Notice2022-11396
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Amend Rule 6.64P-O
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 27, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 103 (Friday, May 27, 2022)</title>
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[Federal Register Volume 87, Number 103 (Friday, May 27, 2022)]
[Notices]
[Pages 32203-32210]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-11396]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94959; File No. SR-NYSEArca-2022-31]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Amend Rule 6.64P-O
May 23, 2022.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on May 20, 2022, 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 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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[[Page 32204]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 6.64P-O (Auction Process). The
proposed change is available on the Exchange's website at <a href="http://www.nyse.com">www.nyse.com</a>,
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to modify Rule 6.64P-O regarding the
automated process for both opening and reopening trading in a series on
the Exchange on Pillar as set forth below.\4\
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\4\ Rule 6.64P-O (the ``Pillar Rule'') covers the opening and
reopening of option series, which process is identical on the Pillar
trading platform. As such, the Exchange will simply refer to the
``opening'' of a series herein. The Exchange notes that because it
has not yet migrated to the Pillar platform, Rule 6.64-O continues
to apply to the opening process, which rule is not being modified by
this filing. The Exchange has announced July 11, 2022 as the planned
migration date for Pillar, as announced here: <a href="https://www.nyse.com/trader-update/history#110000421498">https://www.nyse.com/trader-update/history#110000421498</a>.
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Current Pillar Auction Process
Rule 6.64P-O(d) sets forth the Auction Process.\5\ Per Rule 6.64P-
O(d)(1), once the Exchange receives the Auction Trigger for a
series,\6\ the Auction Process begins and the Exchange sends a
Rotational Quote \7\ to both OPRA and proprietary data feeds indicating
that the Exchange is in the process of transitioning from a pre-open
state to continuous trading for that series.
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\5\ ``Auction Process'' refers to the process that begins when
the Exchange receives an Auction Trigger for a series and ends when
the Auction is conducted. See Rule 6.64P-O(a)(5).
\6\ ``Auction Trigger'' refers to the information disseminated
by the Primary Market in the underlying security that triggers the
Auction Process for a series to begin. See Rule 6.64P-O(a)(7).
\7\ ``Rotational Quote'' refers to the highest Market Maker bid
and lowest Market Maker offer on the Exchange when the Auction
Process begins and such a Rotational Quote will be updated (for
price and size) during the Auction Process. See Rule 6.64P-O(a)(13).
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Per Rule 6.64P-O(d)(2), once a Rotational Quote has been sent, the
Exchange conducts an Auction,\8\ provided ``there is both a Legal Width
Quote and, if applicable, Market Maker quotes with a non-zero offer in
the series'' within the Opening Timer(s), per Rule 6.64P-O(d)(3).\9\
The Exchange deems the Legal Width Quote requirement satisfied if the
Calculated NBBO (described below) for the series is uncrossed, contains
a non-zero offer, and has a spread that does not exceed a maximum
differential that is determined by the Exchange on a class basis and
announced by Trader Update.\10\ The Calculated NBBO is comprised of the
highest bid and lowest offer among all Market Maker quotes and the ABBO
during the Auction Process.\11\ A Calculated NBBO does not require both
Market Maker quotes and ABBO to be present, and may be composed of
Market Maker quotes only, of the ABBO only, or a combination thereof.
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\8\ ``Auction'' refers to the opening or reopening of a series
for trading either with or without a trade. See Rule 6.64P-O(a)(1).
\9\ See Rule 6.64P-O(d)(2). Rule 6.64P-O(d)(3) specifies the
parameters of the Opening MMQ Timers, which are designed to
encourage (but not require) any Market Maker(s) assigned to an
option series to submit Legal Width Quotes in connection with the
Auction Process. The Exchange proposes a non-substantive change of
``30'' to ``thirty'' regarding the Opening MMQ Timer(s), which would
add clarity and internal consistency to the to rule. See proposed
Rule 6.64P-O(d)(3).
\10\ See Rule 6.64P-O(a)(10)(A)-(C). The maximum spread
differential for a given series or class of options may be modified
by a Trading Official. See Rule 6.64P-O(a)(10)(C).
\11\ See Rule 6.64P-O(a)(8) (defining Calculated NBBO).
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If the foregoing requirements are met (i.e., per Rule 6.64P-
O(d)(2)), the Exchange will conduct an Auction that will either result
in a trade or in a quote depending on whether there is (or is not)
Matched Volume \12\ that can trade at or within the Auction
Collars.\13\ If there is Matched Volume that can trade at or within the
Auction Collars, the Auction will result in a trade at the Indicative
Match Price.\14\ However, if there is no Matched Volume that can trade
at or within the Auction Collars, the Auction will instead result in a
quote and the Exchange transitions to continuous trading as set forth
in Rule 6.64P-O(f).\15\
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\12\ ``Matched Volume'' refers to the number of buy and sell
contracts that can be matched at the Indicative Match Price,
excluding IO Orders. See Rule 6.64P-O(a)(11). An Imbalance Offset
Order (``IO Order'') is a Limit Order that is to be traded only in
an Auction. See Rule 6.62P-O(c)(3).
