[Federal Register Volume 84, Number 200 (Wednesday, October 16, 2019)]
[Notices]
[Pages 55345-55351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22483]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87264; File No. SR-NYSECHX-2019-08]
Self-Regulatory Organizations; NYSE Chicago, Inc.; 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 Rules To
Support the Transition of Trading to the Pillar Trading Platform
October 9, 2019.
I. Introduction
On August 6, 2019, NYSE Chicago, Inc. (``NYSE Chicago'' or
``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 in connection with the transition of trading on
the Exchange to the Pillar trading platform, described below. The
proposed rule change was published for comment in the Federal Register
on August 26, 2019.\3\ The Commission received no comments on the
proposed rule change. On October 2, 2019, the Exchange filed Amendment
No. 1 to the proposed rule change, which supersedes and replaces the
original filing in its entirety.\4\ The Commission is approving
[[Page 55346]]
the proposed rule change, as modified by Amendment No. 1, on an
accelerated basis, and is soliciting comments on Amendment No. 1.
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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. 86709 (August 20,
2019), 84 FR 44654 (``Notice'').
\4\ In Amendment No. 1, the Exchange proposes, among other
things, to: (i) Extend the pilot period for proposed NYSE Chicago
Rule 7.12 (Trading Halts Due to Extraordinary Market Volatility) to
October 18, 2020; (ii) amend NYSE Chicago Article 17, Rule 5(c)(3)
to add definitions of stock-option combination order and stock-
future combination order and amend NYSE Chicago Article 1, Rule 1 to
state that the definitions of stock-option combination order and
stock-future combination order in NYSE Chicago Article 1, Rule 1
(jj) and (kk) are not applicable to trading on the Pillar trading
platform; and (iii) cross reference Article 21, Rule 1 in proposed
NYSE Chicago Rule 7.45(d)(2)(A). Although the Exchange proposed with
Amendment No. 1 to supersede and replace the original proposal, for
ease of reference this Order cites to the published Notice with
respect to those aspects of the original proposal that have not been
changed. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysechx-2019-08/srnysechx201908-6244417-192732.pdf.
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II. Description of the Proposal
In July 2018, NYSE Chicago and its direct parent company were
acquired by NYSE Group, Inc., and the Exchange became part of a
corporate family including NYSE Arca, Inc. (``NYSE Arca''), NYSE
American LLC (``NYSE American''), NYSE National, Inc. (``NYSE
National'') and New York Stock Exchange LLC (``NYSE'') (collectively,
the ``Affiliated Exchanges'').\5\ Since the acquisition, NYSE Chicago
has continued to operate with rules distinct from those of the
Affiliated Exchanges.\6\
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\5\ See Securities Exchange Act Release No. 83635 (July 13,
2018), 83 FR 34182 (July 19, 2018) (SR-CHX-2018-004); see also
Securities Exchange Act Release No. 83303 (May 22, 2018), 83 FR
24517 (May 29, 2018) (SR-CHX-2018-004).
\6\ See Notice, supra note 3, at 44655.
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The Exchange now proposes to transition trading in Tape A, Tape B,
and Tape C-listed securities from its current trading platform to a
fully automated price-time priority allocation model that operates on
the Pillar trading platform, which is an integrated trading technology
platform designed to use a single specification for connecting to the
equities and options markets operated by the Exchange and its
affiliates. NYSE Chicago would offer the same suite of orders and
modifiers, generally, as are available on NYSE Arca or NYSE
National.\7\ Accordingly, the Exchange proposes trading rules based on
the rules and trading model of the cash equities platforms of those
exchanges--including rules relating to orders and modifiers, ranking
and display of orders, execution and routing of orders, and all other
trading functionality--with certain differences in some of the details
of its rules, as discussed below.
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\7\ See id. at footnote 8 for a discussion of the differences
between the rules of NYSE Arca and NYSE National and those of
markets of the other Affiliated Exchanges that share a substantial
number of trading functions and Pillar platform rules with them.
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The Exchange states that it will continue to support its dual
listings, but would not provide trading functions that support the
operation of a primary listing exchange.\8\ Accordingly, the Exchange
states, once it transitions to Pillar, NYSE Chicago will function most
similarly to NYSE National, which, unlike NYSE Arca, is not a listing
exchange.\9\ The Exchange proposes, however, a number of substantive
differences in its trading on the Pillar platform from how trading on
NYSE Arca and NYSE National function.\10\
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\8\ See Notice at 44655.
\9\ As a result, for example, the Exchange does not propose to
operate any auctions and therefore does not propose rules like those
of NYSE Arca to provide for auction functionality on the Exchange.
Concomitantly, like NYSE National, the Exchange would offer
``Auction-Only Orders,'' which are orders designated to participate
in an auction on the primary listing market. See NYSE National (and
proposed NYSE Chicago) Rule 7.31(c). The Exchange would route all
such orders to the primary listing market. See Notice at 44660 for a
discussion of this and other, related provisions based on NYSE
National rules. See also Securities Exchange Act Release No. 83289
(May 17, 2018), 83 FR 23968 (May 23, 2018) (SR-NYSENAT-2018-02).
