[Federal Register Volume 84, Number 204 (Tuesday, October 22, 2019)]
[Notices]
[Pages 56494-56496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22931]



[[Page 56494]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87316; File No. SR-NYSEArca-2019-58]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change To Modify Rules 6.60-O and 6.65A-O Regarding the 
Treatment of Orders Subject to Trade Collar Protection

October 16, 2019.

I. Introduction

    On August 21, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change to modify Exchange Rules 6.60-O and 6.65A-O 
regarding the treatment of orders subject to Trade Collar Protection. 
The proposed rule change was published for comment in the Federal 
Register on September 4, 2019.\4\ The Commission received no comments 
on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ Securities Exchange Act Release No. 86788 (August 28, 2019), 
84 FR 46593 (September 4, 2019) (``Notice'').
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II. Description of the Proposal

    The Exchange states that it proposes to modify Rule 6.60-O(a) to 
clarify existing functionality and to adopt enhancements to the 
operation of the Trading Collars.\5\ The Exchange applies Trade Collar 
Protection to incoming orders. As described more fully in the Notice, 
the Exchange states that Trading Collars \6\ mitigate the risks 
associated with orders sweeping through multiple price points 
(including during extreme market volatility) and resulting in 
executions at prices that are potentially erroneous.\7\ According to 
the Exchange, by applying Trading Collars to incoming orders, the 
Exchange provides an opportunity to attract additional liquidity at 
tighter spreads and it ``collars'' affected orders at successive price 
points until the bid and offer are equal to the bid-ask differential 
guideline for that option (i.e., equal to the Trading Collar).\8\ 
Similarly, by applying Trading Collars to partially executed orders, 
the Exchange states that it prevents the balance of such orders from 
executing away from the prevailing market after exhausting interest at 
or near the top of book on arrival.\9\
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    \5\ See Notice, supra note 4, at 46594.
    \6\ ``Trading Collars'' are determined by the Exchange on a 
class-by-class basis and, unless announced otherwise via Trader 
Update, are the same value as the bid-ask differential guidelines 
established pursuant to Rule 6.37-O(b)(4). See Rule 6.60(a)(2).
    \7\ See Notice, supra note 4, at 46594.
    \8\ See id.
    \9\ See id.
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    Current Rule 6.60-O(a)(1)(i) states that Trade Collar Protection 
prevents the ``immediate execution'' of incoming market orders when the 
difference between the National Best Offer (``NBO'') and the National 
Best Bid (``NBB'') is greater than one Trading Collar. Rule 6.60-O(a) 
currently states that Trade Collar Protection would apply to any 
unexecuted portion of a marketable limit order. The Exchange proposes 
to modify Rule 6.60-O(a) to make clear that Trade Collar Protection may 
also be applied to marketable limit orders on arrival. The Exchange 
asserts that this proposed change would clarify how Trade Collar 
Protection currently operates, and that the Exchange would continue to 
apply Trade Collar Protection to the balance of Marketable Orders \10\ 
consistent with the current rule.\11\
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    \10\ ``Marketable Orders'' are defined as incoming market orders 
and marketable limit orders under the proposed rule. See proposed 
Rule 6.60-O(a)(1)(A).
    \11\ See Notice, supra note 4, at 46594.
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    The Exchange also proposes to modify the current Rule 6.60-O(a)(3), 
which currently states that order types that have contingencies, 
namely, IOC, NOW, AON, and FOK orders, would receive an ``immediate 
execution.'' The proposed modifications would clarify that such 
incoming orders would ``receive an execution, depending upon the 
