Notice2023-05444
Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Proposed New Rule 980NYP and Conforming Amendments to Rule 935NY
Primary source
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Published
March 17, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 52 (Friday, March 17, 2023)</title>
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[Federal Register Volume 88, Number 52 (Friday, March 17, 2023)]
[Notices]
[Pages 16467-16484]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-05444]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97125; File No. SR-NYSEAMER-2023-17]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing of Proposed New Rule 980NYP and Conforming Amendments to Rule
935NY
March 13, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 28, 2023, NYSE American LLC (``NYSE American'' 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 Exchange. 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\ 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 new Rule 980NYP (Electronic Complex Order
Trading) to reflect the implementation of the Exchange's Pillar trading
technology on its options market and to make conforming amendments to
Rule 935NY (Order Exposure Requirements). 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 Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Exchange plans to transition its options trading platform to
its Pillar technology platform. The Exchange's affiliated options
exchange, NYSE Arca, Inc. (``NYSE Arca'' or ``Arca Options'') is
currently operating on Pillar, as are the Exchange's national
securities exchange affiliates' cash equity markets.\3\ For this
transition, the Exchange proposes to use the same Pillar technology
already in operation on Arca Options.\4\ In doing so, the Exchange will
be able to offer not only common specifications for connecting to both
of its options markets, but also common trading functions. The Exchange
plans to roll out the new technology platform over a period of time
based on a range of symbols beginning on October 23, 2023.\5\
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\3\ The Exchange's national securities exchange affiliates' cash
equity markets include: the New York Stock Exchange LLC, NYSE Arca,
Inc., NYSE National, Inc., and NYSE Chicago, Inc. (collectively, the
``NYSE Equities Exchanges'').
\4\ See Arca Options Rule 6.91P-O. See also Securities Exchange
Act Release No. 92563 (August 4, 2021), 86 FR 43704 (August 10,
2021) (Notice of Filing of Amendment Nos. 1 and 2 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, to Adopt New Exchange Rule 980NYP, regarding
complex order trading on Pillar) (``Arca Options Approval Order'').
\5\ See Trader Update, January 30, 2023 (announcing Pillar
Migration Launch date of October 23, 2023 for the Exchange),
available here, <a href="https://www.nyse.com/trader-update/history#110000530919">https://www.nyse.com/trader-update/history#110000530919</a>.
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In this regard, the Exchange recently filed a proposal to add new
rules to reflect the priority and allocation of
[[Page 16468]]
options on the Exchange once Pillar is implemented.\6\ The current
proposal sets forth how Electronic Complex Orders \7\ would trade on
the Exchange once Pillar is implemented. As noted in the American
Pillar Priority Filing, as the Exchange transitions to Pillar, certain
rules would continue to be applicable to symbols trading on the current
trading platform, but would not be applicable to symbols that have
transitioned to trading on Pillar.\8\ Consistent with the American
Pillar Priority Filing, proposed Rule 980NYP would have the same number
as the current Electronic Complex Order Trading rule, but with the
modifier ``P'' appended to the rule number. Current Rule 980NY,
governing Electronic Complex Order Trading, would remain unchanged and
continue to apply to any trading in symbols on the current system.
Proposed Rule 980NYP would govern Electronic Complex Orders for trading
in options symbols migrated to the Pillar platform.
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\6\ See SR-NYSEAMER-2023-16, filed on February 27, 2023
(proposal to adopt new Rules 964NYP (Order Ranking, Display, and
Allocation), 964.1NYP (Directed Orders and DOMM Quoting
Obligations), and 964.2NYP (Participation Entitlement of
Specialists, e-Specialists, and Primary Specialist) as well as to
add or modify Rule 900.2NY (Definitions) to address the migration to
Pillar) (referred to herein as the ``American Pillar Priority
Filing''). For avoidance of doubt, references to Rule 964NYP refer
to the Exchange's proposed new priority and allocation rule for
trading on Pillar, as described in the American Pillar Priority
Filing.
\7\ The term ``Electronic Complex Order'' is currently defined
in the preamble to Rule 980NY to mean any Complex Order, as defined
in Rule 900.3NY(e)(e) that is entered into the System.
\8\ See American Pillar Priority Filing (providing that, once a
symbol is trading on the Pillar trading platform, a rule with the
same number as a rule with a ``P'' modifier would no longer be
operative for that symbol and the Exchange would announce by Trader
Update when symbols are trading on the Pillar trading platform); see
also supra note 5, Arca Options Approval Order (same).
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Proposed Rule 980NYP would (1) use Pillar terminology; and (2)
introduce new functionality for Electronic Complex Order trading (e.g.,
adopting a DBBO and Away Market Deviation price check as well as
enhancing the opening process for ECOs as described below), each of
which proposed changes would align the Exchange with both the
terminology used, and the functionality described, in Arca Options Rule
6.91P-O.
Finally, as discussed in the American Pillar Priority Filing, the
Exchange will announce by Trader Update when symbols are trading on the
Pillar trading platform. The Exchange intends to transition Electronic
Complex Order trading on Pillar at the same time that single-leg
trading is transitioned to Pillar.
Proposed Rule 980NYP: Electronic Complex Order Trading
Current Rule 980NY (Electronic Complex Order Trading) specifies how
the Exchange processes Electronic Complex Orders submitted to the
Exchange. The Exchange proposes new Rule 980NYP to establish how such
orders would be processed after the transition to Pillar. To promote
clarity and transparency, the Exchange proposes to add a preamble to
current Rule 980NY specifying that it would not be applicable to
trading on Pillar.
As discussed in greater detail below and unless otherwise specified
herein, the Exchange is not proposing fundamentally different
functionality regarding how Electronic Complex Orders would trade on
Pillar than is currently available on the Exchange. However, with
Pillar, the Exchange would use Pillar terminology to describe
functionality that is not changing and also introduce certain new or
updated functionality for Electronic Complex Orders (e.g., enhancing
the opening auction process, including introducing the ``ECO Auction
Collars'') that will also be available for outright options trading on
the Pillar platform.
Definitions. Proposed Rule 980NYP(a) would set forth the
definitions applicable to trading on Pillar under the new rule. The
proposed definitions are identical to how these terms are defined in
Arca Options Rule 6.91P-O(a), except that the proposed Rule includes a
definition for ``Complex BBO,'' as described below.
<bullet> Proposed Rule 980NYP(a)(1) would define the term ``Away
Market Deviation'' as the difference between the Exchange BB (BO) for a
series and the ABB (ABO) for that same series when the Exchange BB (BO)
is lower (higher) than the ABB (ABO).\9\ The maximum allowable Away
Market Deviation is the greater of $0.05 or 5% below (above) the ABB
(ABO) (rounded down to the nearest whole penny). As further proposed,
no ECO on the Exchange would execute at a price that would exceed the
maximum allowable Away Market Deviation on any component of the complex
strategy. The maximum allowable Away Market Deviation is designed to
protect market participants from having their complex strategies
execute at prices that are significantly outside of (and inferior to)
the market for the individual legs. The proposed functionality provides
the Exchange with flexibility in determining the acceptable execution
range by allowing that it be calculated using either a percentage
amount or a dollar amount. This proposed risk protection is not new or
novel as it is identical to Arca Options Rule 6.91P-O(a)(1) and is also
available on other options exchanges.\10\ As discussed further below,
the Exchange proposes that its calculation of the DBBO (for each leg of
a complex strategy) as well as trading of ECOs with the leg markets
would be bound by the maximum allowable Away Market Deviation as an
additional protection against ECOs being executed on the Exchange at
prices too far away from the current market. This proposed definition
is new and would promote clarity and transparency.
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\9\ In the American Pillar Priority Filing, the Exchange
proposes to define the (new) term ``Away Market BBO (`ABBO')'' as
referring to the best bid(s) or offer(s) disseminated by Away
Markets and calculated by the Exchange based on market information
the Exchange receives from OPRA and the terms ``ABB'' and ``ABO'' as
referring to the best Away Market bid and best Away Market offer,
respectively. See id. (defining Away Market BBO in proposed Rule
900.2NYP).
\10\ See, e.g., BOX Options Exchange LLC (``BOX'') Rule
7240(b)(3)(iii)(A) (providing that each leg of a complex strategy
trade equal to or better than the ``Extended cNBBO,'' which has a
default setting (per Rule 7240(a)(5)) of 5% of the cNBB or cNBO (per
Rule 7240(a)(2) and (4), respectively) as applicable, or $0.05);
Nasdaq ISE, LLC (``Nasdaq ISE''), Options 3, Section 16 (a)
(providing that, in regard to ``Price limits for Complex Orders,
``[n]otwithstanding, the System will not permit any leg of a complex
strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i)
an absolute amount not to exceed $0.10, and (ii) a percentage of the
NBBO not to exceed 500%, as determined by the [ISE] Exchange on a
class, series or underlying basis'').
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<bullet> Proposed Rule 980NYP(a)(2) would define the term ``Complex
NBBO'' to mean the derived national best net bid and derived national
best net offer for a complex strategy calculated using the NBB and NBO
for each component leg of a complex strategy. This definition is based
on current Rule 900.2NY, without any substantive differences and is
also identical to Arca Options Rule 6.91P-O(a)(2).\11\
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\11\ See Rule 900.2NY (defining Complex NBBO as referring to
``the NBBO for a given complex order strategy as derived from the
national best bid and national best offer for each individual
component series of a Complex Order'').
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[cir] Proposed Rule 980NYP(a)(2)(A) would define the term ``Complex
BBO'' to mean the complex order(s) to buy (sell) with the highest
(lowest) net working price (per proposed Rule 964NYP(a)(3)) on each
side of the Consolidated Book for the same complex order strategy. This
definition is based on current Rule 900.2NY(a), without any substantive
differences.\12\
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\12\ See Rule 900.2NY(a) (defining Complex BBO as referring to
``the complex orders with the lowest-priced (i.e., the most
aggressive) net debit/credit price on each side of the Consolidated
Book for the same complex order strategy'').
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[[Page 16469]]
<bullet> Proposed Rule 980NYP(a)(3) would define ``Complex Order
Auction'' or ``COA'' to mean an auction of an ECO as set forth in
proposed Rule 980NYP(f) (discussed below). This definition is based on
the title of paragraph (e) of current Rule980NY, which sets forth the
COA Process for ECOs without any substantive differences. Proposed Rule
980NYP(a)(3) would also state that the terms defined in paragraphs
(a)(3)(A)-(D) would be used for purposes of a COA.
Proposed Rule 980NYP(a)(3)(A) would define a ``COA Order'' to mean
an ECO that is designated by the ATP Holder as eligible to initiate a
COA. This definition is based on the definition of a ``COA-eligible
order'' as set forth in current Rule 980NY(e)(1) and (e)(1)(i), with a
difference that the proposed definition would not require that an
option class be designated as COA-eligible because all option classes
that trade on Pillar would be COA-eligible.
Proposed Rule 980NYP(a)(3)(B) would define the term ``Request for
Response'' or ``RFR'' to refer to the message disseminated to the
Exchange's proprietary complex data feed announcing that the Exchange
has received a COA Order and that a COA has begun. As further proposed,
the definition would provide that each RFR message would identify the
component series, the price, the size and side of the market of the COA
Order. This definition is based on the description of RFR in Rule
980NY(e)(3) without any substantive differences. The Exchange proposes
a clarifying difference to make clear that RFR messages would be sent
over the Exchange's proprietary complex data feed, which is based on
current functionality.
Proposed Rule 980NYP(a)(3)(C) would define the term ``RFR
Response'' to mean any ECO received during the Response Time Interval
(defined below) that is in the same complex strategy, on the opposite
side of the market of the COA Order that initiated the COA, and
marketable against the COA Order.\13\ This definition is based in part
on the description of RFR Responses in Rule 980NY(e)(5). However,
unlike the current definition, an RFR Response would not have a time-
in-force contingency for the duration of the COA. Instead, the Exchange
would consider any ECOs received during the Response Time Interval
(defined below) that are marketable against the COA Order as an RFR
Response. As described below, the Exchange proposes to define
separately the term ``COA GTX Order,'' which would be more akin to the
current definition of RFR Response. In addition, the proposed
definition omits the current rule description that an RFR Response may
be entered in $0.01 increments or that such responses may be modified
or cancelled because these features are applicable to all ECOs and
therefore is not necessary to separately state in connection with RFR
Responses.
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\13\ The term ``marketable'' is defined in Rule 900.2NY as ``for
a Limit Order, the price matches or crosses the NBBO on the other
side of the market. Market Orders are always considered
marketable.''
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Proposed Rule 980NYP(a)(3)(D) would define the term ``Response Time
Interval'' to mean the period of time during which RFR Responses for a
COA may be entered and would provide that the Exchange would determine
and announce by Trader Update the length of the Response Time Interval;
provided, however, that the duration of the Response Time Interval
would not be less than 100 milliseconds and would not exceed one (1)
second. This definition is based in part on the description of Response
Time Interval in Rule 980NY(e)(4), with a difference that the Exchange
proposes to reduce the minimum time from 500 milliseconds to 100
milliseconds. The proposal to establish a minimum duration for a COA is
identical to the minimum time frame allowed for a COA per Arca Options
Rule 6.91P-O(a)(4) and is consistent with the minimum auction length
for the Exchange's electronic-paired auctions (i.e., the CUBE Auction)
as well as for auctions on other markets.\14\ Given the fact that the
Exchange has (for years) offered the CUBE Auction with a Response Time
Interval of at least 100 milliseconds and the same time interval is
applicable to COAs on Arca Options (per Rule 6.91P-O(a)(3)(D)), the
Exchange believes that the proposed Response Time Interval of at least
this length would provide ATP Holders adequate time to respond to a
COA.\15\
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\14\ See, e.g., Rules 971.1NY(c)(2)(B) (providing that for a
Customer Best Execution Auction ``[t]he minimum/maximum parameters
for the Response Time Interval will be no less than 100 milliseconds
and no more than one (1) second'') and 971.2NY(c)(1)(B) (same); Cboe
Exchange Inc. (``Cboe'') Rule 5.33(d)(3) (providing that Cboe
``determines the duration of the Response Time Interval on a class-
by-class basis, which may not exceed 3000 milliseconds'').
\15\ See, e.g., Securities Exchange Act Release Nos. 82498
(January 12, 2018), 83 FR 2823 (January 19, 2018) (SR-NYSEAmer-2017-
26) (Notice of filing and immediate effectiveness of proposed rule
change to reduce the response time interval for a CUBE Auction to no
less than 100 milliseconds); 83384 (June 5, 2018), 83 FR 27061 (June
11, 2018) (SR-NYSEAMER-2018-05) (Order approving Complex CUBE
functionality, including Rule 971.2NY(c)(1)(B), providing that
``[t]he minimum/maximum parameters for the Response Time Interval
will be no less than 100 milliseconds and no more than one (1)
second'')).