\10\ See Notice at 44655.
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First, the Exchange states, it would continue to support
Institutional Brokers,\11\ as provided for under Article 17 of the
current NYSE Chicago rules.\12\ Second, the Exchange would continue to
support a Qualified Contingent Trade (``QCT'') cross order modifier to
facilitate compliance with the contingent trade exemption of Rule 611
of Regulation NMS.\13\ Third, the Exchange will continue to support
non-regular way settlement instructions for cross orders and the
ability for cross orders to be submitted in an increment as small as
$0.000001, as provided in its current rules.\14\ Fourth, the Exchange
will not support Market Makers on the Exchange.\15\
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\11\ The term ``Institutional Broker'' is defined in Article 1,
Rule 1(n) to mean a member of the Exchange who is registered as an
Institutional Broker pursuant to the provisions of Article 17 and
has satisfied all Exchange requirements to operate as an
Institutional Broker on the Exchange.
\12\ As detailed below, the Exchange proposes to amend the rules
set forth under Article 17 as necessary to support differences in
the Pillar trading platform as compared to the Exchange's current
trading rules. See infra notes 52-54 and accompanying text.
\13\ The QCT cross order modifier, which is currently described
in Article 1, Rule 2(b)(2)(E) of the current NYSE Chicago rules, is
designed for an Institutional Broker to comply with the contingent
trade exemption. The Exchange states that, while NYSE Arca and NYSE
National both describe this exemption in their respective rules,
neither exchange offers a specific order type designed for this
exemption. See Notice at 44655 and NYSE Arca Rule 7.37-E(f)(5) and
NYSE National Rule 7.37(f)(5).
\14\ See infra note 29 and accompanying text.
\15\ Accordingly, the Exchange does not propose rules based on
Section 2 of NYSE Arca Rule 7-E or NYSE National Rule 7, relating to
market makers, and will not offer the ``Q'' order type described in
NYSE Arca Rule 7.31-E(j) and NYSE National Rule 7.31(j). See Notice
at 44655. ``Q'' orders are relevant only for market makers.
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The following is an overview of the proposed revisions to the
Exchange's existing rules as well as a more detailed discussion of some
of the proposed new rules for the Pillar trading platform.\16\
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\16\ See Notice, supra note 3, for a more complete description.
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The following current rules of the Exchange will continue to be
operative without any substantive changes:\17\ Article 2 (Committees);
Article 3 (Participants and Participant Firms); Article 5 (except for
Rule 1) (Access to the Exchange); Article 6 (Registration, Supervision
and Training); Article 7 (Financial Responsibility and Reporting
Requirements); Article 8 (except for Rule 17) (Business Conduct);
Article 9 (except for Rule 23) (General Trading Rules); Article 10
(Margins); Article 11 (except for Rule 3(b)(8)) (Participant Books and
Records); Article 12 (Disciplinary Matters and Trial Proceedings);
Article 13 (Suspension--Reinstatement); Article 14 (Arbitration);
Article 15 (Hearings and Reviews); Article 21 (Clearance and
Settlement); and Article 22 (Listed Securities).\18\
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\17\ The Exchange's existing rules will appear in its rulebook
in their current numbering format following a rules set that is
based on numbering system of NYSE National's rules, the framework of
which was recently adopted by the Exchange and is organized in 13
Rules. See Securities Exchange Act Release No. 85297 (March 12,
2019), 84 FR 9854 (March 18, 2019) (SR-NYSECHX-2019-03).
\18\ Regarding the exceptions to the rules included in this
paragraph, see infra note 19.