availability of an execution pursuant to the terms of those orders.'' 
\12\
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    \12\ See proposed Rule 6.60-O(a)(3). The Exchange believes that 
removing the word ``immediate'' would more accurately reflect the 
Exchange's current functionality in regards to the processing of 
these contingent order types, insofar as such orders will only 
``immediately'' execute if the contingency is satisfied. See Notice, 
supra note 4, at 46594.
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    In addition, the Exchange proposes to modify current Rule 6.60-
O(a)(4) to make clear that when Marketable (as opposed to just market) 
Orders are subject to Trade Collar Protection, the Exchange will limit 
the ``execution and/or routing'' of such orders.\13\ The Exchange also 
proposes to make clear that this provision relates to ``incoming'' 
Marketable Orders as opposed to the balance thereof.\14\
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    \13\ The current rule states that when a market order is subject 
to Trade Collar Protection, the Exchange does not ``immediately 
execute or route such orders.''
    \14\ See proposed Rule 6.60-O(a)(4). See also proposed Rule 
6.60-O(a)(1)(A) (making clear that incoming marketable limit orders 
are subject to Trade Collar Protection).
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    Proposed Rule 6.60-O(a)(4)(A) would provide that ``[a] Market Order 
to buy (sell) received when there is already a collared order to buy 
(sell) will join that collared order and be processed consistent with 
paragraphs (a)(4)(C)-(a)(6),'' which the Exchange states reflects 
current functionality.\15\ The Exchange also proposes Rule 6.60-
O(a)(4)(B) to specify that collared orders will be assigned a ``collar 
execution price,'' which price depends upon the order type (market or 
limit) and whether (when the order arrives) the Exchange is already in 
receipt of another order being collared.\16\ Current Rule 6.60-
O(a)(4)(A) covers collared market orders to buy (sell), which would not 
immediately execute or route, but would be ``displayed at a price equal 
to the NBB (NBO) plus (minus) one Trading Collar.'' The Exchange 
proposes to replace ``displayed'' as used in the current rule with 
``assigned a collar execution price'' because, according to the 
Exchange, once collared, the order would be eligible to immediately 
execute against available interest before its price is displayed.\17\
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    \15\ See Notice, supra note 4, at 46595.
    \16\ See proposed Rule 6.60-O(a)(4).
    \17\ See Notice, supra note 4, at 46595. The Exchange states 
that this is consistent with its current functionality. See id.
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    In addition, the Exchange proposes an exception to the processing 
of incoming market orders to buy (sell) that arrive when the NBB (NBO) 
is zero (``Zero NBBO Collar Exception''). Specifically, as proposed, a 
market order to buy entered when the NBB is $0.00 would be assigned a 
collar execution price equal to the NBB (i.e., $0.00) plus one Trading 
Collar to ensure it is collared to avoid executing at an erroneous 
price; whereas, a market order to sell entered when the NBO is $0.00 
would be rejected as there would be no market for the incoming 
order.\18\
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    \18\ See proposed Rule 6.60-O(a)(4)(B)(i), (ii). The Exchange 
believes the Zero NBBO Collar Exception would improve the operation 
of Trading Collars when the prevailing market is zero (indicating 
market dislocation) at the time an incoming market order arrives. 
See Notice, supra note 4, at 46595.
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    In addition, because Rule 6.60-O(a)(1)(A) has been updated to 
clarify that incoming marketable limit orders may be collared, the 
Exchange proposes to further update Rule 6.60-O(a) to address how such 
orders would be collared, depending upon whether the Exchange is 
already in receipt of a