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<bullet> Proposed Rule 980NYP(a)(4) would define the term ``Complex
strategy'' to mean a particular combination of leg components and their
ratios to one another. The proposed definition would further provide
that new complex strategies can be created when the Exchange receives
either a request to create a new complex strategy or an ECO with a new
complex strategy. This proposed definition is new and is identical to
how this term is defined in Arca Options Rule 6.91P-O(a)(4).
Furthermore, this proposed definition is consistent with how this
concept is defined on other options exchanges and would promote clarity
and transparency.\16\
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\16\ See, e.g., Cboe Rule 5.33(a) (defining ``complex strategy''
as ``a particular combination of components and their ratios to one
another'' and further providing that ``[n]ew complex strategies can
be created as the result of the receipt of a complex instrument
creation request or complex order for a complex strategy that is not
currently in the System''); MIAX Options Exchange (``MIAX'') Rule
518(a)(6) (same).
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<bullet> Proposed Rule 980NYP(a)(5) would define the term ``DBBO''
to address situations where it is necessary to derive a (theoretical)
bid or offer for a particular complex strategy. As proposed, ``DBBO''
would mean the derived best net bid (``DBB'') and derived best net
offer (``DBO'') for a complex strategy. The bid (offer) price used to
calculate the DBBO on each leg would be the Exchange BB (BO) \17\ (if
available), bound by the maximum allowable Away Market Deviation (as
defined above). If a leg of a complex strategy does not have an
Exchange BB (BO), the bid (offer) price used to calculate the DBBO
would be the ABB (ABO) for that leg. Thus, the ``bid (offer)'' prices
used to calculate the DBBO would be based on the Exchange BB (BO) for
each leg when available, and, absent an Exchange BB (BO) for a given
leg, the ABB (ABO). The proposed definition would also provide that the
DBBO would be updated as the Exchange BBO or ABBO, as applicable, is
updated.
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\17\ The term BBO when used with respect to options traded on
the Exchange means ``the best displayed bid or best displayed offer
on the Exchange.'' See Rule 900.2NY.
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Proposed Rule 980NYP(a)(5)(A) would provide further detail about
how the DBBO would be derived when, for a leg, there is no Exchange BB
(BO) and no ABB (ABO). As proposed, in such circumstances, the bid
(offer) price used to calculate the DBBO would be the offer (bid) price
for that leg (i.e., Exchange BO (BB), bound by the maximum allowable
Away Market Deviation (or the ABO (ABB) for that leg if no Exchange BO
(BB) is available)),
[[Page 16470]]
minus (plus) ``one collar value,'' per proposed Rule 900.3NY(a)(4)(C);
or (ii) $0.01, if the offer is equal to or less than one collar
value.\18\ The proposed values used to generate a DBBO in the absence
of local or Away Market interest would be consistent with the values
that the Exchanges proposes to use in the Trading Collars for single-
leg orders.\19\ In addition, such values are within the current
parameters for determining whether a trade is an Obvious Error or
Catastrophic Error.\20\ This proposed definition of the DBBO is new and
is based, in part, on the current definition of Derived BBO as set
forth in Rule 900.2NY.\21\ Furthermore, this definition is identical to
how this term is defined in Arca Options Rule 6.91P-O(a)(4)(C) and is
also consistent with how this concept is defined on other options
exchanges.\22\ The Exchange believes that providing an alternative
means of calculating the DBBO (i.e., by looking to the contra-side best
bid (offer) in the absence of same-side interest) would benefit market
participants as it should increase opportunities for trading. For
example, absent this proposed functionality, the Exchange would not be
able to trade complex strategies when, for at least one leg of such
strategy, the Exchange has no displayed interest on one or both sides
of such component leg. Allowing the Exchange to look to the ABBO to
calculate the DBBO in such circumstances would increase trading
opportunities for ECOs to the benefit of all market participants. The
Exchange believes that the additional detail about how the DBBO would
be calculated in the absence of an Exchange BB (BO) and ABB (ABO),
including that it would be rounded down to the nearest whole penny,
would promote clarity and transparency. As noted above and herein, the
Exchange believes that binding the DBBO (when calculated using the
Exchange BBO) to the maximum allowable Away Market Deviation would help
prevent ECOs from executing on the Exchange at prices too far away from
the current market.
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\18\ Proposed Rule 900.3NYP (Orders and Modifiers) will be
described in a separate rule filing regarding the operation of
orders and quotes on Pillar (the ``Pillar Order Type'' filing).
Proposed Rule 900.3NYP(a)(4)(C) would describe how Trading Collars
are calculated on Pillar. The Exchange represents that this
functionality would operate the same way it currently operates per
Arca Options Rule 6.62P-O(a)(4)(C) (providing that ``[u]nless
announced otherwise via Trader Update, the Trading Collar for an
order to buy (sell) will be a specified amount above (below) the
Reference Price, as follows'').
\19\ See id.; see, e.g., Trader Update, September 9, 2022, NYSE
Arca Options: Changes to Trading Collars Effective September 21st,
available here, <a href="https://www.nyse.com/trader-update/history#110000475461">https://www.nyse.com/trader-update/history#110000475461</a>.
\20\ See Rules 975NY(c)(1) (thresholds for Obvious Errors) and
975NY (d)(1) (thresholds for Catastrophic Errors).
\21\ See Rule 900.2NY(b) (defining Derived BBO as being
``calculated using the BBO from the Consolidated Book for each of
the options series comprising a given complex order strategy).
\22\ See, e.g., Cboe Rule 5.33(a) (defining ``Synthetic Bed Bid
or Offer and SBBO'' for complex orders as ``the best bid and offer
on the Exchange for a complex strategy calculated using'' the ``BBO
for each component (or the NBBO for a component if the BBO for that
component is not available) of a complex strategy from the [Cboe]
Simple Book'').
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Proposed Rule 980NYP(a)(5)(B) would provide that, if for a leg of a
complex strategy, there is neither an Exchange BBO nor an ABBO, the
Exchange would not allow the complex strategy to trade until, for that
leg, there is either an Exchange BB or BO, or an ABB or ABO, on at
least one side of the market. The Exchange believes that preventing a
complex strategy from trading when, for a leg, there is no reliable
pricing indication--either on the Exchange or in Away Markets, would
benefit market participants by preventing potentially erroneous
executions. Moreover, including this additional detail in the proposed
rule about when a complex strategy would not trade would benefit market
participants as it would promote clarity and transparency in Exchange
rules regarding ECO trading. This functionality is also identical to
Arca Options Rule 6.91P-O (a)(5)(B).
Proposed Rule 980NYP(a)(5)(C) would provide that if the best bid
and offer prices (when not based solely on the Exchange BBO) for a
component leg of a complex strategy are locked or crossed, the Exchange
would not allow an ECO for that strategy to execute against another ECO
until the condition resolves. The Exchange notes that, as described
above, the DBBO may be calculated using leg prices derived either
exclusively from, or a combination of, the Exchange BBO, the ABBO, or
the Exchange BBO as adjusted to be priced within the maximum allowable
Away Market Deviation. As such, if the best bid and offer prices (when
not based solely on Exchange BBO) for a component leg of a complex
strategy are locked or crossed, a DBBO calculated when using those
prices could be erroneous.\23\ Accordingly, the Exchange believes that
it is appropriate to not permit an ECO to execute against another ECO
under these circumstances until the locked or crossed market resolves.
The Exchange believes preventing ECO-to-ECO trading in this
circumstance would benefit market participants by preventing
potentially erroneous ECO executions. Moreover, including this
additional detail in the proposed rule about when an ECO would be
prevented from trading with another ECO would benefit market
participants as it would promote clarity and transparency in Exchange
rules regarding ECO trading. This functionality is also identical to
Arca Options Rule 6.91P-O(a)(5)(C).
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\23\ The reliability of the Exchange's calculated DBBO is
essential to ECO trading on the Exchange as this concept permeates
all aspects of complex trading, including to determine price
parameters at the opening of each series and in determining when,
and at what price, a COA Order may initiate a COA as well as market
events impacting the DBBO that would result in an early end to a
COA. See, e.g., proposed Rule 980NYP(d)(3) (relying on the DBBO to
determine ECO Auction Collars for the ECO Opening Auction Process)
and 980NYP(f)(2)(A) and (f)(3) (relying on the DBBO to both initiate
and price a COA Order as well as to terminate a COA early under
certain market conditions)).
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Further, per proposed Rule 980NYP(a)(5)(C), if an Away Market quote
updates to lock or cross the current Exchange BB (BO) or ABB (ABO) for
a component leg of a complex strategy, the Exchange would allow an ECO
for that strategy to execute against leg market interest on the
Exchange. Allowing an eligible ECO to execute against leg market
interest in these circumstances is consistent with the way single-leg
orders trade. This functionality is also identical to Arca Options Rule
6.91P-O(a)(5)(C). In this regard, the Exchange notes that, to the
extent that leg prices are locked or crossed as a result of updates to
the ABBO, such updates do not prevent resting leg market interest from
trading at its resting price with all eligible contra-side interest,
which includes incoming ECOs in the same complex strategy.\24\
Moreover, to the extent that an ECO trades with leg market interest in
a complex strategy when interest in the leg markets is crossed, such
executions are not deemed as trade-throughs.\25\ As such, the Exchange
believes that allowing an ECO to trade with leg market interest in this
circumstance would maximize the execution opportunities of such ECO
while respecting price-time priority of the leg markets.
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\24\ See Arca Options Rule 6.76P-O(b)(3) providing that ``[i]f
an Away Market locks or crosses the Exchange BBO, the Exchange will
not change the display price of any Limit Orders or quotes ranked
Priority 2--Display Orders and any such orders will be eligible to
be displayed as the Exchange's BBO'').
\25\ See Rule 991NY(b)(3) (exempting from trade-through
liability transactions that occur ``when there was a Crossed
Market''). See also the Options Order Protection And Locked/Crossed
Market Plan, dated April 14, 2009, available here, <a href="https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf">https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf</a>.
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<bullet> Proposed Rule 980NYP(a)(6) would define the term ``ECO
Order
[[Page 16471]]
Instruction'' to mean a request to cancel, cancel and replace, or
modify an ECO, which definition is identical to how this term is
defined in Arca Options Rule 6.91P-O(a)(6). As described further below,
this concept relates to order processing when a series opens or reopens
for trading and is based on the term ``order instruction'' as used in
Arca Options Rules 6.64P-O(e) and (f), which (similarly) would define
an ``order instruction'' for options as a request to cancel, cancel and
replace, or modify an order or quote.
<bullet> Proposed Rule 980NYP(a)(7) would define the term
``Electronic Complex Order'' or ``ECO'' to mean a Complex Order as
defined in Rule 900.3NYP(f) that would be submitted electronically to
the Exchange.\26\ This proposed definition is based on the preamble to
Rule 980NY, and the Exchange proposes to replace reference to the
``System'' with the term ``Exchange'' and to update cross-reference to
the definition of a Complex Order as proposed in the American Pillar
Priority Filing.
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\26\ The proposed definition of Complex Order under Pillar will
be included in proposed Rule 900.3NYP, which will be described in
the Pillar Order Type Filing. The Exchange represents that the
proposed definition of Complex Orders will be substantively the same
as this order type is defined in current Rule 900.3NY(e). See also
Arca Options Rule 6.62P-O(f) (describing Complex Orders in
substantively the same manner as Exchange Rule 900.3NY).
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<bullet> Proposed Rule 980NYP(a)(8) would define the term ``leg''
or ``leg market'' to mean each of the component option series that
comprise an ECO. This definition is consistent with the concept of leg
markets as used in current Rule 980NY(a), which defines legs as
individual orders and quotes in the Consolidated Book. The Exchange
believes the proposed definition would add clarity regarding how the
terms ``leg'' and ``leg market'' would be used in connection with ECO
trading on Pillar.
<bullet> Proposed Rule 980NYP(a)(9) would define ``Ratio'' or ``leg
ratio'' to mean the quantity of each leg of an ECO broken down to the
least common denominator such that the ``smallest leg ratio'' is the
portion of the ratio represented by the leg with the fewest contracts.
The Exchange believes the proposed definition would add clarity
regarding how the terms ``ratio'' and ``leg ratio'' would be used in
connection with ECOs trading on Pillar, which definition is identical
to how this term is defined in Arca Options Rule 6.91P-O(a)(9). This
proposed definition is likewise consistent with how this concept is
described on other options exchanges.\27\
---------------------------------------------------------------------------
\27\ See, e.g., Cboe, US Options Complex Book Process, Complex
Order Basics, Section 2.1, Ratios, available here: <a href="https://cdn.batstrading.com/resources/membership/US-Options-Complex-Book-Process.pdf">https://cdn.batstrading.com/resources/membership/US-Options-Complex-Book-Process.pdf</a> (providing that ``[t]he quantity of each leg of a
complex order broken down to the lowest terms will determine the
ratio of the complex order'').
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Types of ECOs. Proposed Rule 980NYP(b) would set forth the types of
ECOs that would trade on Pillar. Proposed Rule 980NYP(b)(1) would
provide that ECOs may be entered as Limit Orders, Limit Orders
designated as Complex Only Orders, or as Complex QCCs.\28\ This
proposed text is based on current Rule 980NY(d)(1), with a difference
to include reference to (existing) Complex CUBE Orders and to provide
that the Exchange would offer Complex Only Orders and Complex QCCs on
Pillar. Allowing ECOs to be designated as Complex QCCs is consistent
with current functionality not described in the rule and the Exchange
believes that this additional specificity to the proposed rule would
add clarity and transparency. Complex Only Orders (as described below)
would be updated functionality available on Pillar.\29\ The proposed
Types of ECOs are also the same as those offered per Arca Options Rule
6.91P-O(b).
---------------------------------------------------------------------------
\28\ The Exchange plans to adopt the proposed definitions of
Limit Orders and Complex QCC Orders in the Pillar Order Type Filing
(adopting Rule 900.3NYP, Orders and Modifiers)). The Exchange
represents that these proposed order types will function in a manner
substantively the same as is described per Arca Options Rule 6.62P-
O(a)(2) and (g)(1)(A), (C) and (D), (describing Limit Orders and
Complex QCC Orders, respectively).
\29\ See, infra, for discussion of proposed Rule 980NYP(e)(1)(C)
(discussing Complex Only Order functionality).