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Once trading on the Pillar trading platform begins, certain
specified current Exchange rules would not be applicable, either
because they are not relevant for Pillar or because there is an
equivalent or replacement provision in the Pillar rules set that
addresses the same topic.\19\ With respect, specifically,
[[Page 55347]]
to the Exchange's current rules regarding cross orders, certain aspects
of these rules that are unique to NYSE Chicago would be integrated
within the rules governing crosses in the Pillar platform,\20\ while
certain of these would be eliminated in Pillar.\21\
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\19\ These include: Certain of the definitions set forth in
Article 1, Rule 1 (see infra note 24); Article 1, Rule 2 (Order
Types, Modifiers, and Related Terms), covered in proposed Section 3
of Rule 7 (see infra text accompanying notes 32-48); Article 1, Rule
3 (Time) (see proposed Rule 1.1(e), providing that all times in the
Pillar Platform Rules are Eastern Time); Article 1, Rule 4 (Exchange
Use of the Securities Information Processors) (see proposed Rule
7.37); Article 3, Rule 21 (Mandatory Participation Testing of Backup
Systems), covered by proposed Rule 2.13 (see infra note 25); Article
4, relating to Book Feed and Connect service, which will not be
offered on Pillar (see Notice at 44663); Article 5, Rule 1 (Access
to Exchange Systems), covered by proposed Rule 7.29; Article 8, Rule
17 (Customer Disclosures), covered in proposed Rule 7.34; Article 9,
Rule 23 (Short Sales), covered in proposed Rule 7.16; Article 11,
Rule 3(b)(8), covered by proposed Rule 7.33, relating to capacity
codes; Article 16 (Market Makers), not applicable on the Exchange
(see supra note 15); Article 19 (Operation of the Routing Services),
covered by proposed rule 7.45; Article 20, Rules 1-8, 10, 12-13,
replaced by provisions in proposed Rule 7 covering trading sessions,
trading halts, Limit Up-Limit Down Plan, firm orders, orders
eligible for entry, prevention of trade-throughs, locked and crossed
markets, operation of the matching system, clearly erroneous
transactions, order cancellation, and reporting of transactions (see
discussion infra); and Article 22, Rule 6(a)(3), relating to trading
halts for derivative securities products traded pursuant to unlisted
trading privileges, covered by proposed Rule 7.18. For each current
rule (or Article) that would not be applicable for trading on the
Pillar trading platform, the Exchange proposes to state in a
preamble to such rule that ``this Rule/Article is not applicable to
trading on the Pillar trading platform.''
\20\ As previously mentioned, the Exchange would continue to
support the QCT cross order type, which is designed for
Institutional Brokers to comply with the contingent trade exemption.
See supra note 13. Similarly, it would retain the ``Cross with
Size'' modifier available in its existing rules. However, the
Exchange proposes to no longer offer ``Benchmark'' or ``Midpoint
Cross'' orders once it transitions to Pillar.
\21\ See infra notes 39-48 and accompanying text.
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The new rules relating to trading on the Pillar platform that are
proposed in this filing will be added in Rules 0, 1, 2, and 7 of the
recently adopted new numbering framework.\22\ They include the
following:
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\22\ See supra note 17.
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Rule 0--Regulation of the Exchange and ETP Holders
Proposed NYSE Chicago Rule 0 would establish the regulation of the
Exchange and Participants. Proposed NYSE Chicago Rule 0 would provide
that the Exchange and FINRA are parties to a regulatory services
agreement in which FINRA will perform certain functions on behalf of
the Exchange, with the Exchange retaining ultimate legal responsibility
for, and control of, such functions. The proposed rule is based on the
NYSE National Rule 0 and NYSE Arca Rule 0 without any differences.\23\
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\23\ See Notice at 44656.
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Rule 1--Definitions
Proposed NYSE Chicago Rule 1 would contain definitions applicable
to trading on the Exchange's Pillar platform. The Exchange represents
that the definitions are based on the rules of NYSE Arca, NYSE
American, and NYSE National.\24\
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\24\ Because these definitions would be applicable to the rules
pertaining to trading on Pillar, the Exchange proposes to amend
Article 1, Rule 1 of the existing rules to specify which current
definitions would not be applicable to trading on the Pillar trading
platform. See Notice at 44657-58 and additional current definitions
specified in Amendment No. 1.
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Rule 2--Trading Permits
The Exchange proposes to add proposed NYSE Chicago Rule 2.13
concerning the mandatory testing of the Exchange's business continuity
and disaster recovery plans. Proposed NYSE Chicago Rule 2.13 provides
that the Exchange will establish standards to identify Participants
that it reasonably determines are the minimum necessary for the
maintenance of fair and orderly markets in the event the Exchange's
business continuity and disaster recovery plans are activated and
require designated Participants to participate in the functional and
performance testing of the Exchange's business continuity and disaster
recovery plans.\25\ The Exchange represents that proposed NYSE Chicago
Rule 2.13 is based on NYSE National Rule 2.13 without any substantive
differences.\26\
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\25\ ``Participants''--defined formally in Article 1, Rule 1(s)
of the Exchange's existing rules--signifies, generally, persons who
are permitted to trade on the Exchange, who are deemed ``members''
for purposes of the Act. The Exchange proposes to retain its current
rules governing membership and registration, which are found,
generally, in Article 3 of its existing rules and thus does not
propose to add any membership rules in Rule 2 (Trading Permits)
corresponding to those of NYSE National in its Rule 2, with the
exception of proposed Rule 2.13, which is being added, according to
the Exchange, to maintain consistency among the Affiliated
Exchanges. Correspondingly, the Exchange proposes to amend Article
3, Rule 21 of its existing rules to add a preamble stating that such
rule would not be applicable to trading on the Pillar trading
platform.
\26\ See Notice at 44658.