\13\ ``Auction Collar'' refers to the price collar thresholds
for the Indicative Match Price for an Auction, with the upper
Auction Collar being the offer of the Legal Width Quote and the
lower Auction Collar being the bid of the Legal Width Quote,
provided that if the bid of the Legal Width Quote is zero, the lower
Auction Collar will be one MPV above zero for the series. And, if
there is no Legal Width Quote, the Auction Collars will be published
in the Auction Imbalance Information as zero. See Rule 6.64P-
O(a)(2).
\14\ See Rule 6.64P-O(d)(2)(A). ``Indicative Match Price''
refers to the price at which the maximum number of contracts can be
traded in an Auction, including the non-displayed quantity of
Reserve Orders and excluding IO Orders, subject to the Auction
Collars. If there is no Legal Width Quote, the Indicative Match
Price included in the Auction Imbalance Information will be
calculated without Auction Collars. See Rule 6.64P-O(a)(9).
\15\ See Rule 6.64P-O(d)(2)(B).
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Finally, per Rule 6.64P-O(d)(4), unless otherwise specified by
Trader Update, for the first ninety seconds of the Auction Process
(inclusive of the thirty-second Opening MMQ Timer(s)), if there is no
Legal Width Quote, the Exchange will not conduct an Auction, even if
there is Matched Volume, i.e., the series will not open. After the
first ninety seconds of the Auction Process, if there is no Matched
Volume and the Calculated NBBO is wider than the Legal Width Quote, is
not crossed, and does not contain a zero offer, the Exchange will first
cancel any Market Orders and MOO Orders and then transition the option
series to continuous trading per Rule 6.64P-O(f).\16\ Thus, per Rule
6.64P-O(d)(4)(A), if after the first ninety seconds of the Auction
Process there is Matched Volume but the other elements of this
provision are satisfied, the series will not open and will remain
unopened and the Exchange will not transition to continuous trading
until the earlier of (i) a Legal Width Quote is established and an
Auction can be conducted; (ii) the series can be opened as provided for
in paragraph (d)(4)(A); (iii) the series is halted; or (iv) the end of
Core Trading Hours.\17\ In other words, a series that does not meet the
requirements of Rule 6.64P-O(d)(4)(A) may be delayed in opening until
one of the conditions set forth in Rule 6.64P-O(d)(4)(B) occur.
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\16\ See Rule 6.64P-O(d)(4)(A).
\17\ See Rule 6.64P-O(d)(4)(B).
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Proposed Change to Auction Process
The Exchange notes that waiting for market conditions to change
before transitioning to continuous trading per the current Pillar Rule
may result in missed execution opportunities for eligible interest
submitted to the Exchange during the pre-open state. Moreover, this
potential (indefinite) delay is inconsistent with the Exchange's
intention of providing a timely and efficient Auction Process. As
[[Page 32205]]
such, the Exchange proposes to modify Rule 6.64P-O. In short, the
Exchange proposes that after the first ninety seconds of the Auction
Process, the Exchange would conduct an Auction of marketable interest
based on the spread of the then-current market conditions (i.e., a
Calculated NBBO that is uncrossed with a non-zero offer), provided that
if the Calculated NBBO exceeds the Legal Width Quote differential
established per Rule 6.64P-O(a)(10)(C) the Exchange would cancel any
Market Orders or MOO Orders before conducting the Auction. As further
proposed, marketable Limit Orders would trade in the Auction bound by
the Calculated NBBO (i.e., the highest bid and lowest offer among all
Market Maker quotes and the ABBO), which executions may be earlier and
more efficient than afforded under the current Pillar Rule. If there is
no marketable interest after such cancelation, the Exchange would open
on a quote.\18\
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\18\ As described further below, consistent with Rule 6.64P-
O(d)(2)(B), an Auction conducted per proposed Rule 6.64P-O(d)(4)(A)
would open on a quote if there is no Matched Volume).
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The Exchange believes the proposed change to the Pillar Rule (the
details of which are described below) would promote competitive
liquidity by allowing series to open at then-current market prices and
would promote a fair and orderly opening process by improving the speed
and efficiency of the Auction Process without impairing price
discovery.
First, the Exchange proposes to codify existing rule text into the
defined phrase the ``initial Auction Process time period'' in proposed
Rule 6.64P-O(a)(5)(i). As proposed, the initial Auction Process time
period would mean, ``unless otherwise specified by Trader Update, the
first ninety seconds after the commencement of the Auction Process,''
which definition simply codifies (and relocates) identical text that
appears in the preamble of both sentences in Rule 6.64P-O(d)(4).\19\
The Exchange believes this proposed change is non-substantive and would
streamline and add clarity to the existing rule.\20\
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\19\ See proposed Rule 6.64P-O(a)(5)(i). See Rule 6.64P-O(d)(4)
(providing that ``[u]nless otherwise specified by Trader Update, for
the first ninety seconds of the Auction Process . . . .'' and
``[n]inety seconds after the Auction Process begins:'').
\20\ See id. See proposed Rule 6.64P-O(d)(4)(A) (replacing
reference to the first ninety-seconds after the Auction Process with
the proposed definition of the ``initial Auction Process time
period,'' which would add clarity and internal consistency to the
Rule, making it easier to navigate and comprehend).