[[Page 56495]]

collared order.\19\ Specifically, as proposed, modified Rule 6.60-
O(a)(4)(C) would state that when the incoming collared order is a 
marketable limit order to buy (sell) and there is no other order 
already being collared, the order would be ``assigned a collar 
execution price equal to the NBO (NBB).'' If, however, a marketable 
limit order arrives when there is already an order being collared, it 
would join that collared order and be processed consistent with 
proposed Rule 6.60-O(a)(6)(B).\20\ The Exchange states that this is 
consistent with current functionality.\21\
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    \19\ See id.
    \20\ See proposed Rule 6.60-O(a)(4)(C).
    \21\ See Notice, supra note 4, at 46595.
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    The Exchange also proposes to modify the rule regarding executions 
of collared orders. The Exchange proposes to clarify that a collared 
order to buy (sell) would ``trade against any contra-side interest 
priced equal to its collar execution price or at prices within one 
Trading Collar above (below) the collar execution price (``Collar 
Range'').'' \22\ Consistent with proposed Rule 6.60-O(a)(4)(B),(C), the 
Exchange proposes to refer to the ``collar execution price'' (as 
opposed to a display price). In addition, the Exchange believes that 
clarifying that the collared order would execute with contra-side 
interest priced within a Collar Range (i.e., equal to, and up to one 
Trading Collar above (below) the collar execution price), provides more 
specificity than the current language, which states only that such 
order would execute against interest ``within one Trading Collar'' of 
its price.\23\
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    \22\ See proposed Rule 6.60-O(a)(4)(D).
    \23\ See Notice, supra note 4, at 46595. The Exchange believes 
these proposed changes, which describe current functionality, would 
add clarity, transparency, and internal consistency to Exchange 
rules. See id.
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    In addition, the Exchange proposes to add new paragraph (a)(4)(E) 
to Rule 6.60-O to codify existing functionality and make clear that the 
Exchange would cancel a market order, or the balance thereof, that has 
been collared pursuant to proposed Rule 6.60-O(a)(1)(A) or (B) if, 
after exhausting trading opportunities within the Collar Range, the 
Exchange determines there are no quotes on the Exchange and/or no 
interest on another market (``Available Interest'').\24\
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    \24\ See id. According to the Exchange, the absence of Available 
Interest, such as a market maker quote in the series, means that the 
Exchange would have no reliable price framework within which to 
evaluate the market order. See id.
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    The Exchange also proposes to modify the rule language describing 
the treatment of the balance of a Marketable Order that is subject to 
Trade Collar Protection. Pursuant to new Rule 6.60-O(a)(5), a market 
order that does not trade on arrival will be displayed at its collar 
execution price whereas the display price of the balance of a partially 
executed Marketable Order collared pursuant to proposed Rule 6.60-
O(a)(1)(B), depends upon eligible contra-side interest.\25\ 
Specifically, proposed Rule 6.60-O(a)(5)(A) would provide that if the 
collared order has traded against all contra-side interest within the 
Collar Range, the order would be displayed at the most recent execution 
price. If, however, there is contra-side interest priced within one 
Trading Collar of the most recent execution price, proposed Rule 6.60-
O(a)(5)(B) would provide that the order to buy (sell) would be 
displayed at the higher (lower) of its assigned collar execution price 
or the best execution price of the order that is both within the Collar 
Range and at least one Trading Collar away from the best priced contra-
side trading interest (i.e., lowest sell interest for collared buy 
orders/highest buy interest for collared sell orders).\26\
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    \25\ See proposed Rule 6.60-O(a)(5).
    \26\ The Exchange believes adding this information to the rule 
would add transparency, clarity and internal consistency to Exchange 
rules. See Notice, supra note 4, at 46596.
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    In addition, the Exchange also proposes to add rule text to Rule 
6.60-O(a)(5) to state that collared orders would be displayed at the 
Minimum Price Variation (``MPV'') for the option, pursuant to Rule 
6.72-O (Trading Differentials) which rule sets forth the minimum 
quoting increments for options traded on the Exchange.\27\
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    \27\ See proposed Rule 6.60-O(a)(5).
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    Current Rule 6.60-O(a)(4)(C) sets forth scenarios that would 
trigger the ``redisplay'' of a collared order. The Exchange proposes to 
state that the Exchange would ``assign a new collar execution price'' 
to (as opposed to redisplay) the collared order under each of the 
listed scenarios, as well as make other changes that conform the rule 
text with the changes described above.\28\ In addition, the Exchange 
proposes to state in Rule 6.60-O(a)(6)(C) that ``if the collared order 
is a Market Order to sell that has reached $0.00, it will not reprice 
but will be posted in the Consolidated Book at its MPV (e.g., $0.01 or 
$0.05),'' because an order may never be posted for lower than its MPV, 
and the alternative to holding the order at the MPV would be to cancel 
it.\29\
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    \28\ See proposed Rule 6.60-O(a)(6).
    \29\ See Notice, supra note 4, at 46597.
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    The Exchange also proposes to clarify current Rule 6.60-O(a)(6). 
The Exchange states that because the current rule text does not make 
clear that collared orders, like non-collared orders, will be processed 
at each price in time priority, the Exchange proposes to clarify that 
such orders would be ``processed in accordance with Rule 6.76-O.Order 
Ranking and Display--OX.'' \30\
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    \30\ See proposed Rule 6.60-O(a)(8).
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    The proposed rule change would also make several non-substantive 
technical and organizational changes to proposed Rule 6.60-O(a), such 
as changes to conform the numbering and lettering of the rule, as well 
as to update cross-references and terminology in connection with the 
changes described above.
    Finally, the Exchange proposes to modify Rule 6.65A-O (``Limit-Up 
and Limit-Down During Extraordinary Market Volatility''), related to 
the Plan to Address Extraordinary Market Volatility Pursuant to Rule 
608 of Regulation NMS (``LULD'' or the ``LULD Rule''). The Exchange 
proposes to add rule text to state that the Exchange, under existing 
functionality, ``will cancel any Market Order that is a collared order 
pursuant to Rule 6.60-O(a)'' if the underlying NMS stock enters an LULD 
State and ``will notify OTP Holders of the reason for such 
cancellation.'' \31\
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    \31\ See proposed Rule 6.65A-O(a)(1).
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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.\32\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\33\ 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 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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    \32\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \33\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange believes that the proposed 
changes that codify existing functionality, including how incoming 
marketable limit orders are collared and the cancellation of collared 
market orders in the absence of Available Interest or if an NMS stock 
enters an LULD state would add clarity, transparency and internal 
consistency to

[[Page 56496]]