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Rule 7--Equities Trading
To accommodate trading on Pillar, the Exchange proposes to adopt in
NYSE Chicago Rule 7, ``Equities Trading,'' rules that are based largely
on the equivalent rules of NYSE National and NYSE Arca for their cash
equities trading platforms.\27\
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\27\ See supra note 7. Certain rules would differ from the NYSE
Arca and NYSE National rules, as discussed within the descriptions
below. In addition, the Exchange has identified certain trading
rules of NYSE Arca and NYSE National that it is not proposing to
adopt. For example, as already noted, the Exchange would not operate
auctions and therefore is not proposing rules pertaining to auction
procedures (see supra note 9), and is also not proposing to adopt
rules relating to market makers (supra note 15). In addition, the
Exchange does not propose rules based on NYSE National Rule 7.14 and
7.41, relating to clearing. Current Article 21 (Clearance and
Settlement) will continue to be operative on the Pillar trading
platform without any differences. See supra note 17 and accompanying
text.
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Proposed NYSE Chicago Rule 7 is divided into six sections. In
Section 1, ``General Provisions,'' the Exchange proposes to add
provisions relating to units of trading; trading differentials;
anonymity of bids and offers; binding prices; clearly erroneous
executions; Exchange compliance with the Limit Up-Limit Down National
Market System Plan; trading halts; short sales; and firmness of
quotes.\28\
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\28\ See Notice at 44658 and proposed NYSE Chicago Rules 7.5,
7.6, 7.7, 7.9, 7.10, 7.11, 7.12, 7.16, 7.17, and 7.18. The Exchange
proposes to add NYSE Chicago Rules 7.14 and 7.15 and designate them
as ``Reserved'' to maintain continuity of rule numbering with the
rules of NYSE Chicago's exchange affiliates. See Notice at footnote
23.
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The Exchange proposes a difference from the rules of NYSE Arca and
NYSE National within this section relating to trading differentials in
proposed Rule 7.6. Based on its current rules, NYSE Chicago proposes
that, a Cross Order, whether priced less than or at or above $1.00,
would be permitted to be submitted in an increment as small as
$0.000001 unless the Cross Order has been designated with regular way
settlement terms and does not meet Cross with Size.\29\
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\29\ See current Article 20, Rule 4(a)(7)(B). For Cross Orders
designated with regular way settlement terms (that do not meet Cross
with Size requirements), the cross price would be required to be (i)
at least $0.01 above (below) the BB (BO) if the cross price is at or
above $1.00 or (ii) at least $0.0001 above (below) the BB (BO) if
the cross price is under $1.00.
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The Exchange proposes another difference from the rules of NYSE
Arca and NYSE National within this section, relating to settlement
terms. Whereas the rules of those exchanges, in Rule 7.8, provide that
bids and offers are considered to be ``regular way'' settlement terms,
the proposed NYSE Chicago rules would make an exception based on its
current rules that would provide that Cross Orders would be considered
to be ``regular way'' unless designated with either of the following
settlement terms: ``Cash'' or ``Next Day''.\30\ Also based in part on
current rules, a cross order marked for non-regular way settlement
would be permitted under the proposed rules to execute at any price,
without regard to the NBBO or any other orders in the Matching
System.\31\
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\30\ A Cross Order designated for ``non-regular way'' settlement
would be permitted to execute at any price without regard to the
Protected Best Bid or Offer or any orders on the Exchange's book.
See proposed Rules 7.8 and 7.8A. The Exchange states that this
proposed rule text is based in part on current Article 20, Rule
4(a)(7)(A), which provides that a cross order may be submitted for
non-regular way settlement, and current Article 1, Rule 2(e)(2),
which provides that cross orders may be settled with one of three
conditions: Cash, Next Day, or Seller's Option. However, on Pillar,
the Exchange does not propose to offer Seller's Option non-regular
way settlement instructions. See Notice at 44662. See also id. for a
discussion of other changes that the Exchanges proposes to implement
with respect to current Article 1, Rule 2(e).
\31\ See Article 1, Rule 2(e)(2). See also Article 20, Rule
8(e)(3).
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Section 3 of proposed NYSE Chicago Rule 7,\32\ ``Exchange
Trading,'' sets forth provisions regarding authorized access to the
Exchange and establishes rules relating to the kinds of order types
[[Page 55348]]
available on the Exchange and how they are designed to trade. Section 3
of proposed Rule 7 also would set forth the rules of the Exchange
relating to order entry (including one substantive difference from the
rules of NYSE Arca and NYSE National); \33\ the codes by which the ETP
Holder submitting an order must indicate whether it is acting in a
principal, agency, or riskless principal capacity; and the three
trading sessions for which the Exchange will be open (early, core, and
late), including the order types that may be traded in each and the
disclosures that Participants must make to non-Participants that send
orders to them for trading in the early or late session regarding,
among other things, the risks that may apply to such orders.\34\
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\32\ As noted above, the Exchange at this time will not support
market makers, and therefore, does not propose the rules relating to
market makers that make up Section 2 of the Pillar rules of
Affiliated Exchanges, and proposes instead to designate Section 2 as
``Reserved.''
\33\ As set forth in proposed NYSE Chicago Rule 7.32 (Order
Entry), unlike NYSE Arca and NYSE National rule, the Exchange would
accept cross orders that are up to 25 million shares in size. The
Exchange states that this provision is based on NYSE Rule 7.32. See
Notice at 44663.
