[Federal Register Volume 88, Number 54 (Tuesday, March 21, 2023)]
[Notices]
[Pages 17072-17077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05686]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97147; File No. SR-NYSEARCA-2023-24]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 
6.40P-O Pertaining to Pre-Trade Risk Controls

March 15, 2023.
    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 March 9, 2023, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.40P-O (Pre-Trade and 
Activity-Based Risk Controls) pertaining to pre-trade risk controls to 
make additional pre-trade risk controls available to Entering Firms. 
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 Rule 6.40P-O (Pre-Trade and 
Activity-Based Risk Controls) pertaining to pre-trade risk controls to 
make additional pre-trade risk controls available to entering Firms.\4\ 
The Exchange originally filed on November 17, 2022 to make this change 
immediately effective and that filing was published for comment on 
December 5, 2022 (the ``original filing'').\5\ In light of a comment 
letter dated January 5, 2023,\6\ the Exchange withdrew the original 
filing and now submits this revised filing to address several of the 
points raised in the comment letter.
---------------------------------------------------------------------------

    \4\ The term ``Entering Firm'' refers to an OTP Holder or OTP 
Firm (including those acting as Market Makers). See Rule 6.40P-
O(a)(1).
    \5\ See Securities Exchange Act Release No. 96829 (February 7, 
2023), 88 FR 8980 (February 10, 2023) (SR-NYSEArca-2022-82).
    \6\ See Letter to Vanessa Countryman, Secretary, Securities and 
Exchange Commission, from Gerard P. O'Connor, Vice President and 
General Counsel of Hyannis Port Research, Inc. (``HPR Letter'') 
dated January 19, 2023, available at https://www.sec.gov/comments/sr-bx-2022-022/srbx2022022-20155250-323599.pdf. HPR is a provider of 
(among other things) non-exchange based risk controls solutions.
---------------------------------------------------------------------------

Background and Purpose
    In 2022, in connection with the Exchange's migration to Pillar and 
to better assist OTP Holders and OTP Firms in managing their risk, the 
Exchange adopted Rule 6.40P-O, which included pre-trade risk controls, 
among other activity-based controls, wherein an Entering Firm had the 
option of establishing limits or restrictions on certain of its trading 
behavior on the Exchange and authorizing the Exchange to take action if 
those limits or restrictions were exceeded.\7\ Specifically, the 
Exchange added a Single Order Maximum Notional Value Risk Limit, and a 
Single Order Maximum Quantity Risk Limit \8\ (collectively, the 
``Initial Pre-Trade Risk Controls'').
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 94072 (January 26, 
2022), 87 FR 5592 (February 1, 2022) (Notice of filing Notice of 
Filing of Amendment No. 4 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 4) (SR-
NYSEArca-2021-47).
    \8\ The terms ``Single Order Maximum Notional Value Risk Limit, 
and ``Single Order Maximum Quantity Risk Limit'' are defined in Rule 
6.40P-O(a)(2).
---------------------------------------------------------------------------

    The Exchange now proposes to expand the list of the optional pre-
trade risk controls available to Entering Firms by adding several 
additional pre-trade risk controls that would provide

[[Page 17073]]

Entering Firms with enhanced abilities to manage their risk with 
respect to orders on the Exchange. As detailed below, each of the 
proposed additional risk controls is modeled on risk settings that are 
already available on the Exchange's affiliate equities exchanges, 
including NYSE American LLC (``NYSE American''),\9\ as well as on other 
equities exchanges, including Cboe,\10\ Nasdaq,\11\ MEMX,\12\ and MIAX 
Pearl.\13\
---------------------------------------------------------------------------

