[Federal Register Volume 85, Number 53 (Wednesday, March 18, 2020)]
[Notices]
[Pages 15515-15522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05557]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88369; File No. SR-NYSEArca-2020-17]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Amending Rule 7.31-E (Orders and Modifiers)
Relating to How Orders Are Repriced and Make Related Changes to Rules
7.35-E, 7.36-E, and 7.38-E
March 12, 2020.
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 28, 2020, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the
[[Page 15516]]
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. 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 7.31-E (Orders and Modifiers)
relating to how orders are repriced and make related changes to Rules
7.35-E, 7.36-E, and 7.38-E. The proposed 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 7.31-E (Orders and Modifiers)
relating to how orders are repriced and make related changes to Rules
7.35-E, 7.36-E, and 7.38-E.
Background
Currently, if an Away Market updates its PBBO and crosses not only
the Exchange's BBO, but also displayed orders in the Exchange Book not
represented in the BBO, i.e., depth-of-book orders, and then the
Exchange's BBO cancels or trades, the Exchange will not disseminate its
next-best priced displayed order as its new BBO to the securities
information processor (``SIP'').\4\ Instead, the Exchange reprices such
order before it is disseminated to the SIP.\5\
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\4\ The term ``Away Market'' is defined in Rule 1.1 to mean
``any exchange, alternative trading system (``ATS'') or other
broker-dealer (1) with which the Exchange maintains an electronic
linkage and (2) that provides instantaneous responses to orders
routed from the Exchange.'' The term ``BBO'' is defined in Rule 1.1
to mean the best bid or offer on the Exchange, and the term ``BB''
means the best bid on the Exchange, and the term ``BO'' means the
best offer on the Exchange. The term ``PBB'' is defined in Rule 1.1
to mean the highest Protected Bid, the term ``PBO'' means the lowest
Protected Offer, and ``PBBO'' means the Best Protected Bid and Best
Protected Offer. The terms ``Protected Bid'' and ``Protected Offer''
are defined in Rule 1.1. The term ``Exchange Book'' is defined in
Rule 1.1 to mean the Exchange's electronic file of orders, which
contains all orders entered on the Exchange.
\5\ See Rule 7.31-E(a)(2)(C), which provides that ``[i]If a BB
(BO) that is locked or crossed by an Away Market PBO (PBB) is
cancelled, executed or routed and the next best-priced resting Limit
Order(s) on the Exchange Book that would become the new BB (BO)
would have a display price that would lock or cross the PBO (PBB),
such Limit Order(s) to buy (sell) will be assigned a display price
one MPV below (above) the PBO (PBB) and a working price equal to the
PBO (PBB). When the PBO (PBB) is updated, the Limit Order(s) to buy
(sell) will be repriced consistent with the original terms of the
order. If a Day ISO to buy (sell) arrives before the PBO (PBB) is
updated, such repriced Limit Order(s) to buy (sell) will be repriced
to the lower (higher) of the display price of the Day ISO or the
original price of the Limit Order(s).''
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For example, if the Exchange's BB is $10.05 and on the Exchange
Book, there is an order to buy 100 shares ranked Priority 2--Display
Orders at $10.04 (``Order A''), Order A is displayed in the Exchange's
proprietary depth-of-book market data at that $10.04 price but is not
disseminated to the SIP.\6\ If next, an Away Market publishes a PBO of
$10.03, the Exchange's BB of $10.05 will stand its ground. However, if
that $10.05 BB trades, cancels, or routes, the Exchange will not
disseminate Order A to the SIP as the new BB at $10.04. Instead, as
provided for in Rule 7.31-E(a)(2)(C), Order A will be assigned a
display price of $10.02 and a working price of $10.03, which is equal
to the Away Market PBO, and will be disseminated to the SIP as the
Exchange's BB at $10.02. Order A will be repriced to $10.04 once the
Away Market PBBO no longer locks or crosses the Exchange BBO. Each time
Order A is repriced, including back to its original price, it is
assigned a new working time.\7\ The Exchange also applies this
repricing functionality to Primary Pegged Orders and following an
auction.\8\
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\6\ See Rule 7.36-E(b)(3) (describing which orders are collected
and made available to quotation vendors for dissemination pursuant
to the requirements of Rule 602 under Regulation NMS under the Act).
\7\ See Rule 7.36-E(f)(2) (an order is assigned a new working
time any time its working price changes).
\8\ See Rules 7.31-E(h)(2)(B) and 7.35-E(h)(3)(A).