\34\ See proposed NYSE Chicago Rules 7.33 (Capacity Codes); and
7.34 (Trading Sessions).
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Further, Section 3 of proposed NYSE Chicago Rule 7 would establish
rules relating to the display and non-display of various order types,
the ranking of orders in the Exchange book with respect to execution
priority, and the role of price and time in determining such
priority.\35\ The section also includes proposed rules that pertain to
routing of orders to away markets; the prohibition of trading through
protected quotations and exceptions thereto; and compliance with other
aspects of Regulation NMS under the Act.\36\ It also lists the data
feeds that the Exchange proposes to use for the handling, execution,
and routing of orders, as well as regulatory compliance.\37\ Additional
proposed rules in Section 3 relate to odd lot and mixed lot trading on
the Exchange; and trade execution and reporting.\38\
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\35\ See proposed NYSE Chicago Rule 7.36 (Order Ranking and
Display).
\36\ See proposed NYSE Chicago Rule 7.37 (Order Execution and
Routing).
\37\ Id.
\38\ See proposed NYSE Chicago Rules 7.38 and 7.40,
respectively.
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In Section 3, the Exchange proposes, as already mentioned,\39\ to
combine existing Pillar functionality relating to cross orders with the
Exchange's current cross order offerings. Proposed Rule 7.31(g) would
first define Cross Orders as two-sided orders with instructions to
match the identified buy-side with the identified sell-side at a
specified price (the ``cross price''), and is based on NYSE Arca and
NYSE National rules. As in the rules of those other exchanges, Rule
7.31(g) would further provide that a Cross Order must trade in full at
its cross price and will not route. NYSE Chicago, however--unlike at
the other exchanges--proposes to permit a Cross Order to be designated
with non-regular way settlement instructions, based on current Exchange
rules, stating that this proposed provision is based on its current
rules.\40\ Also based on its current rules, the Exchange proposes to
further provide in its version of Rule 7.31(g) that a Cross Order
entered by an Institutional Broker may represent interest of one or
more Participants and may be executed as agent or principal.\41\
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\39\ See supra note 20.
\40\ See Article 1, Rule 2(e)(2) of the current rules, which
provides that the Exchange's Matching System will only accept cross
orders for non-regular way settlement.
\41\ The Exchange states that this proposed provision is based
in part on current Article 1, Rule 2(b)(2)(E), which provides that
Institutional Brokers may execute a cross order as agent or
principal, and current Article 1, Rule 2(g)(1), which provides that
a cross order with Cross with Size may represent interest of one or
more Participants of the Exchange. On Pillar, the Exchange proposes
that any Cross Order entered by an Institutional Broker may
represent interest of one or more Participants on the Exchange.
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Proposed Rule 7.31(g)(1) would set forth the proposed ``Limit IOC
Cross Order,'' which is based in part on how the Limit IOC Cross Order
functions on NYSE Arca and NYSE National. As proposed, a Limit IOC
Cross Order would be a Cross Order that would be rejected under the
following circumstance: (a) If the cross price would trade through the
PBBO; \42\ (b) if the cross price is not between the BBO, unless it
meets Cross with Size requirements, in which case the cross price may
be equal to the BB (BO); \43\ or (c) if there is no PBB or PBO or the
PBBO is locked or crossed. As on NYSE Arca and NYSE National, under the
proposed rule the Exchange would accept and execute a Limit IOC Cross
Order that is priced between the BBO--a functionality currently not
available on the Exchange--and the cross will be executed even if there
are non-displayed or odd-lot sized buy or sell orders between the
BBO.\44\ The proposed rule text differs from the NYSE Arca and NYSE
National rules to account for the availability of the Cross with Size
modifier (described immediately below) which, when utilized, would
permit the cross price to be equal to the BB or BO.
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\42\ The term PBBO is defined on NYSE Arca and NYSE National,
and would be defined on the Exchange under proposed Rule 1.1(o) to
mean the best Protected Bid and the Best Protected Offer, as those
terms are defined in Rule 600(b)(57) of Regulation NMS.
\43\ The BBO is defined on NYSE Arca and NYSE National, and
would be defined on the Exchange under proposed Rule 1.1(c), to mean
the best bid or offer that is a Protected Quotation on the Exchange.
The term ``BB'' would mean the best bid that is a Protected
Quotation on the Exchange and the term ``BO'' would mean the best
offer that is a Protected Quotation on the Exchange. Pursuant to
proposed Rule 1.1(r), the term ``Protected Quotation'' would mean a
Protected Bid or Protected Offer and references definitions under
Rule 600(b) of Regulation NMS. Odd-lot sized bids and offers are not
Protected Quotations.
\44\ See Notice at 44661.
