[Federal Register Volume 84, Number 247 (Thursday, December 26, 2019)]
[Notices]
[Pages 71016-71018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87796; File No. SR-NYSEArca-2019-89]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.60-
O (Price Protection--Orders)

December 18, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on December 5, 2019, NYSE Arca, Inc. (``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.60-O (Price Protection--
Orders) to modify and enhance certain of its current price protection 
mechanisms. The proposed rule change is available on the Exchange's 
website at www.nyse.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
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 IV 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 amend paragraph (c) of Rule 6.60-O to 
modify and enhance its Price Reasonability Checks for options orders to 
sell puts or calls (the ``Sell Check''). As proposed, the Exchange 
would enhance the Sell Checks applied when the National Best Bid 
(``NBB'') is below a specified price and would exclude from the Sell 
Check any Intermarket Sweep Orders, both of which changes would allow 
for a more finely calibrated Sell Check.
Price Reasonability Checks
    The Exchange has in place various price check mechanisms that are 
designed to prevent incoming orders from automatically executing at 
potentially erroneous prices.\4\ In particular, the Exchange has Price 
Reasonability Checks (``Price Checks'') for Limit Orders based on the 
principle that an option order is in error and should be rejected (or 
canceled) when the same result can be achieved on the market for the 
underlying equity security at a lesser cost.\5\ The Price Checks are 
based on the consolidated last sale price of the security underlying 
the option, once the security opens for trading (or reopens following a 
Trading Halt).\6\ The Exchange offers Price Checks for buy and sell 
options orders.\7\ The proposed change relates only to the Price Checks 
for sell options orders (i.e., the Sell Check).\8\
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    \4\ See, e.g., Rules 6.60-O(a) (trading collars) and (b) (limit 
order price filter), 6.61-O(a) (price protection for Market Maker 
quotes).
    \5\ A Limit Order is an order to buy or sell a stated number of 
option contracts at a specified price, or better. See Rule 6.62-
O(b).
    \6\ See Rule 6.60-O(c).
    \7\ The Price Checks--or arbitrage checks--for buy orders 
operate as follows: Unless otherwise provided in Commentary .01 of 
the Rule, the Exchange rejects or cancels any limit order to buy a 
put option if the price of the order is equal to or greater than the 
strike price of the option; and, the Exchange rejects or cancels any 
limit order to buy a call option if the price of the order is equal 
to or greater than the consolidated last sale price of the 
underlying security, plus a dollar amount to be determined by the 
Exchange and announced by Trader Update. See Rule 6.60-O(c)(1)(A), 
(B).
    \8\ The proposed rule change would not impact the securities 
that are excluded from the Price Checks per Commentary .01 to the 
Rule, which currently are options series for which the underlying 
security has a non-standard cash or stock deliverable as part of a 
corporate action; options series for which the underlying security 
is identified as OTC; option series on an index; and ByRDs. See 
Commentary .01 to Rule 6.60-O.
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    Current Rule 6.60-O(c)(2) sets forth the current Sell Check, which 
is designed to protect sellers of calls and puts from presumptively 
erroneous executions based on the ``Intrinsic Value'' of an option. The 
Intrinsic Value of an option series is measured as the difference 
between the strike price and the consolidated last sale price. A sell 
order in a call series creates an obligation to sell the underlying 
security at the strike price and a sell order in a put series creates 
an obligation to buy the underlying security at the strike price. Thus, 
the Intrinsic Value for a call option is equal to the consolidated last 
sale price of the underlying security minus the strike price; whereas 
the Intrinsic Value for a put option is equal to the strike price minus 
the consolidated last sale price of the underlying security.\9\ Under 
the current Rule, the Exchange rejects or cancels options Limit Orders 
to sell a call or to sell a put if the price of the order is equal to 
or lower than its Intrinsic Value, minus a threshold percentage 
(``percentage threshold''), which is determined by the Exchange and 
announced by Trader Update.\10\ The percentage threshold buffer is an 
important aspect of the Sell Check because there may be situations in 
which market participants willingly opt to execute certain trading 
strategies even if such trade or trades occur for a price less than the 
Intrinsic Value of the options series.\11\ Absent this percentage 
threshold buffer, application of the Sell Check could result in the 
rejection or cancelation of certain options sell orders where market 
participants seek an execution.
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    \9\ See Rule 6.60-O(c)(2).
    \10\ See Rule 6.60-O(c)(2)(A). The percentage threshold for sell 
orders is currently set to twenty-five percent (25%). The Exchange 
refers to this existing percentage threshold as the ``Regular 
Intrinsic Value percentage threshold'' to differentiate from the 
proposed threshold. See proposed Rule 6.60-O(c)(2)(A).
    \11\ For example, if the market participant is looking to close 
out a position, it may be financially beneficial to pay a small 
premium and close out the position rather than carry such position 
to expiration and take delivery. See, e.g., Securities Exchange Act 
Release No. 85922 (May 23, 2019), 84 FR 25093, 25094, fn10 (May 30, 
2019) (SR-NYSEArca-2019-35) (immediately effective filing 
implementing Price Checks, including the Sell Check).
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Proposed Low Price Intrinsic Value Percentage Threshold
    The Exchange proposes to modify the Sell Check to introduce a 
separate percentage threshold to better account for sell orders in 
options series that are trading at relatively low prices so as to avoid 
such orders potentially being (incorrectly) rejected or canceled.