    \9\ See, e.g., Securities Exchange Act Release Nos. 96922 
(February 14, 2023), 88 FR 10580 (February 14, 2023) (SR-NYSE AMER-
2023-12) (modifying NYSE American Rule 7.19E).
    \10\ See Securities Exchange Act Release Nos. 80611 (May 5, 
2017), 82 FR 22045 (May 11, 2017) (SR-BatsBZX-2017-24) (adopting 
Rule 11.13, Interpretation and Policies .01); 80612 (May 5, 2017), 
82 FR 22024 (May 11, 2017) (SR-BatsBYX-2017-07) (same); 80608 (May 
5, 2017), 82 FR 22030 (May 11, 2017) (SR-BatsEDGA-2017-07) (adopting 
Rule 11.10, Interpretation and Policies .01); 80607 (May 5, 2017), 
82 FR 22027 (May 11, 2017) (SR-BatsEDGX-2017-16) (same).
    \11\ See, e.g., Securities Exchange Act Release Nos. 82479 
(January 10, 2018), 83 FR 2471 (January 17, 2018) (SR-Nasdaq-2018-
002) (adopting IM-6200-1); 90577 (December 7, 2020), 85 FR 80202 
(December 11, 2020) (SR-Nasdaq-2020-79) (moving IM-6200-1 into 
Equity 6, Section 5). See also Securities Exchange Act Release Nos. 
82545 (January 19, 2018), 83 FR 3834 (January 26, 2018) (SR-BX-2018-
001) (adopting Rule 4765 and commentary thereto); 91830 (May 10, 
2021), 86 FR 26567 (May 14, 2021) (SR-BX-2021-012) (moving Rule 4765 
and commentary into Equity 6, Section 5).
    \12\ See Securities Exchange Act Release No. 89581 (August 17, 
2020), 85 FR 51799 (August 21, 2020) (SR-MEMX-2020-04) (adopting 
Rule 11.10, Interpretation and Policies .01).
    \13\ See Securities Exchange Act Release Nos. 89563 (August 14, 
2020), 85 FR 51510 (August 20, 2020) (SR-PEARL-2020-03) (adopting 
Rule 2618(a)(1)(A)-(D)); 96205 (November 1, 2022), 87 FR 67080 
(November 7, 2022) (SR-PEARL-2022-43) (adopting subsections (E)-(H) 
to Rule 2618(a)(1)).
---------------------------------------------------------------------------

    Like the Initial Pre-Trade Risk Controls, use of the pre-trade risk 
controls proposed herein is optional, but all orders on the Exchange 
would pass through these risk checks. As such, an Entering Firm that 
does not choose to set limits pursuant to the new proposed pre-trade 
risk controls would not achieve any latency advantage with respect to 
its trading activity on the Exchange.
    The HPR Letter questions why the Exchange proposes to make all 
orders on the Exchange pass through its risk checks, even if a 
particular firm trading on the Exchange opts not to employ the 
Exchange's pre-trade risk controls. The Exchange has chosen to 
implement its risk checks ``symmetrically'' to all orders because that 
is the functionality that clients have specifically requested, and it 
is also the recognized best practice in this area. In a September 2021 
white paper entitled ``Market Lens: Exchange Best Practices for 
Reducing Operational Risk at Broker-Dealers,'' \14\ Citadel Securities 
requested that exchanges assist firms in mitigating operational trading 
risk by instituting exchange-based risk controls, but expressly 
cautioned exchanges against segmenting orders into those that would 
pass through risk checks versus those that would not. Citadel noted 
that such segmentation of orders would ``produce incentives for all 
firms to avoid using any controls, for fear of suffering a competitive 
disadvantage.'' \15\ Instead, Citadel recommended that exchanges 
``ensure orders follow the same order processing logic regardless of 
which options or features are enabled,'' \16\ in order to eliminate any 
competitive advantage or disadvantages for clients.
---------------------------------------------------------------------------