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The Cross with Size modifier permits a cross order of at least
5,000 shares of the same security with a total value of at least
$100,000 to execute, notwithstanding resting orders in the book at the
same price. To qualify, the cross order must be larger than the largest
order displayed on the Exchange Book at the BB or BO.\45\
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\45\ The Exchange states that the Cross with Size modifier,
which would be set forth in proposed Rule 7.31(g)(3), is based in
part on Article 1, Rule 2(g)(1) of the current rules with
differences to reflect that on Pillar, Cross Orders would be
eligible to execute if the cross price is between the BBO even
without a size requirement. See supra note 44 and Notice at 44662.
Because of this, Cross with Size would only be necessary if the
proposed cross price is equal to the BB (BO).
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Proposed Rule 7.31(g)(2) would define a QCT Cross Order as a Cross
Order that is part of a transaction consisting of two or more component
orders that qualifies for a Contingent Order Exemption under proposed
Rule 7.37(f)(5).\46\ The proposed rule would provide that a QCT Cross
Order, which would be available only to Institutional Brokers,\47\
would be rejected if the cross price is not between the BBO (unless it
meets Cross with Size requirements). However, because, as noted above,
Cross Orders generally would newly be permitted to execute on the
Exchange if the cross price is between the BBO,\48\ the Exchange would
also apply this functionality when it transitions QCT Cross Orders to
Pillar.
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\46\ Proposed Rule 7.37(f)(5), which is based on corresponding
rules of NYSE Arca and NYSE National, would set forth the
requirements for a transaction to qualify as a QCT Cross Order.
\47\ See proposed Rule 7.31(g)(b)(2). The Exchange states that
this proposed provision is based on current Article 1, Rule
2(b)(2)(E), which provides that a QCT cross order modifier may only
be utilized by an Institutional Broker.
\48\ See supra note 44 and Notice at 44662.
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Another difference in Section 3 from the rules of NYSE Arca and
NYSE National is proposed in Rule 7.32 (Order Entry), which provides,
generally, that orders entered that are greater than five million
shares in size are to be rejected. NYSE Chicago's proposed rule, based
on the rules of NYSE, another Affiliated Exchange, would provide an
exception in the case of Cross Orders, which the Exchange will accept
in sizes up to 25 million shares.\49\
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\49\ See supra note 33.
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Section 4 of proposed NYSE Chicago Rule 7, ``Operation of Routing
Broker,'' would define ``routing broker'' as ``the
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broker-dealer affiliate of the Exchange and/or any other non-affiliate
third-party broker-dealer that acts as a facility of the Exchange for
routing orders entered into Exchange systems to other market centers
for execution whenever such routing is required by the Rules of the
Exchange or the federal securities laws.'' \50\ In Section 4, the
Exchange further proposes rules covering outbound and inbound routing
functions.\51\
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\50\ See proposed NYSE Chicago Rule 7.45, which comprises the
whole of Section 4.
\51\ See Notice at 44661 for additional details. The proposed
rule would also set forth the parameters of the Exchange's
relationship with its affiliated broker-dealer, Archipelago
Securities LLC, which would function solely as a routing broker on
behalf of both the Exchange and the Affiliated Exchanges. See id.
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As noted above, the Exchange proposes changes to existing Article
17 of its rules to support differences in the Pillar trading platform
as compared to the Exchange's current trading rules.\52\ The Exchange
proposes to amend Article 17 to specify order types defined under
proposed Exchange Rule 7.31 that an Institutional Broker would not be
able to enter via BrokerPlex \53\ and specify that the Quote@Exchange
and Reprice@Exchange order types will not be available on Pillar.\54\
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\52\ See supra note 12.
\53\ BrokerPlex is an order and trade entry, recordation and
management system developed and operated by the Exchange for use by
affiliated representatives of Institutional Brokers as provided in
Article 17, Rule 5. The orders that would not be available include:
Inside Limit Orders, Auction-Only Orders, MPL Orders, Tracking
Orders, ISOs, Primary Only Orders, Primary Until 9:45 Orders,
Primary After 3:55 Orders, Pegged Orders, Non-Display Remove
Modifier, Proactive if Locked or Crossed Modifier, Self-Trade
Prevention Modifier, and Minimum Trade Size Modifier. The Exchange
states that, while these order types would not be available via
Brokerplex, an Institutional Broker could enter these orders via any
other system that they choose to use to connect with the Exchange,
just as any other NYSE Chicago Participant could choose to do.
\54\ The Exchange also proposes to renumber these order types as
proposed NYSE Chicago Rule 5(c)(3)(C) and (D), respectively. See in
this regard Amendment No. 1. Further in Amendment No. 1, the
Exchange proposes to move text relating to Stock-Option Combination
Orders, and Stock-Future Combination Orders, which are currently
defined in Article 1, Rule 1(jj)-(kk), to new subparagraphs (A) and
(B) under Article 17, Rule 5(c)(3). As noted above, the Exchange
proposes to specify that certain provisions of Article 1, Rule 1
(Definitions) would not be applicable to trading on Pillar. Because
both Stock-Option and Stock-Future Combination Orders are currently
available via Brokerplex, the Exchange proposes to amend its rules
to specify that these are order types that would be available via
Brokerplex. The Exchange states that, because such orders are cross
orders, an order that meets the requirements of either a Stock-
Option or Stock-Future Combination Order could be entered for
execution on Pillar as either a QCT Cross Order (if it also meets
the requirements of QCT) or a Limit IOC Cross Order, as described
above. Such orders would continue to be subject to Article 20, Rule
11 and the Exchange proposes non-substantive amendments to that rule
to update rule cross references.