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The Exchange believes that no other exchange reprices resting depth
orders in this manner. The Exchange understands that in the same
scenario on other exchanges, ``Order A'' would stand its ground and be
disseminated to the SIP as their new BBO at $10.04, even if that price
would cross the Away Market PBO of $10.03. The rules of other exchanges
vary regarding how much detail is used to describe circumstances when
displayed orders stand their ground, and none explicitly address the
specific scenario described above, i.e., when a resting, displayed,
depth-of-book order is crossed by an Away Market quotation and then
becomes the best-priced order on that exchange. For example:
The Nasdaq Stock Market LLC (``Nasdaq'') Rule 4756(c)(2)
provides that Nasdaq transmits for display to the appropriate network
processor its best-priced orders. That Rule specifies exceptions of
which orders are not transmitted to the SIP, i.e., the reserve size of
orders, the discretionary portion of Discretionary Orders, and Non-
Displayed Orders. This rule is silent as to whether resting, displayed,
depth-of-book orders that have been locked or crossed by another market
center and then become the best-ranked orders on Nasdaq are transmitted
to the SIP at their original price. Separately, Nasdaq rules provide
that certain previously-displayed orders stand their ground. For
example, pursuant to Nasdaq Rules 4702(b)(1)(B) and 4702(b)(2)(B),
resting ``Price to Comply Orders'' and ``Price to Display Orders''
entered via RASH, QIX, or FIX will stand their ground if locked or
crossed by another market center. But these rules discuss top-of-book
displayed orders that are crossed, not depth-of-book orders.
CBOE BZX Exchange, Inc. (``BZX'') Rule 11.12(b) (Priority
of Orders) provides that the best-ranked order(s) to buy and the best-
ranked order(s) to sell that are displayable in the BZX Book and the
aggregated displayed size of such orders associated with such prices
shall be collected and made available to quotation vendors for
dissemination pursuant to the requirements of Rule 602 of Regulation
NMS. This rule is silent as to whether resting, displayed, depth-of-
book orders that have been locked or crossed by another market center
and then become the best-ranked orders on BZX are transmitted to the
SIP at their original price. BZX Rule 11.13(a)(2)(C) (Order Execution
and Routing) discusses how orders execute on BZX when the PBBO is
crossed, and how that exchange processes incoming orders during a
crossed market. But that rule does not address the scenario described
above regarding resting, displayed, depth-of-book orders and whether
they would be made available to quotation vendors for dissemination at
their original price, even when the
[[Page 15517]]
PBBO is crossed. Under Rule 11.13(b)(4), BZX further provides for
optional ``Re-Route Instructions'' pursuant to which if a routable
order has been locked or crossed by another market, the routable order
on the BZX book would be routed to that other market. However, these
are optional instructions, which implies that in the absence of one of
these instructions, if a routable order on BZX is locked or crossed by
another market, such order stands its ground.
Investors Exchange LLC (``IEX'') Rule 11.240(c)(1)
provides that IEX disseminates the aggregate of its best-ranked
displayable orders to quotation vendors for dissemination to the SIPs.
IEX Rules 11.190(h)(3)(A)(i) and (h)(3)(B)(i) further provide that
resting orders that are displayed at a price that later becomes locked
or crossed, and were originally displayed in compliance with rules and
regulations of IEX, will maintain their displayed price and
quantity.\9\ While these rules do not distinguish between displayed
orders at the top of the IEX book and depth-of-book displayed orders,
these rules appear consistent with the Exchange's proposed change to
provide that resting, displayed, depth-of-book orders would stand their
ground and are eligible to be disseminated to the SIP as the BBO at
their original displayed price.
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\9\ See also Supplementary Material .02 to Rule 11.190(h)
(providing that ``[o]rders displayed on the Exchange which were
displayed at a price compliant with Regulation NMS are generally
permitted to maintain their displayed price in the event an away
trading center locks or crosses the price of the IEX displayed
order.'')
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Long-Term Stock Exchange (``LTSE'') Rule 11.240(c)(1)
provides that LTSE disseminates the aggregate of its best-ranked
displayable orders to quotation vendors for dissemination to the
SIPs.\10\ LTSE Rules 11.190(g)(3)(A)(i) and (g)(3)(B)(i) further
provide that resting orders that are displayed at a price that later
becomes locked or crossed, and were originally displayed in compliance
with rules and regulations of LTSE, will maintain their displayed price
and quantity.\11\ While these rules do not distinguish between
displayed orders at the top of the LTSE book and at depth, these rules
appear consistent with the Exchange's proposed change to provide that
resting, displayed, depth-of-book orders would stand their ground and
are eligible to be disseminated to the SIP as the BBO at their original
displayed price.
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\10\ LTSE has been approved as a registered exchange but is not
yet operational.
\11\ See also Supplementary Material .02 to LTSE Rule 11.190(g).
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MEMX LLC (``MEMX'') has filed a Form 1 application for
registration as a national securities exchange pursuant to Section 6 of
the Act.\12\ Proposed MEMX Rule 11.9(b) provides that the best-ranked
order(s) to buy and the best-ranked order(s) to sell that are
displayable in the MEMX Book and the aggregate displayed size of such
orders associated with such prices shall be collected and made
available to the SIP. MEMX claims that its proposed MEMX Rule
11.6(j)(1)(A)(ii), which provides that ``[f]ollowing the initial
ranking and display or an order subject to the Display-Price Sliding
instruction, an order will only be re-ranked and re-displayed to the
extent it achieves a more aggressive price, provided, however, that the
Exchange will re-rank an order at the same price as the displayed price
in the event such orders' displayed price would be a Locking or
Crossing Quotation'' makes clear that an order displayed by MEMX would
not be re-priced to a less aggressive price if another market locked or
crossed an order displayed by MEMX.\13\ The Exchange understands this
response to mean that MEMX would not re-price displayed orders that
were at depth that would become the MEMX best bid or offer.
