[Federal Register: September 4, 2008 (Volume 73, Number 172)]
[Notices]
[Page 51681-51684]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se08-74]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58431; File No. SR-NYSEArca-2008-90]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NYSE Arca, Inc. Amending NYSE Arca Equities Rule 7.31(x) To
Clarify the Permissible Order Entry Time and Eligibility of Its Primary
Only Order and Amending NYSE Arca Equities Rule 14.3 To Establish
Procedures Designed To Manage Potential Informational Advantages
Resulting From the Affiliation Between the Exchange and Archipelago
Securities L.L.C.
August 27, 2008.
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 August 20, 2008, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') through its wholly-owned subsidiary, NYSE Arca Equities,
Inc. (``NYSE Arca Equities'' or the ``Corporation''), filed with the
Securities and Exchange Commission (the ``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to (i) amend NYSE Arca Equities Rule 7.31(x)
in order to clarify the permissible order entry time and eligibility of
its Primary Only Order (``PO Order'') and (ii) amend NYSE Arca Equities
Rule 14.3 in order to establish procedures designed to manage potential
informational advantages resulting from the affiliation between the
Exchange and Archipelago Securities L.L.C. ((i) and (ii) together, the
``Proposed Rule Change''). The text of the proposed rule change is
available on the Exchange's Web site at http://www.nyse.com, at the
Exchange's principal office, 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
On February 13, 2008, NYSE Arca filed with the Commission a
proposed rule change to amend NYSE Arca Equities Rule 7.31(x) (the ``PO
Plus Proposal'').\4\ NYSE Arca filed that rule change as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A)
\5\ of the Act and Rule 19b-4(f)(6) \6\ thereunder, which rendered it
effective upon filing with the Commission. On April 11, 2008, the
Commission issued an order abrogating the PO Plus Proposal (the
``Abrogation Order'').\7\
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\4\ See Securities Exchange Act Release No. 57377 (Feb. 25,
2008), 73 FR 11177 (February 29, 2008) (SR-NYSEArca-2008-19).
\5\ 15 U.S.C. 78s(3)(A).
\6\ 7 CFR 240.19b-4.
\7\ See Securities Exchange Act Release No. 57648 (April 11,
2008), 73 FR 20981 (April 17, 2008) (order abrogating NYSE Arca Rule
7.31(x)).
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In the Abrogation Order, the Commission noted its concern regarding
(i) the potential for conflicts of interest in instances where a member
firm is affiliated with an exchange to which it is routing orders and
(ii) the potential for informational advantages that could place an
affiliated member of an exchange at a competitive advantage vis-
[agrave]-vis other non-affiliated members.\8\
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\8\ See id.
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NYSE Arca is submitting the Proposed Rule Change to re-propose the
PO Plus Order and to propose a new NYSE Arca Equities Rule 14.3(e). The
Proposed Rule Change is intended to provide additional flexibility and
increased system functionality for NYSE Arca Users \9\ by modifying the
operability and eligibility of PO Orders, and to address the issues
noted by the Commission in the Abrogation Order.
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\9\ See NYSE Arca Equities Rule 1.1(yy) for the definition of
``User.'' Under Rule 1.1(yy), the term User means any ETP Holder or
Sponsored Participant who is authorized to obtain access to the NYSE
Marketplace pursuant to NYSE Arca Equities Rule 7.29. PO Orders,
similar to all other order types offered by the Exchange, are
available only to authorized Users.
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a. The PO Plus Order
The PO Order is a market or limit order that is routed to the
primary, listing market, without sweeping the NYSE Arca book.\10\ PO
Orders are thus a form of directed order, an order type that is
commonly used by exchange members and offered by exchanges and other
market centers to enable firms to discharge their obligations under
Regulation NMS and other rules.\11\ This is an order functionality
offered by the Exchange to its Users. NYSE Arca Users
[[Page 51682]]
submit the PO Order to NYSE Arca. In turn, NYSE Arca passes the PO
Order to Archipelago Securities L.L.C. (``Arca Securities''), its
outbound order routing facility. Arca Securities routes the PO Order to
the primary, listing market. It is important to note that Arca
Securities accepts orders only from the Exchange (in this case NYSE
Arca), which in turn only accepts orders from authorized NYSE Arca
Users.
