Notice2023-04565
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 7.19 Related to Pre-Trade Risk Controls
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
March 7, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 44 (Tuesday, March 7, 2023)</title>
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[Federal Register Volume 88, Number 44 (Tuesday, March 7, 2023)]
[Notices]
[Pages 14213-14218]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-04565]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97010; File No. SR-NYSE-2023-14]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Rule 7.19 Related to Pre-Trade Risk Controls
March 1, 2023.
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 February 23, 2023, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``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 amend Rule 7.19 pertaining to pre-trade
risk controls to make additional pre-trade risk controls available to
Entering Firms. The proposed rule 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.
[[Page 14214]]
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 7.19 pertaining to pre-trade
risk controls to make additional pre-trade risk controls available to
Entering Firms. The Exchange's affiliates NYSE American LLC, NYSE Arca,
Inc., NYSE Chicago, Inc., and NYSE National, Inc. (the ``Affiliate
Exchanges'') recently filed to make similar changes and, in those
filings, addressed several points raised in a comment letter submitted
in connection with filings since withdrawn by the Affiliate
Exchanges.\4\ The instant filing also addresses those same points.
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\4\ See Securities Exchange Release Act Nos. 96922 (February 14,
2023) (SR-NYSEAMER-2023-12); 96921 (February 14, 2023) (SR-NYSEArca-
2023-13); 96920 (February 14, 2023) (SR-NYSECHX-2023-08); and 96919
(February 14, 2023) (SR-NYSENAT-2023-07. See Letter to Vanessa
Countryman, Secretary, Securities and Exchange Commission, from
Gerard P. O'Connor, Vice President and General Counsel of Hyannis
Port Research, Inc. (``HPR Letter'') dated January 5, 2023,
available at <a href="https://www.sec.gov/comments/sr-nyseamer-2022-53/srnyseamer202253-20154615-322842.pdf">https://www.sec.gov/comments/sr-nyseamer-2022-53/srnyseamer202253-20154615-322842.pdf</a>. HPR is a provider of (among
other things) non-exchange based risk controls solutions.
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Background and Purpose
In 2020, in order to assist member organizations' efforts to manage
their risk, the Exchange amended its rules to add Rule 7.19 (Pre-Trade
Risk Controls),\5\ which established a set of optional pre-trade risk
controls by which Entering Firms and their designated Clearing Firms
\6\ could set credit limits and other pre-trade risk controls for an
Entering Firm's trading on the Exchange and authorize the Exchange to
take action if those credit limits or other pre-trade risk controls are
exceeded. Specifically, the Exchange added a Gross Credit Risk Limit, a
Single Order Maximum Notional Value Risk Limit, and a Single Order
Maximum Quantity Risk Limit \7\ (collectively, the ``2020 Risk
Controls'').
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\5\ See Securities Exchange Act Release No. 88776 (April 29,
2020), 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17).
\6\ The terms ``Entering Firm'' and ``Clearing Firm'' are
defined in Rule 7.19.
\7\ The terms ``Gross Credit Risk Limit,'' ``Single Order
Maximum Notional Value Risk Limit, and ``Single Order Maximum
Quantity Risk Limit'' are defined in Rule 7.19.
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The Exchange now proposes to expand the list of the optional pre-
trade risk controls available to Entering Firms by adding several
additional pre-trade risk controls that would provide Entering Firms
with enhanced abilities to manage their risk with respect to orders on
the Exchange. As detailed below, each of the proposed additional risk
controls is modeled on risk settings that are already available on the
Cboe,\8\ Nasdaq,\9\ MEMX,\10\ and MIAX Pearl \11\ equities exchanges.