    \14\ See Citadel Securities, ``Market Lens: Exchange Best 
Practices for Reducing Operational Risk at Broker-Dealers'' 
(``Citadel white paper'') dated September 2021, available at https://www.citadelsecurities.com/wp-content/uploads/sites/2/2021/09/Citadel_Securities_Market-Lens_Sept_2021_Exchange-Best-Practices-for-Reducing-Operational-Risk.pdf. As Citadel put it (at page 5):
    Insufficiently well-designed and tested controls can create what 
amount to penalties, driven by the time and computational power 
required to perform various stages of checks, if applied only to 
participants who opt-in to their use. This could produce incentives 
for all firms to avoid using any controls, for fear of suffering a 
competitive disadvantage. One way to address this, while maintaining 
choice for member firms, is to ensure orders follow the same order 
processing logic regardless of which options or features are 
enabled--similar to how all colocated servers in an equalized data 
center incur the same cabling distance to the matching engine, 
regardless of their physical proximity to it. Additionally, 
exchanges should vigorously test controls to ensure no latency 
penalty exists in practice. Exchanges should actively publicize the 
net-neutral risk controls.
    \15\ Id. at 5.
    \16\ Id.
---------------------------------------------------------------------------

    This is the model that the Exchange used in building the Initial 
Pre-Trade Risk Controls that the Commission approved in 2020,\17\ and 
is the same model that the Exchange proposes would apply to the 
additional pre-trade risk checks proposed here. There is nothing unique 
about this approach. Functionality on the Exchange's trading systems is 
often applied uniformly to all orders and quotes, regardless of whether 
a particular client has opted to use that functionality for a 
particular order or quote. For example, the Exchange's limit order 
price protection applies generally to trading on the Exchange and 
orders or quotes with limit prices are not processed more slowly than 
those without. Similarly, the Exchange's trading systems check all 
orders and quotes for a variety of details and modifiers (e.g., 
duplicative client order check, order capacity check, and self-trade 
prevention).
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 88776 (April 29, 
2020), 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17) (order approving 
pre-trade risk controls on the Exchange's affiliate exchange, the 
New York Stock Exchange LLC). The Commission concluded that ``the 
proposed rule change is reasonably designed to provide members with 
optional tools to manage their credit risk.'' Id. at 26770.
---------------------------------------------------------------------------

    The Exchange understands that the risk checks of other exchanges, 
on which the proposed rule is modeled, also apply symmetrically to all 
orders.\18\ The Exchange also notes that the Citadel white paper cited 
above was written ``in collaboration with several major exchanges, 
including NYSE, Nasdaq, MIAX, MEMX, and BOX,'' suggesting that some or 
all of those exchanges may also employ the symmetrical application of 
risk checks that the Citadel white paper recommends.\19\
---------------------------------------------------------------------------

    \18\ See, e.g., MEMX Risk FAQ, dated October 13, 2020, available 
at https://info.memxtrading.com/us-equities-faq/#Bookmark21 (``The 
risk checks are applied in a consistent manner to all participant 
orders in order to mitigate risk without incurring latency 
disadvantage.''); MIAX Pearl Equities Exchange User Manual, updated 
October 2022, available at https://www.miaxequities.com/sites/default/files/website_file-files/MIAX_Pearl_Equities_User_Manual_October_2022.pdf, at 29 (stating 
that all but two of the exchange's 14 risk checks ``are latency 
equalized i.e. there is no latency penalty for a member when opting 
into and leveraging a risk protection available on the exchange when 
entering an order as compared to a member not opting into the risk 
protection when entering an order'').
    \19\ See Citadel white paper, supra note 14, at 2.
---------------------------------------------------------------------------

    The Exchange stated in its original filing for the current proposal 
that it expects that any latency added by the proposed additional pre-
trade risk controls would be de minimis. Specifically, the Exchange 
expects that the latency added by the combination of the Initial Pre-
Trade Risk Controls plus the proposed additional pre-trade risk 
controls would be significantly less than one microsecond. 
Nevertheless, seizing on the phrase ``de minimis,'' HPR argues that the 
Commission's 2016 interpretation regarding automated quotations under 
Regulation NMS \20\ applies here and should require the Exchange to 
justify this de minimis latency change in a number of ways.\21\ But 
that Commission interpretation pertains to ``intentional access 
delays,'' like speed bumps--not to the issues here. The Exchange's pre-
trade risk controls are not an intentional access delay,\22\ but a 
functional enhancement to the Exchange's trading systems, and, like any 
change to a trading system's