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\12\ See Securities Exchange Act Release No. 87436 (October 31,
2019), 84 FR 59854 (November 6, 2019) (File No. 1--237). Although
MEMX has not yet been approved as an exchange, the Exchange believes
that its proposed rules are relevant to this discussion as MEMX
expects to be operational in 2020, subject to approval of its Form 1
application.
\13\ See Letter from Anders Franzon, General Counsel, MEMX, to
Ms. Vanessa Countryman, Secretary, Securities and Exchange
Commission, dated February 11, 2020, available here: https://www.sec.gov/comments/10-237/10237-6795399-208386.pdf.
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The Exchange proposes to amend its rules to conform how it reprices
orders in this scenario to how other exchanges function. The Exchange
believes that because such orders did not lock or cross an Away Market
PBBO when they were entered on the Exchange and displayed to the
Exchange's proprietary market data, such resting orders have priority
at the price at which they were originally displayed.\14\ In other
words, such resting orders did not cause a locked or crossed market
condition.
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\14\ If the PBBO is locked or crossed at the time of an order's
arrival, such arriving orders would be either routed, cancelled, or
repriced, as provided for in Rule 7.37-E(c) (for routable orders) or
Rule 7.31-E(e) (for non-routable orders). This proposed rule change
is applicable only to resting orders.
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The Exchange further believes that providing priority to such
resting orders on the Exchange Book (e.g., disseminating ``Order A'' as
a BB at $10.04 in the above-described scenario) would be consistent
with Rule 610(d) under the Act (``Rule 610(d)'').\15\ Rule 610(d)
provides that ``[e]ach national securities exchange . . . shall
establish, maintain, and enforce written rules that . . . are
reasonably designed to assure the reconciliation of locked quotations
in an NMS stock.'' The proposed rule change is consistent with this
requirement because in the scenario described above, the Away Market
has published a PBO that crosses not only the Exchange's BB, but also
other orders that have already been entered on the Exchange and
displayed on the Exchange's proprietary market data. Even though such
depth-of-book orders have not yet been disseminated to the SIP as part
of the Exchange's BBO, those resting orders pre-exist the Away Market
quote that crossed them. Therefore, disseminating any pre-existing,
displayed orders to the SIP as the new BB at their original price would
be consistent with Rule 610(d) because it was the Away Market that
crossed previously-displayed orders.
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\15\ 17 CFR 242.610(d).
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Proposed Rule Change
To effect this proposed rule change, the Exchange proposes to
delete Rule 7.31-E(a)(2)(C) in its entirety. The Exchange also proposes
to delete references to this Rule and describe how the Exchange would
process orders, as follows.
First, the Exchange proposes rule changes to specify that
previously-displayed orders at any price stand their ground and remain
eligible to be quoted or traded at their last-displayed price, even if
locked or crossed by an Away Market. The Exchange proposes to specify
this principal generally for all displayed orders by amending Rule
7.36-E(b) to add new subparagraph (4) that would provide that if an
Away Market locks or crosses the BBO, the Exchange would not change the
display price of any Limit Order ranked Priority 2--Display Orders \16\
and any such orders would be eligible to be disseminated as the
Exchange's BBO.\17\ This proposed rule text both (1) provides
specificity that all resting, top-of-book displayed orders stand their
[[Page 15518]]
ground, which is current functionality,\18\ and (2) describes new
functionality for previously displayed depth-of-book orders, which
would now stand their ground instead of being repriced if they become
the Exchange's BBO.
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\16\ As set forth in Rule 7.36-E(c), all non-marketable orders
are ranked and maintained in the Exchange Book in the following
manner: (1) price; (2) priority category; (3) time; and (4) ranking
restrictions applicable to an order or modifier condition. Under
Rule 7.36-E(e)(2), ``Priority 2--Display Orders'' are non-marketable
Limit Orders with a displayed working price. Limit Orders that are
ranked Priority 2--Display Orders can be top of book or at depth.
\17\ As set forth in Rule 7.36-E(b)(1), the Exchange considers
an order to be ``displayed'' when it has been disseminated via a
market data feed. Because all orders ranked Priority 2--Display
Orders, regardless of price, are displayed via proprietary data
feeds, such orders are all ``displayed'' for purposes of Exchange
rules.
\18\ Current Rule 7.31-E(e)(1)(A)(iii) specifies that Non-
Routable Limit Orders stand their ground when crossed by an Away
Market PBBO.
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Because such resting orders would no longer be repriced if locked
or crossed by an Away Market, such orders would not need to be assigned
new working times and would therefore retain priority at their original
price. In addition, for market participants that read the Exchange's
proprietary market data and are aware of displayed, depth-of-book
orders, this proposed change provides greater certainty regarding the
price at which a liquidity-taking order would execute on the Exchange.