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\8\ See Securities Exchange Act Release Nos. 80611 (May 5,
2017), 82 FR 22045 (May 11, 2017) (SR-BatsBZX-2017-24) (adopting
Rule 11.13, Interpretation and Policies .01); 80612 (May 5, 2017),
82 FR 22024 (May 11, 2017) (SR-BatsBYX-2017-07) (same); 80608 (May
5, 2017), 82 FR 22030 (May 11, 2017) (SR-BatsEDGA-2017-07) (adopting
Rule 11.10, Interpretation and Policies .01); 80607 (May 5, 2017),
82 FR 22027 (May 11, 2017) (SR-BatsEDGX-2017-16) (same).
\9\ See, e.g., Securities Exchange Act Release Nos. 82479
(January 10, 2018), 83 FR 2471 (January 17, 2018) (SR-Nasdaq-2018-
002) (adopting IM-6200-1); 90577 (December 7, 2020), 85 FR 80202
(December 11, 2020) (SR-Nasdaq-2020-79) (moving IM-6200-1 into
Equity 6, Section 5). See also Securities Exchange Act Release Nos.
82545 (January 19, 2018), 83 FR 3834 (January 26, 2018) (SR-BX-2018-
001) (adopting Rule 4765 and commentary thereto); 91830 (May 10,
2021), 86 FR 26567 (May 14, 2021) (SR-BX-2021-012) (moving Rule 4765
and commentary into Equity 6, Section 5).
\10\ See Securities Exchange Act Release No. 89581 (August 17,
2020), 85 FR 51799 (August 21, 2020) (SR-MEMX-2020-04) (adopting
Rule 11.10, Interpretation and Policies .01).
\11\ See Securities Exchange Act Release Nos. 89563 (August 14,
2020), 85 FR 51510 (August 20, 2020) (SR-PEARL-2020-03) (adopting
Rule 2618(a)(1)(A)-(D)); 96205 (November 1, 2022), 87 FR 67080
(November 7, 2022) (SR-PEARL-2022-43) (adopting subsections (E)-(H)
to Rule 2618(a)(1)).
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Like the 2020 Risk Controls, use of the pre-trade risk controls
proposed herein is optional, but all orders on the Exchange would pass
through these risk checks. As such, an Entering Firm that does not
choose to set limits pursuant to the new proposed pre-trade risk
controls would not achieve any latency advantage with respect to its
trading activity on the Exchange.
The HPR Letter questions why the Exchange proposes to make all
orders on the Exchange pass through its risk checks, even if a
particular firm trading on the Exchange opts not to employ the
Exchange's pre-trade risk controls. The Exchange has chosen to
implement its risk checks ``symmetrically'' to all orders because that
is the functionality that clients have specifically requested, and it
is also the recognized best practice in this area. In a September 2021
white paper entitled ``Market Lens: Exchange Best Practices for
Reducing Operational Risk at Broker-Dealers,'' \12\ Citadel Securities
requested that exchanges assist firms in mitigating operational trading
risk by instituting exchange-based risk controls, but expressly
cautioned exchanges against segmenting orders into those that would
pass through risk checks versus those that would not. Citadel noted
that such segmentation of orders would ``produce incentives for all
firms to avoid using any controls, for fear of suffering a competitive
disadvantage.'' \13\ Instead, Citadel recommended that exchanges
``ensure orders follow the same order processing logic regardless of
which options or features are enabled,'' \14\ in order to eliminate any
competitive advantage or disadvantages for clients.
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\12\ See Citadel Securities, ``Market Lens: Exchange Best
Practices for Reducing Operational Risk at Broker-Dealers''
(``Citadel white paper'') dated September 2021, available at <a href="https://www.citadelsecurities.com/wp-content/uploads/sites/2/2021/09/Citadel_Securities_Market-Lens_Sept_2021_Exchange-Best-Practices-for-Reducing-Operational-Risk.pdf">https://www.citadelsecurities.com/wp-content/uploads/sites/2/2021/09/Citadel_Securities_Market-Lens_Sept_2021_Exchange-Best-Practices-for-Reducing-Operational-Risk.pdf</a>. As Citadel put it (at page 5):
Insufficiently well-designed and tested controls can create what
amount to penalties, driven by the time and computational power
required to perform various stages of checks, if applied only to
participants who opt-in to their use. This could produce incentives
for all firms to avoid using any controls, for fear of suffering a
competitive disadvantage. One way to address this, while maintaining
choice for member firms, is to ensure orders follow the same order
processing logic regardless of which options or features are
enabled--similar to how all colocated servers in an equalized data
center incur the same cabling distance to the matching engine,
regardless of their physical proximity to it. Additionally,
exchanges should vigorously test controls to ensure no latency
penalty exists in practice. Exchanges should actively publicize the
net-neutral risk controls.
