[Federal Register Volume 82, Number 37 (Monday, February 27, 2017)]
[Notices]
[Pages 11964-11967]
[FR Doc No: 2017-03727]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80072; File No. SR-NYSEArca-2017-17]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Amend Rule 6.37B Regarding Market Maker
Quotations

February 21, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on February 10, 2017, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``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 6.37B regarding Market Maker
Quotations, including to adopt a Market Maker Light Only Quotation. The
proposed rule change is available on the Exchange's Web site 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 purpose of this filing is to modify Rule 6.37B regarding Market
Maker Quotations. Rule 6.37B(a) provides that a Market Maker may enter
quotes in the option issues included in its appointment. The Exchange
proposes to amend Rule 6.37B(a) to define Market Maker quotes, add a
new quote type, and specify how such quotes would be processed when a
series is open for trading.
Defining Market Maker Quotes and Adopting Market Maker Light Only
Quotes
    First, the Exchange proposes to define Market Maker quotes to
provide that ``[t]he term `quote' or `quotation' means a bid or offer
entered by a Market Maker that updates the Market Maker's previous bid
or offer, if any.'' \4\ This proposed definition, which would add
clarity, transparency, and internal consistency to Exchange rules, is
identical or substantially identical to the way quotes are defined on
at least two other options exchanges.\5\ Consistent with this change,
the Exchange also proposes to modify the current definition of ``Quote
with Size'' to include a cross reference to the proposed definition of
quotation, which would add clarity and transparency to Exchange
rules.\6\
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    \4\ See proposed Rule 6.37B(a)(1).
    \5\ See, e.g., International Securities Exchange Rule 100(42).
See also BOX Options Exchange LLC Rule 100(a)(55) (providing that
``[t]he term `quote' or `quotation' means a bid or offer entered by
a Market Maker as a firm order that updates the Market Maker's
previous bid or offer, if any'').
    \6\ See proposed Rule 6.1(b)(33) (providing that ``the term
`Quote with Size' means a quotation (as defined in Rule 6.37B(a)(1))
to buy or sell a specific number of option contracts at a specific
price that a Market Maker has submitted to the NYSE Arca OX trading
system through an electronic interface'').
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    Second, the Exchange proposes to add a Market Maker Light Only
Quotation (``MMLO'') to provide Market Makers the option to designate
incoming quotes to trade solely with displayed interest on the
Consolidated Book.\7\ This proposed change would allow Market Makers to
designate quotes as MMLO to prevent such quotes from trading with
undisplayed liquidity upon arrival. Once an MMLO is added to the
Consolidated Book, the MMLO designation no longer applies and any
unexecuted portion could trade with displayed and undisplayed interest.
The Exchange believes that this functionality would give Market Makers
greater control over the circumstances in which their quotes interact
with contra-side trading interest on the Exchange. This increase in
control is desirable from the perspective of Market Makers because it
is difficult for them to account for undisplayed liquidity in their
quoting models.\8\ Because the options market is quote driven, Market
Makers are vital to the price discovery process, the Exchange believes
that the proposed MMLO would provide Market Makers with a greater level
of determinism, in terms of managing their exposure, and thus may
encourage more aggressive liquidity provision, resulting in more
trading opportunities and tighter spreads. Accordingly, the Exchange
believes that the proposal would improve overall market quality and
enhance competition on the Exchange to the benefit to all market
participants.
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    \7\ See proposed Rule 6.37B(a)(2).
    \8\ The Exchange understands that, while a Market Maker's
quoting algorithm can take into account displayed liquidity in the
marketplace, the algorithm may not be able to accurately account for
the risk of interacting with undisplayed liquidity.
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    The Exchange notes that all market participants, including Market
Makers, already have the ability to avoid trading with undisplayed
liquidity by entering Post No Preference Light Order (``PNP-Light
Orders''), which have existed on the Exchange since 2009.\9\ With the
adoption of the MMLO, the Exchange is proposing a similar functionality
for use

by Market Makers when quoting.\10\ The Exchange also notes that other
options exchanges have recently adopted quote types designed to
strengthen market making.\11\
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    \9\ See Securities Exchange Act Release 59603 (March 19, 2009),
74 FR 13279 (March 26, 2009) (SR-NYSEArca-2009-21) (immediately
effective filing to adopt PNP-Light Order type). See also Rule
6.62(v) (defining PNP-Light Orders as non-routable orders that are
only eligible to execute against displayed liquidity).
