[Federal Register Volume 87, Number 125 (Thursday, June 30, 2022)]
[Notices]
[Pages 39134-39136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13962]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95154; File No. SR-NYSEArca-2022-13]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, To Amend Rule 
7.31-E(h)(3) Relating to Discretionary Pegged Orders

June 24, 2022.

I. Introduction

    On March 9, 2022, NYSE Arca, Inc. (``NYSE Arca'' or the 
``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 Arca Rule 7.31-E(h)(3) to modify 
certain factors relevant to the quote instability calculation for 
Discretionary Pegged Orders. The proposed rule change was published for 
comment in the Federal Register on March 28, 2022.\3\ On May 9, 2022, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ On May 10, 
2022, the Exchange filed Amendment No. 1 to the proposed rule 
change,\6\ and on June 15, 2022, the Exchange filed Amendment No. 2 to 
the proposed rule change, which replaced and superseded in their 
entirety both the original filing and Amendment No. 1. The Commission 
has received no comments on the proposed rule change.
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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. 94490 (Mar. 22, 
2022), 87 FR 17376 (Mar. 28, 2022) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 94869 (May 9, 2022), 
87 FR 29417 (May 13, 2022). The Commission designated June 26, 2022, 
as the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ Amendment No. 1 is available on the Commission's website at 
https://www.sec.gov/comments/sr-nysearca-2022-13/srnysearca202213-20128473-292032.pdf.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 2, from interested 
persons and is approving the proposed rule change, as modified by 
Amendment No. 2, on an accelerated basis.

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 Rule 7.31-E(h)(3) to modify certain 
factors relevant to the quote instability calculation for Discretionary 
Pegged Orders. The Discretionary Pegged Order is a non-displayed order 
type that is pegged to the same side of the PBBO.\7\ The price of a 
Discretionary Pegged Order automatically adjusts as the PBBO moves, and 
a Discretionary Pegged Order will exercise the least amount of 
discretion necessary to trade with contra-side interest. A 
Discretionary Pegged Order will not exercise discretion if the PBBO is 
determined to be unstable via a quote instability calculation that 
assesses the probability of a change to the PBB or PBO (as described in 
further detail below), thereby offering protection against unfavorable 
executions during periods of quote instability.
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    \7\ As defined in NYSE Arca Rule 1.1, ``PBBO'' means the Best 
Protected Bid and the Best Protected Offer. Rule 1.1 also defines 
``PBB'' as the highest Protected Bid and ``PBO'' as the lowest 
Protected Offer.
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    Specifically, the Exchange proposes to amend Rule 7.31-
E(h)(3)(D)(i)(D)(1)(a), which sets forth the quote stability 
coefficients. Under Rule 7.31-E(h)(3)(D)(i)(D)(3), the Exchange may 
modify the quote stability coefficients at any time, subject to a 
filing of a proposed rule change. The Exchange proposes such changes in 
this rule filing.
Discretionary Pegged Orders
    Rule 7.31-E(h)(3) provides for Discretionary Pegged Orders, which 
are Pegged Orders \8\ that may exercise price discretion from their 
working price to a discretionary price in order to trade with contra-
side orders on the NYSE Arca Book, except during periods of quote 
instability as defined in Rule 7.31-E(h)(3)(D).
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    \8\ A Pegged Order is a Limit Order that does not route with a 
working price that is pegged to a dynamic reference price. If the 
designated reference price is higher (lower) than the limit price of 
a Pegged Order to buy (sell), the working price will be the limit 
price of the order. See Rule 7.31-E(h).
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    Rule 7.31-E(h)(3)(D) provides that the Exchange uses a quote 
instability calculation to assess a security's ``quote instability 
factor,'' or the probability of an imminent change to the current PBB 
to a lower price or PBO to a higher price. When quoting activity in a 
security meets predefined criteria and the quote instability factor 
calculated is greater than the Exchange's defined ``quote instability 
threshold,'' the Exchange treats the quote as unstable (``quote 
instability'' or a ``crumbling quote'').
    Rule 7.31-E(h)(3)(D)(i) provides that the Exchange determines a 
quote to be unstable when, among other factors, the quote instability 
factor result from the quote stability calculation is greater than the 
quote instability threshold. To perform the quote stability calculation 
and determine the quote instability factor, the Exchange employs a 
fixed formula utilizing the quote stability coefficients and quote 
stability variables set forth in Rule 7.31-E(h)(3)(D)(i)(D)(1)(a) and 
Rule 7.31-E(h)(3)(D)(i)(D)(1)(b), respectively.
Proposed Rule Change
    The Exchange proposes to update the quote stability coefficients 
used in the quote instability calculation, which have not been modified 
since Rule 7.31-E(h)(3) was adopted.\9\ The proposed changes are 
intended to update the quote stability coefficients so that they are 
based on current market data and better calibrated to function on an