\13\ Id. at 5.
\14\ Id.
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This is the model that the Exchange used in building the 2020 Risk
Controls that the Commission approved in 2020,\15\ and is the same
model that the Exchange proposes would apply to the additional pre-
trade risk checks proposed here. There is nothing unique about this
approach. Functionality on the Exchange's trading systems is often
applied uniformly to all orders, regardless of whether a particular
client has opted to use that functionality for a particular order. For
example, the Exchange's limit order price protection applies generally
to trading on the Exchange and orders with limit prices are not
processed more slowly than those without. Similarly, the Exchange's
trading systems check all orders for a variety of details and modifiers
(e.g., duplicative client order check, order capacity check, and self-
trade prevention).
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\15\ See Securities Exchange Act Release No. 88776 (April 29,
2020), 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17) (order approving
the Exchange's pre-trade risk controls). The Commission concluded
that ``the proposed rule change is reasonably designed to provide
members with optional tools to manage their credit risk.'' Id. at
26770.
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The Exchange understands that the risk checks of other exchanges,
on which the proposed rule is modeled, also apply symmetrically to all
orders.\16\
[[Page 14215]]
The Exchange also notes that the Citadel white paper cited above was
written ``in collaboration with several major exchanges, including
NYSE, Nasdaq, MIAX, MEMX, and BOX,'' suggesting that some or all of
those exchanges may also employ the symmetrical application of risk
checks that the Citadel white paper recommends.\17\
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\16\ See, e.g., MEMX Risk FAQ, dated October 13, 2020, available
at <a href="https://info.memxtrading.com/us-equities-faq/#Bookmark21">https://info.memxtrading.com/us-equities-faq/#Bookmark21</a> (``The
risk checks are applied in a consistent manner to all participant
orders in order to mitigate risk without incurring latency
disadvantage.''); MIAX Pearl Equities Exchange User Manual, updated
October 2022, available at <a href="https://www.miaxequities.com/sites/default/files/website_file-files/MIAX_Pearl_Equities_User_Manual_October_2022.pdf">https://www.miaxequities.com/sites/default/files/website_file-files/MIAX_Pearl_Equities_User_Manual_October_2022.pdf</a>, at 29 (stating
that all but two of the exchange's 14 risk checks ``are latency
equalized, i.e., there is no latency penalty for a member when
opting into and leveraging a risk protection available on the
exchange when entering an order as compared to a member not opting
into the risk protection when entering an order'').
\17\ See Citadel white paper, supra note 12, at 2.
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The Exchange expects that any latency added by the proposed
additional pre-trade risk controls would be de minimis. Specifically,
the Exchange expects that the latency added by the combination of the
2020 Risk Checks plus the proposed additional pre-trade risk controls
would be significantly less than one microsecond. Nevertheless, seizing
on the phrase ``de minimis,'' HPR argues that the Commission's 2016
interpretation regarding automated quotations under Regulation NMS \18\
applies here and should require the Exchange to justify this de minimis
latency change in a number of ways.\19\ But that Commission
interpretation pertains to ``intentional access delays,'' like speed
bumps--not to the issues here. The Exchange's pre-trade risk controls
are not an intentional access delay,\20\ but a functional enhancement
to the Exchange's trading systems, and, like any change to a trading
system's function or performance, may impact the overall speed of
trading on the Exchange in ways that can increase or decrease overall
latency. It is within the Exchange's prerogative as a market center in
the current hotly competitive environment to assess whether and when to
make functional enhancements to its trading systems. What is key under
the Exchange Act is that any anticipated latency effects of such
enhancements are applied uniformly, to all orders of all market
participants, in a non-discriminatory way--as the risk controls
proposed here would be. If market participants find that the latency
cost of such enhancements is not justified by the additional
functionality they offer, such market participants will vote with their
feet and send their order flow elsewhere.
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\18\ See also Securities Exchange Act Release No. 78102 (June
17, 2016), 81 FR 40785 (June 23, 2016) (File No. S7-03-16)
(Commission Interpretation Regarding Automated Quotations Under
Regulation NMS), available at <a href="https://www.sec.gov/rules/interp/2016/34-78102.pdf">https://www.sec.gov/rules/interp/2016/34-78102.pdf</a>.