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<bullet> Proposed Rule 980NYP(b)(2) would set forth the time-in-
force contingencies available to ECOs, which would be Day, IOC, FOK, or
GTC, as those terms will be defined in the subsequent Pillar Order Type
Filing in proposed Rule 900.3NYP(b), and GTX (per proposed Rule
980NYP(b)(2)(C) as described below).\30\
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\30\ The Exchange plans to adopt the proposed definitions of
Day, IOC, FOK, and GTX in the Pillar Order Type Filing (adopting
Rule 900.3NYP, Orders and Modifiers). The Exchange represents that
these proposed order types will function in a manner substantively
the same as is described in current Rule 900.3NY. See also Arca
Options Rule 6.62P-O(b).
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<bullet> The proposed text is based on current Rules 980NY(d)(2)
and (3), except that it adds GTX (as described below). The proposed
text also omits AON because the Exchange would not offer AONs for ECO
trading on Pillar.
<bullet> Proposed Rule 980NYP(b)(2)(A) would provide that an ECO
designated as IOC or FOK would be rejected if entered during a pre-open
state,\31\ which is consistent with the time-in-force of the order
(because they could not be traded when a complex strategy is not open
for trading) as well as with current functionality.
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\31\ The term ``pre-open state'' will be defined in Rule
952NYP(a)(12) in a subsequent filing (the ``Pillar Auction
Filing''), to mean ``the period before a series is opened or
reopened,'' which definition will be identical to how this concept
is described in Arca Options Rule 6.64P-O(a)(12).
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<bullet> Proposed Rule 980NYP(b)(2)(B) would provide that an ECO
designated as FOK must also be designated as a Complex Only Order (per
proposed Rule 980NYP(b)(1) and described further below). This proposed
rule, which is new under Pillar, would simplify the operation of
electronic complex order trading and would add clarity and transparency
that ECOs designated as FOK (i.e., that have conditional size-related
instructions) would not be eligible to trade with the leg markets.
<bullet> Proposed Rule 980NYP(b)(2)(C) would provide that an ECO
designated as GTX would be defined as an ``COA GTX Order'' and would
have the following features: it would not be displayed; it may be
entered only during the Response Time Interval of a COA; it must be on
the opposite side of the market as the COA Order; and it must specify
the price, size, and side of the market. As further proposed, COA GTX
Orders may be modified or cancelled during the Response Time Interval
and any remaining size that does not trade with the COA Order would be
cancelled at the end of the COA. This term ``COA GTX Order'' is new but
the definition is based on the description of an RFR Response in
current Rule 980NY(e)(5)(A)-(C), which likewise are not displayed and
expire at the end of the COA.
Priority and Pricing of ECOs. Proposed Rule 980NYP(c) would set
forth how ECOs would be prioritized and priced under Pillar. The
proposed priority scheme for ECOs under Pillar is consistent with
current functionality, with the differences and clarifications noted
below. As proposed, an ECO received by the Exchange that is not
immediately executed (or cancelled), including an ECO that cannot trade
due to conditions described in paragraphs (a)(5)(B)-(C) (above) \32\
and (c)(1)-(2) of this proposed Rule (below) or does not initiate a COA
per paragraph (f)(1) (below), would be ranked in the Consolidated Book
based on total net price, per Rule 964NYP(e)-(f), with Customer orders
at a price ranked ahead of same-priced non-Customer orders. This
proposed rule adds cross-references to new rule text (set forth in the
American Pillar Priority Filing) but
[[Page 16472]]
is otherwise based on Rule 980NY(b), without any substantive
differences.\33\ The Exchange proposes a non-substantive difference to
refer simply to a ``net price'' rather than a ``net debit or credit
price,'' which streamlined terminology is consistent with the use of
the term ``net price'' on other options exchanges.\34\ The proposed
rule also incorporates the first sentence of Rule 980NY(c)(iii)(A),
regarding the ranking and priority of ECOs not immediately executed,
with additional detail regarding the time-in-force modifier of the ECO,
which adds clarity and transparency to the proposed Rule.\35\
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\32\ Proposed Rule 980NYP(a)(5)(B)-(C) describe conditions
related to the leg markets when complex strategies will not trade.
\33\ See Rule 980NY(b) (pricing that ECOs in the Consolidated
Book will ``be ranked according to price/time priority based on the
total or net debit or credit and the time of entry of the order,
provided that [ECOs] on behalf of Customers shall be ranked ahead of
same price [ECOs] for non-Customers.'').
\34\ See, e.g., Arca Options Rule 6.91P-O(c); Cboe Rule
5.33(f)(2) (setting forth parameters for the ``net price'' of
complex orders traded on Cboe); Nasdaq ISE, Options 3, Section 14
(c) (providing, in relevant part, that ``[c]omplex strategies will
not be executed at prices inferior to the best net price achievable
from the best ISE bids and offers for the individual legs'').
\35\ For example, an ECO designated as IOC that does not
immediately execute would cancel rather than be ranked on the
Consolidated Book, whereas an ECO designated as Day or GTC that does
not immediately execute would be ranked on the Consolidated Book.
---------------------------------------------------------------------------
Proposed Rule 980NYP(c) would further provide that, unless
otherwise specified in this Rule, ECOs would be processed as follows:
<bullet> Proposed Rule 980NYP(c)(1) would provide that when trading
with the leg markets, an ECO would trade at the price(s) of the leg
markets provided the leg markets are priced no more than the maximum
allowable Away Market Deviation (as defined herein). The proposed rule
requiring that when trading with the leg markets, the components of the
ECO would trade at the prices of the leg markets is consistent with
current functionality, per Rule 980NY(c)(ii); requiring that such
prices be bound by the Away Market Deviation for an ECO to trade with
the leg markets is new under Pillar, as discussed further below).\36\
---------------------------------------------------------------------------
\36\ See Rule 980NY(c)(ii) (providing that ``[i]f, at a price,
the leg markets can execute against an incoming [ECO] in full (or in
a permissible ratio), the leg markets (Customer and non-Customer
interest) will have first priority at that price and will trade with
the incoming [ECO] pursuant to Rule 964NY(b) before [ECO] resting in
the Consolidated Book can trade at that price'').
---------------------------------------------------------------------------
For example, if there is sell interest in a leg market at $1.00,
and a leg of an ECO to buy could trade up to $1.05, the ECO would trade
with such leg market at $1.00. This would result in the ECO receiving
price improvement and is consistent with the ECO trading as the
Aggressing Order.\37\ The proposed functionality that an ECO would
trade with leg markets only if the prices of the leg markets are within
(and do not exceed the maximum allowable) Away Market Deviation would
be new under Pillar and is designed to operate as an additional
protection against ECOs being executed on the Exchange at prices too
far away from the current market.
---------------------------------------------------------------------------
\37\ The Exchange proposes to define the term ``Aggressing
Order'' in the American Pillar Priority Filing to mean ``a buy
(sell) order or quote that is or becomes marketable against sell
(buy) interest on the Consolidated Book.'' See also Arca Options
Rule 6.76P-O(a)(5) (same).
---------------------------------------------------------------------------
<bullet> Proposed Rule 980NYP(c)(2) would provide that when trading
with another ECO, each component leg of the ECO must trade at a price
at or within the Exchange BBO for that series, and no leg of the ECO
may trade at a price of zero.\38\ This provision is based in part on
current Rule 980NY(c), which provides that no leg of an ECO will be
executed outside of the Exchange BBO.\39\ This proposed rule, which
ensures that ECOs would never trade through interest in the leg
markets, is consistent with current functionality and adds clarity and
transparency to the proposed Rule. This proposed functionality operates
in the same manner per Arca Options Rule 6.91P-O(c)(2) and is also
consistent with how ECOs are processed on other options exchanges.\40\
---------------------------------------------------------------------------
\38\ See, infra, for discussion of proposed Rule 980NYP(e)(1)
(discussing ``Execution of ECOs During Core Trading Hours,''
including the treatment of ECOs that have executed, at a price, to
the extent possible with the leg markets and of ECOs designated as
Complex Only).
\39\ As noted herein, no ECO on the Exchange would execute at a
price that would exceed the maximum allowable Away Market Deviation
on any component of the complex strategy. See proposed Rule
980NYP(a)(1) (defining Away Market Deviation).
\40\ See, e.g., BOX Rule 7240(b)(3)(ii). See also Securities
Exchange Act Release Nos. 69027 (March 4, 2013), 78 FR 15093, 15094
(March 8, 2013) (SR-BOX-2013-01) (providing that ``where two Complex
Orders trade against each other, the resulting execution prices will
be at a price equal to or better than NBBO and BOX best bid or offer
(``BBO'') for each of the component Legs,'' per proposed Rule
7240(b)(3)(ii)). See, e.g., Cboe Rule 5.33(f)(2) (providing that
complex orders may not execute at a net price that would cause any
component of the complex strategy to be executed at a price of
zero).
---------------------------------------------------------------------------
<bullet> Proposed Rule 980NYP(c)(3) would provide that an ECO may
trade without consideration of prices of the same complex strategy
available on other exchanges, which is based on the same text as
contained in current Rule 980NY(c) without any substantive differences.
<bullet> Proposed Rule 980NYP(c)(4) would provide that an ECO may
trade in one cent ($0.01) increments regardless of the MPV otherwise
applicable to any leg of the complex strategy, which is based on
current Rule 980NY, Commentary .01 without any substantive differences.
Execution of ECOs at the Open (or Reopening after a Trading Halt).
Current Rule 980NY(c)(i) sets forth how ECOs are executed upon opening
or reopening of trading. Proposed Rule 980NYP(d) would set forth
details about how ECOs would be executed at the open or reopen
following a trading halt. With the transition to Pillar, the Exchange
proposes new functionality regarding the ``ECO Opening Auction
Process'' on the Exchange, which would be applicable both to openings
and reopenings following a trading halt. The proposed ECO Opening
Auction Process would operate in a manner identical to the auction
process set forth in Arca Options Rule 6.91P-O(d) as described
below.\41\
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\41\ This proposed functionality is also consistent with the
opening auction process for single-leg options pursuant to Arca
Options Rule 6.64P-O. The Exchange plans to adopt new Rule 952NYP
for single-leg opening (and reopening) auctions on Pillar, which
rule proposal will be filed separately (the ``Pillar Auction
Filing''), which proposed functionality will operate in
substantively the same manner as Arca Options Rule 6.64P-O (Auction
Process).
---------------------------------------------------------------------------
<bullet> Proposed Rule 980NYP(d)(1) would set forth the conditions
required for the commencement of an ECO Opening Auction Process.
Specifically, as proposed, the Exchange would initiate an ECO Opening
Auction Process for a complex strategy only if all legs of the complex
strategy have opened or reopened for trading, which text is based on
current Rule 980NY(c)(i)(A) without any substantive differences.
Proposed Rule 980NYP(d)(1)(A)-(B) would set forth conditions that would
prevent the opening of a complex strategy, as follows:
[cir] Any leg of the complex strategy has neither an Exchange BO
nor an ABO; or
[cir] The complex strategy cannot trade per proposed Rule
980NYP(a)(5)(B)-(C).
The proposal to detail these conditions for opening (and reopening)
are consistent with current functionality not set forth in the current
rule. The Exchange believes that this added detail would not only add
clarity and transparency to Exchange rules but would also protect
market participants from potentially erroneous executions when there is
a lack of reliable information regarding the price at which a complex
strategy should execute, thereby promoting a fair and orderly ECO
Opening Auction Process.
<bullet> Proposed Rule 980NYP(d)(2) would provide that any ECOs in
a complex strategy with prices that lock or cross
[[Page 16473]]
one another would be eligible to trade in the ECO Opening Auction
Process. This proposed rule is based on current Rule 980NY(c)(i)(B),
which provides than an opening process will be used if there are ECOs
that ``are marketable against each other.'' The Exchange proposes a
difference in Pillar not to require that such ECOs be ``priced within
the Complex NBBO'' because the proposed ECO Opening Auction Process
under Pillar would instead rely on the DBBO (as described below).\42\
As such, the Exchange may open a series based on the Exchange BBO,
bound by the Away Market Deviation (or, the ABBO if the Exchange BBO is
not available), which is consistent with ECO handling during Core
Trading (per proposed Rule 980NYP(e)). The Exchange believes this
proposed change would better align the permissible opening price for a
series with the permissible execution price during Core Trading, which
adds consistency to ECO order handling to the benefit of investors.
---------------------------------------------------------------------------
\42\ See Rule 980NY(c)(i)(B) (providing that ``[t]he CME will
use an opening auction process if there are Electronic Complex
Orders in the Consolidated Book that are marketable against each
other and priced within the Complex NBBO''). Per Rule 900.2NY (and
proposed Rule 980NYP(a)(2)), the ``Complex NBBO'' for each complex
strategy is derived from the national best bid and national best
offer for each leg.
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Proposed Rule 980NYP(d)(2)(A) would provide that an ECO received
during a pre-open state would not participate in the Auction Process
for the leg markets pursuant to proposed Rule 952NYP, which is based on
the same text (in the second sentence) of current Rule 980NY(c)(i)(A)
without any substantive differences.
Proposed Rule 980NYP(d)(2)(B) would provide that a complex strategy
created intra-day when all leg markets are open would not be subject to
an ECO Opening Auction Process and would instead trade pursuant to
paragraph (e) of the proposed Rule (discussed below) regarding the
handling of ECOs during Core Trading Hours.
Proposed Rule 980NYP(d)(2)(C) would provide that the ECO Opening
Auction Process would be used to reopen trading in ECOs after a trading
halt. This proposed rule is consistent with current Rule 952NY(e) and
makes clear that the ECO Opening Auction Process would be applicable to
reopenings, which would add internal consistency to Exchange rules and
promote a fair and orderly ECO Opening Auction Process following a
trading halt.
<bullet> Proposed Rule 980NYP(d)(3) would describe each aspect of
the ECO Opening Auction Process. First, proposed Rule 980NYP(d)(3)(A)
would describe the ``ECO Auction Collars,'' which terminology would be
new for ECO trading and is based on the term ``Auction Collars'' used
in Arca Options Rule 6.91P-O.
As proposed, the upper (lower) price of an ECO Auction Collar for a
complex strategy would be the DBO (DBB); provided, however, that if the
DBO (DBB) is calculated using the Exchange BBO for all legs of the
complex strategy and all such Exchange BBOs have displayed Customer
interest, the upper (lower) price of an ECO Auction Collar would be one
penny ($0.01) times the smallest leg ratio inside the DBO (DBB). This
new functionality on Pillar would ensure that if there is displayed
Customer interest on the Exchange on all legs of the strategy, the
opening price for the complex strategy would price improve the DBBO,
which the Exchange believes is consistent with fair and orderly markets
and investor protection.