[[Page 39135]]

exchange without an intentional delay mechanism and with deeper 
liquidity than other exchanges that offer similar functionality.\10\
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    \9\ The Exchange adopted Rule 7.31-E(h)(3) governing 
Discretionary Pegged Orders in 2016. See Securities Exchange Act 
Release No. 78181 (June 28, 2016), 81 FR 43297 (July 1, 2016) (SR-
NYSEArca-2016-44) (Notice of Filing of Amendment No. 1, and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified 
by Amendment No. 1, to Add a New Discretionary Pegged Order). 
Discretionary Pegged Orders (with the current quote stability 
coefficients set forth in current Rules 7.31-
E(h)(3)(D)(i)(D)(1)(a)(i) through (v)) have been available for use 
on the Exchange since March 21, 2022. See https://www.nyse.com/trader-update/history#110000415898.
    \10\ The Exchange notes that its rules governing the 
Discretionary Pegged Order, including the formula for the quote 
instability calculation, are based on the Investors Exchange LLC 
(``IEX'') Discretionary Peg Order (``D-Peg Order''), which functions 
in conjunction with IEX's speed bump. See id. The Exchange does not 
anticipate any issues in connection with the introduction of the 
order type, including because such orders would be processed 
similarly to Discretionary Pegged Orders on its affiliated exchange, 
NYSE American LLC (``NYSE American''). NYSE American, which also 
does not currently function with any intentional delay, offers a 
Discretionary Pegged Order as set forth in NYSE American Rule 
7.31E(h)(3), which is substantially the same as NYSE Arca Rule 7.31-
E(h)(3).
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    The Exchange reviewed NYSE Arca market data from randomly selected 
days in the fourth quarter of 2021 to analyze the effectiveness of the 
quote stability coefficients in predicting changes to the PBBO. 
Specifically, the Exchange reviewed PBBO data, on a nanosecond level, 
for certain intervals throughout each randomly selected day to track 
changes to quotes on NYSE Arca and away markets. The Exchange used this 
data to generate and then test the effectiveness of the proposed quote 
stability coefficients, and based on its analysis, believes that 
modifying the quote stability coefficients would enable the Exchange to 
evaluate the quality of the PBBO more effectively. Specifically, the 
Exchange sampled market activity from randomly selected days in the 
fourth quarter of 2021 to simulate the performance of the quote 
instability calculation using both the current quote stability 
coefficients and the proposed quote stability coefficients. The 
Exchange observed that, in situations where the market price moved 
against the same side of the quote (i.e., the PBB fell or the PBO rose) 
10 milliseconds later, the proposed quote stability coefficients, when 
incorporated into the quote instability calculation, correctly 
predicted the price change approximately 17% more often than the 
current quote stability coefficients were able to predict the price 
change (i.e., the current quote stability coefficients under-predicted 
when a price change would occur).
    Accordingly, the Exchange believes that the proposed quote 
stability coefficients would be more accurate than the current quote 
stability coefficients in identifying changes to the PBBO and thus more 
effective in protecting Discretionary Pegged Orders from unfavorable 
executions. The Exchange thus proposes to modify the quote stability 
coefficients set forth in Rule 7.31-E(h)(3)(D)(i)(D)(1)(a)(i) through 
(v) as follows:

------------------------------------------------------------------------
                                                   Current     Proposed
          Quote stability coefficient               value       value
------------------------------------------------------------------------
C0.............................................    -2.39515    -1.793885
C1.............................................    -0.76504    -0.600796
C2.............................................     0.07599    0.0776515
C3.............................................     0.38374     0.492649
C4.............................................     0.14466    0.1631485
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    The Exchange believes that its proposed modification of the quote 
stability coefficients, based on the market data analysis described 
above, would improve the accuracy of the fixed formula used to perform 
the quote instability calculation. Specifically, the Exchange believes 
that the proposed quote stability coefficients, which have been 
adjusted to reflect more recent activity on the Exchange, would improve 
the calibration of the quote instability calculation to activity on the 
Exchange, thereby improving the Exchange's ability to predict whether 
there is quote instability and protect Discretionary Pegged Orders from 
exercising discretion when the PBBO is unstable.
    Because of the technology changes associated with this proposed 
rule change, the Exchange will announce the implementation date by 
Trader Update. Subject to approval of this proposed rule change, the 
Exchange anticipates that it will implement the proposed quote 
stability coefficients no later than in the third quarter of 2022.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\11\ in general, and furthers the objectives of Section 
6(b)(5),\12\ in particular, because 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 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change would 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 because it is designed to 
increase the effectiveness of the quote instability calculation used to 
determine whether a crumbling quote exists. As discussed above, the 
proposed change is based on the Exchange's analysis of market data, 
which supports that the proposed quote stability coefficients would 
accurately identify changes to the PBBO more frequently than the 
current quote stability coefficients and, accordingly, that the 
proposed change would improve the accuracy of the Exchange's quote 
instability calculation. Accordingly, the Exchange believes that the 
proposed change would remove impediments to, and perfect the mechanism 
of, a free and open market and a national market system, as well as 
protect investors and the public interest, by enhancing the Exchange's 
protection of Discretionary Pegged Orders. Specifically, because the 
proposed quote stability coefficients were derived through an analysis 
of more recent market data and are calibrated to reflect current 
activity on the Exchange (including to adapt them to function on an 
exchange without an intentional delay mechanism and with deeper 
liquidity than other exchanges that offer similar functionality), the 
Exchange believes that the proposed change would improve the 
effectiveness of the quote instability calculation in predicting 
periods of quote instability and thus enhance the extent to which 
Discretionary Pegged Orders would be protected from unfavorable 
executions.

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 believes that 
the proposed change would promote competition by improving the accuracy 
of the quote instability calculation, thereby enhancing the protection 
of Discretionary Pegged Orders from unfavorable executions during 
periods of quote instability.

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. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 2, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national

[[Page 39136]]

securities exchange.\13\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\14\ which 
requires that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange represents that the proposed 
coefficients were calibrated to reflect the Exchange's current activity 
and market structure and are based on an analysis of recent market data 
and on backtesting that indicates that the proposed quote stability 
coefficients and resulting updated quote stability formula and would 
more accurately identify if the PBBO is ``crumbling'' compared to the 
current quote stability coefficients. The Commission finds that the 
proposed rule change is consistent with the protection of investors and 
the public interest because it will modify the coefficients of the 
quote instability formula in a way that is reasonably designed to 
improve the effectiveness of the quote instability calculation in 
predicting periods of quote instability and to thereby enhance the 
effectiveness of Discretionary Pegged Orders against unfavorable 
executions during periods of quote instability.
    For the reasons discussed above, the Commission finds that this 
proposed rule change, as modified by Amendment No. 2, is consistent 
with the requirements of the Act.

IV. Solicitation of Comments on Amendment No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 2 
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 No. SR-NYSEArca-2022-13 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 No. SR-NYSEArca-2022-13. The file 
numbers 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 will also 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 publicly available. All submissions 
should refer to File No. SR-NYSEArca-2022-13 and should be submitted on 
or before July 21, 2022.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 2, prior to the thirtieth day 
after the date of publication of notice of the amended proposal in the 
Federal Register. In Amendment No. 2, the Exchange amended the proposal 
to: (1) provide additional explanation of and rationale for using 
Discretionary Pegged Orders; (2) provide additional explanation of the 
purpose of the proposed rule change; and (3) provide additional 
explanation regarding how the proposed quote instability coefficients 
were formulated and tested; and (4) state when the Exchange expects to 
implement the proposed change to the quote instability coefficients. 
Amendment No. 2 adds clarity and justification to the proposal and does 
not substantively alter the proposed rule change as described in the 
Notice. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\15\ to approve the proposed rule change, 
as modified by Amendment No. 2, on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NYSEArca-2022-13), as 
modified by Amendment No. 2, be, and hereby is, approved on an 
accelerated basis.
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    \16\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-13962 Filed 6-29-22; 8:45 am]
BILLING CODE 8011-01-P


