or liquidate the 
DMM's position).
---------------------------------------------------------------------------

    The Exchange has also proposed to modify the existing definition of 
Prohibited Transactions. Under its initial proposal, the Exchange 
sought to make four substantive changes: (1) To limit the applicability 
of the prohibition to the last 10 seconds of trading before the close, 
rather than the last 10 minutes; (2) to change the price test in the 
rule to the high or low consolidated price for the day, rather than the 
high or low Exchange price for the day; (3) to remove from the 
Prohibited Transactions rule the focus on a DMM's position at the time 
of the transaction; and (4) to apply the Prohibited Transactions rule 
only to Aggressing Transactions, rather than including certain 
liquidity-providing trades.\35\
---------------------------------------------------------------------------

    \35\ See Notice, supra note 3.
---------------------------------------------------------------------------

    In its Order Instituting Proceedings, the Commission asked 
questions about whether the proposed changes were consistent with the 
Act.\36\ The Exchange subsequently amended its proposal significantly 
with respect to Prohibited Transactions. First, the Exchange proposed 
to retain the existing 10-minute period for Prohibited Transactions. 
Second, the Exchange proposed to retain the existing price test for 
Prohibited Transactions. And third, the Exchange proposed to add an 
exception for transactions that would liquidate or decrease the 
position of the DMM unit, incorporating as a specific exception to the 
proposed Prohibited Transactions rule a transaction that is, by 
definition, not covered by the existing rule.\37\
---------------------------------------------------------------------------

    \36\ See Order Instituting Proceedings, supra note 7, 83 FR at 
55764-65.
    \37\ Consistent with its initial proposal, the Exchange's 
amended proposal would also define a Prohibited Transaction as a 
type of Aggressing Transaction, rather than as a separate type of 
transaction, and it would retain the existing exceptions to the 
Prohibited Transactions rule for transactions that would match 
another market's better bid or offer or that would bring the price 
of an assigned security into parity with an underlying security or 
asset. See Proposed NYSE Rule 104(g)(1)(B).
---------------------------------------------------------------------------

    The Commission believes that the Exchange's amended proposal with 
respect to Prohibited Transactions is consistent with the Act. While 
the language and structure of the Prohibited Transactions rule would be 
different, the only substantive difference between the Prohibited 
Transactions rule in Amendment No. 1 and the existing rule would be 
that DMMs could no longer potentially run afoul of the rule by 
passively providing liquidity through a quote that narrowed the spread 
in an assigned security. Consistent with its analysis in disapproving 
an earlier proposal by the Exchange to eliminate the Prohibited 
Transactions rule, the Commission does not believe that the provision 
of liquidity by DMMs under such circumstances risks destabilizing the 
market.\38\
---------------------------------------------------------------------------

    \38\ See Securities Exchange Act Release No. 81150 (July 1, 
2017), 82 FR 33534, 33537 (July 20, 2018) (SR-NYSE-2016-71).
---------------------------------------------------------------------------

    Finally, the Exchange proposes to amend the obligation under NYSE 
Rule 98 of a member organization operating a DMM unit to provide the 
DMM unit's net position data to the Exchange. As amended, NYSE Rule 98 
would require that daily data be provided for specified time periods, 
rather than requiring real-time data. The Commission notes that the DMM 
unit net position information to be provided will be relevant under 
amended NYSE Rule 104 only for the last 10 minutes of trading before 
the close--when the modified Prohibited Transactions rule would be in 
effect--and the Exchange represents that it will be able to effectively 
monitor for compliance with the proposed exception using information 
provided as required by amended NYSE Rule 98, rather than in real time, 
as required by current NYSE Rule 98.\39\ The Commission therefore 
believes that this

[[Page 16086]]

change to NYSE Rule 98 is consistent with the Act.
---------------------------------------------------------------------------

    \39\ Under amended NYSE Rule 98, DMMs would have to provide net 
position information on a same-day basis, but in no event later than 
trading day plus one.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with 
Sections 6(b)(5) and 6(b)(8) of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.

V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 [email protected]. Please include 
File Number SR-NYSE-2018-34 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2018-34. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2018-34 and should be submitted on 
or before May 8, 2019.

VI. 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 thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. As discussed above,\40\ Amendment No. 1 
substantially modifies the original proposed rule change with respect 
to the Prohibited Transactions rule, narrowing the proposed rule change 
significantly so that the only substantive change to the existing rule 
governing Prohibited Transactions would be to limit the applicability 
of the rule to instances in which a DMM was aggressively taking 
liquidity, rather than including certain instances in which a DMM was 
providing liquidity. As noted above, the Commission does not believe 
that the provision of liquidity by DMMs under these circumstances risks 
destabilizing the market.\41\ Amendment No. 1 made no other substantive 
changes to the definition of Aggressing Transaction as published in the 
original Notice.\42\
---------------------------------------------------------------------------

    \40\ See supra notes 36-38 and accompanying text.
    \41\ See supra note 38 and accompanying text.
    \42\ See Notice, supra note 3.
---------------------------------------------------------------------------

    Additionally, in Amendment No. 1, the Exchange proposes to amend 
Rule 98--which requires that member organizations operating a DMM unit 
provide the Exchange with real-time net position information for the 
DMM unit--to require that DMM unit net position information be provided 
to the Exchange on a daily basis and for such time periods as 
prescribed by the Exchange. The Commission believes this proposal does 
not raise regulatory concerns, as the Exchange has represented that it 
would be able to effectively monitor for compliance with the proposed 
exception to the Prohibited Transactions rule using information 
provided under an amended Rule 98, rather than in real time, as 
required under current Rule 98.\43\
---------------------------------------------------------------------------

    \43\ See supra note 39 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\44\ to approve the proposed rule change, SR-NYSE-
2018-34, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(2).
    \45\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-07707 Filed 4-16-19; 8:45 am]
 BILLING CODE 8011-01-P