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Finally, the Exchange proposes to amend Article 12, Rule 8(h)
(Exchange Rules and Policies subject to the Minor Rule Violation Plan)
as follows: (1) Delete the reference to ``Failure to Clear the Matching
System (Article 20, Rule 7),'' as this rule has been eliminated, and
reserve Rule 8(h)(2)(F); (2) add proposed NYSE Chicago Rules 7.6
(concerning minimum trading increments, 7.16 (short sales) and 7.30
(failure to comply with authorized trader requirements) as subject to
the Exchange's minor rule violation plan.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to a national securities exchange.\55\ In particular, the Commission
finds that the amended proposed rule change is consistent with Section
6(b)(5) of the Act,\56\ which requires, among other things, that the
rules of a national securities exchange be designed 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, and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\55\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\56\ 15 U.S.C. 78f(b)(5).
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1. Transitioning of Exchange Trading to the Pillar Trading Platform
The Exchange's proposal would transition trading on the Exchange
from the current trading platform to the Pillar platform as a fully-
automated cash equities trading market with a price-time priority
allocation model. As discussed at length in the proposed rule change,
as amended, the re-launched Exchange would neither list securities nor
operate an auction, although it would retain its dual-listed
securities.
The Commission notes that the Exchange's amended proposal would
establish new rules that are based on, and are substantially similar
to, the rules of its Affiliated Exchanges and its current rules, which
were filed and approved by the Commission (or which became immediately
effective) pursuant to Section 19(b) of the Act.\57\ Several of its
Affiliated Exchanges currently operate using the Pillar trading
platform, and a number of other national securities exchanges operate
fully electronic markets. Under the proposal, the Exchange would retain
many of its existing rules that are unique to the Exchange--such as its
rules relating to Institutional Brokers, the QCT cross order modifier,
provisions for trades with non-regular way settlement and permitted
trading differentials for such trades--and adjust them, where
appropriate, with respect to the Pillar platform, and, in the case of
cross orders, integrate them within the Pillar rules while adopting
several features of the related rules of the Affiliated Exchanges.
Accordingly, the Commission finds that the amended proposal raises no
novel regulatory issues, that it is reasonably designed to protect
investors and the public interest, and that it is consistent with the
requirements of the Act.
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\57\ See 78 U.S.C 78s(b).
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2. Section 11(a) of the Act
Section 11(a)(1) of the Act \58\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\59\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once the order has been transmitted to the member performing the
execution; \60\ (iii) may not be affiliated with the executing member;
and (iv) with respect to an account over which the member or an
associated person has investment discretion, neither the member nor an
associated person may retain any compensation in connection with
effecting the transaction except as provided in the Rule. For the
reasons set forth below, the Commission believes that Participants
entering orders into the
[[Page 55350]]
Exchange's Pillar trading system would satisfy the requirements of Rule
11a2-2(T).
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\58\ 15 U.S.C. 78k(a)(1).
\59\ 17 CFR 240.11a2-2(T).
\60\ This prohibition also applies to associated persons of the
initiating member. The member may, however, participate in clearing
and settling the transaction.
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Rule 11a2-2(T)'s first requirement is that orders for covered
accounts be transmitted from off the exchange floor. The Exchange
represents that it will not have a physical trading floor when it re-
launches trading and the Exchange's Pillar trading system will receive
orders from members electronically through remote terminals or
computer-to-computer interfaces.\61\ In the context of other automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account is transmitted
from a remote location directly to an exchange's floor by electronic
means.\62\ Because the Pillar trading system receives orders
electronically through remote terminals or computer-to-computer
interfaces, the Commission believes that the Pillar trading system
would satisfy this off-floor transmission requirement.
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\61\ See Notice at 44665.
\62\ In the context of other all-electronic systems, the
Commission has similarly found that the off-floor transmission
requirement is met if the system receives orders electronically
through remote terminals or computer-to-computer interfaces. See,
e.g., Securities Exchange Act Release Nos. 61419 (January 26, 2010),
75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) (approving BATS
options trading); 59154 (December 23, 2008), 73 FR 80468 (December
31, 2008) (SR-BSE-2008-48) (approving equity securities listing and
trading on BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18,
2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approving NOM
options trading); 53128 (January 13, 2006), 71 FR 3550 (January 23,
2006) (File No. 10-131) (granting the application of The Nasdaq
Stock Market LLC for registration as a national securities
exchange); and 44983 (October 25, 2001), 66 FR 55225 (November 1,
2001) (SR-PCX-00-25) (approving the establishment of the Archipelago
Exchange as the equities trading facility of PCX Equities, Inc., a
subsidiary of the Pacific Exchange, Inc.).