Exchange rules regarding the handling of orders accepted by the 
Exchange and make such rules easier for market participants to navigate 
and comprehend.\34\
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    \34\ See Notice, supra note 4, at 46599.
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    In addition, the Exchange believes that the proposal to codify that 
the Exchange would cancel a market order or the balance thereof that 
has been collared once it has exhausted trading opportunities within 
its collar execution price plus/minus one Trading Collar if there is no 
Available Interest would protect investors from potentially erroneous 
executions.\35\ Further, the Exchange believes that the proposal to 
codify current functionality regarding a collared order that is a 
market order to sell that has reached $0.00 such that the Exchange will 
post the order at its MPV (e.g., $0.01 or $0.05) would promote just and 
equitable principles of trade and assist with the maintenance of fair 
and orderly markets because an order may never be posted for lower than 
its MPV and the alternative to holding the order at the MPV would be to 
cancel it.\36\ The Exchange believes the proposed clarification of how 
such orders are handled provides the collared order an opportunity for 
an execution (rather than being cancelled) and adds transparency and 
internal consistency to Exchange rules.\37\
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    \35\ See id.
    \36\ See id.
    \37\ See id.
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    The Commission notes that the Exchange believes that the Zero NBBO 
Collar Exception would improve the operation of the Trading Collar when 
the prevailing market is zero (which the Exchange states indicates 
market dislocation) at the time an incoming market order arrives.\38\ 
The Exchange states that absent the proposed Zero NBBO Collar 
Exception, a market order to buy (sell) that arrives when the NBB (NBO) 
is zero would trade based on the last sale price, if any.\39\ The 
Exchange notes that if there is no last sale price, the order would 
trade at the contra-side NBBO which may result in a bad execution 
price.\40\ In regards to the proposal to reject (as opposed to collar) 
incoming sell orders when the NBO is zero, the Exchange believes this 
change in functionality is necessary because any attempt to collar such 
an order would result in a negative number. In addition, the Exchange 
states that it has observed that it is extremely uncommon to have a no 
(zero) offer situation and believes it could be indicative of unstable 
market conditions.\41\ To avoid such orders receiving bad executions in 
times of market dislocation, the Exchange believes it would be 
appropriate to reject such orders.\42\
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    \38\ See id.
    \39\ See id.
    \40\ See id.
    \41\ See id.
    \42\ See id.
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    The Exchange also believes that it is appropriate that the Exchange 
cancel a market order that is collared when an NMS stock enters an LULD 
state because when the underlying NMS stock enters an LULD state, there 
may not be a reliable underlying reference price, there may be a wide 
bid/ask quotation differential in the option, and there may be less 
liquidity in the options markets.\43\ According to the Exchange, 
allowing a collared Market Order to execute (as opposed to cancel) in 
such circumstances could lead to executions at unintended prices (i.e., 
inferior to the NBBO), and could add to volatility in the options 
markets during times of extraordinary market volatility.\44\ The 
Exchange believes that this current treatment of collared market orders 
provides certainty to the treatment of Market Orders during these 
times, and the proposal to explicitly state this treatment in the rule 
text adds clarity and transparency to Exchange rules, thus promoting 
just and equitable principles of trade and removing impediments to, and 
perfecting the mechanism of, a free and open market and a national 
market system.\45\ The Exchange states that the proposed cancellation 
of an options order if the underlying NMS security is in an LULD state 
is not new or novel and is available on other options exchanges that 
offer similar collar functionality.\46\ The Exchange believes that the 
proposed rule changes would add transparency and specificity to 
Exchange rules.\47\
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    \43\ See id.
    \44\ See id.
    \45\ See id.
    \46\ The Exchange cites CBOE Rule 6.3A(b)(1) (LULD rule citing 
Rule 6.2 regarding order handling); CBOE Rule 6.2, Interpretations 
and Policies .07 and NASDAQ Options Market Ch. V, Sec. 3(d). 
However, the Exchange notes that it believes that the rules of these 
other exchanges do not specifically contemplate the underlying 
security entering an LULD state while a market order is resting on 
the book, because such orders typically execute on arrival. See 
Notice, supra note 4, at 46599.
    \47\ See id.
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    The Commission believes that the operation of the Trade Collar 
Protection mechanism set forth in the proposal is consistent with the 
Act. In addition, the Commission believes that the revised description 
of this mechanism should increase transparency with respect to how the 
mechanism operates and enhance investors' understanding of how the 
mechanism may affect their orders in certain market conditions. 
Accordingly, the Commission believes that the proposal is reasonably 
designed to help 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, in general, protect investors and the 
public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\48\ that the proposed rule change (SR-NYSEArca-2019-58) be, and it 
hereby is, approved.
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    \48\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22931 Filed 10-21-19; 8:45 am]
BILLING CODE 8011-01-P