[[Page 17074]]

function or performance, may impact the overall speed of trading on the 
Exchange in ways that can increase or decrease overall latency. It is 
within the Exchange's prerogative as a market center in the current 
hotly competitive environment to assess whether and when to make 
functional enhancements to its trading systems. What is key under the 
Exchange Act is that any anticipated latency effects of such 
enhancements are applied uniformly, to all orders of all market 
participants, in a non-discriminatory way--as the risk controls 
proposed here would be. If market participants find that the latency 
cost of such enhancements is not justified by the additional 
functionality they offer, such market participants will vote with their 
feet and send their order flow elsewhere.
---------------------------------------------------------------------------

    \20\ See also Securities Exchange Act Release No. 78102 (June 
17, 2016), 81 FR 40785 (June 23, 2016) (File No. S7-03-16) 
(Commission Interpretation Regarding Automated Quotations Under 
Regulation NMS), available at https://www.sec.gov/rules/interp/2016/34-78102.pdf.
    \21\ HPR Letter, supra note 6 at 5-6.
    \22\ Indeed, the Commission did not treat any of the other 
exchanges' filings for pre-trade risk controls listed above in notes 
9-13 as ``intentional access delays.''
---------------------------------------------------------------------------

    With one exception, the additional risk checks proposed here would 
be a functional enhancement to the Exchange's Pillar gateway \23\ and 
the risk checks would be applied to all orders and quotes on the 
Exchange. While the Exchange strongly believes that symmetrical 
application of all pre-trade risk controls is the appropriate approach 
(as explained above), providing customers an opt-out ability would 
require the Exchange to provide new order/quote entry ports that would 
bypass the evaluation of such pre-trade risk protections. Providing 
such new ports would burden customers with additional costs to purchase 
such ports and to migrate their order flow to such ports. The Exchange 
does not believe that the added expense of creating such new ports (on 
the part of the Exchange) or of purchasing and migrating to them (on 
the part of customers) is justified in light of the de minimis latency 
imposed by the pre-trade risk controls at issue.
---------------------------------------------------------------------------

    \23\ The one exception is the proposed pre-trade risk control in 
paragraph (a)(2)(A)(ii), discussed below, which would permit an 
Entering Firm to set dollar-based or percentage-based controls as to 
the price of an order that are equal to or more restrictive than the 
levels set out in Rule 6.62P-O(a)(3)(A) regarding Limit Order Price 
Protection. This risk check, like the Exchange's Limit Order Price 
Protection, is implemented in the matching engine.
---------------------------------------------------------------------------

Proposed Amendment to Rule 6.40P-O
    To accomplish this rule change, the Exchange proposes to amend the 
definition of the term ``Pre-Trade Risk Controls'' set forth in Rule 
6.40P-O(a)(2) to adopt the definition of ``Single-Order Risk 
Controls,'' which controls would be listed in proposed paragraph (A) to 
Rule 6.40P-O(a)(2). As proposed, the ``Single-Order Risk Controls'' 
would include the already-defined risk controls of the Single Order 
Maximum Notional Value Risk Limit and Single Order Maximum Quantity 
Risk Limit (collectively referred to herein as the ``existing Single-
Order Risk Checks''), with non-substantive changes to streamline the 
descriptions of these controls into new paragraph (i) of proposed Rule 
6.40P-O(a)(2)(A).\24\ However, because of a lack of demand for the 
option to apply the existing Single-Order Risk Checks to Market Maker 
quotes, the Exchange proposes to discontinue functionality supporting 
this optional feature.
---------------------------------------------------------------------------