This proposed rule text therefore promotes transparency and clarity
in Exchange rules that all resting, displayed orders, including depth-
of-book orders, would stand their ground if locked or crossed by an
Away Market. Proposed Rule 7.36-E(b)(4) is based in part on IEX Rules
11.190(h)(3)(A)(i) and (h)(3)(B)(i) and LTSE Rules 11.190(g)(3)(A)(i)
and (g)(3)(B)(i), described above, and is consistent with proposed MEMX
Rule 11.6(j)(1)(A)(ii).
The Exchange proposes related changes to remove references to Rule
7.31-E(a)(2)(C) in connection with Primary Pegged Orders and replace
that rule text with proposed new functionality that such orders would
stand their ground at their last-displayed price. As described above,
if the PBBO becomes locked or crossed, displayed orders on the Exchange
would stand their ground. The Exchange proposes that in such scenario,
resting Primary Pegged Orders, which are dynamically pegged to the
PBBO, would similarly stand their ground. As further proposed, if the
PBBO becomes locked or crossed, Primary Pegged Orders would wait for a
PBBO that is not locked or crossed before the display and working price
of such orders are adjusted. While the market is locked or crossed,
such orders would remain eligible to trade at their current working
price.
To effect this change, the Exchange proposes to amend Rule 7.31-
E(h)(2)(B) relating to Primary Pegged Orders by deleting the last
clause of that Rule \19\ and amend the last sentence of that paragraph
as follows (new text underlined, proposed text for deletion in
brackets): ``If after arrival, the PBBO becomes locked or crossed, the
Primary Pegged Order will wait for a PBBO that is not locked or crossed
before the display and working price [is]are adjusted[, but]and remains
eligible to trade at its current working price.''
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\19\ The last clause of current Rule 7.31-E(h)(2)(B) provides:
``provided that, if a resting Limit Order on the Exchange Book is
assigned a new display price and working price pursuant to Rule
7.31-E(a)(2)(C) and the PBBO is still locked or crossed, a resting
Primary Pegged Order will also be assigned a new display price and
working price pursuant to Rule 7.31-E(a)(2)(C).''
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Second, the Exchange proposes to specify how the Exchange would
process orders following either a UTP Regulatory Halt in a UTP Security
or an Auction that is not preceded by continuous trading.\20\ Because
continuous trading did not precede either of these scenarios, the
Exchange does not have a displayed quote eligible to stand its ground.
Accordingly, to prevent publishing a quote that would lock or cross an
Away Market, the Exchange proposes that before the Exchange publishes a
quote following either of these scenarios, orders that are marketable
against a protected quotation on an Away Market would be either routed
(if routable) or cancelled (if non-routable).
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\20\ The term ``UTP Security'' is defined in Rule 1.1 to mean a
security that is listed on a national securities exchange other than
the Exchange and that trades on the Exchange pursuant to unlisted
trading privileges and the term ``UTP Regulatory Halt'' is defined
in Rule 1.1 to mean a trade suspension, halt, or pause caused by the
UTP Listing Market in a UTP Security that requires all market
centers to halt trading in that security. The term ``UTP Listing
Market'' is defined in Rule 1.1 to mean the primary listing market
for a UTP Security.
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The second clause of proposed Rule 7.36-E(b)(4) would address how
the Exchange would process orders before resuming trading and
publishing a quote in a UTP Security following a UTP Regulatory Halt.
This proposed rule text would be an exception to the first half of the
rule text, described above, that previously-displayed orders stand
their ground. The Exchange proposes this exception because during a UTP
Regulatory Halt, there is no continuous trading and the Exchange
``zeroes'' out its quote, meaning the Exchange removes its BBO from the
SIP. However, during a UTP Regulatory Halt, the Exchange may still have
orders on its book. Specifically, as set forth in Rule 7.18-E(b),
during a UTP Regulatory Halt, the Exchange cancels resting non-
displayed orders and maintains all other resting orders in the Exchange
Book at their last working price and display price. The Exchange does
not accept new orders during such a halt. As provided for in Rule 7.18-
E(a), the Exchange does not resume trading, including publishing a
quote, in such security until it receives notification from the UTP
Listing Market that the halt or suspension is no longer in effect and
it has received the first Price Band in that security. The Exchange
proposes that once it is eligible to resume trading, previously-
displayed Limit Orders, i.e., the orders entered before the UTP
Regulatory Halt, would be routed (if routable) or cancelled (if non-
routable) if such orders would be marketable against protected
quotations on Away Markets.
For example, if before a UTP Regulatory Halt in XYZ security, the
Exchange's BBO was $10.10 (100 shares) x $10.12 (100 shares), and
before the Exchange resumes trading following that UTP Regulatory Halt,
the first PBBO is $10.08 (100 shares) x $10.09 (100 shares), because
the Exchange's former best bid of $10.10 is marketable against the new
$10.09 PBO, the Exchange would either route that order (if routable) or
cancel it (if non-routable). The Exchange would publish the former
$10.12 because it is not marketable against an Away Market quotation.
