Notice2023-05686
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.40P-O Pertaining to Pre-Trade Risk Controls
Primary source
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Published
March 21, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 54 (Tuesday, March 21, 2023)</title>
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[Federal Register Volume 88, Number 54 (Tuesday, March 21, 2023)]
[Notices]
[Pages 17072-17077]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-05686]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97147; File No. SR-NYSEARCA-2023-24]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Rule
6.40P-O Pertaining to Pre-Trade Risk Controls
March 15, 2023.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on March 9, 2023, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 6.40P-O (Pre-Trade and
Activity-Based Risk Controls) pertaining to pre-trade risk controls to
make additional pre-trade risk controls available to Entering Firms.
The proposed rule change is available on the Exchange's website at
<a href="http://www.nyse.com">www.nyse.com</a>, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 6.40P-O (Pre-Trade and
Activity-Based Risk Controls) pertaining to pre-trade risk controls to
make additional pre-trade risk controls available to entering Firms.\4\
The Exchange originally filed on November 17, 2022 to make this change
immediately effective and that filing was published for comment on
December 5, 2022 (the ``original filing'').\5\ In light of a comment
letter dated January 5, 2023,\6\ the Exchange withdrew the original
filing and now submits this revised filing to address several of the
points raised in the comment letter.
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\4\ The term ``Entering Firm'' refers to an OTP Holder or OTP
Firm (including those acting as Market Makers). See Rule 6.40P-
O(a)(1).
\5\ See Securities Exchange Act Release No. 96829 (February 7,
2023), 88 FR 8980 (February 10, 2023) (SR-NYSEArca-2022-82).
\6\ See Letter to Vanessa Countryman, Secretary, Securities and
Exchange Commission, from Gerard P. O'Connor, Vice President and
General Counsel of Hyannis Port Research, Inc. (``HPR Letter'')
dated January 19, 2023, available at <a href="https://www.sec.gov/comments/sr-bx-2022-022/srbx2022022-20155250-323599.pdf">https://www.sec.gov/comments/sr-bx-2022-022/srbx2022022-20155250-323599.pdf</a>. HPR is a provider of
(among other things) non-exchange based risk controls solutions.
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Background and Purpose
In 2022, in connection with the Exchange's migration to Pillar and
to better assist OTP Holders and OTP Firms in managing their risk, the
Exchange adopted Rule 6.40P-O, which included pre-trade risk controls,
among other activity-based controls, wherein an Entering Firm had the
option of establishing limits or restrictions on certain of its trading
behavior on the Exchange and authorizing the Exchange to take action if
those limits or restrictions were exceeded.\7\ Specifically, the
Exchange added a Single Order Maximum Notional Value Risk Limit, and a
Single Order Maximum Quantity Risk Limit \8\ (collectively, the
``Initial Pre-Trade Risk Controls'').
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\7\ See Securities Exchange Act Release No. 94072 (January 26,
2022), 87 FR 5592 (February 1, 2022) (Notice of filing Notice of
Filing of Amendment No. 4 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 4) (SR-
NYSEArca-2021-47).
\8\ The terms ``Single Order Maximum Notional Value Risk Limit,
and ``Single Order Maximum Quantity Risk Limit'' are defined in Rule
6.40P-O(a)(2).
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The Exchange now proposes to expand the list of the optional pre-
trade risk controls available to Entering Firms by adding several
additional pre-trade risk controls that would provide
[[Page 17073]]
Entering Firms with enhanced abilities to manage their risk with
respect to orders on the Exchange. As detailed below, each of the
proposed additional risk controls is modeled on risk settings that are
already available on the Exchange's affiliate equities exchanges,
including NYSE American LLC (``NYSE American''),\9\ as well as on other
equities exchanges, including Cboe,\10\ Nasdaq,\11\ MEMX,\12\ and MIAX
Pearl.\13\
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\9\ See, e.g., Securities Exchange Act Release Nos. 96922
(February 14, 2023), 88 FR 10580 (February 14, 2023) (SR-NYSE AMER-
2023-12) (modifying NYSE American Rule 7.19E).
