Notice2022-13962
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Rule 7.31-E(h)(3) Relating to Discretionary Pegged Orders
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Published
June 30, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 125 (Thursday, June 30, 2022)</title>
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[Federal Register Volume 87, Number 125 (Thursday, June 30, 2022)]
[Notices]
[Pages 39134-39136]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-13962]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95154; File No. SR-NYSEArca-2022-13]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, To Amend Rule
7.31-E(h)(3) Relating to Discretionary Pegged Orders
June 24, 2022.
I. Introduction
On March 9, 2022, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend NYSE Arca Rule 7.31-E(h)(3) to modify
certain factors relevant to the quote instability calculation for
Discretionary Pegged Orders. The proposed rule change was published for
comment in the Federal Register on March 28, 2022.\3\ On May 9, 2022,
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a
longer period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to disapprove the proposed rule change.\5\ On May 10,
2022, the Exchange filed Amendment No. 1 to the proposed rule
change,\6\ and on June 15, 2022, the Exchange filed Amendment No. 2 to
the proposed rule change, which replaced and superseded in their
entirety both the original filing and Amendment No. 1. The Commission
has received no comments on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 94490 (Mar. 22,
2022), 87 FR 17376 (Mar. 28, 2022) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 94869 (May 9, 2022),
87 FR 29417 (May 13, 2022). The Commission designated June 26, 2022,
as the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ Amendment No. 1 is available on the Commission's website at
<a href="https://www.sec.gov/comments/sr-nysearca-2022-13/srnysearca202213-20128473-292032.pdf">https://www.sec.gov/comments/sr-nysearca-2022-13/srnysearca202213-20128473-292032.pdf</a>.
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The Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Amendment No. 2, from interested
persons and is approving the proposed rule change, as modified by
Amendment No. 2, on an accelerated basis.
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 amend Rule 7.31-E(h)(3) to modify certain
factors relevant to the quote instability calculation for Discretionary
Pegged Orders. The Discretionary Pegged Order is a non-displayed order
type that is pegged to the same side of the PBBO.\7\ The price of a
Discretionary Pegged Order automatically adjusts as the PBBO moves, and
a Discretionary Pegged Order will exercise the least amount of
discretion necessary to trade with contra-side interest. A
Discretionary Pegged Order will not exercise discretion if the PBBO is
determined to be unstable via a quote instability calculation that
assesses the probability of a change to the PBB or PBO (as described in
further detail below), thereby offering protection against unfavorable
executions during periods of quote instability.
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\7\ As defined in NYSE Arca Rule 1.1, ``PBBO'' means the Best
Protected Bid and the Best Protected Offer. Rule 1.1 also defines
``PBB'' as the highest Protected Bid and ``PBO'' as the lowest
Protected Offer.
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Specifically, the Exchange proposes to amend Rule 7.31-
E(h)(3)(D)(i)(D)(1)(a), which sets forth the quote stability
coefficients. Under Rule 7.31-E(h)(3)(D)(i)(D)(3), the Exchange may
modify the quote stability coefficients at any time, subject to a
filing of a proposed rule change. The Exchange proposes such changes in
this rule filing.
Discretionary Pegged Orders
Rule 7.31-E(h)(3) provides for Discretionary Pegged Orders, which
are Pegged Orders \8\ that may exercise price discretion from their
working price to a discretionary price in order to trade with contra-
side orders on the NYSE Arca Book, except during periods of quote
instability as defined in Rule 7.31-E(h)(3)(D).
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\8\ A Pegged Order is a Limit Order that does not route with a
working price that is pegged to a dynamic reference price. If the
designated reference price is higher (lower) than the limit price of
a Pegged Order to buy (sell), the working price will be the limit
price of the order. See Rule 7.31-E(h).
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Rule 7.31-E(h)(3)(D) provides that the Exchange uses a quote
instability calculation to assess a security's ``quote instability
factor,'' or the probability of an imminent change to the current PBB
to a lower price or PBO to a higher price. When quoting activity in a
security meets predefined criteria and the quote instability factor
calculated is greater than the Exchange's defined ``quote instability
threshold,'' the Exchange treats the quote as unstable (``quote
instability'' or a ``crumbling quote'').