<bullet> Next, proposed Rule 980NYP(d)(3)(B) would describe the
``ECO Auction Price.'' As proposed, the ECO Auction Price would be the
price at which the maximum volume of ECOs can be traded in an ECO
Opening Auction, subject to the proposed ECO Auction Collar. As further
proposed, if there is more than one price at which the maximum volume
of ECOs can be traded within the ECO Auction Collar, the ECO Auction
Price would be the price closest to the midpoint of the ECO Auction
Collar, or, if the midpoint falls within such prices, the ECO Auction
Price would be the midpoint, provided that the ECO Auction Price would
not be lower (higher) than the highest (lowest) price of an ECO to buy
(sell) that is eligible to trade in the ECO Opening (or Reopening)
Auction Process. The concept of an ECO Auction Price is consistent with
the concept of ``single market clearing price'' set forth in current
Rule 980NY(c)(i)(B). For Pillar, the Exchange proposes to determine the
ECO Auction Price in the same manner as is used pursuant to Arca
Options Rule 6.91P-O.
Finally, as proposed, if the ECO Auction Price would be a sub-penny
price, it would be rounded to the nearest whole penny, which text is
based on current Rule 980NY(c)(i)(B), with a difference that the
current rule refers to the midpoint of the Complex NBBO (which could be
a sub-penny price and if so, is rounded down to the nearest penny) as
opposed to referring to the ECO Auction Price, which would be a new
Pillar term for trading ECOs, which price, if in sub-pennies, would be
rounded (up or down) to the nearest MPV.
Proposed Rule 980NYP(d)(3)(B)(i) would provide that an ECO to buy
(sell) with a limit price at or above (below) the upper (lower) ECO
Auction Collar would be included in the ECO Auction Price calculation
at the price of the upper (lower) ECO Auction Collar, but ranked for
participation in the ECO Opening (or Reopening) Auction Process in
price-time priority based on its limit price. This proposed text is
based in part on current Rule 980NY(c)(i)(B). The proposed rule would
operate in the same manner as Arca Options Rule 6.91P-O regarding the
ECO Auction Price.
Proposed Rule 980NYP(d)(3)(B)(ii) would provide that locking and
crossing ECOs in a complex strategy would trade at the ECO Auction
Price. As further proposed, if there are no locking or crossing ECOs in
a complex strategy at or within the ECO Auction Collars, the Exchange
would open the complex strategy without a trade. This proposed text
would be new and is identical to Arca Options Rule 6.91P-
O(d)(3)(B)(ii).
<bullet> Proposed Rule 980NYP(d)(4) would describe the ``ECO Order
Processing during ECO Opening Auction Process,'' which processing would
be identical to Rule 6.91P-O(d)(4). The Exchange proposes to apply
existing Pillar auction functionality regarding how to process ECOs
that may be received during the period when an ECO Auction Process is
ongoing.
Accordingly, as proposed, new ECOs and ECO Order Instructions (as
defined in proposed Rule 980NYP(a)(6), described above) that are
received when the Exchange is conducting the ECO Opening Auction
Process for the complex strategy would be accepted but would not be
processed until after the conclusion of this process. As further
proposed, when the Exchange is conducting the ECO Opening Auction
Process, ECO Order Instructions would be processed as follows:
[cir] Proposed Rule 980NYP(d)(4)(A) would provide that an ECO Order
Instruction received during the ECO Opening Auction Process would not
be processed until after this process concludes if it relates to an ECO
that was received before the process begins and that any subsequent ECO
Order Instruction(s) relating to such ECO would be rejected if received
during the ECO Opening Auction Process when a prior ECO Order
Instruction is pending.
[cir] Proposed Rule 980NYP(d)(4)(B) would provide that an ECO Order
Instruction received during the ECO Opening Auction Process would be
processed on arrival if it relates to an order that was received during
this process.
[[Page 16474]]
Proposed Rule 980NYP(d)(4) is identical to Arca Options Rule 6.91P-
O(d)(4) and would provide transparency regarding how ECO Order
Instructions that arrived during the ECO Opening Auction Process would
be processed.
<bullet> Proposed Rule 980NYP(d)(5) would describe the ``Transition
to continuous trading'' after the ECO Opening Auction Process. As
proposed, after the ECO Opening Auction, ECOs would be subject to ECO
Price Protection, per proposed Rule 980NYP(g)(2) (as described below)
and, if eligible to trade, would trade as follows:
[cir] Proposed Rule 980NYP(d)(5)(A) would provide that ECOs
received before the complex strategy was opened that did not trade in
whole in the ECO Opening Auction Process and that lock or cross other
ECOs or leg markets in the Consolidated Book would trade pursuant to
proposed Rule 980NYP(e) (discussed below) regarding the handling of
ECOs during Core Trading Hours; otherwise, such ECOs would be added to
the Consolidated Book. This provision is based on the (last sentence)
of current Rule 980NY(c)(i)(B) and (C), with non-substantive
differences to use Pillar terminology.
[cir] Proposed Rule 980NYP(d)(5)(B) would provide that ECOs
received during the ECO Opening Auction Process would be processed in
time sequence relative to one another based on original entry time.
This proposed rule is based on both current functionality and is
identical to how orders in an option series that were received during
an Auction Processing Period are processed per Arca Options Rule 6.91P-
O(d)(5)(B).
Execution of ECOs During Core Trading Hours. Proposed Rule
980NYP(e) would describe how ECOs would be processed during Core
Trading Hours. The proposed handling of ECOs during core trading hours
would be identical to how ECOs are handled per Arca Options Rule 6.91P-
O(e).
Proposed Rule 980NYP(e)(1) would provide that once a complex
strategy is open for trading, an ECO would trade with the best-priced
contra-side interest as follows:
Proposed Rule 980NYP(e)(1)(A) relates to the priority of the leg
markets over ECOs at a price. As proposed, if, at a price, the leg
markets can trade with an eligible ECO,\43\ in full or in a permissible
ratio, the leg markets would trade first at that price, pursuant to
proposed Rule 964NYP,\44\ until the quantities on the leg markets are
insufficient to trade with the ECO. Once the leg market interest, at a
price, is exhausted, such ECO would trade with same-priced contra-side
ECOs resting in the Consolidated Book, pursuant to Rule 964NYP(j). This
functionality is based on Rule 980NY(c)(ii), with the difference that
the leg markets always have priority at a price.\45\ This proposed
functionality of affording leg markets priority at a price is identical
to Arca Options Rule 6.91(e)(1)(A) and is consistent with functionality
available on other options exchanges.\46\
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\43\ See proposed Rule 980NYP(e)(1)(C) and (D) (for description
of ECOs that are not eligible to trade with the leg markets).
\44\ See American Pillar Priority Filing (describing Rule
964NYP, Order Ranking, Display, and Allocation, which is the
substantively identical Pillar version of current Rule 964NY, except
that the proposed rule includes Pillar ranking and priority
terminology that is identical to Arca Options Rule 6.76P-O).
\45\ See Rule 980NY(c)(ii) (providing that if, at a price, the
leg markets can execute against an incoming ECO in full (or in a
permissible ratio), and each leg includes Customer interest, the leg
markets will have first priority at that price ahead of same-priced
ECOs resting in the Consolidated Book. In contrast to current Rule
980NY(c)(ii), Pillar will afford the leg markets priority without
requiring that ``each leg'' of an incoming ECO contain Customer
interest. See, infra, proposed Rule 980NYP(c) (regarding Priority
and Pricing of ECOs).
\46\ See Arca Options Rule 6.91P-O(e)(1)(A). See also supra note
5, Arca Options Approval Order, 86 FR 43704, at 43709 (discussing
substantively the same functionality available on BOX Options
Exchange wherein certain Complex Orders to trade at the same price
as the best-priced interest in the BOX Book after such eligible leg
interest has been exhausted and providing trading example of
allocation per Rule 6.91P-O(e)(1)(A)).
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The Exchange believes that proposed Rule 980NYP(c)(1)(A) would
benefit market participants because it is designed to protect the
priority of orders on the leg markets by requiring an ECO to execute
first against interest on the leg markets at the best price to the
extent possible, i.e., in full or in a permissible ratio, and only then
permitting an ECO to execute against another ECO at that price. Thus,
following the executions against the best-priced interest on the leg
markets, an ECO would no longer be executable against interest on the
leg markets at the best price because the leg markets would lack
sufficient quantity to fill the ECO in a permissible ratio at that
price. Absent this provision in Rule 980NYP(c)(1)(A), the Exchange
believes that otherwise executable ECOs at the leg market price would
lose execution opportunities without any benefit to interest on the leg
markets, which is unable to trade with the ECO at that price. Because
orders are executable against each other only when both the price and
the quantity of the orders match, the Exchange believes it is
appropriate (and does not deny leg markets priority) to allow ECOs to
trade with other ECOs at the leg market price when such eligible leg
market interest at that price has been exhausted.
<bullet> Proposed Rule 980NYP(c)(1)(B) would provide that an ECO
would not trade with orders in the leg markets designated as AON, FOK,
or with an MTS modifier. This proposed text would be new and is based
in part on existing functionality (for AON and FOK) and also reflects
the Exchange's proposed treatment under Pillar of its new MTS modifier
for orders in the leg markets.\47\ Consistent with current
functionality, orders with an AON, FOK, or (new) MTS modifier are
conditional and, by design, will miss certain execution opportunities.
The Exchange believes that this proposed rule would simplify the
operation of electronic complex order trading and would add clarity and
transparency that ECOs would not trade with orders that have
conditional size-related instructions.
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\47\ The Exchange plans to adopt the proposed the Minimum Trade
Size or MTS Modifier in the Pillar Order Type Filing (adopting Rule
900.3NYP, Orders and Modifiers). The Exchange represents that these
proposed order types will function in a manner substantively the
same as is described in current Arca Options Rule 6.62P-O(i)(3)(B)).
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<bullet> Proposed Rule 980NYP(e)(1)(C) would provide that an ECO
designated as Complex Only would be eligible to trade solely with
another ECO and would not trade with the leg markets. The proposed
Complex Only Orders would be new functionality and would operate in the
same manner as Complex Only Orders per Arca Options Rule 6.91P-
O(e)(1)(C).\48\
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\48\ See proposed Rule 980NYP(e)(1)(C). In addition to Arca
Options, other options exchanges likewise offer Complex Orders that
trade only with Complex Orders. See, e.g., Cboe Rule 5.33(a)
(defining ``Complex Only'' order as an ECO ``that a [Cboe] Market-
Maker may designate to execute only against complex orders in the
COB and not Leg into the Simple Book''). The proposed Complex Only
Order (like its predecessor PNP Plus Order) would be available to
all market participants.
---------------------------------------------------------------------------
As further proposed, an ECO designated as Complex Only must trade
at a price at or within the DBBO; provided that, if the DBB (DBO) is
calculated using the Exchange BBO for all legs of the complex strategy
and all such Exchange BBOs have displayed Customer interest, the
Complex Only Order would not trade below (above) one penny ($0.01)
times the smallest leg ratio inside the DBB (DBO), regardless of
whether there is sufficient quantity on such leg markets to satisfy the
ECO.\49\ This proposed requirement is designed
[[Page 16475]]
to ensure that, if there is displayed Customer interest on all legs of
the strategy on the Exchange, a Complex Only Order would price improve
at least some portion of such interest making up the DBBO. Thus, a
Complex Only Order does not get the benefit of the priority treatment
set out in proposed Rule 980NYP(e)(1)(A). If a Complex Only Order is
unable to trade within the aforementioned price parameters, it would
remain on the Consolidated Book until it can trade with another ECO per
the requirements of proposed Rule 980NYP(e)(1)(C). The Exchange
believes that allowing Complex Only Orders to trade up to the DBBO
unless there is displayed Customer interest on all legs of the strategy
on the Exchange at the DBBO (as described above), provides market
participants additional trading opportunities while still protecting
displayed Customer interest on the Exchange.
---------------------------------------------------------------------------
\49\ See proposed Rule 980NYP(e)(1)(C). Because Complex Only
Orders would never trade with the leg markets, whether or not there
is sufficient quantity at the displayed Customer price is irrelevant
to the operation of this order type.
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The proposed operation of the Complex Only Order, insofar as it
protects displayed Customer interest in the leg markets when an ECO
trades with another ECO, is consistent with current functionality.\50\
The proposed order type would also operate in the same manner as
Complex Only Orders available per Arca Options Rule 6.91P-O(e)(1)(C)
and is therefore not new or novel.
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\50\ See Rule 980NY, Commentary .02(i) (providing that, when
executing an ECO, if each leg of the contra-side Derived BBO for the
components of the ECO includes Customer interest, the price of at
least one leg of the order must trade at a price that is at least
one cent ($0.01) better than the corresponding price of all customer
bids or offers in the Consolidated Book for the same series).
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<bullet> Proposed Rule 980NYP(e)(1)(D) would provide that ECOs with
any one of the following complex strategies would be ineligible to
trade with the leg markets and would be processed as a Complex Only
Order:
[cir] a complex strategy with more than five legs;
[cir] a complex strategy with two legs and both legs are buying or
both legs are selling, and both legs are calls or both legs are puts;
or
[cir] a complex strategy with three or more legs and all legs are
buying or all legs are selling.
The proposal to restrict ECOs with more than five legs from trading
with the leg markets (and being treated as Complex Only Orders), per
proposed Rule 980NYP(e)(1)(D)(i), would be new functionality under
Pillar and is designed to help Market Makers manage risk. The
functionality is identical to functionality available per Arca Options
Rule 6.91P-O(e)(1)(D)(i). Because the execution of a multi-legged ECO
is a single transaction, comprising discrete legs that must all trade
simultaneously, allowing ECOs with more than five legs to trade with
the leg markets may allow a multi-legged transaction to occur before a
Market Maker's risk settings would be triggered. This proposed
limitation is designed to prevent such multi-legged transactions, which
would help ensure that Market Makers continue to provide liquidity and
do not trade above their established risk tolerance levels. In addition
to Arca Options Rule 6.91-O(e)(1)(D)(i), this restriction is also
consistent with similar limits established on other options
exchanges.\51\
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\51\ See, e.g., Cboe Rule 5.33(g) (providing the ECOs may be
restricted from trading with the leg markets if such ECO has more
than a maximum number of legs, which maximum the Exchange determines
on a class-by-class basis and may be two, three, or four).
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Proposed Rule 980NYP(e)(1)(D)(ii)-(iii), which treats ECOs with
certain complex strategies as Complex Only Orders, is based in part on
current Rule 980NY(d)(4)(i)-(ii), with a difference that currently,
such so-called ``directional strategies'' are rejected. The proposed
handling under Pillar would be less restrictive than the current rule
because such strategies would not be rejected and is consistent with
the treatment of such complex strategies on other options
exchanges.\52\ As with the proposal to restrict ECOs with more than
five legs trading with the leg markets, this proposed restriction is
also designed to ensure that Market Maker risk settings would not be
bypassed. Because ECOs with directional strategies are typically geared
towards an aggressive directional capture of volatility, such ECOs can
represent significantly more risk than trading any one of the legs in
isolation. As such, because Market Maker risk settings are only
triggered after the entire ECO package has traded, the Exchange
believes this proposed rule change would help ensure fair and orderly
markets by preventing such orders from trading with the leg markets,
which would minimize risk to Market Makers.