\10\ See Securities Exchange Act Release Nos. 80611 (May 5,
2017), 82 FR 22045 (May 11, 2017) (SR-BatsBZX-2017-24) (adopting
Rule 11.13, Interpretation and Policies .01); 80612 (May 5, 2017),
82 FR 22024 (May 11, 2017) (SR-BatsBYX-2017-07) (same); 80608 (May
5, 2017), 82 FR 22030 (May 11, 2017) (SR-BatsEDGA-2017-07) (adopting
Rule 11.10, Interpretation and Policies .01); 80607 (May 5, 2017),
82 FR 22027 (May 11, 2017) (SR-BatsEDGX-2017-16) (same).
\11\ See, e.g., Securities Exchange Act Release Nos. 82479
(January 10, 2018), 83 FR 2471 (January 17, 2018) (SR-Nasdaq-2018-
002) (adopting IM-6200-1); 90577 (December 7, 2020), 85 FR 80202
(December 11, 2020) (SR-Nasdaq-2020-79) (moving IM-6200-1 into
Equity 6, Section 5). See also Securities Exchange Act Release Nos.
82545 (January 19, 2018), 83 FR 3834 (January 26, 2018) (SR-BX-2018-
001) (adopting Rule 4765 and commentary thereto); 91830 (May 10,
2021), 86 FR 26567 (May 14, 2021) (SR-BX-2021-012) (moving Rule 4765
and commentary into Equity 6, Section 5).
\12\ See Securities Exchange Act Release No. 89581 (August 17,
2020), 85 FR 51799 (August 21, 2020) (SR-MEMX-2020-04) (adopting
Rule 11.10, Interpretation and Policies .01).
\13\ See Securities Exchange Act Release Nos. 89563 (August 14,
2020), 85 FR 51510 (August 20, 2020) (SR-PEARL-2020-03) (adopting
Rule 2618(a)(1)(A)-(D)); 96205 (November 1, 2022), 87 FR 67080
(November 7, 2022) (SR-PEARL-2022-43) (adopting subsections (E)-(H)
to Rule 2618(a)(1)).
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Like the Initial Pre-Trade Risk Controls, use of the pre-trade risk
controls proposed herein is optional, but all orders on the Exchange
would pass through these risk checks. As such, an Entering Firm that
does not choose to set limits pursuant to the new proposed pre-trade
risk controls would not achieve any latency advantage with respect to
its trading activity on the Exchange.
The HPR Letter questions why the Exchange proposes to make all
orders on the Exchange pass through its risk checks, even if a
particular firm trading on the Exchange opts not to employ the
Exchange's pre-trade risk controls. The Exchange has chosen to
implement its risk checks ``symmetrically'' to all orders because that
is the functionality that clients have specifically requested, and it
is also the recognized best practice in this area. In a September 2021
white paper entitled ``Market Lens: Exchange Best Practices for
Reducing Operational Risk at Broker-Dealers,'' \14\ Citadel Securities
requested that exchanges assist firms in mitigating operational trading
risk by instituting exchange-based risk controls, but expressly
cautioned exchanges against segmenting orders into those that would
pass through risk checks versus those that would not. Citadel noted
that such segmentation of orders would ``produce incentives for all
firms to avoid using any controls, for fear of suffering a competitive
disadvantage.'' \15\ Instead, Citadel recommended that exchanges
``ensure orders follow the same order processing logic regardless of
which options or features are enabled,'' \16\ in order to eliminate any
competitive advantage or disadvantages for clients.
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\14\ See Citadel Securities, ``Market Lens: Exchange Best
Practices for Reducing Operational Risk at Broker-Dealers''
(``Citadel white paper'') dated September 2021, available at <a href="https://www.citadelsecurities.com/wp-content/uploads/sites/2/2021/09/Citadel_Securities_Market-Lens_Sept_2021_Exchange-Best-Practices-for-Reducing-Operational-Risk.pdf">https://www.citadelsecurities.com/wp-content/uploads/sites/2/2021/09/Citadel_Securities_Market-Lens_Sept_2021_Exchange-Best-Practices-for-Reducing-Operational-Risk.pdf</a>. As Citadel put it (at page 5):
Insufficiently well-designed and tested controls can create what
amount to penalties, driven by the time and computational power
required to perform various stages of checks, if applied only to
participants who opt-in to their use. This could produce incentives
for all firms to avoid using any controls, for fear of suffering a
competitive disadvantage. One way to address this, while maintaining
choice for member firms, is to ensure orders follow the same order
processing logic regardless of which options or features are
enabled--similar to how all colocated servers in an equalized data
center incur the same cabling distance to the matching engine,
regardless of their physical proximity to it. Additionally,
exchanges should vigorously test controls to ensure no latency
penalty exists in practice. Exchanges should actively publicize the
net-neutral risk controls.