    \24\ See proposed Rule 6.40P-O(a)(2)(A)(i) (setting forth 
``controls related to the maximum dollar amount for a single order 
to be applied one time (`Single Order Maximum Notional Value Risk 
Limit') and the maximum number of contracts that may be included in 
a single order before it can be traded (`Single Order Maximum 
Quantity Risk Limit'). Orders designated GTC will be subject to 
these checks only once.'') Consistent with the foregoing changes, 
the Exchange proposes to delete current paragraph (B) to Rule 6.40P-
O(a)(2)(B). See id.
---------------------------------------------------------------------------

    In the addition, the Exchange proposes to add paragraphs 
(a)(2)(A)(ii) through (v) to enumerate the proposed new Single-Order 
Risk Controls, as follows:
    (ii) controls related to the price of an order or quote (including 
percentage-based and dollar-based controls);
    (iii) controls related to the order types or modifiers that can be 
utilized;
    (iv) controls to restrict the options class transacted; and
    (v) controls to prohibit duplicative orders.
    Each of the new Single-Order Risk Controls in proposed paragraph 
(a)(2)(A)(ii)-(v) is substantively identical to risk settings already 
in place on the Exchange's affiliate equities exchange, NYSE American 
as well as those on other equities exchanges, including Cboe, Nasdaq, 
MEMX, and MIAX Pearl,\25\ except that the proposed controls account for 
options trading, such as including reference to ``an order or quote'' 
versus ``an order'' and reference to restrictions on trading in an 
``options class'' versus on ``the types of securities transacted 
(including but not limited to restricted securities).'' \26\ As such, 
the proposed new optional Pre-Trade Risk Controls are familiar to 
market participants and are not novel.
---------------------------------------------------------------------------

    \25\ See supra notes 9-13.
    \26\ See proposed Rule 6.40P(a)(2)(A)(ii) and (a)(2)(A)(iv) as 
compared to NYSE American Rule 7.19E(b)(2)(B) and (b)(2)(F), 
respectively.
---------------------------------------------------------------------------

    The Exchange proposes to modify current paragraph (b)(2) regarding 
the setting and adjusting of the Pre-Trade Risk Controls to state that, 
in addition to Pre-Trade Risk Controls being available to be set at the 
MPID level or at one or more sub-IDs associated with that MPID, or 
both, that Pre-Trade Risk Controls to restrict the options class(es) 
transacted must be set per option class.\27\
---------------------------------------------------------------------------

    \27\ See, e.g., Rule 7.19E(d)(2) (specifying that pre-trade risk 
controls related to transacting in restricted securities must be set 
per symbol).
---------------------------------------------------------------------------

    The Exchange proposes to modify paragraph (c)(1) regarding ``Breach 
Action for Pre-Trade Risk Controls.'' First, the Exchange proposes to 
specify that ``[a] Limit Order that breaches any Single-Order Risk 
Control will be rejected.'' \28\ The proposed functionality is 
consistent with the treatment of Limit Orders that breach the existing 
Single Order Risk Checks and simply extends the application of the 
breach action to the newly proposed Single-Order Risk Controls. Next, 
proposed Rule 6.40P-O(c)(1)(A)(ii) specifies that ``[a] Market Order 
that arrives during a pre-open state will be cancelled if the quantity 
remaining to trade after an Auction breaches the Single Order Maximum 
Notional Value Risk Limit,'' which functionality is identical to 
treatment of such interest under the current Rule.\29\ Proposed Rule 
6.40P-O(c)(1)(A)(ii) further specifies that ``[a]t all other times, a 
Market Order that triggers or breaches any Single-Order Risk Control 
will be rejected.'' \30\ The proposed functionality is consistent with 
the treatment of Market Orders (that arrive other than during a pre-
open state) that breach the existing Single Order Risk Checks and 
simply extends the application of the breach action to the newly 
proposed Single-Order Risk Controls. Further, proposed Rule 6.40P-
O(c)(1)(A)(iii) addresses the breach action relevant to the new Single-
Order Risk Control set forth in proposed Rule 6.40P-O(a)(2)(A)(ii) 
(i.e., a breach of controls related to the price of an order or quote 
including percentage-based and dollar-based controls). As proposed, a 
Limit Order or quote that would breach a price control under paragraph 
(a)(2)((A)(ii) would be rejected or cancelled as specified in Rule 
6.62P-O (a)(3)(A) (Limit Order Price Protection).\31\
---------------------------------------------------------------------------

