[Federal Register: May 29, 2007 (Volume 72, Number 102)]
[Notices]
[Page 29568-29569]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29my07-122]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55789; File No. SR-NYSEArca-2007-34]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change and Amendment No. 1 Thereto Relating to Trading
a Class of Options Without Designating a Lead Market Maker
May 21, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 3, 2007, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been substantially prepared by the Exchange. On May 2, 2007,
NYSE Arca filed Amendment No. 1 to the proposed rule change. The
Commission is publishing this notice to solicit comment on the proposed
rule change, as amended, from interested persons.
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\1\ 15 U.S.C 78s(b)(1).
\2\ 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
NYSE Arca is proposing to modify Exchange Rules 6.35, 6.38, 6.92,
and 6.93 to allow an option issue to trade without designating a Lead
Market Maker (``LMM''). In those options without an LMM, the Exchange
will designate a Market Maker as the sender of a Principal Acting as
Agent (``P/A'') Order \3\ through the Options Intermarket Linkage
(``Linkage'').
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\3\ Section 2(16)(a) of the Plan for the Purpose of Creating and
Operating an Intermarket Option Linkage (``Linkage Plan'') defines a
P/A Order as an order for the principal account of a market maker
that is authorized to represent customer orders, reflecting the
terms of a related unexecuted customer order for which the market
maker is acting as agent.
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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 Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule changes would allow the Exchange to trade a class
of options without designating an LMM, yet still meet the requirements
of the Linkage Plan.\4\
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\4\ On July 28, 2000, the Commission approved Linkage proposed
by Amex, CBOE, and ISE. See Securities Exchange Act Release No.
43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). Subsequently,
Phlx, Pacific Exchange, Inc. (n/k/a NYSE Arca), and BSE joined the
Linkage Plan. See Securities Exchange Act Release Nos. 43573
(November 16, 2000), 65 FR 70851 (November 28, 2000); 43574
(November 16, 2000), 65 FR 70850 (November 28, 2000); and 49198
(February 5, 2004), 69 FR 7029 (February 12, 2004).
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An LMM designation on the Exchange obligates a Market Maker to a
99% quoting requirement in all appointed series of an underlying
class,\5\ in return for up to a 40% guaranteed allocation on trades
executed on the Exchange when the LMM is quoting at the national best
bid or offer (``NBBO'').\6\ The Exchange states that, in large part,
LMMs are designated in option classes to foster liquidity. The Exchange
believes that certain highly liquid, highly active options classes,
however, have sufficient participation by OTP Holders \7\ that there is
no need for an LMM. In not designating an LMM in certain option issues,
orders would be processed in price/time priority, meaning any market
participant, regardless of status, may gain priority by improving the
market. The Exchange believes that this change to price/time order
execution will create more competition and liquidity in the selected
option issues.
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\5\ NYSE Arca Rule 6.37B(b).
\6\ NYSE Arca Rule 6.76B(a)(1)(A)(i).
\7\ See NYSE Arca Rule 1.1(q) for the definition of ``OTP
Holder.''
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To accommodate the Linkage Plan, the Exchange proposes
modifications to its Rules 6.35, 6.38, 6.92, and 6.93 to allow for the
designation of an Exchange Market Maker, assigned on a rotating basis,
as the responsible Intermarket Linkage Market Maker (``IMM'') on
outbound P/A Orders.\8\ Under the terms of the Linkage Plan as applied
in the NYSE Arca rules,\9\ the LMM currently is the responsible party
on outbound P/A Orders sent through the Linkage. Although the Exchange
intends to rely solely on the use of its outbound routing broker to
access away markets when the Exchange is not at the NBBO, there may be
instances when the Exchange's routing broker is not available because
of system malfunctions. As a result, the Exchange proposes that
designated IMMs be responsible for outbound P/A Orders sent through the
Linkage. The IMM would be required to submit prior written instructions
to the Exchange for routing of any P/A Orders the IMM may send through
the Exchange to the Linkage.
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\8\ The IMM will be selected from the pool of all Market Makers
who have been appointed in the particular class. Market Makers
requesting appointment in the underlying class will need to agree to
participate in the rotation of IMM assignment.
\9\ Telephone conversation between Peter Armstrong, Managing
Director, Options, Office of the General Counsel, NYSE Group, Inc.,
and Timothy C. Fox, Special Counsel, Division of Market Regulation,
Commission, on May 16, 2007.
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Under Section 2(16)(a) of the Linkage Plan, however, a P/A Order
may be routed to another exchange only through the principal account of
a market maker that is authorized to represent customer orders,
``reflecting the terms of a related unexecuted Customer order for which
the Market Maker is acting as agent.'' Market Makers on the Exchange
other than LMMs, however, are not permitted to act as an agent on
behalf of an order submitted to the Exchange, so as to avoid any
appearance of a conflict of interest.\10\ In order to comply with the
Linkage Plan, therefore, the Exchange proposes to amend Exchange Rule
6.38(a) to provide an exception for Market Makers acting as an IMM for
the purpose of settling P/A Orders sent to away markets pursuant to
Exchange Rules 6.92 and 6.93. This proposed exception is limited to
Market Makers acting in the capacity of an IMM strictly for the purpose
of settling P/A Orders sent over the Linkage. The proposed exception
does not confer any other rights or create any other obligations to any
Market Maker.
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\10\ See Exchange Rule 6.38(b)(1), which provides that Market
Makers other than LMMs are restricted from acting as a principal and
an agent in the same issue on the same business day. See also
Exchange Rule 6.38(b)(5), which provides Market Makers are
restricted from acting as a floor broker in options covering the
same underlying security to which its primary appointment extends.
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The Exchange also proposes to amend Exchange Rule 6.93 to clarify
that the Exchange will be responsible for the receipt, processing, and
execution of inbound Linkage orders received from other Participant
exchanges. Inbound Linkage orders sent to NYSE Arca are routed directly
to the trading system for immediate automatic execution; any remaining
unexecuted portion, or any order not executable because a quote is no
longer available, will be immediately
[[Page 29569]]
returned by the Exchange to the originating away market.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\11\ in general and furthers the objectives of Section 6(b)(5) \12\ in
particular in that 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 facilitating transactions in securities, and to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system.
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\11\ 15 U.S.C. 78f(b)
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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 such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2007-34 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2007-34. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEArca-2007-34 and should be submitted on or before
June 19, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-10208 Filed 5-25-07; 8:45 am]
BILLING CODE 8010-01-P