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\52\ See, e.g., Nasdaq ISE Options 3, Section 14 (d)(3)(A)-(B)
(providing that ECOs with these complex strategies may trade only
with other ECOs).
---------------------------------------------------------------------------
Proposed Rule 980NYP(e)(2) would provide that the Exchange would
evaluate trading opportunities for a resting ECO when the leg markets
comprising a complex strategy update, provided that during periods of
high message volumes, such evaluation may be done less frequently. The
Exchange believes that this proposed rule promotes transparency of the
frequency with which the Exchange would be evaluating the leg markets
for updates.
The Exchange believes the proposed handling of ECOs during Core
Trading is reasonably designed to facilitate increased interaction
between orders on the leg markets and ECOs, and to do so in such a
manner as to ensure a dynamic, real-time trading mechanism that
maximizes the opportunity for trade executions for both ECOs and orders
on single option series.
Execution of ECOs During a COA. Proposed Rule 980NYP(f) would
describe how ECOs would trade during a COA. The COA Process is
currently described in Rule 980NY(e). Under Pillar, the Exchange
proposes to modify the COA process, including by relying on the DBBO
(as described above) for pricing, allowing a COA Order to initiate a
COA only on arrival, and streamlining the rule text describing the
circumstances that would cause an early end to a COA. The proposed COA
Process is substantively identical to Arca Options Rule 6.91P-O(f),
except as noted here with regard to the allocation of a COA Order.
As proposed, a COA Order received when a complex strategy is open
for trading and that satisfies the requirements of paragraph (f)(1) of
the proposed Rule would initiate a COA only on arrival after trading
with eligible interest per proposed Rule 980NYP(f)(2)(A) (described
below). As further proposed, a COA Order would be rejected if entered
during a pre-open state or if entered during Core Trading Hours with a
time-in-force of FOK or GTX. This proposed order handling is based in
part on current Rule 980NY(e)(1)(ii), which requires that COA Orders be
submitted during Core Trading Hours. The proposed rejection of such
orders during a pre-open state would be new under Pillar and is
consistent with the Exchange's proposed functionality that a COA Order
would initiate a COA only on arrival. In addition, the proposal would
clarify that COA Orders designated as FOK or GTX would be rejected,
even if submitted during Core Trading Hours, is based on current
functionality and this addition would add further detail and
clarification to the rule text. Finally, as further proposed, only one
COA may be conducted at a time in a complex strategy, which is
identical to text in current Rule 980NY(e)(3).
Proposed Rule 980NYP(f)(1), which is identical to Arca Options Rule
6.91P-O(f)(1), would describe the conditions required for the
``Initiation of a COA.'' As proposed, to initiate a COA, the limit
price of the COA Order to buy (sell) must be higher (lower) than the
best-
[[Page 16476]]
priced, same-side ECOs resting on the Consolidated Book and equal to or
higher (lower) than the midpoint of the DBBO, which is designed to
encourage aggressively-priced COA Orders and, in turn, to attract a
meaningful number of RFR Responses to potentially provide price
improvement of the COA Order's limit price. This proposed text is based
in part on current Rule 980NY(e)(3)(i), with a difference to add a new
``midpoint of the DBBO'' requirement to reflect this new concept under
Pillar. As further proposed, a COA Order that does not satisfy these
pricing parameters would not initiate a COA and, unless it is cancelled
(i.e., if an IOC), such order would be ranked in Consolidated Book and
processed as an ECO, per proposed Rule 980NYP(e) (described above).
This would be new under Pillar, as current Rule 980NY(e)(3) allows an
order designated for COA to reside on the Consolidated Book unless or
until such order meets the requisite pricing conditions to initiate a
COA. The Exchange believes this proposed change would simplify the COA
process and promote the orderly initiation of COAs, which is essential
to maintaining a fair and orderly market for ECOs.
Finally, as proposed, once a COA is initiated, the Exchange would
disseminate a Request for Response message, the Response Time Interval
would begin and, during such interval, the Exchange would accept RFR
Responses, including COA GTX Orders. This proposed text is based on
current functionality set forth in Rule 980NY(e), with non-substantive
differences to use Pillar terminology, including using the new Pillar
term for COA GTX Orders.
Proposed Rule 980NYP(f)(2), which is identical to Arca Options Rule
6.91P-O(f)(2), would describe the ``Pricing of a COA.'' As proposed, a
COA Order to buy (sell) would initiate a COA at its limit price, unless
its limit price locks or crosses the DBO (DBB), in which case it would
initiate a COA at a price equal to one penny ($0.01) times the smallest
leg ratio inside the DBO (DBB) (the ``COA initiation price''). This
proposed functionality utilizes the new concept of a DBBO, is
consistent with current functionality (that relies on substantively
similar concept of Complex BBO (per Rule 900.2NY(a)), and ensures
(consistent with current functionality) that interest on the leg
markets maintain priority.
<bullet> Proposed Rule 980NYP(f)(2)(A) would provide that prior to
initiating a COA, a COA Order to buy (sell) would trade with any ECO to
sell (buy) resting in the Consolidated Book that is priced equal to or
lower (higher) than the DBO (DBB), unless the DBO (DBB) is calculated
using the Exchange BBO for all legs of the complex strategy and all
such Exchange BBOs have displayed Customer interest, in which case the
COA Order will trade up (down) to one penny ($0.01) times the smallest
leg ratio inside the DBO (DBB) (i.e., priced better than the leg
markets) and any unexecuted portion of such COA Order would initiate a
COA. This proposed rule is based on current Rule 980NY(e)(2) with a
difference to use the Pillar concept of DBBO rather than refer to the
contra-side Complex BBO and to specify that the COA Order must price
improve the DBBO when there is displayed Customer interest on the
Exchange leg markets, as noted above.
<bullet> Proposed Rule 980NYP(f)(2)(B) would provide that a COA
Order would not be eligible to trade with the leg markets until after
the COA ends, which added detail, while not explicitly stated in the
current rule, is consistent with current functionality described in
Rules 980NY(e)(7)(A) and (B) that only RFR Responses (i.e., GTX orders)
and ECOs will be allocated in a COA and that the COA Order would not
trade with the leg markets until after the COA allocations.
Proposed Rule 980NYP(f)(3) would set forth the conditions that
would result in the ``Early End to a COA'' (i.e., a COA ending prior to
the expiration of the Response Time Interval), which conditions are
consistent with current Rule 980NY(e)(6) as described below. Currently,
as described in Rule 980NY(e)(3), the Exchange takes a snapshot of the
Derived BBO at the start of a COA and uses that snapshot as the basis
for determining whether to end a COA early.
Under Pillar, the Exchange would no longer use a snapshot of the
Derived BBO as the basis for determining whether to end a COA early but
would instead rely on the DBBO (calculated per proposed Rule
980NYP(a)(5)), which is updated as market conditions change (including
during the Response Time Interval).\53\ The Exchange believes relying
on the DBBO is appropriate and would benefit investors as it would
provide real-time trading information that includes an additional layer
of price protection for ECO trading as the DBBO is based on Exchange
BBOs, when available, or the ABBO. The Exchange proposes a COA would
end early under the following conditions:
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\53\ As discussed infra regarding proposed Rule 980NYP(a)(5) and
the definition of the Derived BBO, ``the DBBO will be updated as the
Exchange BBO or ABBO, as applicable, is updated'').
---------------------------------------------------------------------------
[cir] Proposed Rule 980NYP(f)(3)(A) would provide that a COA would
end early if the Exchange receives an incoming ECO or COA Order to buy
(sell) in the same complex strategy that is priced higher (lower) than
the initiating COA Order to buy (sell), which proposed text is based on
current Rule 980NY(e)(6)(B)(i) without any substantive differences.
[cir] Proposed Rule 980NYP(f)(3)(B) would provide that a COA would
end early if the Exchange receives an RFR Response that locks or
crosses the DBBO on the same-side as the COA Order, which proposed text
is based on current Rule 980NY(e)(6)(A)(i), except (as noted above) it
refers to the DBBO rather than the ``initial Derived BBO.''
[cir] Proposed Rule 980NYP(f)(3)(C) would provide that a COA would
end early if the leg markets update causing the DBBO on the same-side
as the COA Order to lock or cross (i) any RFR Response(s) or (ii) if no
RFR Responses have been received, the best-priced, contra-side ECOs.
This proposed rule is based in part on current Rule 980NY(e)(6)(C)(i),
with differences to use Pillar terminology, including reference to the
DBBO.
[cir] Proposed Rule 980NYP(f)(3)(D) would provide that a COA would
end early if the leg markets update causing the contra-side DBBO to
lock or cross the COA initiation price. This proposed rule is based in
part on current Rule 980NY(e)(6)(C)(ii), except that it would refer to
the DBBO and the COA initiation price, which would be new concepts
under Pillar.
Because the DBBO may be calculated using the ABBO for a given leg,
the Exchange notes that it would be new under Pillar to have a COA end
early based on (locking or crossing) market conditions outside of the
Exchange. The Exchange believes this proposed functionality would
benefit market participants by preventing COA Orders from executing at
prices too far away from the prevailing market for that complex
strategy. In addition, the Exchange believes this proposed
functionality would promote internal consistency and benefit market
participants because, as proposed, the execution of ECOs on the
Exchange, including whether such ECO may initiate a COA as a COA Order,
is based on the DBBO. As such, the Exchange believes it is appropriate
and to the benefit of market participants that the early termination of
a COA likewise be based on the DBBO--regardless of whether the prices
used to calculate such DBBO include (or consist entirely of) ABBO
prices.
[cir] Proposed Rule 980NYP(f)(3)(E) would provide that a COA would
end early if the Exchange receives a Complex CUBE Order in the same
[[Page 16477]]
complex strategy as the COA Order, which is consistent with current
functionality only insofar as certain Complex CUBE Orders may cause a
COA to end early based on price (see, e.g., Rule 980NY(e)(6)(A) and
(B)). The proposed functionality is different, however, because any
Complex CUBE Order in the same series as a COA will cause the COA to
end early regardless of the price, side, or size of the CUBE Order. The
Exchange proposes to end a COA early upon receipt of a CUBE Order in
the same series so that the Exchange can evaluate whether the CUBE
Order is eligible to initiate a Complex CUBE Auction, per Rule 971.2NY.
<bullet> Proposed Rule 980NYP(f)(4) would set forth the
``Allocation of COA Orders'' after a COA either ends early or after the
expiration of the Response Time Interval. Current Rule 980NY(e)(7)(A)
sets forth that the COA-eligible orders are allocated against the best-
priced interest received in the COA at each price on a ``size pro rata
basis,'' as that concept is defined in Rule 964NY(b)(3).\54\ Under
Pillar, the allocation of the COA Order would continue to be allocated
on a size pro rata basis, with new functionality based on the proposed
DBBO (per Rule 980NYP(a)(5)) to ensure that Customer interest at a
price continues to be afforded priority.
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\54\ See Rule 980NYP(e)(7)(A) (providing that the COA-Eligible
Order will execute against ``RFR Responses and [ECOs] to buy (sell)
that are priced higher (lower) than the initial Derived BBO will be
eligible to trade first with the COA-eligible order, beginning with
the highest (lowest), at each price point, on a Size Pro Rata basis
pursuant to Rule 964NY(b)(3), provided that [ECOs] on behalf of
Customers will have priority over same priced [ECOs] for non-
Customers.'').
---------------------------------------------------------------------------
Specifically, proposed Rule 980NYP(f)(4)(A) would provide that RFR
Responses to sell (buy) that are priced equal to or lower (higher) than
a COA Order to buy (sell) would trade up (down) to the DBBO; provided,
however, that if all legs of the DBB (DBO) are calculated using
Exchange BBOs and all such Exchange BBOs have displayed Customer
interest, RFR Responses to sell (buy) would not trade below (above) one
penny ($0.01) times the smallest leg ratio inside the DBB (DBO). This
proposed rule would ensure that the COA Order would not trade at a
worse price than the leg markets and would price improve the DBBO where
there is displayed Customer interest on all legs of the complex
strategy on the Exchange, which is consistent with current Commentary
.02(ii) to Rule 980NY.\55\ Further, proposed Rule 980NYP(f)(4)(A)(i)
would specify that ``[a]t each price point, the COA Order will trade
first with Customer RFR Responses in time priority, followed by non-
Customer RFR Responses on a size pro rata basis pursuant to Rule
964NYP(i)'' and that ``Non-Customer RFR Responses will be capped at the
remaining size of the COA Order for purposes of size pro rata
allocation.'' \56\ The proposed text is based in part on current Rule
980NY(e)(7)(A) insofar as it ensures that the COA Order would trade
with the best-priced RFR Responses received in the COA, beginning with
Customer interest at a price followed by same-priced non-Customer
interest. The proposed text would also include the additional detail
that non-Customer RFR Responses are capped at the remaining size of the
COA Order for purposes of pro rata allocation, which is consistent with
current functionality as relates to non-Customer RFR Responses.
However, on Pillar, Customer RFR Responses would trade in time and
would not be subject to a pro rata allocation, which proposed handling
is consistent with the Exchange's Customer priority model.\57\
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\55\ See Rule 980NY, Commentary .02(ii) (providing that, when
executing an ECO in a class that has been designated as eligible for
a COA, if each leg of the contra-side Derived BBO--calculated using
the BBO from the Consolidated Book for each of the options series
comprising a given complex order strategy per Rule 900.2NY--for the
components of the ECO includes Customer interest, the price of at
least one leg of the order must ``trade at a price that is better
than the corresponding price of all customer bids or offers in the
Consolidated Book for the same series, by at least one standard
trading increment as defined in Rule 960NY,'' which minimum trading
increment is one cent ($0.01). See Rule 960NY(b).
\56\ See American Pillar Priority Filing (which includes
proposed Rule 964NYP(i), which sets forth a size pro rata allocation
formula that is identical to the formula set forth in current Rule
964NY(b)(3)).
\57\ See, e.g., Rules 964NY(b)(2)(A) (regarding priority of
displayed Customer interest based on time) and (b)(2)(D) (providing
that non-Customer interest is subjected to pro rata allocation); see
also proposed Rule 964NYP(h)(3) (regarding non-Customers in ``size
pro rata pool'') and (j) (regarding allocation of Customer and non-
Customer interest) as described in the American Pillar Priority
Filing).
