Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchanges propose to (1) amend Rule 13 to establish new order types, (2) amend Rule 115A to delete obsolete text and to clarify and update the description of the allocation of market and limit interest in opening and reopening transactions, (3) amend Rule 123C to include better-priced G orders in the allocation of orders in closing transactions, and (4) make other technical and conforming changes.
The Exchanges propose deleting and replacing two types of opening orders currently defined in Rule 13 to stop opening orders from executing when a security opens on a quote or routing to an away market.
The orders the Exchanges propose to delete are "At the Opening or At the Opening Only" orders. These order types currently are defined in Rule 13 as market or limit orders which are to be executed on the opening trade of the stock on one of the Exchanges, or if one of the Exchanges opens the stock on a quote, the opening trade in the stock on another market center to which such order or part thereof has been routed in compliance with Regulation NMS. Under the current definition, any such order or portion thereof not so executed is to be treated as cancelled. Furthermore, all or part of such orders that seek the possibility of an NYSE- or NYSE MKT-only opening execution, and that are marked as a Regulation NMS-compliant Immediate or Cancel ("IOC") order, are immediately and automatically cancelled if they are not executed on the opening trade of the stock on one of the Exchanges or if compliance with Regulation NMS would require all or part of such order to be routed to another market center.
The Exchanges propose to replace "At the Opening or At the Opening Only" orders with two new order types: Market "On-the-Open" ("MOO") and Limit "On-the-Open" ("LOO") orders. A MOO order would be defined as a market order in a security that is to be executed in its entirety on the opening or reopening trade of the security on the Exchange; it would be immediately and automatically cancelled if the security opened on a quote or not executed due to tick restrictions. A LOO order would be defined as a limit order in a security that is to be executed on the opening or reopening trade of the security on the Exchange. A LOO order, or a part thereof, would immediately and automatically cancel if by its terms it were not marketable at the opening price, if it were not executed on the opening trade of the security on the Exchange, or if the security opened on a quote. Both MOO and LOO orders could be entered before the open to participate on the opening trade or during a trading halt or pause to participate on a reopening trade.
The Exchanges also propose to add new order type to IOC Orders in Rule 13, the "Immediate or Cancel Minimum Trade Size" order ("IOC MTS order"). As proposed, any IOC order, including an intermarket sweep order, may include a minimum trade size ("MTS") instruction.
In conjunction with the substantive amendments described above, the Exchanges propose to make technical and conforming changes to the Immediate or Cancel order definition in Rule 13. The Exchanges would make conforming changes throughout the definition to provide that only an IOC order without an MTS instruction could be entered before the Exchange opening for participation in the opening trade or when auto execution is suspended, which includes during a trading pause or halt. In addition, NYSE proposes to delete existing paragraph (e) from its Immediate or Cancel order definition because the paragraph's references to commitments to trade received on the Floor through the Intermarket Trading System are no longer relevant, as the Intermarket Trading System was decommissioned in 2007.
Lastly, the Exchanges propose to delete several obsolete provisions of Rule 13. They propose to delete the definition of Time Order because this order typically related to a Floor broker order that historically would have been held by the specialist on behalf of the Floor broker and converted to a market or limit order at a specified time. The Exchange notes that this order can no
The Exchanges propose to amend Rule 115A, which addresses orders at the opening or in unusual situations. In its existing form, the Rule has no main text but has Supplementary Material .10, which addresses queries to the Display Book before an opening; Supplementary Material .20, which addresses the arranging of an opening or price by a Designated Market Maker ("DMM"); and Supplementary Material .30, which addresses certain functions of Exchange systems with respect to orders at the opening.
The Exchanges propose to re-designate what is now Supplementary Material .10 as paragraph (a) as the main text of Rule 115A. The Exchanges further propose to add new paragraph (b) to Rule 115A to address the process of arranging a price and the allocation of orders on opening and reopening trades. Proposed Rule 115A(b) would provide that when arranging an opening or reopening price, except as provided for in proposed Rule 115A(b)(2), which concerns opening a security on a quote and is described below, market interest
Proposed Rule 115A(b)(2) would clarify the circumstances surrounding when a security could open on a quote. As proposed, Rule 115A(b)(2) would provide that if the aggregate quantity of MOO and market orders on at least one side of the market equals one round lot or more, the security must open on a trade. If the aggregate quantity of MOO and market orders on each side of the market equals less than one round lot or is zero, the security could open on a quote. If a security opens on a quote, odd-lot market orders would automatically execute in a trade immediately following the open on a quote and odd-lot MOOs would immediately and automatically cancel. MOO and market orders subject to tick restrictions that either cannot participate at an opening or reopening price or are priced equal to the opening or reopening price would not be included in the aggregate quantity of MOO and market orders.
Finally, the Exchanges propose to delete Supplementary Material .20 and .30. The Exchanges state that much of the content of these provisions has been obsolete since the second phase of the New Market Model was launched in 2008.