To specify how orders would be processed before publishing a quote
when transitioning from a prior trading session or following the Core
Open or Closing Auction, i.e., transitions preceded by continuous
trading and the Exchange has a published quote immediately preceding
the transition, the Exchange proposes that those displayed orders are
eligible to stand their ground, as described in proposed Rule 7.36-
E(b)(4) above. To effect this change, the Exchange proposes to delete
the last clause of Rule 7.35-E(h)(3)(A)(i), which provides that if the
new published quote is worse than the previously-published quote and
would lock or cross the PBBO, the display price of Limit Orders will be
adjusted consistent with Rule 7.31-E(a)(2)(C). This proposed change is
consistent with the proposed change to Rule 7.36-E(b), described above,
that previously-displayed orders stand their ground if crossed by an
Away Market. Because this paragraph is about scenarios where an Auction
follows continuous trading and there was a previously-published quote,
the Exchange also proposes a non-substantive, clarifying amendment to
Rule 7.35-E(h)(3)(A)(i) to specify that this subparagraph of the Rule
would be applicable to Closing Auctions that are preceded by continuous
trading.
To specify how orders would be processed before publishing a quote
when transitioning to continuous trading following an Auction that is
not preceded by continuous trading, the Exchange proposes to amend Rule
7.35-
[[Page 15519]]
E(h)(3)(A)(ii) regarding how orders would be processed before
publishing a quote when transitioning to continuous trading following
an Auction that is not preceded by continuous trading. Currently,
before publishing following a Trading Halt Auction: (1) Previously-live
Limit Orders that are designated with a Proactive if Locked/Crossed
Modifier or that would be the result of reserve interest replenishing
the display quantity of a routable Reserve Order will route, if
marketable against protected quotations on Away Markets; (2)
previously-live orders that are marketable against other orders in the
NYSE Arca Book and that would not trade-through a protected quotation
will trade; and (3) the display price of all other orders that are
marketable against a protected quotation on an Away Market will be
adjusted consistent with Rule 7.31-E(a)(2)(C).
Because the Exchange will no longer be adjusting the price of
orders as provided for in Rule 7.31-E(a)(2)(C), the Exchange proposes
that, generally, to prevent publishing a quote that would lock or cross
an Away Market PBBO, following an Auction that is not preceded by
continuous trading, if orders are marketable against protected
quotations on Away Markets, routable orders would route and non-
routable orders would cancel. To effect this change, the Exchange
proposes to amend Rule 7.35-E(h)(3)(A)(ii) to provide that, before
publishing a quote following a Trading Halt Auction (or Closing Auction
if not preceded by continuous trading), previously-live orders would be
processed as follows:
Orders eligible to route that are marketable against
protected quotations on Away Markets would route based on the ranking
of such orders as set forth in Rule 7.36-E(c) (proposed Rule 7.35-
E(h)(3)(A)(ii)(a)). With this proposed change, routable orders at
potentially multiple price points would be routed to protected
quotations on Away Markets before any other action is taken.
After routing eligible orders, orders not eligible to
route (excluding Primary Pegged Orders, and during a Short Sale Price
Test, sell short orders) that are marketable against protected
quotations on Away Markets would cancel (proposed Rule 7.35-
E(h)(3)(A)(ii)(b)). The Exchange does not propose to route or cancel
Primary Pegged Orders, or, during a Short Sale Price Test, sell short
orders, because such orders, by their terms, are eligible to be
repriced.
Once there are no more unexecuted orders marketable
against protected quotations on Away Markets (because they have either
been routed or cancelled), orders that are marketable against other
orders in the NYSE Arca Book would trade (proposed Rule 7.35-
E(h)(3)(A)(ii)(c)). With this proposed step, remaining orders on the
NYSE Arca book that could trade would trade.
The display quantity of Reserve Orders would be
replenished as provided for in Rule 7.31-E(d)(1) (proposed Rule 7.35-
E(h)(3)(A)(ii)(d)).
Primary Pegged Orders would be assigned a display price
and working price as provided for in Rule 7.31-E, provided that such
orders would cancel if the PBBO is locked or crossed or there is no PBB
(PBO) against which to peg (proposed Rule 7.35-E(h)(3)(A)(ii)(e)).
Because these orders reprice on arrival, the Exchange proposes to
process previously-entered Primary Pegged Orders in the same manner
following an Auction. This proposed rule text therefore makes clear
that Primary Pegged Orders would be assigned a display price and
working price no differently than they would on arrival, as described
in Rule 7.31-E.
Finally, sell short orders would be priced to a Permitted
Price as provided for under Rule 7.16-E(f)(5) (proposed Rule 7.35-
E(h)(3)(A)(ii)(f)). The Exchange proposes to reprice sell short orders
last as the Permitted Price may have changed as a result of step one,
described above (routing orders to the PBBO).