---------------------------------------------------------------------------
Proposed Rule 980NYP(f)(4)(B) would provide that after COA
allocations pursuant to paragraph (f)(4)(A) of this proposed Rule, any
unexecuted balance of a COA Order (including COA Orders designated as
IOC) would be eligible to trade with any contra-side interest,
including the leg markets unless the COA Order is designated or treated
as a Complex Only Order. This proposed text is based on existing
functionality and makes explicit that a COA Order would trade solely
with complex interest (and not the leg markets) during a COA. This
proposed rule is designed to provide clarity and transparency that the
remaining balance of a COA Order would be eligible to trade with the
leg markets after the COA ends.
Proposed Rule 980NYP(f)(4)(C) would provide that after a COA Order
trades pursuant to proposed Rule 980NYP(f)(4)(B), any unexecuted
balance of a COA Order that is not cancelled (i.e., if an IOC) would be
ranked in the Consolidated Book and processed as an ECO pursuant to
paragraph (e) of this Rule. The proposed text is based on current Rule
980NY(e)(7)(B) without any substantive differences.
Proposed Rule 980NYP(f)(5) would set forth ``Prohibited Conduct
related to COAs,'' and is based on the first sentence of current
Commentary .04 to Rule 980NY with one substantive differences: to add
reference to quotes, and would provide that a pattern or practice of
submitting ``unrelated quotes or orders that cause a COA to conclude
early would be deemed conduct inconsistent with just and equitable
principles of trade,'' \58\ which addition would broaden the scope of
``Prohibited Conduct'' to the benefit of market participants and would
also add clarity and transparency to Exchange rules. The proposed
change is identical to Arca Options Rule 6.91P-O(f)(5).
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\58\ See proposed Rule 980NYP(f)(5) (emphasis added). In
addition, rather than copy into proposed Rule 980NYP the second
sentence of current Rule 980NY, Commentary .04, which provides that
dissemination of information related to COA Orders to third parties
would also be deemed as conduct inconsistent with just and equitable
principles of trade, the Exchange proposes to add more expansive
language regarding this prohibited conduct to the order exposure
rule. See infra for discussion of proposed change to Rule 935NY.
---------------------------------------------------------------------------
ECO Risk Checks. Proposed Rule 980NYP(g) would describe the ``ECO
Risk Checks,'' which are designed to help ATP Holders to effectively
manage risk when trading ECOs. Current Commentaries .03, .05, and .06
of Rule 980NY set forth the existing risk checks for ECOs. The proposed
ECO Risk Checks are identical to and would operate in the same manner
as set forth in Arca Options Rule 6.91P-O(g).
With the transition to Pillar, the Exchange proposes to modify and
enhance its existing risk checks for ECOs, as follows:
<bullet> Proposed Rule 980NYP(g)(1) would set forth the ``Complex
Strategy Limit.'' As proposed, the Exchange would establish a limit on
the maximum number of new complex strategies that may be requested to
be created per MPID, which limit would be announced by Trader
Update.\59\ As further
[[Page 16478]]
proposed, when an MPID reaches the limit on the maximum number of new
complex strategies, the Exchange would reject all requests to create
new complex strategies from that MPID for the rest of the trading day.
In addition, and notwithstanding the established Complex Strategy
Limit, the Exchange proposes that it may reject a request to create a
new complex strategy from any MPID whenever the Exchange determines it
is necessary in the interests of a fair and orderly market.
---------------------------------------------------------------------------
\59\ The Exchange has proposed to add the definition of MPID to
proposed Rule 900.2NY, which would refer to ``the identification
number(s) assigned to the orders and quotes of a single ETP Holder,
ATP Holder, or OTP Firm for the execution and clearing of trades on
the Exchange by that permit holder. An ETP Holder, ATP Holder, or
OTP Firm may obtain multiple MPIDs and each such MPID may be
associated with one or more sub-identifiers of that MPID.'' See
American Priority Pillar Filing.
---------------------------------------------------------------------------
This is new functionality proposed under Pillar but is conceptually
similar to the Complex Order Table Cap (the ``Cap''), set forth in
Commentary .03 to Rule 980NY, which Cap (like the Complex Strategy
Limit), would help maintain a fair and orderly market because it would
operate as a system protection tool that enables the Exchange to
prevent any single MPID from creating more than a limited number of
complex strategies during the trading day. This proposed Cap is
identical to Arca Options Rule 6.91P-O(g)(1). The Exchange also notes
that other options exchanges likewise impose a limit on new complex
order strategies.\60\
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\60\ See, e.g., Cboe Rule 5.33(a) (providing, in its definition
of ``complex strategy'' that Cboe ``may limit the number of new
complex strategies that may be in the [Cboe] System at a particular
time'') and MIAX Rule 518(a)(6) (providing, in its definition of
``complex strategy'' that MIAX ``may limit the number of new complex
strategies that may be in the System at a particular time and will
communicate this limitation to Members via Regulatory Circular'').
---------------------------------------------------------------------------
<bullet> Proposed Rule 980NYP(g)(2) would set forth the ECO Price
Protection. The existing ECO ``Price Protection Filter'' is set forth
in Commentary .05 to current Rule 980NY (the ``ECO Filter''). The
proposed ``ECO Price Protection'' on Pillar would work similarly to how
the current ECO price protection mechanism functions on the Exchange
because an ECO would be rejected if it is priced a specified percentage
away from the contra-side Complex NBB or NBO.\61\ However, on Pillar,
the Exchange proposes to use new thresholds and reference prices, which
would simplify the existing price check, but because this functionality
is identical to Arca Options Rule 6.91P-O(g)(2), this change would also
add uniformity to Exchange options platforms. Although the mechanics of
the ECO Price Protection would vary slightly from the existing Price
Protection Filter, the goal of this feature would remain the same: to
prevent the execution of ECOs that are priced too far away from the
prevailing market for the same strategy and therefore potentially
erroneous. Whereas the Away Market Deviation (vis a vis a DBBO based on
an Exchange BBO) is designed to make sure that ECOs do not trade too
far away from the prevailing market, the ECO Order Protection as
proposed (and as is the case today) is to prevent the execution of ECOs
that were potentially (inadvertently) entered at prices too far away
from the prevailing market and, as such, this mechanism protects the
order sender from itself.
---------------------------------------------------------------------------
\61\ As noted above, the Exchange proposes to define the Complex
NBBO as the derived national best bid and derived national best
offer for a complex strategy calculated using the NBB and NBO for
each component leg of a complex strategy. See proposed Rule
980NYP(a)(2).
---------------------------------------------------------------------------
Proposed Rule 980NYP(g)(2)(A) would provide that each trading day,
an ECO to buy (sell) would be rejected or cancelled (if resting) if it
is priced a Specified Threshold amount or more above (below) the
Reference Price (as described below), subject to proposed paragraphs
(g)(2)(A)(i)-(v) of the Rule as described below. Because ECO Price
Protection would be applied each trading day, an ECO designated GTC
would be re-evaluated for ECO Price Protection on each day that it is
eligible to trade and would be cancelled if the limit price is equal to
or through the Specified Threshold.\62\ This proposed functionality is
identical to Arca Options Rule 6.91P-O(g)(2)(A).
---------------------------------------------------------------------------
\62\ As noted here, the Exchange proposes to add GTC Orders in
Pillar Order Type Filing, which order type would operate in the same
manner as per current Rule 900.3NY.
---------------------------------------------------------------------------
[cir] Proposed Rule 980NYP(g)(2)(A)(i) would provide that an ECO
that arrives when a complex strategy is open for trading would be
evaluated for ECO Price Protection on arrival. This functionality is
identical to Arca Options Rule 6.91P-O(g)(2)(A)(i).
[cir] Proposed Rule 980NYP(g)(2)(A)(ii) would provide that an ECO
received during a pre-open state would be evaluated for ECO Price
Protection after the ECO Opening Auction Process concludes.\63\ This
functionality is identical to Arca Options Rule 6.91P-O(g)(2)(A)(ii).
---------------------------------------------------------------------------
\63\ See discussion infra regarding proposed Rule 980NYP(d),
which describes the ECO Opening Auction Process (or Reopening after
a Trading Halt) as well as the concepts of ECO Auction Collars and
ECO Auction Price.
---------------------------------------------------------------------------
[cir] Proposed Rule 980NYP(g)(2)(A)(iii) would provide that an ECO
resting on the Consolidated Book before a trading halt would be
reevaluated for ECO Price Protection after the ECO Opening Auction
Process concludes. This functionality is identical to Arca Options Rule
6.91P-O(g)(2)(A)(iii).
[cir] Proposed Rule 980NYP(g)(2)(A)(iv) would provide that QCC
Orders (per Rule 6.62P-O(g)(1)) would not be subject to ECO Price
Protection, as the Exchange subjects such paired orders to distinct
price validations.\64\ This functionality is identical to Arca Options
Rule 6.91P-O(g)(2)(A)(iv).
---------------------------------------------------------------------------
\64\ See, e.g., Rules 971.1NY and 971.2NY (regarding price
requirements to initiate a CUBE Auction).
---------------------------------------------------------------------------
[cir] Proposed Rule 980NYP(g)(2)(A)(v) would provide that ECO Price
Protection would not be applied if there is no Reference Price for an
ECO. This functionality is identical to Arca Options Rule 6.91P-
O(g)(2)(A)(v).
Proposed Rule 980NYP(g)(2)(B) would specify the ``Reference Price''
used in connection with the ECO Price Protection. As proposed, the
Reference Price for calculating ECO Price Protection for an ECO to buy
(sell) would be the Complex NBO (NBB), provided that, immediately
following an ECO Opening Auction Process, the Reference Price would be
the ECO Auction Price or, if none, the Complex NBO (NBB). The Exchange
believes that adjusting the Reference Price for ECO Price Protection
immediately following an ECO Opening Auction would ensure that the most
up-to-date price would be used to assess whether to cancel an ECO that
was received during a pre-open state, including during a Trading Halt.
The Exchange notes this functionality is identical to how this
functionality operations per Arca Options Rule 6.91P(g)(2)(B).
As further proposed, there would be no Reference Price for an ECO
if there is no NBBO for any leg of such ECO (i.e., the Exchange would
not calculate a Complex NBB (NBO)), which text is based on current Rule
980NY, Commentary .05(c), except that the proposed rule would not
reference OPRA because, as further proposed, for purposes of
determining a Reference Price, the Exchange would not use an adjusted
NBBO (i.e., such NBBO is implicitly reliant on information from
OPRA).\65\ The Exchange notes that using an unadjusted NBBO to
calculate the Reference Price is identical to how this
[[Page 16479]]
functionality operations per Arca Options Rule 6.91P(g)(2)(B).
---------------------------------------------------------------------------
\65\ See American Pillar Priority Filing (discussion regarding
the definition of ``NBBO'' in proposed Rule 900.2NY describing that
the ``NBBO'' for purposes of options trading as referring to the
national best bid or offer and that ``[u]nless otherwise specified,
the Exchange may adjust its calculation of the NBBO based on
information about orders it sends to Away Markets, execution reports
received from those Away Markets, and certain orders received by the
Exchange'').
---------------------------------------------------------------------------
Proposed Rule 980NYP(g)(2)(C) would set forth the ``Specified
Threshold'' used in connection with the ECO Price Protection. As
proposed, the Specified Threshold for calculating ECO Price Protection
would be $1.00, unless determined otherwise by the Exchange and
announced to ATP Holders by Trader Update.
The Exchange believes that the proposed Specified Threshold of
$1.00 simplifies how the Reference Price would be calculated as
compared to the calculations currently specified in Commentary .05 to
Rule 980NY. In addition, consistent with Commentary .05(d), the
Exchange proposes that the Specified Threshold could change, subject to
announcing the changes by Trader Update. Providing flexibility in
Exchange rules regarding how the Specified Threshold would be set is
identical functionality available per Arca Options Rule 6.62P-
O(a)(3)(C) and is also consistent with the rules of other options
exchanges as well as the functionality for the single-leg Limit Order
Price Protection feature.\66\
---------------------------------------------------------------------------
\66\ See, e.g., Cboe Rule 5.34(b)(6) (describing the ``Drill-
Through Protection'' and that Cboe ``determines a default buffer
amount on a class-by-class basis). See Single-Leg Pillar Filing
(describing use of Trader Update to modify Specified Thresholds in
Rule 6.62P-O (a)(3)(C)).
---------------------------------------------------------------------------
<bullet> Proposed Rule 980NYP(g)(3) would set forth the ``Complex
Strategy Protections,'' which are identical to Arca Options Rule 6.91P-
O(g)(3). The proposed protections are based on current Rule 980NY,
Commentary .06, which are referred to as the ``Debit/Credit
Reasonability Checks.'' The Exchange believes this name change is
appropriate because it more accurately conveys that the check applies
solely to certain complex strategies and because (as discussed above),
the Exchange proposes to refer simply to a ``net price'' as opposed to
the ``total net debit or credit price.'' The proposed Pillar Complex
Strategy Protections would function similarly to the current Debit/
Credit Reasonability Checks because potentially erroneously priced
incoming ECOs would be rejected. However, rather than to refer to
specified debit or credit amounts as a way to determine whether a given
strategy is erroneously priced, the proposed rule would instead focus
on the expectation of the order sender and what would result if the ECO
were not rejected. Consistent with current functionality, the proposed
Complex Strategy Protections are designed to prevent the execution of
ECOs at prices that are inconsistent with/not aligned with their
strategies.
As proposed, to protect an ATP Holder that sends an ECO (each an
``ECO sender'') with the expectation that it would receive (or pay) a
net premium but has priced the ECO such that the ECO sender would
instead pay (or receive) a net premium, the Exchange would reject any
ECO that is comprised of the erroneously-priced complex strategies as
set forth in proposed Rule 980NYP(g)(3)(A)-(C) and described below.
Proposed Rule 980NYP(g)(3)(A) would provide that `` `All buy' or
`all sell' strategies'' would be rejected as erroneously-priced if it
is an ECO for a complex strategy where all legs are to buy (sell) and
it is entered at a price less than one penny ($0.01) times the sum of
the number of options in the ratio of each leg of such strategy (e.g.,
a complex strategy to buy (sell) 2 calls and buy (sell) 1 put with a
price less than $0.03). The proposed text is based on Rule 980NY,
Commentary .06(a)(1), with no substantive differences, except that the
Exchange has streamlined the text and set forth the minimum price
(i.e., $0.03) for any ``all buy'' or ``all sell'' strategies.