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Second, Rule 11a2-2(T) requires that neither the initiating member
nor an associated person of the initiating member participate in the
execution of the transaction at any time after the order for the
transaction has been transmitted. The Exchange represents that the
Pillar trading system would at no time following the submission of an
order allow a Member or an associated person of the Member to acquire
control or influence over the result or timing of the order's
execution.\63\ According to the Exchange, the execution of a Member's
order would be determined solely by the quotes and orders that are
present in the system at the time the member submits the order and by
the order priority under the Exchange rules.\64\ Accordingly, the
Commission believes that an Exchange member and its associated persons
would not participate in the execution of an order submitted to the
Pillar trading system.
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\63\ See Notice at 44665.
\64\ See id. The Exchange notes that Rule 11a2-2(T) does not
preclude a member from cancelling or modifying orders, or from
modifying the instructions for executing orders, after they have
been transmitted, provided that such cancellations or modifications
are transmitted from off an exchange floor. See id. The Commission
has stated that the non-participation requirement is satisfied under
such circumstances so long as the modifications or cancellations are
also transmitted from off the floor. See Securities Exchange Act
Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978)
(``1978 Release'') (stating that the ``non-participation requirement
does not prevent initiating members from canceling or modifying
orders (or the instructions pursuant to which the initiating member
wishes orders to be executed) after the orders have been transmitted
to the executing member, provided that any such instructions are
also transmitted from off the floor'').
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member that is not associated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities are used, as long as the design of
these systems ensures that members do not possess any special or unique
trading advantages in handling their orders after transmitting them to
the exchange.\65\ The Exchange represents that the design of the Pillar
trading system ensures that no Participant has any special or unique
trading advantage in the handling of its orders after transmitting its
orders to the Exchange.\66\ Based on the Exchange's representation, the
Commission believes that the Pillar trading system would satisfy this
requirement.
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\65\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See Securities
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084
(January 31, 1979).
\66\ See Notice at 44665.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person may retain any compensation in connection with
effecting the transaction, unless the person authorized to transact
business for the account has expressly provided otherwise by written
contract referring to Section 11(a) of the Act and Rule 11a2-2(T)
thereunder.\67\ Members trading for covered accounts over which they
exercise investment discretion must comply with this condition in order
to rely on the rule's exemption.\68\
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\67\ In addition, Rule 11a2-2(T)(d) requires that, if a member
or associated person is authorized by written contract to retain
compensation in connection with effecting transactions for covered
accounts over which the member or associated person thereof
exercises investment discretion, the member or associated person
must furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member or any associated person
thereof in connection with effecting transactions for the account
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 107 (``The contractual
and disclosure requirements are designed to assure that accounts
electing to permit transaction-related compensation do so only after
deciding that such arrangements are suitable to their interests'').
\68\ The Exchange represents that it will advise its membership
through the issuance of a Regulatory Bulletin that those
Participants trading for covered accounts over which they exercise
investment discretion must comply with this condition in order to
rely on the exemption in Rule 11a2-2(T). See Notice at 44665.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
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-NYSECHX-2019-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSECHX-2019-08. 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
[[Page 55351]]
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-
NYSECHX-2019-08 and should be submitted on or before November 6, 2019.
V. Accelerated Approval of Proposed Rule Change, as Modified By
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As discussed above, in Amendment No. 1, the
Exchange proposes, among other things, to: (i) Extend the pilot period
for proposed NYSE Chicago Rule 7.12 (Trading Halts Due to Extraordinary
Market Volatility) to October 18, 2020; (ii) amend NYSE Chicago Article
17, Rule 5(c)(3) to add definitions of stock-option combination order
and stock-future combination order and amend NYSE Chicago Article 1,
Rule 1 to state that the definitions of stock-option combination order
and stock-future combination order in NYSE Chicago Article 1, Rule 1
(jj) and (kk) are not applicable to trading on the Pillar trading
platform; and (iii) cross reference Article 21, Rule 1 in proposed NYSE
Chicago Rule 7.45(d)(2)(A). The proposed changes do not introduce any
rules that differ in any substantive manner from rules that previously
have been approved by the Commission, or that have become immediately
effective, pursuant to Section 19(b) of the Act. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\69\ to approve the proposed rule change, as modified by Amendment
No. 1, on an accelerated basis so that the Exchange can commence its
transition to the Pillar platform without unnecessary delay.
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\69\ 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,\70\ that the proposed rule change (SR-NYSECHX-2019-08), as
modified by Amendment No. 1, be and hereby is approved on an
accelerated basis.
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\70\ Id.
\71\ 17 CFR 200.30-3(a)(31).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\71\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22483 Filed 10-15-19; 8:45 am]
BILLING CODE 8011-01-P