The Exchange believes that following a UTP Regulatory Halt or an
Auction that is not preceded by continuous trading, orders that would
lock or cross the Away Market PBBO should either be routed (if
routable) or cancelled (if non-routable) if they would be marketable
against protected quotations on Away Markets. The Exchange believes
that routing or cancelling such orders is consistent with Rule 610(d)
because the Away Market does not have an obligation to prevent locking
or crossing an Exchange quote in these scenarios. Therefore, in these
scenarios, to prevent locking or crossing the Away Market PBBO, the
Exchange would either route or cancel previously-entered orders before
publishing a quote. This was how the New York Stock Exchange LLC
(``NYSE'') processed orders following an Auction before it transitioned
to Pillar.
The Exchange also proposes a non-substantive change regarding how
the term ``previously-live orders' is defined for purposes of Rule
7.35-E(h)(3)(A). Currently, the term ``previously-live orders'' is
defined as unexecuted orders that were eligible to trade in the trading
session both before and after the transition or auction. This
definition is intended to refer to the trading session designated for
an order, not that it was eligible to trade in continuous trading, and
includes orders that were entered during a trading halt that occurred
in the same trading session as the auction. To clarify this rule, the
Exchange proposes to amend Rule 7.35E(h)(3)(A) and define a
``previously-live order'' as an unexecuted order that was received
before the Auction Processing Period and was designated to trade in the
trading session both before and after the transition or auction.
Third, the Exchange proposes to apply the proposed processing of
orders, described above, to odd-lot orders. In other words, odd-lot
orders would no longer be processed differently than orders that are a
round lot or greater in size. Currently, Rule 7.38-E(b)(1) and
subparagraphs (A)-(C) describe how the working and display price of
odd-lot orders are adjusted in relation to the contra-side PBBO. In
short, currently, the working and display prices of odd-lot orders are
bound by the PBBO, which means that resting odd-lot orders can be
repriced if the PBBO changes or becomes locked or crossed.\21\
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\21\ Current Rule 7.38-E(b)(1) provides that ``[t]he working and
display price of an odd lot order will be adjusted both on arrival
and when resting on the Exchange Book as follows: (A) If the limit
price of an odd lot order to buy (sell) is at or below (above) the
PBO (PBB), it will have a working and display price equal to the
limit price. (B) If the limit price of an odd lot order to buy
(sell) is above (below) the PBO (PBB), it will have a working price
equal to the PBO (PBB). The display price will also be adjusted to
the PBO (PBB) unless the order's instruction requires a display
price that is different from the PBBO. (C) If the PBBO is locked or
crossed and the limit price of an odd lot order to buy (sell) is
above (below) the PBO (PBB), it will have a working and display
price equal to the PBB (PBO). The working and display price of such
odd lot order will not be adjusted again until the PBBO unlocks or
uncrosses.''
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As proposed, odd-lot sized orders would be priced the same as
orders of a round-lot size or higher, and if they are designated
Priority 2--Display Orders, they would stand their ground if locked or
crossed by an Away Market PBBO. To effect this change, the Exchange
proposes to delete Rule 7.38-E(b)(1) and sub-paragraphs (A)-(C) in
their entirety. The Exchange also proposes to delete the clause
``provided that'' at the end of Rule 7.38-E(b) and make a non-
substantive change to that Rule to replace the term ``in'' with the
term ``on.'' As a result of these changes, Rule 7.38-E(b) would
provide, without any qualifiers, that ``[r]ound lot, mixed lot and odd
lot orders are treated in the same manner on the Exchange.'' The
Exchange proposes an additional non-substantive change to renumber
current Rule 7.38-E(b)(2) as Rule 7.38-E(c).
Fourth, because displayed odd-lot orders would stand their ground,
the Exchange proposes to amend Rule 7.31-
[[Page 15520]]
E(d)(1) to add new subparagraph (F) relating to Reserve Orders to
specify new functionality of how non-routable Reserve Orders would be
replenished if the display quantity of a resting Reserve Order is
decremented to an odd-lot size when the PBBO is crossed. The Exchange
proposes this change only for non-routable Reserve Orders. These
changes are not necessary for a routable Reserve Order because when
such order replenishes, the replenish quantity is evaluated for routing
to Away Markets and thus would not be displayed at a price that crosses
an Away Market.
As proposed in new subparagraph (F) to Rule 7.31-E(d)(1), if the
PBBO is crossed and the display quantity of a Reserve Order to buy
(sell) that is a Non-Routable Limit Order is decremented to less than a
round lot, the display price and working price of the remaining odd-lot
quantity of the Reserve Order would not change. This proposed rule text
is consistent with the change, described above, that resting displayed
orders, including odd-lot sized orders, would stand their ground if
crossed by an Away Market. The proposed rule would further provide that
the reserve interest that replenishes the display quantity would be
assigned a display price one MPV below (above) the PBO (PBB) and a
working price equal to the PBO (PBB). Because this is the first time
such interest would be displayed, the Exchange proposes to adjust the
display and working price so that the replenished quantity would not
lock or cross the Away Market, which is the same manner that an
arriving Non-Routable Limit Order is priced.\22\
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\22\ See Rule 7.31-E(e)(1)(A) (describing how arriving Non-
Routable Limit Order is priced). On Nasdaq, a Price to Comply Order
with Reserve Size replenishes in a similar manner. See Nasdaq Rule
4703(h); see also Supplementary Material .02 to IEX Rule 11.190(h)
(``When a reserve order refreshes its displayed portion, the
refreshing shares are not permitted to be displayed at a price that
locks or crosses the price of a protected quotation on an away
market and are subject to display-price sliding'').