\19\ HPR Letter, supra note 4, at 5-6.
\20\ Indeed, the Commission did not treat any of the other
exchanges' filings for pre-trade risk controls listed in supra notes
8-11 as ``intentional access delays.''
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With one exception, the additional risk checks proposed here would
be a functional enhancement to the Exchange's Pillar gateway \21\ and
the risk checks would be applied to all orders on the Exchange. While
the Exchange strongly believes that symmetrical application of all pre-
trade risk controls is the appropriate approach (as explained above),
providing customers an opt-out ability would require the Exchange to
provide new order entry ports that would bypass the evaluation of such
pre-trade risk protections. Providing such new ports would burden
customers with additional costs to purchase such ports and to migrate
their order flow to such ports. The Exchange does not believe that the
added expense of creating such new ports (on the part of the Exchange)
or of purchasing and migrating to them (on the part of customers) is
justified in light of the de minimis latency imposed by the pre-trade
risk controls at issue.
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\21\ The one exception is the proposed pre-trade risk control in
paragraph (b)(2)(B), discussed below, which would permit an Entering
Firm to set dollar-based or percentage-based controls as to the
price of an order that are equal to or more restrictive than the
levels set out in Rule 7.31(a)(2)(B) regarding Limit Order Price
Protection. This risk check, like the Exchange's Limit Order Price
Protection, is implemented in the matching engine.
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The proposed new pre-trade risk controls proposed herein would be
available to be set by Entering Firms only. Clearing Firms designated
by an Entering Firm would continue to be able to view all pre-trade
risk controls set by the Entering Firm and to set the 2020 Risk
Controls on the Entering Firm's behalf. In addition, as specified
below, several of the proposed additional Pre-Trade Risk Controls would
not be immediately available to Floor brokers. The Exchange is in the
process of updating its technology to allow Floor brokers to connect to
the Exchange via Pillar gateways. Because the Exchange anticipates that
Floor brokers will transition to Pillar gateways in 2023, the Exchange
did not add the proposed new Pre-Trade Risk Controls to legacy gateways
that will be decommissioned. Once that transition is underway, the
Exchange will file a proposed rule change to extend such risk checks to
Floor brokers.
Proposed Amendment to Rule 7.19
To accomplish this rule change, the Exchange proposes to amend
paragraph (a) to include a new paragraph (a)(3) that would define the
term ``Pre-Trade Risk Controls'' as all of the risk controls listed in
proposed paragraph (b), inclusive of the 2020 Risk Controls and the
proposed new risk controls.
In proposed paragraph (b), the Exchange proposes to list all Pre-
Trade Risk Controls available to Entering Firms, which would include
the existing 2020 Risk Controls and the proposed new controls. The
Exchange proposes to move the definition of Gross Credit Risk Limit
from current paragraph (a)(5) to proposed paragraph (b)(1), with no
substantive change. Next, the Exchange proposes to add paragraph
(b)(2), which would list all available ``Single Order Risk Controls.''
The Exchange proposes to move the definitions of Single Order Maximum
Notional Value Risk Limit and Single Order Maximum Quantity Risk Limit
from current paragraphs (a)(3) and (a)(4) to proposed paragraph
(b)(2)(A), with no substantive change. Next, the Exchange proposes to
add paragraphs (b)(2)(B) through (b)(2)(F) to enumerate the proposed
new Single Order Risk Controls, as follows:
(B) controls related to the price of an order (including
percentage-based and dollar-based controls);
(C) controls related to the order types or modifiers that can be
utilized;
(D) controls to restrict the types of securities transacted
(including but not limited to restricted securities);
(E) controls to prohibit duplicative orders; and
(F) controls related to the size of an order as compared to the
average daily volume of the security (including the ability to specify
the minimum average daily volume for the securities for which such
controls will be activated).
Each of the Single Order Risk Controls in proposed paragraph (b)(2)
is substantively identical to risk settings available on the Cboe,
Nasdaq, MEMX, and MIAX Pearl \22\ equities exchanges. As such, the
proposed new Pre-Trade Risk Controls are familiar to market
participants and are not novel.
