SECURITIES AND EXCHANGE COMMISSION
[Release No. 34–67252; File No. SR–NYSEArca–2012–05]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change Adding New Paragraph (cc) to NYSE Arca Options Rule 6.62 To Provide for a Post No Preference Light Only Quotation
June 25, 2012.
I. Introduction
On May 3, 2012, NYSE Arca, Inc. (“Exchange” or “NYSE Arca”) 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 add new paragraph (cc) to NYSE Arca Options Rule 6.62 to provide for a Post No Preference Light Only Quotation (“PNPLO Quotation”). The proposed rule change was published for comment in the
Federal Register
on May 11, 2012.
3
The Commission received no comments on the proposal. This order approves the proposed rule change.
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b–4.
3
See
Securities Exchange Act Release No. 66937 (May 7, 2012), 77 FR 27820 (May 11, 2012) (“Notice”).
II. Description of the Proposal
The Exchange has proposed to provide a new quotation type—the PNPLO Quotation. The PNPLO Quotation would be an electronic Market Maker
4
quotation that, upon initial entry into the Exchange's trading system, would only be eligible to execute against displayed liquidity on Arca's Consolidated Book.
5
If a PNPLO Quotation, upon entry, would: (1) Execute exclusively against non-displayed liquidity on the Consolidated Book, it would be rejected; (2) execute against both displayed and non-displayed liquidity on the Consolidated Book, it would immediately execute against such displayed liquidity, but not against the non-displayed liquidity, and any remaining size would be rejected; (3) execute exclusively against displayed liquidity on the Consolidated Book, it would immediately execute and any remaining size would be placed on the Consolidated Book and treated as a standard Market Maker quotation; and (4) not execute against either displayed or non-displayed liquidity, it would be placed on the Consolidated Book and treated as a standard Market Maker quotation.
6
The entry of a PNPLO Quotation would cause the automatic removal of the pre-existing quotation(s) of a Market Maker, regardless of whether the PNPLO Quotation is accepted or rejected by the NYSE Arca System.
7
Accordingly, in instances where the PNPLO Quotation is rejected by the system because of the presence of otherwise marketable non-displayed interest, the Market Maker would be required to re-enter a quotation for purposes of satisfying any applicable quoting obligations under NYSE Arca Options Rule 6.37B.
8
4
See
NYSE Arca Options Rule 6.32 (defining “Market Maker”).
5
See
new NYSE Arca Options Rule 6.62(cc);
see also
NYSE Arca Options Rule 6.1(b)(37) (defining “Consolidated Book”).
6
See
new NYSE Arca Options Rule 6.62(cc).
7
See supra
note 3, at 27821.
8
See id.
The PNPLO Quotation may only be submitted for options in penny pilot issues.
9
On the Exchange, penny pilot issues are subject to a make/take fee structure, under which Market Makers receive credits for posting liquidity and incur fees for taking liquidity.
10
By preventing interactions with resting, non-displayed liquidity through use of the PNPLO Quotation, Market Makers in penny pilot issues would be able to avoid incurring unexpectedly the fees associated with such interactions. The Exchange notes that this is desirable for Market Makers because it is difficult for them to account for this risk of interacting with non-displayed liquidity in their quoting models.
11
9
See
new NYSE Arca Options Rule 6.62(cc);
see also
Securities Exchange Act Release Nos. 55156 (January 23, 2007), 72 FR 4759 (February 21, 2007) (order approving penny pilot program); 56568 (September 27, 2007), 72 FR 56422 (October 3, 2007) (order approving expansion and extension of penny pilot); 59628 (March 26, 2009), 74 FR 15025 (April 2, 2009) (notice of extension of penny pilot); 60224 (July 1, 2009), 74 FR 32991 (July 9, 2009) (notice of extension of penny pilot); 60711 (September 23, 2009), 74 FR 49419 (September 28, 2009) (order partially approving expansion of penny pilot); 61061 (November 24, 2009), 74 FR 62857 (December 1, 2009) (order partially approving expansion of penny pilot); 63376 (November 24, 2010), 75 FR 75527 (December 3, 2010) (notice of extension of penny pilot); 65977 (December 15, 2011), 76 FR 79234 (December 21, 2011) (notice of extension of penny pilot).
10
See supra
note 3, at 27821.
11
See id.
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.
12
In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,
13
which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in 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 not be designed to permit unfair discrimination between customers, issuers, brokers or dealers.
12
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).
13
15 U.S.C. 78f(b)(5).
The Exchange noted that the quoting algorithms of Market Makers may not be able to account accurately for the risk of interacting with resting, non-displayed liquidity in penny pilot issues and the related take fees. The Exchange represents that this challenge may result in Market Makers widening their quotes in penny pilot classes.
14
The Exchange further represents that use of the PNPLO Quotation should allow Market Makers to better control their execution costs by avoiding unexpected take fees related to executions with resting, non-displayed liquidity in penny pilot issues. This cost certainty, according to the Exchange, could lead to narrower quote widths in penny pilot issues, thereby improving the Exchange's market and benefiting investors. Additionally, if the PNPLO Quotation is rejected by the NYSE Arca system because of the presence of otherwise marketable non-displayed interest, the Market Maker would be required to re-enter a quotation for purposes of satisfying any applicable quoting obligations under NYSE Arca Options Rule 6.37B. For these reasons, the Commission believes that the proposed PNPLO Quotation is consistent with Section 6(b)(5) of the Exchange Act as it is designed to remove impediments to and perfect the mechanisms of a free and open market
and a national market system, and in general to protect investors and the public interest.
14
See supra
note 3, at 27821.
The Commission also believes that the proposed rule change is not unfairly discriminatory. Currently, market participants including Market Makers can achieve functionality similar to the PNPLO Quotation through use of the PNP-Light Order, which is a non-routable order type that is only eligible to execute against displayed liquidity.
15
The Exchange is proposing a similar functionality for use by Market Makers when quoting. The PNPLO Quotation would be available for use by all Market Makers quoting in the penny pilot classes on the Exchange.
16
15
See
NYSE Arca Options Rule 6.62(v).
16
See supra
note 3, at 27821.
IV. Conclusion
It is therefore ordered,
pursuant to Section 19(b)(2) of the Act,
17
that the proposed rule change (SR–NYSEArca–2012–05) be, and it hereby is, approved.
17
15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
18
18
17 CFR 200.30–3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.