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When the PBBO uncrosses, the display price and working price would
be adjusted as provided for under paragraph (e)(1) of this Rule
relating to Non-Routable Limit Orders.
Fifth, as described above, displayed orders would stand their
ground if locked or crossed by an Away Market. However, non-displayed
orders do not. As set forth in Rule 7.31-E(d)(2)(A), the working price
of a resting Non-Displayed Limit Order will be adjusted based on the
limit price of the order. If the limit price of a Non-Displayed Limit
Order to buy (sell) is at or below (above) the PBO (PBB), it will have
a working price equal to the limit price. If the limit price of a Non-
Displayed Limit Order to buy (sell) is above (below) the PBO (PBB), it
will have a working price equal to the PBO (PBB). The Exchange proposes
to amend Rule 7.31-E(d)(1) to provide that the working price of the
reserve interest of resting Reserve Orders, which are not displayed,
would be adjusted in the same manner that the working price of Non-
Displayed Limit Orders are adjusted.
To effect this change, the Exchange proposes to amend Rule 7.31-
E(d)(1) to add the following sentence: ``The working price of the
reserve interest of a resting Reserve Order will be adjusted in the
same manner as a Non-Displayed Limit Order, as provided for in
paragraph (d)(2)(A) of this Rule.'' The Exchange understands that at
least one other exchange also adjusts the price of the non-displayed
portion of Reserve Orders in the same manner that such exchange adjusts
the price of non-displayed orders.\23\
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\23\ See IEX Rule 11.190(b)(2) (stating that the non-displayed
portion of reserve orders are treated as non-displayed orders). IEX
reprices its non-displayed orders differently from how the Exchange
reprices Non-Displayed Limit Orders. See IEX Rule 11.190(h)(3)(D).
Importantly, both IEX and the Exchange reprice non-displayed orders
when crossed by an Away Market PBBO.
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Together with the proposed rule change described above to Rule
7.36-E(b), these rule changes make clear that on the Exchange, if
crossed by an Away Market PBBO, displayed orders would stand their
ground and non-displayed orders, including the reserve interest of
resting Reserve Orders, would be repriced based off of the PBBO.
Implementation
Because of the technology changes associated with this proposed
rule change, the Exchange will announce the implementation date of this
proposed rule change by Trader Update. Subject to effectiveness of this
proposed rule change, the Exchange anticipates that the implementation
date will be in the Spring of 2020.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\24\ in general, and furthers the objectives of
Sections 6(b)(5) of the Act,\25\ 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 mechanisms 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.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that deleting Rule 7.31-E(a)(2)(C) and the
related proposed amendment to Rule 7.36-E(b) to add new sub-paragraph
(4) would remove impediments to and perfect the mechanism of a free and
open market and a national market system because they would promote
transparency in Exchange rules that previously-displayed orders would
stand their ground if locked or crossed by an Away Market PBBO. The
proposed rule changes would further promote transparency because they
make clear that resting, displayed, depth-of-book orders that have been
locked or crossed by an Away Market PBBO would be eligible to be
disseminated to the SIP at their original price if they become the BBO.
The Exchange believes that previously-displayed orders, including
depth-of-book orders, have priority at such price and should be able to
stand their ground if locked or crossed by an Away Market. The Exchange
therefore believes it is consistent with this principle to delete Rule
7.31-E(a)(2)(C) and change functionality on the Exchange for such
orders to stand their ground and not be repriced if another market
locks or crosses their price. The proposed change therefore benefits
those resting orders because they would be able to keep their original
working time and any priority ranking associated with such working
time. The proposed change would also benefit liquidity takers, who
would have greater certainty regarding the price at which they would
receive an execution on the Exchange.
Moreover, the proposed change is consistent with how other
exchanges function. While the rules of other exchanges differ in level
of detail, these proposed changes are based in part on IEX Rules
11.190(h)(3)(A)(i) and (h)(3)(B)(i)and LTSE Rules 11.190(g)(3)(A)(i)
and (g)(3)(B)(i), which similarly provide that previously-displayed
orders on those exchanges maintain their display price and quantity if
locked or crossed by an another market center. The proposal is also
similar to how MEMX proposes it would function if approved as an
exchange.