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\22\ See supra notes 8-11.
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The Exchange proposes to move current paragraph (b)(2) to proposed
paragraph (c) and to re-name that paragraph ``Pre-Trade Risk Controls
Available to Clearing Firms.'' The Exchange proposes to renumber
current paragraphs (b)(2)(A), (b)(2)(B), and (b)(2)(C) as paragraphs
(c)(1), (c)(2), and (c)(3) accordingly. The Exchange proposes to smooth
the grammar in proposed paragraph (c)(1) by moving the ``or both''
language from the end of the sentence to the beginning, to clarify that
[[Page 14216]]
an Entering Firm that does not self-clear may designate its Clearing
Firm to take either or both of the following actions: viewing or
setting Pre-Trade Risk Controls on the Entering Firm's behalf. Finally,
in proposed paragraph (c)(1)(B), the Exchange proposes to specify that
Clearing Firms so-designated may only set the 2020 Risk Controls on an
Entering Firm's behalf; the proposed new risk controls set out in
proposed paragraph (b)(2)(B) through (b)(2)(F) are available to be set
by Entering Firms only. The Exchange does not propose any changes to
proposed paragraph (c)(2), and with respect to proposed paragraph
(c)(3), proposes only to update internal cross-references.
The Exchange proposes to move current paragraph (b)(3) regarding
``Setting and Adjusting Pre-Trade Risk Controls'' to proposed paragraph
(d), and to renumber current paragraphs (b)(3)(A) and (b)(3)(B) as
proposed paragraphs (d)(1) and (d)(2) accordingly. The Exchange
proposes to amend the text of proposed paragraph (d)(2) to state that
in addition to Pre-Trade Risk Controls being available to be set at the
MPID level or at one or more sub-IDs associated with that MPID, or
both, Pre-Trade Risk Controls related to the short selling of
securities, transacting in restricted securities, and the size of an
order compared to the average daily volume of a security must be set
per symbol.
The Exchange proposes to move current paragraph (b)(4) regarding
``Notifications'' to paragraph (e), with no changes.
The Exchange proposes to move current paragraph (c) regarding
``Automated Breach Actions'' to proposed paragraph (f) and to renumber
current paragraphs (c)(1), (c)(2), (c)(3), and (c)(4) as paragraphs
(f)(1), (f)(2), (f)(3), and (f)(4) accordingly. The Exchange proposes
no changes to the text of proposed paragraphs (f)(1), (f)(3), or
(f)(4), other than to update an internal cross-reference. With respect
to proposed paragraph (f)(2) regarding ``Breach Action for Single Order
Risk Limits,'' the Exchange proposes to change the word ``Limits'' in
the heading to ``Controls.'' The Exchange further proposes to amend the
text of current paragraph (c)(2) to specify in paragraph (f)(2)(A) that
if an order would breach a price control under paragraph (b)(2)(B), it
would be rejected or canceled as specified in Rule 7.31(a)(2)(B) (the
``Limit Order Price Protection Rule''), while providing in paragraph
(f)(2)(B) that an order that breaches the designated limit of any other
Single Order Risk Control would be rejected.
The Exchange proposes to move current paragraph (d) regarding
``Reinstatement of Entering Firm After Automated Breach Action'' to
proposed paragraph (g), with no changes.
The Exchange proposes to move current paragraph (e) regarding
``Kill Switch Actions'' to proposed paragraph (h) with no changes,
other than to update an internal cross-reference.
The Exchange proposes no changes to Commentary .01. The Exchange
proposes to add a new Commentary .02 to specify the interplay between
the Exchange's Limit Order Price Protection Rule and the price controls
that may be set by an Entering Firm pursuant to proposed paragraph
(b)(2)(B). Proposed Commentary .02 specifies that pursuant to paragraph
(b)(2)(B), an Entering Firm may always set dollar-based or percentage-
based controls as to the price of an order that are equal to or more
restrictive than the levels set out in Rule 7.31(a)(2)(B) regarding
Limit Order Price Protection (e.g., the greater of $0.15 or 10% (for
securities with a reference price up to and including $25.00), 5% (for
securities with a reference price of greater than $25.00 and up to and
including $50.00), or 3% (for securities with a reference price greater
than $50.00) away from the NBB or NBO). However, an Entering Firm may
set price controls under paragraph (b)(2)(B) that are less restrictive
than the levels in the Limit Order Price Protection Rule only (i)
outside of Core Trading Hours or (ii) with respect to LOC Orders or
Closing IO Orders.