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\10\ See NYSE Arca Equities Rule 7.31(x).
\11\ The Exchange believes that the proposed functionality is
substantially similar to the ``Directed Order'' type currently
offered by The NASDAQ Stock Market LLC (``Nasdaq''), which allows
Nasdaq members to enter orders to be routed to a user-designated
market center other than Nasdaq, without first interacting with the
Nasdaq order book. See Securities Exchange Act Release No. 55405
(March 6, 2007), 72 FR 11069 (March 12, 2007) (SR-NASDAQ-2007-020).
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Users may enter PO Orders until a cut-off time established from
time to time by the Exchange. Currently, the Exchange restricts PO
Orders to participation in the primary, listing market opening. In an
effort to enhance order execution opportunities for its Users, the
Exchange proposes to modify the PO Order type so that PO Orders may be
entered at any time and to offer an order modifier for Users to
designate PO Orders that are eligible for entry and execution
throughout the trading day.
Under the Proposed Rule Change, a PO Order may be entered at any
time \12\ and will be immediately routed to the primary, listing market
for execution. If the order is not immediate-or-cancel, the order is
not returned to the NYSE Arca book; rather it remains at the venue to
which it is routed, until executed or cancelled that day. In instances
where a symbol is halted, the PO Order will remain at the primary,
listing market until it is cancelled or the symbol is re-opened. PO
Orders eligible for participation in the primary, listing market's
opening must be entered before 6:28 a.m. (Pacific Time). A PO Order
entered for participation in the primary, listing market re-opening
after a trading halt must be entered after trading was halted and
before the Re-Opening Time. Otherwise, PO Orders eligible for
participation in the primary, listing market at all other times must be
marked with the modifier ``PO+''.
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\12\ Users would be able to enter PO Orders into the system for
execution during any of the Exchange's trading sessions (Opening,
Core and Late Sessions).
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The proposed changes to the PO Order type will provide additional
flexibility and functionality to the Exchange's system and its Users
that wish to use the system to comply with their obligations to avoid
trading through any Protected Quotation within the meaning of Rule
600(b)(58) of Regulation NMS.\13\ PO Orders may be designated as
intermarket sweep orders thereby permitting the executing party to
execute at the primary, listing market without checking away market
centers for any protected bid or offer (as defined in Rule 600(b) of
Regulation NMS under the Act). Of course, a broker-dealer that
designates an order as an intermarket sweep order has the
responsibility of complying with Rules 610 and 611 of Regulation NMS.
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\13\ 17 CFR 242.600(b)(58).
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b. Order Routing and Existing NYSE Arca Rules
In its Order approving the merger of the Archipelago Exchange
(``ArcaEx'') with the Pacific Exchange (the ``PCX''),\14\ the
Commission permitted ArcaEx's holding company, Archipelago Holdings,
Inc. (``Archipelago''), to own and operate Arca Securities, in its
capacity as a facility of the PCX that routes orders from ArcaEx to
other market centers.\15\ The Exchange believes that this approval
remains in effect insofar as Arca Securities acts in the capacity of a
facility of NYSE Arca for the routing of orders from NYSE Arca to other
market centers, subject to the applicable conditions.\16\
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\14\ Following the ArcaEx-PCX merger, Archipelago merged with
the NYSE and the PCX was later renamed NYSE Arca.
\15\ See Securities Exchange Act Release No. 52497 (September
22, 2005), 70 FR 56949 (September 29, 2005) (order approving SR-PCX-
2005-90). The Commission's approval was subject to several
conditions and undertakings, specifically that: (1) Arca Securities
would continue to operate and be regulated as a facility of the PCX,
(2) the scope of the exception would be limited to outbound routing,
(3) the primary regulatory responsibility for Arca Securities would
lie with an unaffiliated SRO and (4) the continued use of Arca
Securities for outbound routing would remain optional for other PCX
members. With respect to routing of PO Orders by Arca Securities,
NYSE Arca believes that these conditions and undertakings continue
to be fulfilled.