Rule 7.31-E(h)(3)(D)(i) provides that the Exchange determines a
quote to be unstable when, among other factors, the quote instability
factor result from the quote stability calculation is greater than the
quote instability threshold. To perform the quote stability calculation
and determine the quote instability factor, the Exchange employs a
fixed formula utilizing the quote stability coefficients and quote
stability variables set forth in Rule 7.31-E(h)(3)(D)(i)(D)(1)(a) and
Rule 7.31-E(h)(3)(D)(i)(D)(1)(b), respectively.
Proposed Rule Change
The Exchange proposes to update the quote stability coefficients
used in the quote instability calculation, which have not been modified
since Rule 7.31-E(h)(3) was adopted.\9\ The proposed changes are
intended to update the quote stability coefficients so that they are
based on current market data and better calibrated to function on an
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exchange without an intentional delay mechanism and with deeper
liquidity than other exchanges that offer similar functionality.\10\
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\9\ The Exchange adopted Rule 7.31-E(h)(3) governing
Discretionary Pegged Orders in 2016. See Securities Exchange Act
Release No. 78181 (June 28, 2016), 81 FR 43297 (July 1, 2016) (SR-
NYSEArca-2016-44) (Notice of Filing of Amendment No. 1, and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified
by Amendment No. 1, to Add a New Discretionary Pegged Order).
Discretionary Pegged Orders (with the current quote stability
coefficients set forth in current Rules 7.31-
E(h)(3)(D)(i)(D)(1)(a)(i) through (v)) have been available for use
on the Exchange since March 21, 2022. See <a href="https://www.nyse.com/trader-update/history#110000415898">https://www.nyse.com/trader-update/history#110000415898</a>.
\10\ The Exchange notes that its rules governing the
Discretionary Pegged Order, including the formula for the quote
instability calculation, are based on the Investors Exchange LLC
(``IEX'') Discretionary Peg Order (``D-Peg Order''), which functions
in conjunction with IEX's speed bump. See id. The Exchange does not
anticipate any issues in connection with the introduction of the
order type, including because such orders would be processed
similarly to Discretionary Pegged Orders on its affiliated exchange,
NYSE American LLC (``NYSE American''). NYSE American, which also
does not currently function with any intentional delay, offers a
Discretionary Pegged Order as set forth in NYSE American Rule
7.31E(h)(3), which is substantially the same as NYSE Arca Rule 7.31-
E(h)(3).
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The Exchange reviewed NYSE Arca market data from randomly selected
days in the fourth quarter of 2021 to analyze the effectiveness of the
quote stability coefficients in predicting changes to the PBBO.
Specifically, the Exchange reviewed PBBO data, on a nanosecond level,
for certain intervals throughout each randomly selected day to track
changes to quotes on NYSE Arca and away markets. The Exchange used this
data to generate and then test the effectiveness of the proposed quote
stability coefficients, and based on its analysis, believes that
modifying the quote stability coefficients would enable the Exchange to
evaluate the quality of the PBBO more effectively. Specifically, the
Exchange sampled market activity from randomly selected days in the
fourth quarter of 2021 to simulate the performance of the quote
instability calculation using both the current quote stability
coefficients and the proposed quote stability coefficients. The
Exchange observed that, in situations where the market price moved
against the same side of the quote (i.e., the PBB fell or the PBO rose)
10 milliseconds later, the proposed quote stability coefficients, when
incorporated into the quote instability calculation, correctly
predicted the price change approximately 17% more often than the
current quote stability coefficients were able to predict the price
change (i.e., the current quote stability coefficients under-predicted
when a price change would occur).
Accordingly, the Exchange believes that the proposed quote
stability coefficients would be more accurate than the current quote
stability coefficients in identifying changes to the PBBO and thus more
effective in protecting Discretionary Pegged Orders from unfavorable
executions. The Exchange thus proposes to modify the quote stability
coefficients set forth in Rule 7.31-E(h)(3)(D)(i)(D)(1)(a)(i) through
(v) as follows:
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Current Proposed
Quote stability coefficient value value
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C0............................................. -2.39515 -1.793885
C1............................................. -0.76504 -0.600796
C2............................................. 0.07599 0.0776515
C3............................................. 0.38374 0.492649
C4............................................. 0.14466 0.1631485
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The Exchange believes that its proposed modification of the quote
stability coefficients, based on the market data analysis described
above, would improve the accuracy of the fixed formula used to perform
the quote instability calculation. Specifically, the Exchange believes
that the proposed quote stability coefficients, which have been
adjusted to reflect more recent activity on the Exchange, would improve
the calibration of the quote instability calculation to activity on the
Exchange, thereby improving the Exchange's ability to predict whether
there is quote instability and protect Discretionary Pegged Orders from
exercising discretion when the PBBO is unstable.