Proposed Rule 980NYP(g)(3)(B) would provide for the rejection of
erroneously-priced ``Vertical spreads,'' which are defined as complex
strategies that consists of a leg to sell a call (put) option and a leg
to buy a call (put) option in the same option class with the same
expiration but at different strike prices. As proposed, the Exchange
would reject as erroneously-priced: (i) an ECO for a vertical spread to
buy a lower (higher) strike call and sell a higher (lower) strike call
and the ECO sender would receive (pay) a net premium (proposed Rule
980NYP(g)(3)(B)(i)); and (ii) an ECO for a vertical spread to buy a
higher (lower) strike put and sell a lower (higher) strike put and the
ECO sender would receive (pay) a net premium (proposed Rule
980NYP(g)(3)(B)(ii)). The proposed strategy protections for vertical
spreads are based on current Rule 980NY, Commentary .06(a)(2), except
that, as noted above, the proposed Rule is written from the standpoint
of the expectation of the ECO sender as opposed to reviewing total net
debit or credit price of the strategy.
Proposed Rule 980NYP(g)(3)(C) would provide for the rejection of
erroneously-priced ``Calendar spreads,'' which are defined as
consisting of a leg to sell a call (put) option and a leg to buy a call
(put) option in the same option class at the same strike price but with
different expirations. As proposed, the Exchange would reject as
erroneously-priced: (i) an ECO for a calendar spread to buy a call leg
with a shorter (longer) expiration while selling a call leg with a
longer (shorter) expiration and the ECO sender would pay (receive) a
net premium (proposed Rule 980NYP(g)(3)(C)(i)); and (ii) an ECO for a
calendar spread to buy a put leg with a shorter (longer) expiration
while selling a put leg with a longer (shorter) expiration and the ECO
sender would pay (receive) a net premium (proposed Rule
980NYP(g)(3)(C)(ii)). The proposed strategy protections for calendar
spreads are based on current Rule 980NY, Commentary .06(a)(3), except
that, as noted above, the proposed Rule is written from the standpoint
of the expectation of the ECO sender as opposed to reviewing the total
net debit or credit price of the strategy. The Exchange has also not
retained discretion to disable the strategy protections for calendar
spreads (as contained in Commentary .06(a)(3)(i) of the current Rule)
because since adopting this provision in 2017, the Exchange has never
exercised this discretion and therefore has determined that such
discretion is no longer needed.
Proposed Rule 980NYP(g)(3)(D) would provide that any ECO that is
not rejected by the complex strategy protections would still be subject
to the ECO Price Protection, per paragraph (g)(2) of this Rule, which
proposed text is based on Rule 980NY, Commentary .06(b) without any
substantive difference.
Rule 935NY: Order Exposure Requirements
The Exchange also proposes conforming, non-substantive amendments
to Rule 935NY, regarding order exposure, to add a cross-reference to
new Pillar Rule 980NYP. Current Rule 6.47A-O(iv) exempts orders
submitted to the COA Process, (per current Rule 980NY) from its one-
second order exposure requirements. This proposed amendment would
extend the exemption from the order exposure requirements to orders
submitted to a COA on Pillar.\67\ The Exchange also proposes to modify
the reference to ``Complex Order Auction Process (`COA')'' to simply
``Complex Order Auction (`COA')'' (i.e., removing the word Process)
consistent with how this concept is defined in proposed Rule
980NYP(a)(3). As previously stated, the Exchange believes that the
proposed Response Time Interval for a COA (with a duration of no less
than 100 milliseconds) is of sufficient length to allow ATP Holders
time to respond to
[[Page 16480]]
a COA. As such, the proposal is designed to promote timely execution of
the COA Order, while ensuring adequate exposure of such orders.
Accordingly, the Exchange proposes to amend Rule 935NY (iv) to extend
the exemption from the one-second exposure requirement to COA Orders
under Pillar, which exemption is substantively identical to NYSE Arca
Rule 6.47A-O. Consistent with Rule 935NY, Commentary .01, ATP Holders
would only utilize the COA where there is a genuine intention to
execute a bona fide transaction.\68\
---------------------------------------------------------------------------
\67\ See proposed Rule 935NY(iv). The Exchange also proposes to
replace reference to ``System'' with ``the Exchange.'' See id.
(preamble).
\68\ See Rule 935NY, Commentary .01 (``Rule 935NY prevents a
User from executing agency orders to increase its economic gain from
trading against the order without first giving other trading
interest on the Exchange an opportunity to either trade with the
agency order or to trade at the execution price when the User was
already bidding or offering on the book'').
---------------------------------------------------------------------------
* * * * *
As discussed above, because of the technology changes associated
with the migration to the Pillar trading platform, subject to approval
of this proposed rule change, the Exchange will announce by Trader
Update when rules with a ``P'' modifier will become operative and for
which symbols. The Exchange believes that keeping existing rules on the
rulebook pending the full migration of Pillar will reduce confusion
because it will ensure that the rules governing trading on the
Exchange's current system will continue to be available pending the
full migration to Pillar.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Securities Exchange Act of 1934 (the ``Act''),\69\ in general, and
furthers the objectives of Section 6(b)(5),\70\ 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. The Exchange
believes that proposed Rule 980NYP to support electronic complex
trading on Pillar would remove impediments to and perfect the mechanism
of a free and open market and a national market system because the
proposed rule would promote transparency in Exchange rules by using
consistent terminology governing trading on both of the Exchange's
options platforms, thereby ensuring that members, regulators, and the
public can more easily navigate the Exchange's rulebook and better
understand how options trading is conducted on the Exchange.
---------------------------------------------------------------------------
\69\ 15 U.S.C. 78f(b).
\70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that adding new Rule 980NYP with the modifier
``P'' to denote that this rule would be operative for the Pillar
trading platform would remove impediments to and perfect the mechanism
of a free and open market and a national market system by providing
transparency of which rules would govern trading once a symbol has been
migrated to the Pillar platform. The Exchange similarly believes that
adding a preamble to current Rule 980NY stating that it would not be
applicable to trading on Pillar would remove impediments to and perfect
the mechanism of a free and open market and a national market system
because it would promote transparency regarding which rules would
govern trading on the Exchange during and after the transition to
Pillar.
The Exchange believes that incorporating Pillar functionality
currently available for trading of electronic complex orders on the
Exchange's affiliated options exchange (in Arca Options Rule 6.91P-O)
would remove impediments to and perfect the mechanism of a free and
open market and a national market system because the Exchange would be
able to offer consistent functionality across its options trading
platforms for trading of electronic complex orders. As discussed
herein, and unless otherwise specified herein, the Exchange is not
proposing fundamentally different functionality regarding how ECOs
would trade on Pillar than is currently available on the Exchange.
Accordingly, with the transition to Pillar, the Exchange would use
Pillar terminology to describe functionality that is not changing and
also introduce certain new or updated functionality for Electronic
Complex Orders (i.e., enhancing the opening auction process, including
introducing the ``ECO Auction Collars'') that will also be available
for outright options trading on the Pillar platform. As such, the
Exchange believes that using Pillar terminology and incorporating
updated functionality for the proposed new rule would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because it would promote consistency in the
Exchange's rules across both of its options platforms.
Definitions, Types of ECOs and Priority and Pricing of ECOs
The Exchange believes that the proposed definitions in Rule
980NYP(a) would remove impediments to and perfect the mechanism of a
free and open market and a national market system because the proposed
changes are designed to promote clarity and transparency by
consolidating existing defined terms related to electronic complex
trading into one section of the proposed rule. The Exchange believes
that the proposed non-substantive amendments to those terms currently
defined in Rule 980NYwould promote clarity and transparency by using
Pillar terminology. The Exchange further believes consolidating defined
terms in proposed Rule 980NYP(a) (including alphabetizing the proposed
terms) would make the proposed rule more transparent and easier to
navigate.
The Exchange believes that the proposed new definition of Away
Market Deviation would further remove impediments to and perfect the
mechanism of a free and open market and a national market system
because it would promote clarity and transparency to market
participants regarding how the Exchange would calculate this additional
protection against ECOs being executed on the Exchange at prices too
far away from the current market.
The Exchange believes that the proposed new definition of DBBO (and
related terms of DBB and DBO) would further remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it would promote clarity and transparency to market
participants regarding how the DBBO would be calculated under Pillar.
The proposed definition is not novel and is identical to how Arca
Options Rule 6.91P-O(a)(5) defines DBBO and is also consistent with
similarly defined terms used on Cboe. The Exchange believes that
providing an alternative means of calculating the DBBO (e.g., by
looking to the contra-side best bid (offer) in the absence of same-side
interest) would remove impediments to and perfect the mechanism of a
free and open market and a national market system thereby benefitting
as it should increase opportunities for trading.
In addition, the Exchange believes that setting forth additional
definitions in proposed Rule 980NYP(a), including those that are used
on other options exchanges (e.g., ``complex strategy'' and ``ratio'')
and clarifying terms (e.g., ``leg'' and ``leg markets''), would remove
impediments to and perfect the
[[Page 16481]]
mechanism of a free and open market and a national market system
because it would promote clarity and transparency to market
participants regarding electronic complex trading under Pillar.
Finally, the proposed definition of ``ECO Order Instruction'' would
remove impediments to and perfect the mechanism of a free and open
market and a national market system because it would incorporate for
ECOs existing Pillar order handling functionality in an auction that
substantively identical to Arca Options Rule 6.91P-O(a)(6). The
Exchange similarly proposes this functionality for the ECO Opening
Auction Process, with non-substantive differences only to use an ECO-
specific defined term and to refer to the ECO Opening Auction Process.
The Exchange believes that the proposed types of ECOs available per
Rule 980NYP(b) would remove impediments to and perfect the mechanism of
a free and open market and a national market system because it would
describe the ECOs and time-in-force modifiers that would be available
on Pillar, as well as specifying additional ECO types. The Exchange
believes that the non-substantive differences to use Pillar terminology
to describe the available ECO order types would promote transparency
and clarity in Exchange rules. The Exchange believes that the proposed
Complex Only Order is not novel because it would operate in a manner
identical to how such orders function per Arca Options Rule 6.91P-O
(i.e., the order type only interact with other ECOs). In addition, the
proposed COA GTX Order uses Pillar terminology to describe what is
referred to as an ``RFR Response'' in the current rules, and therefore
is not novel.
The Exchange believes that proposed new Rule 980NYP(c) would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the proposed rules would set forth a
Customer priority and size pro rata allocation model for Pillar and
pricing requirements for ECO trading that are substantively the same as
the Exchange's current Customer priority model and pricing requirements
as set forth in Rule 980NY(b) and Commentaries .01 and .02(i) and (ii)
to Rule 980NY. The Exchange proposes certain modified functionality,
including the Complex Only Order as noted above, and regarding ECO
trading vis a vis the DBBO (and binding such DBBO by the maximum
allowable Away Market Deviation when the Exchange BBO is used to
calculate the DBBO for a leg), which would benefit market participants
as the proposed features would provide additional price protection in
ECO trading and would add clarity and transparency to the rules. The
Exchange believes that proposed Rule 980NYP(c) would remove impediments
to and perfect the mechanism of a free and open market and a national
market system because they would promote transparency and clarity in
Exchange rules regarding how ECOs would trade with the leg markets and
with other ECOs.
Execution of ECOs at the Open (or Reopening After a Trading Halt)
The Exchange believes that proposed Rule 980NYP(d) regarding the
ECO Opening Auction Process would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because the proposed rule maintains the fundamentals of an auction
process that the Exchange currently uses for ECOs, as described in Rule
980NY(c)(i)(B), while at the same time enhancing the process by
incorporating Pillar auction functionality that is identical to Arca
Options Rule 6.91P-O(d). For example, the Exchange proposes to use
Pillar functionality to determine how to price an ECO Opening Auction
Process, as described in proposed Rule 980NYP(d)(3), including using
proposed ``ECO Auction Collars'' and an ``ECO Auction Price,'' which
are consistent with the core functionality for opening ECOs, with
additional detail that would promote clarity and transparency to market
participants regarding this process. The Exchange believes it is
appropriate to refrain from opening a series when there is a lack of
reliable pricing indication(s) regarding the price at which a complex
strategy should execute because doing so would protect market
participants from potentially erroneous executions, thereby promoting a
fair and orderly ECO Opening Auction Process.
Moreover, the Exchange believes that the proposal to use the DBBO
(as opposed to the currently used Complex NBBO) for the ECO Opening
Process would allow the Exchange to open a series based on the Exchange
BBO, bound by the Away Market Deviation (or, the ABBO if the Exchange
BBO is not available), which is consistent with ECO handling during
Core Trading (per proposed Rule 980NYP(e)). The Exchange believes this
proposed change would better align the permissible opening price for a
series with the permissible execution price during Core Trading, which
adds consistency to ECO order handling (as well as internal consistency
to Exchange rules) to the benefit of investors. As such, this proposed
change would remove impediments to and perfect the mechanism of a free
and open market and a national market system.
In addition, the Exchange believes that requiring that the opening
price for a complex strategy must improve the DBBO if there is
displayed Customer interest on all legs of the strategy on the Exchange
would protect displayed Customer interest, and protect investors in
general, while ensuring a fair and orderly ECO Opening Process.
The Exchange also proposes to process ECOs received during an ECO
Opening Auction Process, as described in proposed Rule 980NYP(d)(4),
and transition to continuous trading following an ECO Opening Auction
Process, as described in proposed Rule 980NYP(d)(5), in a manner that
is identical to how ECOs are processed at the open per Arca Options
Rule 6.91P-O(d)(4) and (d)(5). The Exchange believes that using similar
functionality for ECO auctions would promote consistency across the
Exchange's options trading platforms. The Exchange believes that the
additional detail regarding the ECO Opening Auction Process for
electronic complex options trading on Pillar would promote transparency
in the Exchange's trading rules.
The Exchange further believes that the proposed Rules 980NYP(d)(1)
and (2), which describe when the Exchange would initiate an ECO Opening
Auction Process and which ECOs would be eligible to trade in that
process, would remove impediments to and perfect the mechanism of a
free and open market and a national market system because they would
provide clarity and transparency of the conditions required before the
Exchange would initiate an ECO Opening Auction Process. The Exchange
further believes that those conditions are not novel and are based on
existing conditions specified in Rule 980NY(c)(i)(A) and (B), with
additional specificity designed to promote clarity and transparency.
Accordingly, the Exchange believes that the ECO Opening Auction Process
for ECOs trading on Pillar would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because the proposed process is based on the current opening process,
including that orders would be matched based on price-time priority at
a price at which the maximum volume can be traded.