\16\ Id.
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In its Order granting this approval, the Commission also recognized
the distinction between Arca Securities' role as a broker-dealer
performing the DOT function and Arca's role as an Exchange facility in
connection with outbound routing:
Archipelago Securities also provides the DOT function in
addition to its Outbound Router function * * * PCX requests * * * an
exception for Archipelago Securities to permit Archipelago to
continue to own all of its ownership interest in and operate the DOT
function of Archipelago Securities on a pilot basis until the
earlier of (1) a period of 60 days following the closing of the
Merger, and (2) the closing date of the proposed merger of
Archipelago and the NYSE * * * (Emphasis added.) \17\
\17\ Id.
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Significantly, although Arca Securities was required to discontinue
its operation of the DOT function in connection with the Archipelago/
New York Stock Exchange (``NYSE'') merger, no restrictions other than
those previously described above were requested or imposed by the
Commission with respect to Arca Securities' continuing role as an
outbound router for the Exchange. Accordingly, NYSE Arca does not
believe that outbound routing of PO Orders by Arca Securities to the
NYSE, as an approved facility of the Exchange, is inconsistent with
existing NYSE Arca rules.\18\
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\18\ For purposes of routing in general and this proposal in
particular, the Exchange believes that there is no functional
difference between routing orders that previously scraped the NYSE
Arca book and routing the PO Order, which does not. Each type of
order is subject to the same principles governing the Exchange's
authority to route orders to away market centers, namely: Use of
Arca Securities for outbound routing is optional for NYSE Arca
Users, the primary regulatory responsibility for Arca Securities
lies with an unaffiliated SRO, and, as clarified herein, appropriate
procedures are in place to manage any potential conflicts of
interest or potential information advantages.
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Arca Securities performs a similar outbound routing function on
behalf of the NYSE. On April 5, 2007, in a notice of immediate
effectiveness, the Commission published the NYSE's rule change that
established Arca Securities as a facility of the NYSE for purposes of
routing orders to away market centers for execution in compliance with
NYSE Rules and Regulation NMS.\19\ Pursuant to NYSE Rule 17, Arca
Securities receives its routing instructions from the NYSE and reports
any such executions back to the NYSE.\20\ Arca Securities has no
discretion and cannot change the terms of an order or the routing
instructions.\21\ Moreover, each type of order is subject to the same
principles governing the NYSE's authority to route orders to away
market centers, namely: Use of Arca Securities for outbound routing is
only available to--and is optional for--NYSE Members, the primary
regulatory responsibility for Arca Securities lies with an unaffiliated
SRO, and, as clarified herein, appropriate procedures are in place to
manage any conflicts of interest or potential information advantages.
In this capacity as a facility of the NYSE, Arca Securities receives
the routing instructions from the NYSE and routes the orders to various
away market centers, including NYSE Arca, for execution.
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\19\ See Securities Exchange Act Release No. 55590 (April 5,
2007), 72 FR 18707 (April 13, 2007) (notice of immediate
effectiveness of SR-NYSE-2007-29).
\20\ See NYSE Rule 17(b)(1).
\21\ Id.
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c. Record Keeping
As mentioned above, in the Abrogation Order, the Commission noted
the potential for conflicts of interest in instances where a member
firm is affiliated with an exchange to which it is routing orders.
[[Page 51683]]
In order to manage these concerns, with respect to orders routed to
NYSE Arca by Arca Securities in its capacity as a facility of the NYSE,
the Exchange notes that Arca Securities is subject to independent
oversight and enforcement by the Financial Industry Regulatory
Authority (``FINRA''), an unaffiliated self-regulatory organization
(``SRO'') that is Arca Securities' designated examining authority. In
this capacity, FINRA is responsible for examining Arca Securities with
respect to its books and records and capital obligations, and shares
with NYSE Regulation, Inc. (``NYSE Regulation'') the responsibility for
reviewing Arca Securities' compliance with intermarket trading rules
such as SEC Regulation NMS. In addition, through an agreement between
FINRA and NYSE Arca pursuant to the provisions of Rule 17d-2 under the
Act,\22\ FINRA's staff reviews for Arca Securities' compliance with
other NYSE Arca rules through FINRA's examination program. NYSE
Regulation monitors Arca Securities for compliance with NYSE Arca
trading rules, subject, of course, to SEC oversight of NYSE
Regulation's regulatory program.