\15\ Id. at 5.
\16\ Id.
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This is the model that the Exchange used in building the Initial
Pre-Trade Risk Controls that the Commission approved in 2020,\17\ and
is the same model that the Exchange proposes would apply to the
additional pre-trade risk checks proposed here. There is nothing unique
about this approach. Functionality on the Exchange's trading systems is
often applied uniformly to all orders and quotes, regardless of whether
a particular client has opted to use that functionality for a
particular order or quote. For example, the Exchange's limit order
price protection applies generally to trading on the Exchange and
orders or quotes with limit prices are not processed more slowly than
those without. Similarly, the Exchange's trading systems check all
orders and quotes for a variety of details and modifiers (e.g.,
duplicative client order check, order capacity check, and self-trade
prevention).
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\17\ See Securities Exchange Act Release No. 88776 (April 29,
2020), 85 FR 26768 (May 5, 2020) (SR-NYSE-2020-17) (order approving
pre-trade risk controls on the Exchange's affiliate exchange, the
New York Stock Exchange LLC). The Commission concluded that ``the
proposed rule change is reasonably designed to provide members with
optional tools to manage their credit risk.'' Id. at 26770.
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The Exchange understands that the risk checks of other exchanges,
on which the proposed rule is modeled, also apply symmetrically to all
orders.\18\ The Exchange also notes that the Citadel white paper cited
above was written ``in collaboration with several major exchanges,
including NYSE, Nasdaq, MIAX, MEMX, and BOX,'' suggesting that some or
all of those exchanges may also employ the symmetrical application of
risk checks that the Citadel white paper recommends.\19\
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\18\ See, e.g., MEMX Risk FAQ, dated October 13, 2020, available
at <a href="https://info.memxtrading.com/us-equities-faq/#Bookmark21">https://info.memxtrading.com/us-equities-faq/#Bookmark21</a> (``The
risk checks are applied in a consistent manner to all participant
orders in order to mitigate risk without incurring latency
disadvantage.''); MIAX Pearl Equities Exchange User Manual, updated
October 2022, available at <a href="https://www.miaxequities.com/sites/default/files/website_file-files/MIAX_Pearl_Equities_User_Manual_October_2022.pdf">https://www.miaxequities.com/sites/default/files/website_file-files/MIAX_Pearl_Equities_User_Manual_October_2022.pdf</a>, at 29 (stating
that all but two of the exchange's 14 risk checks ``are latency
equalized i.e. there is no latency penalty for a member when opting
into and leveraging a risk protection available on the exchange when
entering an order as compared to a member not opting into the risk
protection when entering an order'').
\19\ See Citadel white paper, supra note 14, at 2.
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The Exchange stated in its original filing for the current proposal
that it expects that any latency added by the proposed additional pre-
trade risk controls would be de minimis. Specifically, the Exchange
expects that the latency added by the combination of the Initial Pre-
Trade Risk Controls plus the proposed additional pre-trade risk
controls would be significantly less than one microsecond.
Nevertheless, seizing on the phrase ``de minimis,'' HPR argues that the
Commission's 2016 interpretation regarding automated quotations under
Regulation NMS \20\ applies here and should require the Exchange to
justify this de minimis latency change in a number of ways.\21\ But
that Commission interpretation pertains to ``intentional access
delays,'' like speed bumps--not to the issues here. The Exchange's pre-
trade risk controls are not an intentional access delay,\22\ but a
functional enhancement to the Exchange's trading systems, and, like any
change to a trading system's
[[Page 17074]]
function or performance, may impact the overall speed of trading on the
Exchange in ways that can increase or decrease overall latency. It is
within the Exchange's prerogative as a market center in the current
hotly competitive environment to assess whether and when to make
functional enhancements to its trading systems. What is key under the
Exchange Act is that any anticipated latency effects of such
enhancements are applied uniformly, to all orders of all market
participants, in a non-discriminatory way--as the risk controls
proposed here would be. If market participants find that the latency
cost of such enhancements is not justified by the additional
functionality they offer, such market participants will vote with their
feet and send their order flow elsewhere.