    \28\ See proposed Rule 6.40P(c)(1)(A)(i).
    \29\ See Rule 6.40P(c)(1)(A)(i) (providing, in relevant part, 
that ``[a] Market Order that breaches the designated limit of a 
Single Order Maximum Quantity Risk Limit'' will be ``canceled if the 
order was received during a pre-open state and the quantity 
remaining to trade after an Auction concludes breaches the 
designated limit.'').
    \30\ See proposed Rule 6.40P(c)(1)(A)(ii).
    \31\ See proposed Rule 6.40P(c)(1)(A)(iii).

---------------------------------------------------------------------------

[[Page 17075]]

    Finally, the Exchange proposes to add new Commentary .02 to specify 
the interplay between the Exchange's Limit Order Price Protection 
(``LOPP'') functionality and the price controls that may be set by an 
Entering Firm pursuant to proposed paragraph (a)(2)(A)(ii). Proposed 
Commentary .02 specifies that an Entering Firm may set price controls 
under paragraph (a)(2)(A)(ii) that are equal to or more restrictive 
than levels set by the Exchange LOPP functionality.

Continuing Obligations of OTP Holders Under Rule 15c3-5

    The proposed Pre-Trade Risk Controls described here are meant to 
supplement, and not replace, the OTP Holders' own internal systems, 
monitoring, and procedures related to risk management. The Exchange 
does not guarantee that these controls will be sufficiently 
comprehensive to meet all of an OTP Holder's needs, the controls are 
not designed to be the sole means of risk management, and using these 
controls will not necessarily meet an OTP Holder's obligations required 
by Exchange or federal rules (including, without limitation, the Rule 
15c3-5 under the Act \32\ (``Rule 15c3-5'')). Use of the Exchange's 
Pre-Trade Risk Controls will not automatically constitute compliance 
with Exchange or federal rules and responsibility for compliance with 
all Exchange and SEC rules remains with the OTP Holder.\33\
---------------------------------------------------------------------------

    \32\ See 17 CFR 240.15c3-5.
    \33\ See also Commentary .01 to Rule 6.40P-O, which provides 
that the Pre-Trade Risk Controls set forth in Rule 6.40P-O ``are 
meant to supplement, and not replace, the OTP Holder's or OTP Firm's 
own internal systems, monitoring, and procedures related to risk 
management and are not designed for compliance with Rule 15c3-5 
under the Exchange Act. Responsibility for compliance with all 
Exchange and SEC rules remains with the OTP Holder or OTP Firm.'').
---------------------------------------------------------------------------

Timing and Implementation
    The Exchange anticipates completing the technological changes 
necessary to implement the proposed rule change in the second quarter 
of 2023, but in any event no later than June 30, 2023. The Exchange 
anticipates announcing the availability of the Pre-Trade Risk Controls 
introduced in this filing by Trader Update in the first quarter of 
2023.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\34\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\35\ 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 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, 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.\36\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78f(b).
    \35\ 15 U.S.C. 78f(b)(5).
    \36\ HPR argues that the Exchange should be compelled to submit 
this proposal as a fee filing pursuant to Section 19(b)(3)(A)(ii) of 
the Exchange Act. See HPR Letter, supra note 6, at 6-8. But that 
provision only applies to rule filings ``establishing or charging a 
due, fee, or other charge imposed by the [SRO] . . . .'' Because the 
Exchange does not propose to charge any fees for the proposed 
services here, Section 19(b)(3)(A)(ii) is inapplicable. Notably, the 
Commission did not treat any of the other exchanges' filings for 
pre-trade risk controls listed above in notes 9-13 as fee filings.
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed rule change 
will remove impediments to and perfect the mechanism of a free and open 
market and a national market system because the proposed optional 
additional Pre-Trade Risk Controls would provide Entering Firms with 
enhanced abilities to manage their risk with respect to orders or 
quotes on the Exchange. The proposed additional Pre-Trade Risk Controls 
are not novel; they are based on existing risk settings already in 
place on NYSE American, as well as those on Cboe, Nasdaq, MEMX and MIAX 
Pearl equities exchanges,\37\ and market participants are already 
familiar with the types of protections that the proposed risk controls 
afford. Moreover, the proposed new Single-Order Risk Controls (like the 
existing Single-Order Risk Checks) are options and, as such, Entering 
Firms are free to utilize or not at their discretion. As such, the 
Exchange believes that the proposed additional Pre-Trade Risk Controls 
would provide a means to address potentially market-impacting events, 
helping to ensure the proper functioning of the market.
---------------------------------------------------------------------------