    \10\ The Exchange previously offered (and later eliminated) a
Post No Preference Light Only Quotation (``PNPLO''), which, like the
MMLO, allowed Market Makers to designate certain quotations to only
interact with displayed liquidity. The Commission approved the
PNPLO, in part, on grounds that market participants, including
Market Makers, could achieve functionality similar to the PNPLO
through use of the PNP-Light Order and that the PNPLO offer similar
functionality for use by Market Makers when quoting. See Securities
Exchange Act Release Nos. 67252 (June 25, 2012), 77 FR 38879 (June
29, 2012) (SR-NYSEArca-2012-05) (order approving adoption of PNPLO,
applicable to Penny Pilot issues only); 68339 (December 3, 2012), 77
FR 73109 (December 7, 2012) (SR-NYSEArca-2012-130) (immediately
effective filing extending the PNPLO to non-Penny Pilot issues). The
PNPLO was eliminated approximately one year after it was adopted
because the functionality was not implemented in the time period
contemplated. See Securities Exchange Act Release No. 34-69641 (May
28, 2013), 78 FR 33134 (June 3, 2013) (SR-NYSEArca-2013-51)
(immediately effective filing deleting reference to the PNPLO from
Rule 6.62(cc)).
    \11\ The Exchange notes that BOX recently added functionality to
only accept quotes that add liquidity. See Securities Exchange Act
Release Nos. 79311 (October 3 [sic], 2016), 81 FR 83322 (November 15
[sic], 2016) (SR-BOX-2016-45) (order approving change to only accept
liquidity-adding quotes); 78946 (September 27, 2016), 81 FR 68069
(October 3, 2016) (notice). See also BOX IM-8050-3 (providing that
``[i]f an incoming quote is marketable against the BOX Book and will
execute against a resting order or quote, it will be rejected'').
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* * * * *
Specifying the Treatment of Market Maker Quotes, Including MMLOs
    The Exchange also proposes to modify and add detail regarding how
Market Maker quotes, including MMLOs, would be processed when a series
is open for trading. As discussed below, the Exchange's proposal to
modify the processing of Market Maker quotations aligns with the NMS
plan for Options Order Protection And Locked/Crossed Market Plan
(``Plan''), to which the Exchange is a party.\12\
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    \12\ See Plan, dated April 14, 2009, available here, http://www.optionsclearing.com/components/docs/clearing/services/options_order_protection_plan.pdf. See also Securities Exchange Act
Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009)
(File No. 4-546) (order approving the Plan). Consistent with the
Plan, the rules of the Exchange include prohibitions against trade-
throughs and a pattern or practice of displaying certain quotations
that lock or cross away markets. See, e.g., Rules 6.94, 6.95. See
also infra note 20.
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    The Exchange proposes to change the treatment of incoming
quotations, including the conditions under which quotes would be
cancelled or rejected. Specifically, as proposed, an incoming quotation
would only trade against contra-side interest in the Consolidated Book
at prices that would not trade through interest on another Market
Center.\13\ Any untraded size of an incoming quote would be added to
the Consolidated Book, unless it locks or crosses interest on another
Market Center or if the quote is an MMLO and locks or crosses
undisplayed interest.\14\ The proposed rule would state that when such
quantity of an incoming quote is cancelled (as opposed to being
rejected outright), the Exchange would also cancel the Market Maker's
current quote on the opposite side of the market. In other words, both
sides of the Market Maker's quote residing on the Consolidated Book
would be cancelled, which allows a Market Maker to refresh both its bid
and offer simultaneously.
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    \13\ See proposed 6.37B(a)(3)(A). See Rule 6.1A(6) (defining
Market Center as ``a national securities exchange that has qualified
for participation in the Options Clearing Corporation pursuant to
the provisions of the rules of the Options Clearing Corporation'').
    \14\ See proposed Rule 6.37B(a)(3)(B)(i).
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    In addition, as proposed, an incoming quotation would be rejected
if it locks or crosses interest on another Market Center and if it
cannot trade with interest in the Consolidated Book at prices that do
not trade through another Market Center.\15\ An incoming quotation
designated as MMLO would be rejected if it locks or crosses undisplayed
interest and cannot trade with displayed interest in the Consolidated
Book at prices that do not trade through another Market Center.\16\ The
proposed rule would specify that when an incoming quote is rejected
outright (as opposed to being cancelled after a partial fill), the
Exchange would also cancel the Market Maker's current quote on the same
side of the market.\17\ Such treatment recognizes that the Market Maker
attempted (unsuccessfully) to update its bid or offer price and allows
the Market Maker to refresh that side of its quote.