[[Page 16482]]
Execution of ECOs During Core Trading Hours
The Exchange believes that proposed Rule 980NYP(e), setting forth
the execution of ECOs during Core Trading Hours, would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the proposed functionality would
incorporate the Exchange's existing Customer priority and size pro rata
allocation model for trading ECOs and would provide that the leg
markets would have priority at a price. The Exchange believes that the
proposed rule change to add text to specify that an ECO may trade with
another ECO at the leg market price if the interest in the leg markets
is insufficient to trade at that price (i.e., the leg markets cannot
trade at that price in full or in a permissible ratio), would continue
to respect the priority of the leg markets at a price, but would also
ensure that ECO trading opportunities are maximized after eligible
interest in the leg markets is exhausted at that price resulting in
more efficient executions. The Exchange notes that this proposed
functionality--with the exception of the Exchange's distinct priority
model--is otherwise identical to Arca Options Rule 6.91P-O(e) and is
consistent with the rule of another options exchange and is therefore
not new or novel.\71\
---------------------------------------------------------------------------
\71\ See BOX Rule 7240(b)(2)(ii).
---------------------------------------------------------------------------
In addition, the Exchange believes that allowing Complex Only
Orders to trade up to the DBBO unless there is displayed Customer
interest on each leg on the Exchange at the DBBO (as described above)
would provide market participants additional trading opportunities
while still protecting Customer interest on the Exchange, which would,
in turn, remove impediments to and perfect the mechanism of a free and
open market and national market system.
The Exchange believes that it would remove impediments to and
perfect the mechanism of a free and open market and national market
system to specify that ECOs will not trade with orders in the leg
markets designated AON, FOK or with an MTS modifier (consistent with
Arca Options Rule 6.91P-O) because it would add clarity and
transparency regarding the handling of ECOs vis a vis these single-leg
order types that are conditional based on order size. The Exchange
further believes that it would remove impediments to and perfect the
mechanism of a free and open market and a national market system for
ECOs to trade as Complex Only Orders (rather than be rejected as they
would under current rules) if they have a complex strategy that could
result in a Market Maker breaching their established risk settings.\72\
This proposed process is also identical to Arca Options Rule 6.91P-
O(e)(1)(D) and is consistent with the treatment of similar ECOs on
other options markets.\73\ The Exchange further believes that it would
remove impediments to and perfect the mechanism of a free and open
market and a national market system to specify the frequency with which
the Exchange would evaluate trading opportunities for an ECO when the
leg markets update because it would promote clarity and transparency in
Exchange rules.
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\72\ See discussion infra regarding rationale for proposed Rule
980NYP(e) to restrict certain ECOs from executing as a package and
bypassing Market Maker risk settings.
\73\ See supra notes 52 and 53 [sic] (citing to Cboe Rule
5.33(g) and Nasdaq ISE Options 3, Section 14 (d)(3)(A)-(B) regarding
similar functionality).
---------------------------------------------------------------------------
Overall, the Exchange believes the proposal for ECO trading during
Core Trading Hours would help maintain a fair and orderly market and
would benefit investors by facilitating increased interaction between
ECOs (not designated as Complex Only) and leg markets interest. In
particular, such ECOs would execute against interest in the leg markets
for all of the quantity available at the best price in a permissible
ratio until the quantities remaining on such leg markets are
insufficient to execute against the ECO while respecting the spread
ratio. The Exchange believes that requiring Complex Only Orders to
improve at least a portion of the displayed Customer interest on the
leg markets when all legs of a complex strategy contain displayed
Customer interest would provide market participants with additional
trading opportunities while still protecting displayed Customer
interest on the Exchange. To the extent that this proposed handling of
ECOs on the Exchange during Core Trading Hours results in greater
liquidity (because of increased opportunity for order execution) this
increased liquidity should, in turn, enhance execution quality.
Execution of ECOs During a COA
The Exchange believes that proposed Rule 980NYP(f), setting forth
the execution of ECOs during a COA, would remove impediments to and
perfect the mechanism of a free and open market and a national market
system and promote just and equitable principles of trade because the
proposed functionality would both incorporate existing functionality to
provide that COA Orders would trade solely with other ECOs (and not the
leg markets) during the auction. The Exchange believes that relying on
the proposed DBBO (and binding such DBBO by the maximum allowable Away
Market Deviation when the Exchange BBO is used to calculate the DBBO
for a leg) would benefit market participants as the proposed operation
of the DBBO would provide additional price protection in ECO trading,
including during a COA, and would add clarity and transparency to the
rules. The Exchange also believes that the proposed text would make
clear that the COA Order would trade with the best-priced RFR Responses
received in the COA, beginning with Customer interest at a price
followed by same-priced non-Customer interest. In addition, the
proposed text would also include the additional detail that non-
Customer RFR Responses are capped at the remaining size of the COA
Order for purposes of pro rata allocation, which is consistent with
current functionality as relates to non-Customer RFR Responses.
However, on Pillar, Customer RFR Responses would trade in time and
would not be subject to a pro rata allocation, which proposed handling
is consistent with the Exchange's Customer priority model, which change
would add clarity, transparency and internal consistency to Exchange
rules.\74\
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\74\ See, e.g., Rules 964NY(b)(2)(A) (regarding priority of
displayed Customer interest based on time) and (b)(2)(D) (providing
that non-Customer interest is subjected to pro rata allocation); see
also proposed Rule 964NYP(h)(3) (regarding non-Customers in ``size
pro rata pool'') and (j) (regarding allocation of Customer and non-
Customer interest) as described in the American Pillar Priority
Filing).
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The Exchange also believes that the proposed change to add
reference to quotes (in addition to orders) to Rule 980NYP(f)(5)
(Prohibited Conduct) regarding the COA Process, would benefit market
participants as it would broaden the scope of such the prohibition.
Overall, the Exchange believes the proposed rule, which is
substantively identical to Arca Options Rule 6.91P-O(f) except for the
difference to account for the Exchange Customer priority/pro rata
allocation model, would add clarity and transparency to ATP Holders
utilizing the COA process.
In addition, the Exchange further believes that the proposed
changes to the COA process on Pillar that either differ from current
functionality or that would be new would remove impediments to and
perfect the mechanism of a free and open market and national market
system because:
[[Page 16483]]
<bullet> Requiring that a COA Order initiate a COA on arrival, or
else be treated as a standard ECO, is new under Pillar as, per the
current Rule, a COA Order may sit on the Consolidated Book until market
conditions change such that it may initiate a COA. The Exchange
believes the proposed change would provide ATP Holders with a higher
level of transparency and determinism of when a COA Order could
initiate a COA and would also encourage market participants to submit
aggressively-priced orders in order to qualify for initiation of a COA,
which better-priced interest benefits all investors and improves market
quality.
<bullet> Making explicit that COA Orders may only execute with ECOs
(and not the leg markets) until after the COA ends is consistent with
current functionality, per Rule 980NY(e)(2), but is designed to make
clear that ECOs have priority during a COA.
<bullet> Streamlining the rule text that would describe the market
events that, under Pillar, would cause an early end to a COA would
simplify the COA process and would provide ATP Holders with a higher
level of transparency and determinism regarding the handling of COA
Orders.
<bullet> Allowing a COA to end early based on the DBBO, which may
be calculated using ABBO leg prices, would benefit market participants
and promote internal consistency because, as proposed, such early
termination would prevent COA Orders from executing at prices too far
away from the prevailing market for that complex strategy. In addition,
the DBBO is used to determine the execution of ECOs on the Exchange,
including whether such ECO may initiate a COA as a COA Order. As such,
the Exchange believes it is appropriate and to the benefit of market
participants that the early termination of a COA likewise be based on
the DBBO--regardless of whether the prices used to calculate such DBBO
include (or consist entirely of) ABBO prices.
<bullet> Requiring that a COA Order end early upon receipt of a
Complex CUBE Order would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because it would allow the Exchange to simplify technology on Pillar
and would allow the Exchange to determine the viability of a CUBE Order
(i.e., whether the price of such order meets the pricing requirements
to initiate a Complex CUBE Auction per Rule 971.2NY). A COA Order that
is subject to the early end of a COA because of the arrival of a
Complex CUBE Order would still have the opportunity to trade with the
Complex CUBE Order if such COA Order is on the opposite side of the
market or with other interest once it is resting on the Consolidated
Book.
ECO Risk Checks
The Exchange believes that proposed Rule 980NYP(g), setting forth
ECO Risk Checks, which are identical to those set forth per Arca
Options Rule 6.91P-O(g), would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
promote just and equitable principles of trade because the proposed
functionality would incorporate existing risk controls, without any
substantive differences. The Exchange further believes that the
proposed changes to ECO Risk Checks on Pillar that either differ from
current functionality or would be new would remove impediments to and
perfect the mechanism of a free and open market and national market
system because:
<bullet> The Exchange believes that the new Complex Strategy Limit
(which is conceptually similar to the Complex Order Table Cap under the
current Rule) would help maintain a fair and orderly market because it
would operate as a system protection tool that enables the Exchange to
prevent any single MPID from creating more than a limited number of
complex strategies during the trading day. The proposed limits are not
novel and are based on limits imposed in Arca Options Rule 6.91P-
O(g)(1) as well as by other options exchanges on new complex order
strategies.\75\
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\75\ See supra note 61 [sic] (citing Cboe Rule 5.33(a) and MIAX
Rule 518(a)(6) regarding each exchange's ability to limit the number
of new complex strategies in their systems at any particular time).
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<bullet> The proposed ECO Price Protection on Pillar would work
similarly to how the current ECO price protection mechanism functions
on the Exchange because an ECO would be rejected if it is priced a
specified percentage away from the contra-side Complex NBB or NBO.\76\
The Exchange believes that the proposed differences on Pillar, to use
new thresholds and reference prices, would not only simplify the
existing price check, but it would also align the proposed
functionality with Arca Options Rule 6.91P-O, thus adding uniformity
across the Exchange's options platforms. Although the mechanics of the
ECO Price Protection would vary slightly from the existing Price
Protection Filter, the goal of this feature would remain the same:
prevent the execution of ECOs that are priced too far away from the
prevailing market for the same strategy and therefore potentially
erroneous to be benefit of market participants.
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\76\ As noted above, the Exchange proposes to define the Complex
NBBO as the derived national best bid and derived national best
offer for a complex strategy calculated using the NBB and NBO for
each component leg of a complex strategy. See proposed Rule
980NYP(a)(2).
---------------------------------------------------------------------------
<bullet> The proposed Pillar Complex Strategy Protections would
function similarly to the current Debit/Credit Reasonability Checks
because erroneously priced incoming ECOs would be rejected. Consistent
with current functionality, the proposed Complex Strategy Protections
are designed to prevent the execution of ECOs at prices that are
inconsistent with/not aligned with their strategies to the benefit of
market participants. The Exchange believes that the non-substantive
differences to focus on the expectation of the ECO sender and what
would result if the ECO were not rejected rather than refer to
specified debit or credit amounts as a way to determine whether a given
strategy is erroneously priced would remove impediments to and perfect
the mechanism of a free and open market system because it would promote
clarity and transparency in Exchange rules.
Rule 935NY
The Exchange believes that the proposed non-substantive change to
Rule 935NY to update references to ``COA'' (versus COA Process) and
``the Exchange,'' to delete reference to ``System,'' and add the
reference to Rule 980NYP would remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, protect investors and the public interest because the
proposed conforming changes would add clarity, transparency and
consistency to the Exchange's rules. The Exchange believes that market
participants would benefit from the increased clarity, thereby reducing
potential confusion. Similarly, the Exchange believes that adding a
cross-reference to proposed Rule 980NYP(f) and extending the exemption
from the one-second order exposure requirement of Rule 935NY would
remove impediments to and perfect the mechanism of a free and open
market and a national market system because it would promote clarity
and transparency of which Pillar rules would be eligible for the
exception specified in that Rule.
As previously stated, the Exchange believes that the proposed
Response Time Interval for a COA (i.e., no less than 100 milliseconds)
is of sufficient length so as to permit ATP Holders time to respond to
a COA. As such, the Exchange believes the proposed rule change would
provide the order sender with a timely execution of its COA
[[Page 16484]]
Order, while ensuring that there is an adequate exposure of such order.
Accordingly, the Exchange proposes to amend Rule 935NY(iii) to extend
the exemption from the one-second order exposure requirement to COA
Orders under Pillar, which exemption is consistent with the treatment
of similar orders on other options exchanges.\77\ Consistent with Rule
935NY, Commentary .01, ATP Holders would only utilize the COA where
there is a genuine intention to execute a bona fide transaction.\78\
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\77\ See supra note 68 [sic] (regarding Arca Options Rule 6.47A-
O (iii)).
\78\ See supra note 69 [sic] (regarding Rule 935NY, Commentary
.01).
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* * * * *
For the reasons set forth above, the Exchange believes proposed
Rule 980NYP, regarding ECO trading, including the priority and
execution of such ECOs vis a vis the leg markets, is consistent with
the goals of the Act to remove impediments to and to perfect the
mechanism of a free and open market and a national market system, and
to protect investors and the public interest.
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 believes that the transition to Pillar for
trading of ECOs on its options trading platform would promote
competition among options exchanges by offering a low-latency platform
that offers more deterministic outcomes for trading interest, which, in
turn, facilities ECO trading on a continuous and real-time basis on the
Exchange.
The proposed rule changes would support that inter-market
competition by allowing the Exchange to offer additional functionality
to its ATP Holders, thereby potentially attracting additional order
flow to the Exchange. Otherwise, the proposed changes are not designed
to address any competitive issues, but rather to amend the Exchange's
rules relating to trading of ECOs to support the transition to Pillar.
As discussed in detail above, with this rule filing, the Exchange is
not proposing to change its core functionality regarding the treatment
of ECOs. Rather, the Exchange believes that the proposed rule changes
would promote consistent use of terminology to support options trading
on the Exchange (and to promote uniformity with its affiliated exchange
Arca Options), making the Exchange's rules easier to navigate. The
Exchange does not believe that the proposed rule changes would raise
any intra-market competition as the proposed rule changes would be
applicable to all ATP Holders, and reflects the Exchange's existing
treatment of ECOs, without proposing any material substantive changes.
As noted herein, proposed Rule 980NYP is substantively the same as Arca
Options Rule 6.91P-O except as noted herein (including to account for
the Exchange's Customer priority/pro rata allocation model).
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 within such longer period 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 Exchange consents, the Commission will:
A. by order approve or disapprove such 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#394b4c555c145a5654545c574d4a794a5c5a175e564f"><span class="__cf_email__" data-cfemail="146661787139777b7979717a6067546771773a737b62">[email protected]</span></a>. Please include
File Number SR-NYSEAMER-2023-17.
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-NYSEAMER-2023-17. 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-NYSEAMER-2023-17, and should be
submitted on or before April 7, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\79\
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\79\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05444 Filed 3-16-23; 8:45 am]
BILLING CODE 8011-01-P
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