The Exchange proposes to add a new Commentary .03 titled ``Floor
Brokers'' to specify how the Pre-Trade Risk Controls apply to Floor
brokers. The Exchange proposes to move the text of current Commentary
.02 into a new paragraph (a) of Commentary .03, with the following
proposed alterations. The Exchange proposes to provide additional
specificity to the text to state that ``either the Customer or the
Floor broker firm'' (instead of ``both the Customer and the Floor
broker firm'') may be considered an Entering Firm for the purpose of
the Pre-Trade Risk Controls in proposed paragraphs (b)(1) and
(b)(2)(A). The Exchange further proposes to add additional text to
paragraph (a) of Commentary .03 to specify that the Pre-Trade Risk
Controls described in paragraphs (b)(2)(B) through (b)(2)(F) will not
initially be available to Floor brokers and that the Exchange will file
a proposed rule change when such Pre-Trade Risk Controls become
available to Floor brokers.
The Exchange proposes to move the text of current Commentary .03,
regarding manual transactions by a Floor broker and crossing
transactions pursuant to Rule 76, into a new paragraph (b) of
Commentary .03, without change.
The Exchange proposes to amend Commentary .04 to insert the title
``DMMs'' and to move the current text of Commentary .04 into a new
paragraph (a) of Commentary .04, without change, except that the
Exchange proposes to update the current cross-reference to Rule
7.35(a)(8) to now cross-reference Rule 7.35(a)(9). The Exchange further
proposes to add new paragraph (b) of Commentary .04 to specify that
manually entered DMM Interest as defined in Rule 7.35(a)(9) will be
excluded from the Pre-Trade Risk Controls in paragraphs (b)(2)(C)
through (b)(2)(F).
Continuing Obligations of Member Organizations Under Rule 15c3-5
The proposed Pre-Trade Risk Controls described here are meant to
supplement, and not replace, the member organizations' own internal
systems, monitoring, and procedures related to risk management. The
Exchange does not guarantee that these controls will be sufficiently
comprehensive to meet all of a member organization's needs, the
controls are not designed to be the sole means of risk management, and
using these controls will not necessarily meet a member organization's
obligations required by Exchange or federal rules (including, without
limitation, the Rule 15c3-5 under the Act \23\ (``Rule 15c3-5'')). Use
of the Exchange's Pre-Trade Risk Controls will not automatically
constitute compliance with Exchange or federal rules and responsibility
for compliance with all Exchange and SEC rules remains with the member
organization.\24\
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\23\ See 17 CFR 240.15c3-5.
\24\ See also Commentary .01 to Rule 7.19, which provides that
``[t]he pre-trade risk controls described in this Rule are meant to
supplement, and not replace, the member organization's own internal
systems, monitoring and procedures related to risk management and
are not designed for compliance with Rule 15c3-5 under the Exchange
Act. Responsibility for compliance with all Exchange and SEC rules
remains with the member organization.''
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Timing and Implementation
The Exchange anticipates completing the technological changes
necessary to implement the proposed rule change in the first quarter of
2023, but in any event no later than April 30, 2023. The Exchange
anticipates announcing the availability of the Pre-Trade Risk Controls
introduced in this filing by Trader Update in the first quarter of
2023.
[[Page 14217]]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\25\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\26\ 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 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,
and because it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.\27\
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ HPR argues that the Exchange should be compelled to submit
this proposal as a fee filing pursuant to Section 19(b)(3)(A)(ii) of
the Exchange Act. See HPR Letter, supra note 4, at 6-8. But that
provision only applies to rule filings ``establishing or charging a
due, fee, or other charge imposed by the [SRO] . . . .'' Because the
Exchange does not propose to charge any fees for the proposed
services here, Section 19(b)(3)(A)(ii) is inapplicable. Notably, the
Commission did not treat any of the other exchanges' filings for
pre-trade risk controls listed in supra notes 8-11 as fee filings.