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\20\ See also Securities Exchange Act Release No. 78102 (June
17, 2016), 81 FR 40785 (June 23, 2016) (File No. S7-03-16)
(Commission Interpretation Regarding Automated Quotations Under
Regulation NMS), available at <a href="https://www.sec.gov/rules/interp/2016/34-78102.pdf">https://www.sec.gov/rules/interp/2016/34-78102.pdf</a>.
\21\ HPR Letter, supra note 6 at 5-6.
\22\ Indeed, the Commission did not treat any of the other
exchanges' filings for pre-trade risk controls listed above in notes
9-13 as ``intentional access delays.''
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With one exception, the additional risk checks proposed here would
be a functional enhancement to the Exchange's Pillar gateway \23\ and
the risk checks would be applied to all orders and quotes on the
Exchange. While the Exchange strongly believes that symmetrical
application of all pre-trade risk controls is the appropriate approach
(as explained above), providing customers an opt-out ability would
require the Exchange to provide new order/quote entry ports that would
bypass the evaluation of such pre-trade risk protections. Providing
such new ports would burden customers with additional costs to purchase
such ports and to migrate their order flow to such ports. The Exchange
does not believe that the added expense of creating such new ports (on
the part of the Exchange) or of purchasing and migrating to them (on
the part of customers) is justified in light of the de minimis latency
imposed by the pre-trade risk controls at issue.
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\23\ The one exception is the proposed pre-trade risk control in
paragraph (a)(2)(A)(ii), discussed below, which would permit an
Entering Firm to set dollar-based or percentage-based controls as to
the price of an order that are equal to or more restrictive than the
levels set out in Rule 6.62P-O(a)(3)(A) regarding Limit Order Price
Protection. This risk check, like the Exchange's Limit Order Price
Protection, is implemented in the matching engine.
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Proposed Amendment to Rule 6.40P-O
To accomplish this rule change, the Exchange proposes to amend the
definition of the term ``Pre-Trade Risk Controls'' set forth in Rule
6.40P-O(a)(2) to adopt the definition of ``Single-Order Risk
Controls,'' which controls would be listed in proposed paragraph (A) to
Rule 6.40P-O(a)(2). As proposed, the ``Single-Order Risk Controls''
would include the already-defined risk controls of the Single Order
Maximum Notional Value Risk Limit and Single Order Maximum Quantity
Risk Limit (collectively referred to herein as the ``existing Single-
Order Risk Checks''), with non-substantive changes to streamline the
descriptions of these controls into new paragraph (i) of proposed Rule
6.40P-O(a)(2)(A).\24\ However, because of a lack of demand for the
option to apply the existing Single-Order Risk Checks to Market Maker
quotes, the Exchange proposes to discontinue functionality supporting
this optional feature.
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\24\ See proposed Rule 6.40P-O(a)(2)(A)(i) (setting forth
``controls related to the maximum dollar amount for a single order
to be applied one time (`Single Order Maximum Notional Value Risk
Limit') and the maximum number of contracts that may be included in
a single order before it can be traded (`Single Order Maximum
Quantity Risk Limit'). Orders designated GTC will be subject to
these checks only once.'') Consistent with the foregoing changes,
the Exchange proposes to delete current paragraph (B) to Rule 6.40P-
O(a)(2)(B). See id.
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In the addition, the Exchange proposes to add paragraphs
(a)(2)(A)(ii) through (v) to enumerate the proposed new Single-Order
Risk Controls, as follows:
(ii) controls related to the price of an order or quote (including
percentage-based and dollar-based controls);
(iii) controls related to the order types or modifiers that can be
utilized;
(iv) controls to restrict the options class transacted; and
(v) controls to prohibit duplicative orders.