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\22\ 17 CFR 240.17d-2.
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In order to alleviate any residual concerns the Commission may have
regarding the potential for conflicts of interest, the Exchange notes
that NYSE Regulation has agreed with the Exchange that it will collect
and maintain the following information of which NYSE Regulation staff
becomes aware--namely, all alerts, complaints, investigations and
enforcement actions where Arca Securities (in its capacity as a
facility of the NYSE, routing orders to NYSE Arca) is identified as a
participant that has potentially violated NYSE Arca or applicable SEC
rules--in an easily accessible manner, so as to facilitate any review
conducted by the SEC's Office of Compliance Inspections and
Examinations. NYSE Regulation has further agreed with the Exchange that
it will provide a report to the Exchange's Chief Regulatory Officer, on
at least a quarterly basis, which: (i) Quantifies all alerts (of which
NYSE Regulation is aware) that identify Arca Securities as a
participant that has potentially violated NYSE Arca or SEC rules and
(ii) quantifies the number of all investigations that identify Arca
Securities as a participant that has potentially violated NYSE Arca or
SEC rules.\23\
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\23\ The Exchange, NYSE Regulation, and SEC staff, may agree
going forward to reduce the number of applicable or relevant
surveillances that form the scope of the agreed upon report.
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d. New Policies and Procedures
Finally, in the Abrogation Order, the Commission noted the
potential for informational advantages that could place an affiliated
member of an exchange at a competitive advantage vis-[agrave]-vis other
non-affiliated members.
In response to this concern, with respect to Arca Securities being
an affiliated member of NYSE Arca, the Exchange is proposing to add new
Rule 14.3(e). New Rule 14.3(e) will require the implementation of
policies and procedures that are reasonably designed to prevent Arca
Securities from acting on non-public information regarding NYSE Arca
systems prior to the time that such information is made available
generally to all NYSE Arca members performing inbound routing
functions. These policies and procedures would include systems
development protocols to facilitate an audit of the efficacy of these
policies and procedures.
Specifically, new Rule 14.3(e) shall provide as follows:
The holding company owning both the Exchange and Archipelago
Securities, L.L.C. shall establish and maintain procedures and
internal controls reasonably designed to ensure that Archipelago
Securities, L.L.C. does not develop or implement changes to its
system on the basis of non-public information regarding planned
changes to Exchange systems, obtained as a result of its affiliation
with the Exchange until such information is available generally to
similarly situated members of the Exchange in connection with the
provision of inbound order routing to the Exchange.
The Exchange believes these measures will effectively address the
concerns identified by the Commission regarding the potential for
informational advantages favoring Arca Securities vis-[agrave]-vis
other non-affiliated NYSE Arca members.
e. Pilot Period
The Exchange proposes that the Commission authorize NYSE Arca to
receive inbound routes from Arca Securities (in its capacity as a
facility of NYSE, routing orders to NYSE Arca) for a pilot period of
twelve months from the date of the approval of this rule filing. The
Exchange believes that this pilot period is of sufficient length to
permit both the Exchange and the Commission to assess the impact of the
rule change described herein.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) \24\ of
the Act, in general, and furthers the objectives of Section
6(b)(5),\25\ 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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\24\ 15 U.S.C. 78f(b).
\25\ 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
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 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 the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2008-90 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.
[[Page 51684]]
All submissions should refer to File Number SR-NYSEArca-2008-90. 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, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2008-90 and should
be submitted on or before September 25, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-20467 Filed 9-3-08; 8:45 am]
BILLING CODE 8010-01-P