[[Page 71017]]

Specifically, the Exchange would apply this modified check to limit 
orders to sell when the NBB for the option series is equal to or below 
a specified minimum price, as determined and announced by the Exchange 
(the ``Minimum Price'').\12\ As proposed, if the Exchange receives an 
order to sell a put or a call in an option series where the NBB ``is 
equal to or below the Minimum Price,'' such order would be canceled or 
rejected ``if the price of the order is equal to or lower than its 
Intrinsic Value, minus a threshold percentage'' to be determined by the 
Exchange and announced by Trader Update (the ``Low Price Intrinsic 
Value percentage threshold'').\13\ The rule text would also make clear 
that this Low Price Intrinsic Value percentage threshold would be 
calculated as a percentage of the Intrinsic Value.\14\ The Exchange 
believes this proposed modification would enable the Exchange to apply 
a more finely calibrated Sell Check (i.e., to options orders trading at 
or below a certain price), which is distinct from the Regular Intrinsic 
Value percentage threshold, and should reduce the possibility of such 
orders on lower-priced options being improperly canceled or 
rejected.\15\
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    \12\ See proposed Rule 6.60-O(c)(2)(A)(i) (providing that the 
current Sell Check will apply to orders ``provided the NBB for the 
option series is greater than'' the Minimum Price; otherwise the Low 
Price Intrinsic Value percentage threshold would apply). See also 
proposed Rule 6.60-O(c)(2)(A)(i) [sic].
    \13\ See proposed Rule 6.60-O(c)(2)(A)(i).
    \14\ See id.
    \15\ See id. The Exchange anticipates setting the Minimum Price 
to $1.00 and the Low Price Intrinsic Value percentage threshold to 
one hundred percent (100%) and whether and when these amounts change 
would depend upon the interest and/or behavior of market 
participants.
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    As noted above, market participants may opt to willingly execute 
trading strategies regardless of whether the result is an execution for 
a price less than the Intrinsic Value of the options series. The Low 
Price Intrinsic Value percentage threshold is designed to allow greater 
flexibility to market participants submitting sell orders in option 
series trading at lower prices. This would allow participants 
additional opportunities to execute certain orders (rather than reject 
or cancel), while still maintaining a tolerance range. Thus, the 
proposal would protect investors by adding flexibility and sensitivity 
to the Sell Check for orders in lower-priced options and allow the 
balance of the Price Checks to continue to operate as intended.
    The following examples illustrate this proposed functionality.