The Exchanges point out that to the extent certain concepts in Supplementary Material .20 are still relevant or applicable, they are incorporated into proposed new paragraph 115A(b), described above. For instance, current paragraphs 2(a), (b), and (c) of Supplementary Material .20 address the allocation and precedence of certain orders in openings and reopenings. Paragraph 2(a) provides that a limited price order to buy (sell) that is at a higher (lower) price than the security is to be opened or reopened is treated as a market order, and market orders have precedence over limited orders. Substantially similar language appears in proposed paragraph 115A(b)(1)(A)(iii). Paragraph 2(b) provides that when the price on a limited price order is the same as the price at which the stock is to be opened or reopened, it may not be possible to execute a limited price order at such price, and substantially similar language appears in proposed paragraph 115A(b)(1)(C). Paragraph 2(c) requires a DMM to see that each market order the DMM holds participates in the opening transaction, and if the order is for an amount larger than one round lot, the size of the bid that is accepted or the offer that is taken establishing the opening or reopening price is the amount that a market order is entitled to participate in at the opening or reopening. This concept is contained in proposed paragraph 115A(b).
The Exchanges propose to amend Rules 13 and 123C as those rules relate to G orders. First, the Exchanges propose to add the phrase "G orders" as a formal definitional term to an existing order type found in Rule 13. Paragraph (g) of the Auto Ex Order definition in Rule 13 currently describes "an order entered pursuant to Subsection (G) of Section 11(a)(1) of the Securities Exchange Act of 1934." The Exchanges explain in their Notices that this definition is meant to include proprietary orders of members of the Exchanges when those orders are executed by one of the members' floor brokers.
The Exchanges also propose to amend Rule 123C to include better-priced G orders in the list of orders that must be allocated in whole or part in closing transactions. Currently, Rule 123C(7)(a) sets forth six order types that must be included in the closing transaction in
The Exchanges propose to amend Rule 123C(7)(a) to add G orders that are priced better than the closing price as the last type of order that must be included in the closing transaction. In conjunction with this change, the Exchanges also propose to make a conforming change to the reference to G orders in paragraph 5 of Rule 123(C)(7)(b) (the "may execute" list of interest). Under the proposals, language would be added to paragraph 5 of Rule 123(C)(7)(b) to make clear that the G orders included in the "may execute" list of interest are those G orders with a price equal to the closing price--to be distinguished from the G orders priced better than the closing price that are being added to the list of "must execute" interest in 123(C)(7)(a).
Finally, the Exchanges propose one more change to the "may execute" list of interest. The Exchanges propose to amend Rule 123C(7)(b)(i) to add that DMM interest, as well as limit orders represented in the Display Book with a price equal to the closing price, are the first types of interest that may be used to offset a closing imbalance. According to the Exchanges, this is intended to be a clarifying change because they have noted before in prior rule filings that DMM interest would be treated in such a manner.
After carefully considering the proposed rule changes, as modified by Amendment No.1, the Commission finds that they are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
The Exchanges' proposals to delete "At the Opening or At the Opening Only" orders, and to replace them with MOO and LOO orders, are intended to make clear that such opening orders will not execute when a security opens on a quote, and that they will not be routed to away markets. The Commission finds that the proposed MOO and LOO order type definitions are clear and transparent as to when such orders will be immediately and automatically cancelled; in the case of a MOO order, if the security opens on a quote or if it is not executed due to tick restrictions, and in the case of a LOO order, if it is not marketable at the opening price, it is not executed on the opening trade of a security, or if the security opens on a quote. The Commission notes that the MOO and LOO order types proposed by the Exchanges are variations of Market "At-The-Close" ("MOC") and Limit "At-The-Close" ("LOC") orders already offered by the Exchanges.
The Commission finds that the other proposed amendments to Rule 13 are also consistent with the requirements of the Act. The Exchanges' proposed new IOC MTS order type will offer market participants added functionality and additional trading opportunities similar to what is offered in other trading venues.
In addition, the Commission finds that the Exchanges' proposed revision of Rule 115A is consistent with the requirements of the Act. The proposals would specify how market interest would participate in the opening or reopening transaction and how market interest would have precedence over limit interest priced equal to the opening price or reopening price of a security and DMM interest. The Commission believes that the proposal should ensure that market interest, except as provided in Rule 115A(b)(2), would be guaranteed to participate in openings or reopenings.
The Commission also finds that the proposals would delete duplicative and obsolete language in Rule 115A, which should bring clarity to the Exchanges' rules. Similarly, the Commission finds that amending Rule 123C(7)(b)(i) to expressly provide for the treatment of DMM interest in offsetting a closing imbalance will add transparency and clarity to the Exchange's rules, thereby promoting just and equitable principles of trade.
Lastly, the Commission believes that the Exchanges' proposed changes to Rule 123C are consistent with the requirements of the Act, and in particular Section 11(a) of the Act. Section 11(a)(1) of the Act 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 any account over which it or an associated person exercises discretion, unless an exception applies. Subsection (G) of Section 11(a)(1) provides an exemption from the general prohibition set forth in Section 11(a)(1) for any transaction for a member's own account, provided that: (i) Such member is primarily engaged in certain underwriting, distribution, and
Under the proposals, the Exchanges would add G orders priced better than the closing price to the list of "must execute" interest to be allocated in whole or part at the close. Only G orders priced better than the closing price would be eligible to execute as part of the "must execute" interest, and then only after execution of all other "must execute" interest.
The Commission believes that it is consistent with the requirements of the Act for G orders priced better than the closing price to execute before "may execute" interest priced equal to the closing price. Such G orders could offer contra-side interest a chance at price improvement if executed prior to the close. Further, because the rules will require G orders priced better than the closing price to yield to all other eligible orders priced better than the closing price, the Commission believes that the proposal, with respect to such priority, is consistent with Section 11(a)(1)(G) of the Act
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,