    \37\ See supra notes 9-13.
---------------------------------------------------------------------------

    In addition, the Exchange believes that the proposed rule change 
will protect investors and the public interest because the proposed 
additional Pre-Trade Risk Controls are a form of impact mitigation that 
will aid Entering Firms in minimizing their risk exposure and reduce 
the potential for disruptive, market-wide events. The Exchange 
understands that OTP Holders implement a number of different risk-based 
controls, including those required by Rule 15c3-5. The controls 
proposed here will serve as an additional tool for Entering Firms to 
assist them in identifying any risk exposure. The Exchange believes the 
proposed additional Pre-Trade Risk Controls will assist Entering Firms 
in managing their financial exposure which, in turn, could enhance the 
integrity of trading on the securities markets and help to assure the 
stability of the financial system.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system by permitting Entering Firms to set price 
controls under paragraph (a)(2)(A)(ii) that are equal to or more 
restrictive than the levels established in the Exchange's LOPP 
functionality, which protects from aberrant trades, thus improving 
continuous trading and price discovery. To the extent that Entering 
Firms would like to further manage their exposure to aberrant trades, 
this proposed functionality affords such Firms the ability to set price 
controls at levels that are more restrictive than the LOPP levels. 
Additionally, because price controls set by an Entering Firm under 
paragraph (a)(2)(A)(ii) would function as a form of limit order price 
protection, the Exchange believes that it would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system for an order that would breach such a price control to be 
rejected or cancelled as specified per Rule 6.62P-O(a)(3)(A) regarding 
the LOPP.
    Finally, the Exchange believes that the proposed rule change does 
not unfairly discriminate among the Exchange's OTP Holders because use 
of the proposed additional Pre-Trade Risk Controls is optional and is 
not a prerequisite for participation on the Exchange. In addition, 
because all orders on the Exchange would pass through the risk checks, 
there would be no difference in the latency experienced by OTP Holders 
who have opted to use the proposed additional Pre-Trade Risk Controls 
versus those who have not opted to use them. The Exchange does not 
believe it is unfairly discriminatory to have all orders on the 
Exchange pass through the risk checks, even for OTP Holders or OTP 
Firms that opt not to use the Exchange's pre-trade risk controls. As 
described above, the proposed risk checks are a functional enhancement 
to the Exchange's trading systems that the Exchange proposes to apply 
uniformly to all orders and quotes on the Exchange; by applying them 
uniformly, the Exchange would avoid producing incentives for all firms 
to

[[Page 17076]]

avoid using the risk controls for fear of suffering a competitive 
disadvantage. Additionally, any latency imposed by the pre-trade risk 
controls proposed here is de minimis and would not have a material 
impact on the order flow of OTP Holders and OTP Firms that choose to 
employ non-exchange providers (such as HPR) to provide them with risk 
control solutions.