Because of the technology changes associated with this proposed
rule change, the Exchange will announce the implementation date by
Trader Update. Subject to approval of this proposed rule change, the
Exchange anticipates that it will implement the proposed quote
stability coefficients no later than in the third quarter of 2022.
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, 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.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed change would promote just
and equitable principles of trade, remove impediments to, and perfect
the mechanism of, a free and open market and a national market system,
and protect investors and the public interest because it is designed to
increase the effectiveness of the quote instability calculation used to
determine whether a crumbling quote exists. As discussed above, the
proposed change is based on the Exchange's analysis of market data,
which supports that the proposed quote stability coefficients would
accurately identify changes to the PBBO more frequently than the
current quote stability coefficients and, accordingly, that the
proposed change would improve the accuracy of the Exchange's quote
instability calculation. Accordingly, the Exchange believes that the
proposed change would remove impediments to, and perfect the mechanism
of, a free and open market and a national market system, as well as
protect investors and the public interest, by enhancing the Exchange's
protection of Discretionary Pegged Orders. Specifically, because the
proposed quote stability coefficients were derived through an analysis
of more recent market data and are calibrated to reflect current
activity on the Exchange (including to adapt them to function on an
exchange without an intentional delay mechanism and with deeper
liquidity than other exchanges that offer similar functionality), the
Exchange believes that the proposed change would improve the
effectiveness of the quote instability calculation in predicting
periods of quote instability and thus enhance the extent to which
Discretionary Pegged Orders would be protected from unfavorable
executions.
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 believes that
the proposed change would promote competition by improving the accuracy
of the quote instability calculation, thereby enhancing the protection
of Discretionary Pegged Orders from unfavorable executions during
periods of quote instability.
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. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 2, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national
[[Page 39136]]
securities exchange.\13\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\14\ which
requires that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\13\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78f(b)(5).
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As described above, the Exchange represents that the proposed
coefficients were calibrated to reflect the Exchange's current activity
and market structure and are based on an analysis of recent market data
and on backtesting that indicates that the proposed quote stability
coefficients and resulting updated quote stability formula and would
more accurately identify if the PBBO is ``crumbling'' compared to the
current quote stability coefficients. The Commission finds that the
proposed rule change is consistent with the protection of investors and
the public interest because it will modify the coefficients of the
quote instability formula in a way that is reasonably designed to
improve the effectiveness of the quote instability calculation in
predicting periods of quote instability and to thereby enhance the
effectiveness of Discretionary Pegged Orders against unfavorable
executions during periods of quote instability.
For the reasons discussed above, the Commission finds that this
proposed rule change, as modified by Amendment No. 2, is consistent
with the requirements of the Act.
IV. Solicitation of Comments on Amendment No. 2
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 2
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#e193948d84cc828e8c8c848f9592a1928482cf868e97"><span class="__cf_email__" data-cfemail="5a282f363f77393537373f342e291a293f39743d352c">[email protected]</span></a>. Please include
File No. SR-NYSEArca-2022-13 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 No. SR-NYSEArca-2022-13. The file
numbers 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 will also 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 publicly available. All submissions
should refer to File No. SR-NYSEArca-2022-13 and should be submitted on
or before July 21, 2022.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 2, prior to the thirtieth day
after the date of publication of notice of the amended proposal in the
Federal Register. In Amendment No. 2, the Exchange amended the proposal
to: (1) provide additional explanation of and rationale for using
Discretionary Pegged Orders; (2) provide additional explanation of the
purpose of the proposed rule change; and (3) provide additional
explanation regarding how the proposed quote instability coefficients
were formulated and tested; and (4) state when the Exchange expects to
implement the proposed change to the quote instability coefficients.
Amendment No. 2 adds clarity and justification to the proposal and does
not substantively alter the proposed rule change as described in the
Notice. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\15\ to approve the proposed rule change,
as modified by Amendment No. 2, on an accelerated basis.
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\15\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-NYSEArca-2022-13), as
modified by Amendment No. 2, be, and hereby is, approved on an
accelerated basis.
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\16\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-13962 Filed 6-29-22; 8:45 am]
BILLING CODE 8011-01-P
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