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    \15\ See proposed Rule 6.37B(a)(3)(C)(i).
    \16\ See proposed Rule 6.37B(a)(3)(C)(ii).
    \17\ See proposed Rule 6.37B(a)(3)(C).
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    In addition, when a series is open for trading, a quote will trade
only against interest in the Consolidated Book and will not route. The
Exchange does not route Market Maker quotations because such quotes are
designed to meet the Market Maker's obligation to have displayed
quotations on the Exchange. The Exchange proposes to specify this
functionality in Exchange rules.\18\
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    \18\ See proposed Rule 6.37B(a)(3), (D).
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    The Exchange believes that processing Market Maker quotations, as
described in the proposed rules, aligns with the Plan.\19\ The Plan
obligates the participating exchanges to provide order protection,
including addressing locked and crossed markets and the potential for
trade-throughs in certain options classes.\20\ The Plan establishes
various obligations for participating exchanges, including that Market
Makers should ``reasonably avoid displaying, and shall not engage in a
pattern or practice of displaying, any quotations that lock or cross''
the best bid or offer on another Market Center.\21\ The Plan further
obligates participating exchanges to conduct surveillance of their
respective markets on a regular basis to ascertain the effectiveness of
the policies and procedures to prevent trade-throughs and to take
prompt action to remedy deficiencies in such policies and
procedures.\22\ Because Market Maker quotations do not route, and
incoming quotes, or portions thereof, would reject or cancel if such
quotes locked or crossed away markets, the Exchange believes the
proposal is consistent with the requirements of the Plan. In addition,
the proposed processing of quotes is consistent with the Plan because
it avoids trading-through better prices on other exchange and locking
or crossing markets. In addition, the Exchange believes this proposal
would assist Market Makers in maintaining a fair and orderly market, as
it would encourage Market Makers to provide greater liquidity.
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    \19\ See Plan, supra note 12.
    \20\ See e.g., Securities Exchange Act Release No. 60527 (August
18, 2009), 74 FR 43178 (August 26, 2009) (SR-NYSEArca-2009-45)
(adopting and updating Exchange rules to implement the Plan).
    \21\ See Plan at Section 6(c), supra note 12.
    \22\ See Plan at Section 5(a), supra note 12.
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    The Exchange notes that this proposal does not relieve a Market
Maker of its continuous quoting, or firm quote, obligations pursuant to
Rules 6.37B and 6.86, respectively. Further, the Exchange notes that
Market Makers would still be able to send orders in (and out of)
classes to which they are appointed, as orders are not affected by this
proposal.
Implementation
    The Exchange will announce the implementation of the proposed rule
change by Trader Update, which implementation will be no later than 30
days after the approval of this rule change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\23\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\24\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and

equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
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    The proposal to add the definition of Market Maker quotes would
provide clarity and transparency to Exchange rules to the benefit of
investors as the additional clarity would promote just and equitable
principles of trade and remove impediments to, and perfect the
mechanism of, a free and open market and a national market system. The
proposed rule amendments would also provide internal consistency within
Exchange rules and operate to protect investors and the investing
public by making the Exchange rules easier to navigate and comprehend.
Because the proposed definition of quotes is identical or substantially
identical to definitions provided on other options exchanges, the
proposal presents no new or novel issues.\25\
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    \25\ See supra note 5.
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    The proposal to offer to Market Makers the ability to designate
quotes as MMLO would remove impediments to and perfect the mechanism of
a free and open market and a national market system because it would
provide Market Makers with increased control over interactions with
contra-side liquidity. Specifically, the proposal would improve market
making on the Exchange because it would prevent incoming Market Maker
quotes from trading with resting undisplayed interest, which interest
is difficult to take into account in quoting models. Accordingly, the
Exchange believes that the proposed MMLO designation would provide
Market Makers with a greater level of determinism, in terms of managing
their exposure, and would encourage more aggressive liquidity
provision, resulting in more trading opportunities for market
participants and tighter spreads. Accordingly, the Exchange believes
that the proposal would improve overall market quality and improve
competition on the Exchange, to the benefit of all market participants.
Moreover, the Exchange notes that all market participants, including
Market Makers, already have the ability to avoid trading with
undisplayed liquidity interest by entering PNP-Light Orders.\26\ The
proposal to adopt MMLO simply extends existing functionality to Market
Maker quotes.\27\
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    \26\ See supra note 9.