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. In fact, the Exchange 
believes that the proposal will have a positive effect on competition 
because, by providing Entering Firms additional means to monitor and 
control risk, the proposed rule will increase confidence in the proper 
functioning of the markets. The Exchange believes the proposed 
additional Pre-Trade Risk Controls will assist Entering Firms in 
managing their financial exposure which, in turn, could enhance the 
integrity of trading on the securities markets and help to assure the 
stability of the financial system. As a result, the level of 
competition should increase as public confidence in the markets is 
solidified.
    In its letter, HPR contends that it is an unnecessary burden on 
competition for the Exchange to have all orders--even the orders of OTP 
Holders and OTP Firms that choose not to use the proposed pre-trade 
risk controls--to pass through the Exchange's checks because doing so 
will reduce customer demand for HPR's risk control services. HPR argues 
that by imposing latency from its risk checks on all orders, the 
Exchange has created a ``latency tax'' that would encourage customers 
to use the Exchange's risk controls instead of third-party risk 
solutions like HPR's.\38\ These assertions are factually incorrect and 
obscure the very real differences between the Exchange's pre-trade risk 
controls and the services that HPR offers. The Exchange understands 
that HPR's enterprise risk management solutions, like those of its 
competitors, permit its clients to track aggregated risk across all 
markets and provide consolidated risk management capabilities. In 
contrast, exchange based-solutions such as the Exchange's only offer 
tools to manage risk across the Exchanges and its affiliate exchanges 
(e.g., the NYSE Group exchanges). The Exchange's proposed risk checks 
would not and could not replace HPR's far broader offering. In 
addition, as the Exchange made clear in its filing for the Initial Pre-
Trade Risk Controls and repeats here, the Exchange's pre-trade risk 
controls are not a complete Rule 15c3-5 solution. The Exchange's risk 
controls are meant to supplement, and not replace, an OTP Holder's or 
OTP Firm's own internal risk management systems (which firms may 
outsource to providers like HPR), and the Exchange's controls are not 
designed to be the sole means of risk management that any firm uses. 
Additionally, any latency imposed by the proposed pre-trade risk 
controls proposed here is de minimis and would not have a material 
impact on the order flow of OTP Holders and OTP Firms that choose to 
employ non-exchange providers (such as HPR) to provide them with risk 
control solutions.
---------------------------------------------------------------------------

    \38\ See HPR Letter, supra note 6, at 4 (claiming the Exchange 
has ``architected the proposed risk controls to give [itself] an 
unfair and anti-competitive latency advantage over non-exchange 
offerings provided by broker-dealers or vendors such as HPR.'').
---------------------------------------------------------------------------

    Finally, the Exchange believes it would be an unfair burden on 
competition for the Commission to suspend and ultimately disapprove the 
pre-trade risk controls proposed here, where substantially identical 
controls are already in place on numerous of the Exchange's competitor 
exchanges.\39\ Since 2017, equities exchanges have been adding pre-
trade risk controls to their trading systems. And, in 2022, the 
Exchange adopted the Initial Pre-Trade Risk Controls. It would be an 
unjustifiable burden on competition and on the Exchange for the 
Commission to permit all equities exchanges to offer such functionality 
except for the Exchange and its affiliates mentioned in the HPR Letter. 
Specifically, the Exchange would be at a significant competitive 
disadvantage vis-[agrave]-vis other equities exchanges that already 
offer the type of pre-trade risk controls proposed in this filing as 
OTP Holders and OTP Firms may choose to direct order flow away from the 
Exchange until it is able to offer such competing pre-trade risk 
controls.
---------------------------------------------------------------------------

    \39\ See supra notes 9-13.
---------------------------------------------------------------------------

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \40\ and Rule 19b-4(f)(6) thereunder.\41\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\42\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \41\ 17 CFR 240.19b-4(f)(6).
    \42\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \43\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 [email protected]. Please include 
File Number SR-NYSEARCA-2023-24 on the subject line.

Paper Comments

     Send paper comments in triplicate to: Secretary, 
Securities and Exchange

[[Page 17077]]

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEARCA-2023-24. 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-2023-24 and should be submitted 
on or before April 11, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05686 Filed 3-20-23; 8:45 am]
BILLING CODE 8011-01-P