The Exchange further believes that these proposed amendments are
consistent with Rule 610(d). If an Away Market publishes a PBBO that
crosses
[[Page 15521]]
not only the Exchange's BBO, but also resting, displayed, depth-of-book
orders, it was the Away Market that crossed previously-displayed
orders. If such previously-displayed, depth-of-book orders become the
Exchange's BBO, the Exchange believes it is appropriate to disseminate
those previously-displayed prices and quantities to the SIP as the new
BBO because those resting orders pre-existed the Away Market quote that
locked or crossed them.
For the same reasons, the Exchange believes that the proposed
changes to Primary Pegged Orders would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because displayed orders that are pegged to a dynamic price
would stand their ground at their original displayed price if locked or
crossed by an Away Market, which is consistent with the proposed rule
change that all displayed orders would stand their ground. These
proposed rule changes also promote transparency by specifying that such
orders would continue to be eligible to trade at their original working
price, and that their display and working prices would not be adjusted
until the PBBO is no longer locked or crossed.
The Exchange further believes that routing or cancelling orders
that are marketable against an Away Market PBBO following a UTP
Regulatory Halt or an Auction that is not preceded by continuous
trading would also remove impediments to and perfect the mechanism of a
free and open market and a national market system because in these
scenarios, the Away Market would not have had an obligation to prevent
displaying a locking or crossing quotation. The Exchange proposes to
avoid locking or crossing an Away Market PBBO in these scenarios by
routing or cancelling previously-displayed orders, as applicable. These
proposed changes would reduce the number of times resting orders would
be repriced, thereby increasing determinism for the price at which
orders would be executed on the Exchange. The Exchange notes that this
proposed change is not novel as this is how NYSE processed orders
following an auction before it transitioned NYSE-listed securities to
Pillar. The Exchange further believes that the proposed change to the
definition of ``previously-live orders'' would remove impediments to
and perfect the mechanism of a free and open market and a national
market system because the proposed rule text is designed to clarify the
existing rule without changing its meaning, thus promoting transparency
and clarity in Exchange rules.
The Exchange believes that processing odd-lot sized orders in the
same manner as round-lot sized orders would remove impediments to and
perfect the mechanism of a free and open market because the same
principle applies: An order of any size that has been displayed has
priority at that price if an Away Market subsequently locks or crosses
that price. In addition, the Exchange believes that processing odd-lot
orders the same as round-lot sized orders is not novel as it is
consistent with the rules of other exchanges.\26\
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\26\ See, e.g., Nasdaq Rules 4703(b)(3) (defining the term ``odd
lot'' as an order attribute) and 4702 (describing which order
attributes are available for orders on Nasdaq, without any
discussion of odd-lot sized orders being priced differently than
round-lot sized orders). See also BZX Rules 11.10 (defining the term
``odd lot'') and 11.9 (describing BZX Orders and Modifiers, without
any discussion of odd-lot sized orders being priced differently than
round-lot sized orders).
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Finally, the Exchange believes that the proposed changes to Reserve
Orders would remove impediments to and perfect the mechanism of a free
and open market because it would apply these principles to a Non-
Routable Limit Order that is also a Reserve Order. This proposed
functionality is also consistent with how Nasdaq and IEX process non-
routable orders with reserve interest.\27\ The proposed change to
reprice the reserve interest of resting Reserve Orders in the same
manner as a Non-Displayed Limit Order is priced would also remove
impediments to and perfect the mechanism of a free and open market
because it would promote consistency in Exchange rules regarding how
similar orders are priced when crossed by an Away Market. The proposed
change is also consistent with how IEX processes the reserve interest
of Reserve Orders.\28\
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\27\ See supra note 22.
\28\ See supra note 23.
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\29\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The proposed change is competitive because it is
designed to conform how the Exchange processes previously-displayed
orders with the functionality available on other exchanges, i.e., that
such orders would stand their ground if locked or crossed by an Away
Market and be eligible to be disseminated to the SIP at their original
price. The Exchange believes that the proposed change would promote
competition because fewer orders would need to be repriced on the
Exchange and therefore liquidity providers seeking for their orders to
retain priority may route additional orders to the Exchange. Likewise,
liquidity takers may be more likely to route orders to the Exchange if
they have greater determinism regarding the price at which their orders
would be executed.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b)(8).
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Without this proposed rule change regarding how displayed orders
would stand their ground if locked or crossed by an Away Market, the
Exchange is currently at a competitive disadvantage vis-[agrave]-vis
all other equity exchanges, which do not reprice orders in this manner.
As discussed above, displayed orders on all other equity exchanges,
including the two exchanges that recently had their Form 1 applications
to be approved as an exchange (IEX and LTSE), stand their ground when
locked or crossed by an Away Market and such orders are disseminated to
the SIP if they become those exchanges' best bid or offer. In addition,
MEMX proposes that displayed orders would stand their ground if locked
or crossed by an Away Market.
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 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:
[[Page 15522]]
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-2020-17 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-NYSEArca-2020-17. 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 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 offices 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-2020-17, and should be
submitted on or before April 8, 2020.
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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-05557 Filed 3-17-20; 8:45 am]
BILLING CODE 8011-01-P