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Next, the Exchange proposes to modify the definition of Legal Width
Quote, including by leveraging the newly defined ``initial Auction
Process time period.'' Rule 6.64P-O(a)(10)(C) provides that, to be
deemed a Legal Width Quote, the spread of the Calculated NBBO may not
exceed a maximum differential that is determined by the Exchange on a
class basis and announced by Trader Update.\21\
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\21\ See Rule 6.64P-O(a)(10)(C) (which also provides a Trading
Official may establish maximum differentials for one or more series
or classes of options, which differ from those established by the
Exchange).
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As such, by rule, the Exchange has discretion to establish for each
option class the maximum allowable spread of the Calculated NBBO within
which the Exchange will conduct an Auction, provided that the other
elements of a Legal Width Quote are met.\22\ Nothing in Rule 6.64P-
O(a)(10)(C) precludes the Exchange from establishing one set of
Calculated NBBO spreads for the first ninety seconds of the Auction
Process and a second (wider) set of Calculated NBBO spreads for any
time after the first ninety seconds. However, in the interest of
clarity and for the avoidance of potential confusion, the Exchange
proposes to expand the definition of Legal Width Quote (rather than
modify by Trader Update) in the Pillar Rule to provide that ``after the
initial Auction Process time period, the Exchange will not impose
limits for the maximum differential for the spread between the
Calculated NBBO.'' \23\
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\22\ To qualify as a Legal Width Quote, the Calculated NBBO must
also be uncrossed and must contain a non-zero offer, which
requirements are not being modified by this rule change. See Rule
6.64P-O(a)(10)(A)-(B).
\23\ See proposed Rule 6.64P-O(a)(10)(D).
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The Exchange believes adopting Rule 6.64P-O(a)(10)(D) is consistent
with its authority under the Pillar Rule to determine the maximum
allowable Calculated NBBO spread to qualify a series as having a Legal
Width Quote. However, this rule change would make clear that the
Exchange would no longer impose these established spread limits (as
announced by Trader Notice per Rule 6.64P-O(a)(10)(C)) after the
initial Auction Process time period. The Exchange believes this rule
change would add clarity and transparency to the Auction Process to the
benefit of all market participants.\24\ Because the Auction Process,
including the Auction Collars, the presence of Matched Volume, and the
determination of the Indicative Match Price, are dependent upon a
Calculated NBBO that qualifies as a Legal Width Quote, the Exchange
proposes that any Auction conducted consistent with proposed 6.64P-
O(a)(10)(D) would follow the current Auction Process except as
described below.\25\
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\24\ Similar to the Exchange, other options exchanges have rules
granting them broad discretion to modify the opening parameters for
each option series, which modifications are disseminated or
announced to market participants over data feeds or trader notice.
See, e.g., Cboe Options Exchange, Inc. (``Cboe'') Rule 5.31(a)
(definitions of Maximum Composite Width and Opening Collar, each of
which the exchange ``may modify during the opening auction process
(which modifications the Exchange disseminates to all subscribers to
the Exchange's data feeds that deliver opening auction updates)'');
Cboe EDGX Options Exchange, Inc. (``EDGX'') Rule 21.7(a) (same);
Cboe BZX Options Exchange, Inc. (``BZX'') Rule 21.7(a) (definitions
of Maximum Composite Width and Opening Collar); Cboe C2 Exchange
Inc. (``C2'') Rule 6.11(a) (same); see also Miami Securities
Exchange, Inc. (``MIAX'') Rule 503(f)(2) (which permits MIAX to
determine by circular an acceptable range in which openings are
permissible if there is no valid width national best bid or offer
(``NBBO'')).
\25\ See, e.g., Rule 6.64P-O(d)(2)(A)-(B) (describing the
process of opening a series with a trade or a quote depending on
whether there is Matched Volume).
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The Exchange proposes to amend Rule 6.64P-O(d)(4) regarding the
conduct of an Auction after the conclusion of the initial Auction
Process time period (i.e., after the first ninety seconds).\26\ As
noted herein, the Pillar functionality (per Rule 6.64P-O(d)(4)(A))
permits a series to open based on a ``wide'' Calculated NBBO (that is
uncrossed with a non-zero offer), but only if there is no Matched
Volume, which requirement may delay openings and result in missed
execution opportunities.\27\ To address this unintended potential
delay, the Exchange proposes that after the initial Auction Process
time period and consistent with proposed paragraph (a)(10)(D) of this
Rule (which removes the limit on the maximum allowable Calculated NBBO
spread), the Exchange would conduct an Auction regardless of Matched
Volume as long as the Calculated NBBO is not crossed, and does not
contain a zero offer.\28\ This proposed functionality would allow
marketable Limit Orders to execute in the Auction, which may result in
certain option series opening earlier than are opened under the current
rule and
[[Page 32206]]
increase execution opportunities for Limit Orders at then-current
market prices.\29\
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\26\ See proposed Rule 6.64P-O(d)(4) (which includes the
aforementioned non-substantive change to refer to the newly defined
``initial Auction Process time period'' rather than the first ninety
seconds after the Auction Process). The Exchange is not altering
Auction functionality for the initial Auction Process time period.