    \27\ See supra note 11.
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    Because market participants that enter undisplayed interest (e.g.,
PNP-Blind Orders or orders with reserve size) \28\ are opting not to
have their interest displayed, the Exchange believes it is consistent
with the Act for Market Makers to choose to designate their quotes not
to trade with such undisplayed interest.\29\ For the forgoing reasons,
the Exchange believes that the proposal to offer to Market Makers the
option to designate their quotes as MMLO is not unfairly
discriminatory. The Exchange also believes that such offering would
protect investors and the public interest because it may contribute to
more aggressive quoting by Market Makers, which should increase the
quality of the Exchange's market and benefit investors.
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    \28\ See Rule 6.62(u) (providing that a PNP Blind Order is a
Limit Order to buy or sell that is to be executed in whole or in
part on the Exchange, and the portion not so executed is to be
ranked in the Consolidated Book, without routing any portion of the
order to another Market Center) and (d)(3) (providing that a Reserve
Order is ``a limit order with a portion of the size displayed and
with a reserve portion of the size (`reserve size') that is not
displayed on NYSE Arca'').
    \29\ In this regard, the Exchange notes that undisplayed
liquidity is not afforded trade-through protection under Section 5
of the Plan. See Plan, supra note 12.
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    The proposal to add detail and amend the treatment of Market Maker
quotes is consistent with, and facilitates the Exchange meeting its
obligations under the Plan and, thus, would remove impediments to, and
perfect the mechanism of, a free and open market and a national market
system. The Exchange believes the proposed processing of quotes is
consistent with the Plan because it avoids trading through better
prices on other exchanges and is designed to avoid locking and crossing
markets. By preventing Market Makers from locking or crossing trading
interest on away Market Centers, the proposal would prevent fraudulent
and manipulative acts and practices and would promote just and
equitable principles of trade to the benefit of all market
participants. The Exchange also believes the proposal regarding how the
Exchange processes quotes in the event that an incoming quote is
rejected, or a portion thereof is cancelled, would promote just and
equitable principles of trade. Specifically, the proposed rules would
enable Market Makers to simultaneously update both sides of their
resting quote when one side of the quote received a partial fill but
was subsequently cancelled and, where one side of a quote is rejected
and not booked, to leave undisturbed that opposite-side interest
because it remains valid. The Exchange believes this proposed handling
of quotes would assist Market Makers in maintaining a fair and orderly
market as it would encourage Market Makers to provide greater volumes
of liquidity, which would add value to market making on the Exchange.
    The Exchange believes that the entire proposal is just, equitable
and not unfairly discriminatory, as it would apply to all Market Makers
on the Exchange. Further, the proposal would protect investors and the
public interest by providing a more robust market, including because
the proposal may contribute to more aggressive quoting by Market
Makers. The Exchange believes that the proposal would lead to enhanced
liquidity on the Exchange, which in turn will benefit and protect
investors and the public interest through the potential for greater
volume of orders and executions on the Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes the
proposal adds value to market making on the Exchange. The Exchange does
not believe the proposal would impose a burden on competition among the
options exchanges because of vigorous competition for order flow among
the options exchanges. In this highly competitive market, market
participants can easily and readily direct order flow to competing
venues. The proposal does not impose an undue burden on intramarket
competition because the proposed change would apply to all Market
Makers on the Exchange. The proposal is structured to offer the same
enhancement to all Market Makers, regardless of size, and would not
impose a competitive burden on any participant.
    The proposed MMLO, which provides Market Makers with enhanced
determinism over their quotes, may contribute to more aggressive
quoting by Market Makers, resulting in more trading opportunities and
tighter spreads. To the extent this purpose is achieved, the MMLO would
enhance the market making function on the Exchange, which would improve
overall market quality and improve competition on the Exchange to the
benefit of all market participants.
    The Exchange believes the proposal is pro-competitive because when
an exchange offers enhanced functionality that distinguishes it from
other exchanges and participants find it useful, it has been the
Exchange's

experience that competing exchanges will move to adopt similar
functionality. Thus, the Exchange believes that this type of
competition amongst exchanges is beneficial to the market place as a
whole as it can result in enhanced processes, functionality, and
technologies.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be 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<EMAIL_ADDRESS>Please
include File Number SR-NYSEArca-2017-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2017-17. 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 Web site (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 Web site 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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2017-17 and should
be submitted on or before March 20, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03727 Filed 2-24-17; 8:45 am]
 BILLING CODE 8011-01-P