Assumptions:
     Minimum Price is $1.00
     (Regular) Intrinsic Value percentage threshold is 25%
     Low Price Intrinsic Value percentage threshold is 100%
     Series A: XYZ DEC 136 Call
     XYZ Stock is trading at $136.36
Example 1: NBBO for Series A: (100) $2.00 x $3.00 (100)
     The NBB of $2.00 is above the Minimum Price (i.e., $1.00), 
thus, the (Regular) Intrinsic Value percentage threshold, per Rule 
6.60-O(c)(2)(A), applies.
     The Intrinsic Value of Series A is $0.36 ($136.36-
$136.00); and
     The lowest acceptable price for a sell in Series A is 
$0.27 (after applying the 25% percentage threshold ($0.09)).
Example 2: NBBO for Series A: (100) $0.50 x $3.00 (100)
     The NBB of $0.50 is below the Minimum Price (i.e., $1.00), 
thus, the Low Price Intrinsic Value percentage threshold, per proposed 
Rule 6.60-O(c)(2)(A)(i), applies.
     The Intrinsic Value of Series A is $0.36 ($136.36-
$136.00); and
     The lowest acceptable price for a sell in Series A is 
$0.00 (after applying the 100% percentage threshold ($0.36)) (i.e., 
there is no intrinsic check in this case).
ISOs Excluded From Sell Checks
    The Exchange also proposes to modify the Sell Check to exclude any 
Intermarket Sweep Order or ISO.\16\ An ISO is a Limit Order for an 
options series that instructs the Exchange to execute the order up to 
the price of its limit, regardless of the NBBO.\17\ An OTP Holder may 
submit an ISO to sell only if it has simultaneously routed one or more 
additional ISOs, as necessary, to execute against the full displayed 
size of any better-priced protected quotations for the options series 
(i.e., the Protected Bid), with a price that is superior to the limit 
of the ISO.\18\ Because an ISO is generally used when trying to sweep a 
price level across multiple exchanges in an effort to post the balance 
of an order without locking an away market, the Exchange believes it is 
appropriate to exclude such orders from the Sell Check so as not to 
interfere with the intended functioning of such order type.
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    \16\ See proposed Rule 6.60-O(c)(2).
    \17\ See Rule 6.62-O(aa) (providing, in relevant part, that an 
ISOs ``may only be entered with a time-in-force of IOC, and the 
entering OTP Holder must comply with the provisions of Rule 6.92-
O(a)(8)'').
    \18\ See Rule 6.92-O(a)(8) (providing that an ISO is ``a limit 
order for an options series that, simultaneously with the routing of 
the ISO, one or more additional ISOs, as necessary, are routed to 
execute against the full displayed size of any Protected Bid, in the 
case of a limit order to sell, or any Protected Offer, in the case 
of a limit order to buy, for the options series with a price that is 
superior to the limit price of the ISO.'' See id. The rule further 
provides that an OTP Holder may submit an ISO to the Exchange only 
if it has simultaneously routed one or more additional ISOs to buy 
(sell), as necessary, to execute against the full displayed size of 
any Protected Bid (Protected Offer) for the options series with a 
price that is superior to the limit price of the ISO). See id.
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Implementation
    The Exchange will announce by Trader Update the implementation date 
of the proposed rule change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\20\ in particular, in that it is 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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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes the proposed Sell Check as 
modified to account for lower-priced options and to exclude ISOs would 
protect investors and the public interest and maintain fair and orderly 
markets by ensuring that properly entered orders are not inadvertently 
rejected or canceled by the Exchange. In particular, the Low Price 
Intrinsic Value percentage threshold would allow for better calibration 
of the Sell Check (i.e., to options orders trading at or below a 
certain price), which should reduce the possibility of such orders on 
lower-priced options being improperly canceled or rejected. Under 
certain circumstances, market participants may choose to execute 
trading strategies regardless of whether the result is an execution for 
a price less than the Intrinsic Value of the options series. The Low 
Price Intrinsic Value percentage threshold (which is distinct from the 
Regular Intrinsic Value percentage threshold) is designed to allow 
greater flexibility to market participants submitting sell orders in 
option series trading at lower prices. This would allow participants 
additional

[[Page 71018]]

opportunities to execute certain orders (rather than reject or cancel), 
while still maintaining a tolerance range. Thus, the proposal would 
promote just and equitable principles of trade and would protect 
investors by adding flexibility and sensitivity to the Sell Check for 
orders in lower-priced options and allow the balance of the Price 
Checks to continue to operate as intended.
    In addition, with regard to ISOs, the Exchange believes it is 
appropriate to exclude such orders from the Sell Check to ensure that 
the order type (as well as the Sell Check) operates as intended. 
Moreover, modifying the rule to specify that ISOs would be excluded 
from the Sell Check would add clarity and transparency to Exchange 
rules.
    The Exchange is proposing the modifications to the Sell Check for 
the benefit of, and in consultation with, OTP Holders and OTP Firms and 
believes the proposed rule change would help to maintain a fair and 
orderly market, and provide a valuable service to investors. In 
particular, the proposed changes to the Sell Check are responsive to 
member input regarding certain orders being erroneously rejected or 
canceled by the Sell Check (either an ISO or a sell order on an option 
series trading at a (relatively) low price). This proposal would thus 
facilitate transactions in securities and perfect the mechanism of a 
free and open market by providing OTP Holders and OTP Firms with 
enhanced functionality that will assist them with managing their 
portfolio and risk profile.

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 proposed rule change 
enhances the existing Sell Check for option orders of all OTP Holders 
submitted to the Exchange and is designed to ensure that properly 
entered orders are not inadvertently rejected or canceled by the 
Exchange--insofar as the Sell Check would exclude (and not interfere 
with the operation of) ISO orders, and, would apply a modified/more 
finely calibrated percentage threshold to sell orders in option series 
trading at a relatively low price.
    The Exchange further believes that because the proposed rule change 
would be applicable to all OTP Holders it would not impose any burden 
on intra-market competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-
4(f)(6) thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2019-89 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-NYSEArca-2019-89. 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-NYSEArca-2019-89 and should be submitted 
on or before January 16, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27724 Filed 12-23-19; 8:45 am]
 BILLING CODE 8011-01-P