See id.
\27\ See proposed Rule 6.64P-O(d)(4)(B) (setting forth the
necessary market conditions to open a series that has not opened per
paragraph (d)(4) of the Pillar Rule). If the Exchange opens a series
per Rule 6.64P-O(d)(4)(A), it first cancels any Market Order or MOO
Orders before conducting an Auction and transitioning to continuous
trading. See proposed Rule 6.64P-O(d)(4).
\28\ See proposed Rule 6.64P-O(d)(4)(A). See also proposed Rule
6.64P-O(a)(10)(D).
\29\ See id. See also Rule 6.64P-O(a)(9)(A) (providing, in
relevant part, that ``the Indicative Match Price would not be lower
(higher) than the highest (lowest) price of a Limit Order to buy
(sell) ranked Priority 2--Display Orders that is eligible to
participate in the Auction''). In addition, consistent with the
proposal, the Exchange proposes to remove as inapplicable the text
in current Rule 6.64P-O(d)(4)(A) indicating that the ``Auction is
not intended to end with a trade, but it may result in a trade even
if there is no Legal Width Quote if orders or quotes arrive during
the period when the Exchange is evaluating the status of orders and
quotes'' as well as text indicating that the Exchange would
``transition to continuous trading as described in paragraph (f) of
this Rule.'' See proposed Rule 6.64P-O(d)(4)(A).
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Although Limit Orders would be eligible to execute based on this
proposed functionality, whether a Market Order or MOO Order may
participate in the proposed Auction depends on the width of the market
at the time of the Auction. Specifically, as further proposed, if the
Calculated NBBO spread is wider than the differential established per
paragraph (a)(10)(C) of this Rule, the Exchange would cancel Market
Orders and MOO Orders before conducting the Auction, which proposed
handling is consistent with the current Pillar Rule.\30\ Conversely, as
proposed, and consistent with the current Pillar Rule, Market Orders
and MOO Orders are not canceled and will participate in an Auction that
is based on a Calculated NBBO that is less than or equal to the
Calculated NBBO spread limit established per Rule 6.64P-
O(a)(10)(C).\31\ As further proposed, after the cancelation of any
Market Orders or MOO Orders as applicable, the Auction Process will
proceed consistent with paragraph (d)(2)(A)-(B) of this Rule and the
Exchange will execute Matched Volume (if any) to the extent possible
before transitioning to continuous trading.\32\
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\30\ See Rule 6.64P-O(d)(4)(A)(i) (providing that Market Orders
and MOO Orders are cancelled ``[a]ny time a series is opened or
reopened when there is no Legal Width Quote,'' i.e., when the
Calculated NBBO exceeds the maximum allowable spread limit set forth
in Rule 6.64P-O(a)(10)(C)'').
\31\ See id. To avoid potential confusion regarding the distinct
handling of Market Orders and MOO Orders under proposed Rule 6.64P-
O(d)(4)(A) depending upon whether an Auction is conducted based on a
Calculated NBBO spread that is in compliance with Rule 6.64P-
O(a)(10)(C) or with proposed Rule 6.64P-O(a)(10)(D), the Exchange
has intentionally avoided reference to the presence of a Legal Width
Quote in the proposed Rule. See proposed Rule 6.64P-O(d)(4)(A).
\32\ See, e.g., Rule 6.64P-O(d)(2)(A)-(B) (providing that ``[i]f
there is Matched Volume that can trade at or within the Auction
Collars, the Auction will result in a trade at the Indicative Match
Price'' or, ``[i]f there is no Matched Volume that can trade at or
within the Auction Collars,'' the Auction will not result in a trade
and the Exchange will transition to continuous trading as described
in paragraph (f) of this Rule and the Auction will result in a
quote'').
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Taken together, the proposed changes to Rule 6.64P-O(a)(10)(D) and
(d)(4) would allow any series that has not opened by the end of the
initial Auction Process time period the ability to open based on a
Legal Width Quote derived from then-market conditions. As such, the
Exchange proposes to modify Rule 6.64P-O(d)(4)(B) to update the cross-
reference from paragraph (d)(4)(A) to paragraph (d)(4) and to eliminate
as superfluous paragraph (d)(4)(B)(ii), which refers to waiting until
``the series can be opened as provided for in paragraph (d)(4)(A).''
\33\ The Exchange believes these proposed conforming changes are
necessary given that the proposed changes to Rule 6.64P-O(a)(10)(D)
(removing the limit on the Calculated NBBO spread to qualify as Legal
Width Quote) and (d)(4)(A) (addressing the conduct of an Auction after
the initial Auction Process time period under the expanded definition
of Legal Width Quote) render paragraph (d)(4)(B)(ii) of the Rule
unnecessary.
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\33\ See proposed Rule 6.64P-O(d)(4)(A). See proposed Rule
6.64P-O(d)(4)(B). The Exchange also proposes conforming changes to
re-number the remaining paragraphs in light of the proposed
deletion, which would add clarity and internal consistency to the
Rule. See id.