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Specifically, the Exchange believes that the proposed rule change
will remove impediments to and perfect the mechanism of a free and open
market and a national market system because the proposed additional
Pre-Trade Risk Controls would provide Entering Firms with enhanced
abilities to manage their risk with respect to orders on the Exchange.
The proposed additional Pre-Trade Risk Controls are not novel; they are
based on existing risk settings already in place on the Cboe, Nasdaq,
MEMX, and MIAX Pearl equities exchanges \28\ and market participants
are already familiar with the types of protections that the proposed
risk controls afford. As such, the Exchange believes that the proposed
additional Pre-Trade Risk Controls would provide a means to address
potentially market-impacting events, helping to ensure the proper
functioning of the market.
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\28\ See supra notes 8-11.
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In addition, the Exchange believes that the proposed rule change
will protect investors and the public interest because the proposed
additional Pre-Trade Risk Controls are a form of impact mitigation that
will aid Entering Firms in minimizing their risk exposure and reduce
the potential for disruptive, market-wide events. The Exchange
understands that member organizations implement a number of different
risk-based controls, including those required by Rule 15c3-5. The
controls proposed here will serve as an additional tool for Entering
Firms to assist them in identifying any risk exposure. The Exchange
believes the proposed additional Pre-Trade Risk Controls will assist
Entering Firms in managing their financial exposure which, in turn,
could enhance the integrity of trading on the securities markets and
help to assure the stability of the financial system.
The Exchange believes that the proposed rule change will remove
impediments to and perfect the mechanism of a free and open market and
a national market system by permitting Entering Firms to set price
controls under paragraph (b)(2)(B) that are equal to or more
restrictive than the levels in the Exchange's Limit Order Price
Protection Rule, but preventing Entering Firms from setting price
controls that are less restrictive than those levels during Core
Trading Hours in most circumstances. The Exchange's Limit Order Price
Protection Rule protects from aberrant trades, thus improving
continuous trading and price discovery. The Exchange believes that
Entering Firms should not be able to circumvent the protections of that
rule by setting lower levels during Core Trading Hours, except with
respect to orders that participate in the Closing Auction (e.g., LOC
and Closing IO Orders).\29\ But under the proposed rule, Entering Firms
seeking to further manage their exposure to aberrant trades would be
permitted to set price controls at levels that are more restrictive
than in the Exchange's Limit Order Price Protection Rule. Additionally,
because price controls set by an Entering Firm under paragraph
(b)(2)(B) would function as a form of limit order price protection, the
Exchange believes that it would remove impediments to and perfect the
mechanism of a free and open market and a national market system for an
order that would breach such a price control to be rejected or canceled
as specified in the Limit Order Price Protection Rule.
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\29\ LOC Orders and Closing IO orders are not subject to the
Limit Order Price Protection in Rule 7.31(a)(2)(B).
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Finally, the Exchange believes that the proposed rule change does
not unfairly discriminate among the Exchange's member organizations
because use of the proposed additional Pre-Trade Risk Controls is
optional and is not a prerequisite for participation on the Exchange.
In addition, because all orders on the Exchange would pass through the
risk checks, there would be no difference in the latency experienced by
member organizations who have opted to use the proposed additional Pre-
Trade Risk Controls versus those who have not opted to use them. The
Exchange does not believe it is unfairly discriminatory to have all
orders on the Exchange pass through the risk checks, even for member
organizations that opt not to use the Exchange's pre-trade risk
controls. As described above, the proposed risk checks are a functional
enhancement to the Exchange's trading systems that the Exchange
proposes to apply uniformly to all orders on the Exchange; by applying
them uniformly, the Exchange would avoid producing incentives for all
firms to avoid using the risk controls for fear of suffering a
competitive disadvantage. Additionally, any latency imposed by the pre-
trade risk controls proposed here is de minimis and would not have a
material impact on the order flow of member organizations that choose
to employ non-exchange providers (such as HPR) to provide them with
risk control solutions.