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The Exchange notes that it is not making any changes to the
requirements to conduct an Auction during the initial Auction Process
time period. Instead, the proposed changes relate solely to those
series that remain unopened after the conclusion of the initial Auction
Process time period because the Calculated NBBO spread is too wide. The
Exchange believes that the initial Auction Process time period affords
market participants sufficient opportunity to absorb available pricing
information, including Market Makers that are generally responsible for
pricing the market. If the Calculated NBBO remains wide by the end of
the initial Auction Process time period, the Exchange believes it is
unlikely to tighten if the Exchange were to further delay the opening
of a series. The Exchange has observed that on a typical trading day,
in the current system, nearly 98% of all series are opened by 9:32 a.m.
Eastern Time. As such, the Exchange anticipates that the majority of
series would be opened within ninety seconds of the Auction Process and
would not be impacted by the proposed rule change. However, for the
minority of option series that have not opened within the first ninety
seconds, the Exchange believes it is necessary and appropriate to allow
such series to open based on prices consistent with then-current market
conditions, provided the Calculated NBBO for the series is not crossed,
and does not contain a zero offer.
The Exchange believes the proposed modification to the Auction
Process would continue to protect Market Orders and MOO Orders from
being executed (by cancelling such orders before conducting the
proposed Auction) when the Calculated NBBO spread exceeds the spread
differential established per current Rule 6.64P-O(a)(10)(C) before
conducting the proposed Auction. In addition, the proposed modification
would allow any eligible Limit Orders to be executed in the proposed
Auction, bound by the Calculated NBBO. The Calculated NBBO (even if
wide) represents the best-priced quotes by Market Makers (which
participants generally are responsible for pricing the market) and/or
the ABBO, the presence of which indicates that another market has
opened.\34\
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\34\ Options exchanges have varying opening processes and have
made separate determinations on what constitutes individual,
reasonable opening market widths. Thus, if other options exchanges
opened a series with a market width, it is reasonable to open the
series for trading on the Exchange as well (as orders submitted to
other exchanges may be trading at those widths).
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Consistent with current functionality (and with the approved Pillar
Rule), the Exchange would not permit any opening transactions to trade
through any better-priced interest on any Away Market, even it is
permitted to do so.\35\ Rather, because interest in the Auction would
not trade outside of the Calculated NBBO (which defines the then-
current market for the series), any Limit Orders executed in the
proposed Auction would, bound by Auction Collars, would trade at a
price that is equal to or better than the price(s) available at other
exchanges.\36\ Per Rule 6.64P-O(f)(3)(A), any interest remaining after
such Action is then evaluated for potential routing prior to being
posted to the Consolidated Book. Further, the Exchange notes that there
are other price protections available to limit the
[[Page 32207]]
risk of executions at a wider market price.\37\ Thus, the Exchange
believes that the risk of an extreme execution based on the Calculated
NBBO available after the initial Auction Process time period may be
mitigated for the aforementioned reasons. The Exchange believes that,
on balance, the benefits to market participants of having the series
open earlier outweighs this mitigated risk.
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\35\ Although the intermarket linkage rules exempt from trade-
through liability trades occurring during the opening process, the
Exchange would continue to restrict transactions occurring at the
open to the NBBO. See Rule 6.94-O(b)(2) (exempting from trade-
through liability those transactions that ``traded through a
Protected Quotation being disseminated by an Eligible Exchange
during a trading rotation''). A ``Protected Quotation'' is the Best
Bid or Best Offer disseminated by OPRA and displayed by an Eligible
Exchange. See Rule 6.92-O(15)-(16).
\36\ See Rule 6.64P-O(b)(2)(A) (A) (providing that, `[i]f there
is Matched Volume that can trade at or within the Auction Collars,
the Auction will result in a trade at the Indicative Match Price).
See also Rule 6.64-O(a)(3),(9), and (11) (defining Auction Collars,
Indicative Match Price, and Matched Volume, respectively).
\37\ See Rule 6.41P-O(a)(1), (b) (regarding the Arbitrage Check,
which is applied pre-open). The Exchange notes that the price
protection mechanisms it employs during continuous trading are based
on the NBBO, or Auction Prices as applicable. See, e.g., Rules
6.41P-O(c)(4)(B) (regarding the Intrinsic Value Check); Rule 6.62P-
O(a)(4)(A) (regarding Limit Order Price Protection); and Rule 6.62P-
O(a)(4)(B) (regarding Trading Collars).
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Finally, the Exchange also proposes to modify the requirements to
open a series during the initial Auction Process time period for option
series with two or more assigned Market Makers, per Rule 6.64P-
O(d)(3)(C). Per Rule 6.64P-O(3)(C)(i), if there are two or more Market
Makers assigned to a series, the Exchange will conduct the Auction,
without waiting for the Opening MMQ Timer to end, as soon as there is
both a Legal Width Quote and at least two assigned Market Makers have
submitted a quote with a non-zero offer. Per Rule 6.64P-O(3)(C)(ii), if
at least two Market Makers assigned to a series have not submitted a
quote with a non-zero offer by the end of the Opening MMQ Timer, the
Exchange will begin a second Opening MMQ Timer. The Exchange proposes
to modify these provisions to provide that the Exchange would require
that at least two quotes with non-zero offers be submitted during the
Opening MMQ Timer, which quotes may be sent by one or more Market
Makers.\38\
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\38\ See proposed Rule 6.64P-O(d)(2) (providing that ``[o]nce a
Rotational Quote has been sent, the Exchange will conduct an Auction
when there is both a Legal Width Quote and, if applicable, Market
Maker quotes with a non-zero offer in the series (subject to the
Opening MMQ Timer(s) requirements in paragraph (d)(3) of this
Rule'') and Rule 6.64P-O(d)(3)(C)(i) (providing that ``[t]he
Exchange will conduct the Auction, without waiting for the Opening
MMQ Timer to end, as soon as there is both a Legal Width Quote and
at least two quotes with a non-zero offer submitted by assigned
Market Maker(s)'') and (d)(3)(C)(ii) (providing that ``[i]f the
Exchange has not received at least two quotes with a non-zero offer
from any Market Maker(s) assigned to a series by the end of the
Opening MMQ Timer, the Exchange will begin a second Opening MMQ
Timer'').
---------------------------------------------------------------------------
The Exchange believes that the proposed change continues to
encourage (but not require) Market Makers to participate at the open,
which may increase the availability of Legal Width Quotes in more
series, thereby allowing more series to open in a timely manner. The
Exchange believes that expanding the opportunities for each Market
Maker to enter the market--whether by each Market Maker submitting one
quote or a single Market Maker submitting two quotes--could result in
the depth of liquidity that market participants have come to expect in
options with multiple assigned Market Makers, and a more stable trading
environment. The Exchange believes the proposed rule change would
provide more flexibility in terms of how market depth is achieved
(i.e., based on quotes from a single Market Maker as opposed to two)
and may result in a more timely and efficient opening process. Further,
the proposed change may increase the availability of Legal Width Quotes
in more series and would add clarity and transparency to Exchange
rules.
Other Exchange Rules: Proposed Non-Substantive or Clarifying Changes
The Exchange also proposes to make several clarifying or non-
substantive changes to certain of its rules. First, the Exchange
proposes to modify paragraph (c) of Rule 6.37-O (Obligations of Market
Makers) regarding ``Unusual Conditions--Auctions'' to add an open
parenthesis in the cross reference to Rule 6.64P-O(a)(10).\39\ The
Exchange believes this proposed change would correct an inadvertent
omission and would add clarity and transparency to Exchange rules.
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\39\ See proposed Rule 6.37-O(c).
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Next, the Exchange proposes to correct several cross-references in
Rule 6.62P-O (Orders and Modifiers). The Exchange proposes to update
the reference in Rule 6.62P-O(e)(3)(C)(ii) regarding Day ISO ALO Orders
to correctly cross-reference paragraphs (e)(2)(C)-(F) (rather than to
paragraphs (e)(2)(C)-(G)) to cover the processing of such ALO Orders
once resting.\40\ The proposed change would correct an inadvertent
error adding clarity and transparency to Exchange rules. Similarly, the
Exchange proposes to update the reference in Rule 6.62P-O(h)(6)(B) to
correctly cross-reference the defined term Complex Order, which is set
forth in Rule 6.62P-O(f) (rather than paragraph (e)).\41\ The proposed
change would correct an inadvertent error adding clarity and
transparency to Exchange rules.
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\40\ See proposed Rule 6.62P-O(e)(3)(C)(ii).
\41\ See proposed Rule 6.62P-O(h)(6)(B).
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Securities Exchange Act of 1934 (the ``Act''),\42\ in general, and
furthers the objectives of Section 6(b)(5),\43\ 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 facilitating
transactions in securities, to remove impediments to, and perfect the
mechanism of, a free and open market and a national market system and,
in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Proposed Change to Pillar Auction Process
Overall, the Exchange believes the proposed changes to its Auction
Process would promote a fair and orderly market by improving the speed
and efficiency of the Exchange's opening process without impairing
price discovery, which should result in better and more consistent
prices on Auction executions and facilitate a fair and orderly
transition to continuous trading. As noted herein, the Exchange
believes that the (continued) requirement that interest executed in an
Auction must trade at or within the Calculated NBBO (which defines the
then-current market for the series) would provide protection for such
interest.
The Exchange believes modifying the definition of Legal Width Quote
to make clear that after the initial Auction Process time period the
Exchange would no longer impose its own established limits on the
maximum allowable Calculated NBBO spread to qualify a series as having
a Legal Width Quote would promote just and equitable principles of
trade and remove impediments to and perfect the mechanism of a free and
open market and a national market system and protect investors because
it would add clarity and transparency to the Auction Process to the
benefit of all market participants.\44\ The Exchange notes that it
currently has discretion to establish for each option class the maximum
allowable spread of the Calculated NBBO within which the Exchange will
conduct an Auction, provided that the other elements of a Legal Width
Quote are met, which authority is consistent with other options
exchanges. Although the Exchange has rule authority (per current Rule
6.64P-O(a)(10)(C)) to establish one set of Calculated NBBO spreads for
the first ninety seconds of
[[Page 32208]]
the Auction Process and a second (wider) set of Calculated NBBO spreads
for any time after the first ninety seconds, it believes the proposed
change to the definition of Legal Width Quote would help avoid
potential investor confusion to the benefit of all market participants.