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. In fact, the Exchange
believes that the proposal will have a positive effect on competition
because, by providing Entering Firms additional means to monitor and
control risk, the proposed rule will increase confidence in the proper
functioning of the markets. The Exchange believes the proposed
additional Pre-Trade Risk Controls will assist Entering Firms in
managing their financial exposure which, in turn, could enhance the
integrity of trading on the securities markets and help to assure the
stability of the financial system. As a result, the level of
competition should increase as public confidence in the markets is
solidified.
In its letter, HPR contends that it is an unnecessary burden on
competition for the Exchange to have all orders--even the orders of
member organizations that choose not to use the proposed pre-trade risk
controls--to pass through the Exchange's checks because doing so will
reduce customer demand for HPR's risk control services. HPR argues that
by imposing latency from its risk checks on all orders, the Exchange
has created a ``latency tax'' that would encourage customers to use the
Exchange's risk controls instead of third-party risk
[[Page 14218]]
solutions like HPR's.\30\ These assertions are factually incorrect and
obscure the very real differences between the Exchange's pre-trade risk
controls and the services that HPR offers. The Exchange understands
that HPR's enterprise risk management solutions, like those of its
competitors, permit its clients to track aggregated risk across all
markets and provide consolidated risk management capabilities. In
contrast, exchange based-solutions such as the Exchange's only offer
tools to manage risk across the Exchanges and its affiliate exchanges
(e.g., the NYSE Group exchanges). The Exchange's proposed risk checks
would not and could not replace HPR's far broader offering. In
addition, as the Exchange made clear in its filing for the 2020 Risk
Controls and repeats here, the Exchange's pre-trade risk controls are
not a complete Rule 15c3-5 solution. The Exchange's risk controls are
meant to supplement, and not replace, a member organization's own
internal risk management systems (which firms may outsource to
providers like HPR), and the Exchange's controls are not designed to be
the sole means of risk management that any firm uses. Additionally, any
latency imposed by the Pre-Trade Risk Controls proposed here is de
minimis and would not have a material impact on the order flow of
member organizations that choose to employ non-exchange providers (such
as HPR) to provide them with risk control solutions.
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\30\ See HPR Letter, supra note 4, at 4 (claiming the Exchange
has ``architected the proposed risk controls to give [itself] an
unfair and anti-competitive latency advantage over non-exchange
offerings provided by broker-dealers or vendors such as HPR.'').
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Finally, the Exchange believes it would be an unfair burden on
competition for the Commission to suspend and ultimately disapprove the
pre-trade risk controls proposed here, where substantially identical
controls are already in place on numerous of the Exchange's competitor
exchanges.\31\ Since 2017, equities exchanges have been adding pre-
trade risk controls to their trading systems. It would be an
unjustifiable burden on competition and on the Exchange for the
Commission to permit all equities exchanges to offer such functionality
except for the Exchange and its affiliates. Specifically, the Exchange
would be at a significant competitive disadvantage vis-[agrave]-vis
other equities exchanges that already offer the type of pre-trade risk
controls proposed in this filing as member organizations may choose to
direct order flow away from the Exchange until it is able to offer such
competing pre-trade risk controls.
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\31\ See supra notes 8-11.
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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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \32\ and Rule 19b-4(f)(6) thereunder.\33\
Because the foregoing proposed rule change does not: (i) significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, it has become effective pursuant to
Section 19(b)(3)(A)(iii) of the Act \34\ and subparagraph (f)(6) of
Rule 19b-4 thereunder.\35\
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\32\ 15 U.S.C. 78s(b)(3)(A)(iii).
\33\ 17 CFR 240.19b-4(f)(6).
\34\ 15 U.S.C. 78s(b)(3)(A)(iii).
\35\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \36\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\36\ 15 U.S.C. 78s(b)(2)(B).
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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#b9cbccd5dc94dad6d4d4dcd7cdcaf9cadcda97ded6cf"><span class="__cf_email__" data-cfemail="3644435a531b55595b5b535842457645535518515940">[email protected]</span></a>. Please include
File Number SR-NYSE-2023-14 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-NYSE-2023-14. 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-NYSE-2023-14 and should be submitted on
or before March 28, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-04565 Filed 3-6-23; 8:45 am]
BILLING CODE 8011-01-P
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