---------------------------------------------------------------------------
\44\ See supra note 24 (citing the discretion of Cboe and its
affiliates and MIAX to modify the opening auction parameters).
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The Exchange believes the proposal to amend Rule 6.64P-O(d)(4) to
allow the Exchange to conduct an Auction after the conclusion of the
initial Auction Process time period and consistent with proposed
paragraph (a)(10)(D) of this Rule (i.e., without imposing certain
limits established on the Calculated NBBO spread) would promote just
and equitable principles of trade and remove impediments to and perfect
the mechanism of a free and open market and a national market system
and protect investors. First, the Exchange believes that the proposal
to wait a ninety-second initial Auction Process time period before
removing the limits on the permissible Calculated NBBO spread to open a
series (i.e., proposed Rule 6.64P-O(a)(10)(D)) would continue to
provide opportunities for price discovery based on then-current market
conditions, including affording sufficient time to Market Makers (who
are generally responsible for pricing the market) to absorb available
pricing information and, if so inclined, to update their quotes
potentially resulting in tighter spreads. The Exchange has observed
that on a typical trading day, in the current system, nearly 98% of all
series are opened by 9:32 a.m. Eastern Time. As such, the Exchange
anticipates that the majority of series would be opened within ninety
seconds of the Auction Process and would not be impacted by the
proposed rule change. For the minority of option series that have not
opened within the first ninety seconds because of a ``wide'' Calculated
NBBO, the Exchange believes it is unlikely that such spread would
tighten if the Exchange were to further delay the opening of a series.
Thus, the Exchange believes it is necessary and appropriate to allow
such series to open based on prices consistent with then-current market
conditions, provided the Calculated NBBO for the series is not crossed,
and does not contain a zero offer.
Further, the Exchange believes the proposed modification would
promote just and equitable principles of trade and remove impediments
to and perfect the mechanism of a free and open market and a national
market system and protect investors because the proposed Auction
Process would continue to protect Market Orders and MOO Orders from
being executed (by cancelling such orders before conducting the
proposed Auction) when the Calculated NBBO spread exceeds the spread
differential established per (current) Rule 6.64P-O(a)(10)(C) before
conducting the proposed Auction. In addition, the proposed modification
would allow any eligible Limit Orders to be executed in the proposed
Auction, bound by the Calculated NBBO. The Calculated NBBO (even if
wide) represents the best-priced quotes by Market Makers (which
participants generally are responsible for pricing the market) and/or
the ABBO, the presence of which indicates that another market has
opened.\45\
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\45\ Options exchanges have varying opening processes and have
made separate determinations on what constitutes individual,
reasonable opening market widths. Thus, if other options exchanges
opened a series with a market width, it is reasonable to open the
series for trading on the Exchange as well (as orders submitted to
other exchanges may be trading at those widths).
---------------------------------------------------------------------------
Consistent with current functionality (and with the approved Pillar
Rule), the Exchange would not permit any opening transactions to trade
through any better-priced interest on any Away Market, even it is
permitted to do so.\46\ Rather, because interest in the Auction would
not trade outside of the Calculated NBBO (which defines the then-
current market for the series), any Limit Orders executed in the
proposed Auction would, bound by Auction Collars, would trade at a
price that is equal to or better than the price(s) available at other
exchanges.\47\ Per Rule 6.64P-O(f)(3)(A), any interest remaining after
such Action is then evaluated for potential routing prior to being
posted to the Consolidated Book. Further, the Exchange notes that there
are other price protections available to limit the risk of executions
at a wider market price.\48\ Thus, the Exchange believes that the risk
of an extreme execution based on the Calculated NBBO available after
the initial Auction Process time period may be mitigated for the
aforementioned reasons. The Exchange believes that, on balance, the
benefits to market participants of having the series open earlier
outweighs this mitigated risk.
---------------------------------------------------------------------------
\46\ Although the intermarket linkage rules exempt from trade-
through liability trades occurring during the opening process, the
Exchange would continue to restrict transactions occurring at the
open to the NBBO. See Rule 6.94-O(b)(2) (exempting from trade-
through liability those transactions that ``traded through a
Protected Quotation being disseminated by an Eligible Exchange
during a trading rotation''). A ``Protection Quotation'' is the Best
Bid or Best Offer disseminated by OPRA and displayed by an Eligible
Exchange. See Rule 6.92-O(15)-(16).
\47\ See Rule 6.64P-O(b)(2)(A) (A) (providing that, `[i]f there
is Matched Volume that can trade at or within the Auction Collars,
the Auction will result in a trade at the Indicative Match Price).
See also Rule 6.64-O(a)(3),(9), and (11) (defining Auction Collars,
Indicative Match Price, and Matched Volume, respectively).
\48\ See Rule 6.41P-O(a)(1), (b) (regarding the Arbitrage Check,
which is applied pre-open). The Exchange notes that the price
protection mechanisms it employs during continuous trading are based
on the NBBO, or Auction Prices as applicable. See, e.g., Rules
6.41P-O(c)(4)(B) (regarding the Intrinsic Value Check); Rule 6.62P-
O(a)(4)(A) (regarding Limit Order Price Protection); and Rule 6.62P-
O(a)(4)(B) (regarding Trading Collars).
---------------------------------------------------------------------------
The Exchange believes its proposal to modify the requirements to
open a series for option series that have two or more assigned Market
Makers would promote just and equitable principles of trade and remove
impediments to and perfect the mechanism of a free and open market and
a national market system and protect investors because it would
continue to provide Market Makers assigned to such series the
opportunity to submit a quote while potentially promoting a more timely
opening once at least two quotes (even if from a single Market Maker)
have been submitted and would add clarity and transparency to Exchange
rules. The Exchange believes the proposed rule change would provide
more flexibility in terms how of market depth in the affected series is
achieved (i.e., based on quotes from a single Market Maker as opposed
to two) and may result in a more timely and efficient opening process.
Further, the proposed change may increase the availability of Legal
Width Quotes in more series and would add clarity and transparency to
Exchange rules. Improving the validity of the opening price benefits
all market participants and also benefits the reputation of the
Exchange as being a venue that provides accurate price discovery. To
the extent that this proposed rule change results in an option series
opening sooner, which, in turn would increase the times during which
investors may conduct trading in these options, this proposed change
would benefit investors and the investing public.
The Exchange believes that the proposed non-substantive and
conforming changes to Rule 6.64P-O (including to paragraph (d)(4)(B))
would promote just and equitable principles of trade because such
changes would streamline Rule 6.64P-O, thus adding clarity to the
Auction Process making it easier to comprehend and navigate to the
benefit of market participants and would promote transparency and
internal consistency within Exchange rules making them easier to
comprehend and navigate.\49\
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\49\ See supra notes 20, 26, 29 and 33.
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[[Page 32209]]
Additional Proposed Non-Substantive or Clarifying Changes to Exchange
Rules
The Exchange believes that the proposed non-substantive and
clarifying changes that update/correct inaccurate references would
promote transparency and internal consistency within Exchange rules
making them easier to comprehend and navigate.\50\
---------------------------------------------------------------------------
\50\ See supra notes 39-41.
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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. The Exchange operates in a
competitive market and regularly competes with other options exchanges
for order flow. The Exchange does not believe that the proposed rule
change would impose any burden on intra-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act
because all market participants may trade in any series that opens
subject to the proposed (modified) opening process.
The Exchange does not believe that the proposed rule change would
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act because it is
designed to open series on the Exchange in a fair and orderly manner.
The Exchange believes the proposed opening process will continue to
provide market participants with an opportunity for price discovery
based on then-current market conditions when the Exchange opens series
for trading. This will facilitate the presence of sufficient liquidity
in a series when it opens, and increase the ability of series to open
at prices consistent with then-current market conditions (at the
Exchange and on other exchanges). As noted herein, several options
exchanges likewise have discretion to modify their opening procedures
to address then-current market conditions.\51\ Further, the Exchange
does not believe that the proposed rule change will impose any burden
on intra-market competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as all market participants that
participate in the opening process may benefit equally from the
proposal, as the rules of the Exchange apply equally to all market
participants.
---------------------------------------------------------------------------
\51\ See, e.g., supra note 24 (citing the discretion of Cboe and
its affiliates and MIAX to modify the opening auction parameters).
---------------------------------------------------------------------------
The Exchange does not believe that the proposed change to open
those series with more than one assigned Market Maker based on two
quotes regardless of the source would result in an undue burden on
competition. Market Makers are encouraged but not required to quote in
their assigned series at the open regardless of whether a Market Maker
is one of several assigned to a series or is the only one. As such,
this proposal would not subject any Market Maker to additional
obligations. Thus, the Exchange does not believe this proposed change
would result in an undue burden on intra-market competition as it would
apply equally to all similarly-situated Market Makers regarding their
assigned series. The Exchange believes that the proposal to allow a
series with more than one assigned Market Maker to open based on two
quotes regardless of the source would continue to encourage
participation of Market Makers at the open, may increase the
availability of Legal Width Quotes in more series, thereby allowing
more series to open (sooner). Improving the validity of the opening
price benefits all market participants and also benefits the reputation
of the Exchange as being a venue that provides accurate price
discovery. With respect to inter-market competition, the Exchange notes
that most options exchanges do not require Market Makers to quote
during the opening.\52\
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\52\ See, e.g., Cboe and its affiliated exchanges.
---------------------------------------------------------------------------
Additionally, the non-substantive changes proposed by the Exchange
provide additional clarity and detail in the Exchange's rules and are
not changes made for any competitive purpose.
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:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#97e5e2fbf2baf4f8fafaf2f9e3e4d7e4f2f4b9f0f8e1"><span class="__cf_email__" data-cfemail="1f6d6a737a327c7072727a716b6c5f6c7a7c31787069">[email protected]</span></a>. Please include
File Number SR-NYSEArca-2022-31 on the subject line.
Paper Comments
<bullet> 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-2022-31. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2022-31 and should be submitted
on or before June 17, 2022.
[[Page 32210]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-11396 Filed 5-26-22; 8:45 am]
BILLING CODE 8011-01-P
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