Each of the new Single-Order Risk Controls in proposed paragraph
(a)(2)(A)(ii)-(v) is substantively identical to risk settings already
in place on the Exchange's affiliate equities exchange, NYSE American
as well as those on other equities exchanges, including Cboe, Nasdaq,
MEMX, and MIAX Pearl,\25\ except that the proposed controls account for
options trading, such as including reference to ``an order or quote''
versus ``an order'' and reference to restrictions on trading in an
``options class'' versus on ``the types of securities transacted
(including but not limited to restricted securities).'' \26\ As such,
the proposed new optional Pre-Trade Risk Controls are familiar to
market participants and are not novel.
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\25\ See supra notes 9-13.
\26\ See proposed Rule 6.40P(a)(2)(A)(ii) and (a)(2)(A)(iv) as
compared to NYSE American Rule 7.19E(b)(2)(B) and (b)(2)(F),
respectively.
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The Exchange proposes to modify current paragraph (b)(2) regarding
the setting and adjusting of the Pre-Trade Risk Controls to state that,
in addition to Pre-Trade Risk Controls being available to be set at the
MPID level or at one or more sub-IDs associated with that MPID, or
both, that Pre-Trade Risk Controls to restrict the options class(es)
transacted must be set per option class.\27\
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\27\ See, e.g., Rule 7.19E(d)(2) (specifying that pre-trade risk
controls related to transacting in restricted securities must be set
per symbol).
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The Exchange proposes to modify paragraph (c)(1) regarding ``Breach
Action for Pre-Trade Risk Controls.'' First, the Exchange proposes to
specify that ``[a] Limit Order that breaches any Single-Order Risk
Control will be rejected.'' \28\ The proposed functionality is
consistent with the treatment of Limit Orders that breach the existing
Single Order Risk Checks and simply extends the application of the
breach action to the newly proposed Single-Order Risk Controls. Next,
proposed Rule 6.40P-O(c)(1)(A)(ii) specifies that ``[a] Market Order
that arrives during a pre-open state will be cancelled if the quantity
remaining to trade after an Auction breaches the Single Order Maximum
Notional Value Risk Limit,'' which functionality is identical to
treatment of such interest under the current Rule.\29\ Proposed Rule
6.40P-O(c)(1)(A)(ii) further specifies that ``[a]t all other times, a
Market Order that triggers or breaches any Single-Order Risk Control
will be rejected.'' \30\ The proposed functionality is consistent with
the treatment of Market Orders (that arrive other than during a pre-
open state) that breach the existing Single Order Risk Checks and
simply extends the application of the breach action to the newly
proposed Single-Order Risk Controls. Further, proposed Rule 6.40P-
O(c)(1)(A)(iii) addresses the breach action relevant to the new Single-
Order Risk Control set forth in proposed Rule 6.40P-O(a)(2)(A)(ii)
(i.e., a breach of controls related to the price of an order or quote
including percentage-based and dollar-based controls). As proposed, a
Limit Order or quote that would breach a price control under paragraph
(a)(2)((A)(ii) would be rejected or cancelled as specified in Rule
6.62P-O (a)(3)(A) (Limit Order Price Protection).\31\
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\28\ See proposed Rule 6.40P(c)(1)(A)(i).
\29\ See Rule 6.40P(c)(1)(A)(i) (providing, in relevant part,
that ``[a] Market Order that breaches the designated limit of a
Single Order Maximum Quantity Risk Limit'' will be ``canceled if the
order was received during a pre-open state and the quantity
remaining to trade after an Auction concludes breaches the
designated limit.'').
\30\ See proposed Rule 6.40P(c)(1)(A)(ii).
\31\ See proposed Rule 6.40P(c)(1)(A)(iii).
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[[Page 17075]]
Finally, the Exchange proposes to add new Commentary .02 to specify
the interplay between the Exchange's Limit Order Price Protection
(``LOPP'') functionality and the price controls that may be set by an
Entering Firm pursuant to proposed paragraph (a)(2)(A)(ii). Proposed
Commentary .02 specifies that an Entering Firm may set price controls
under paragraph (a)(2)(A)(ii) that are equal to or more restrictive
than levels set by the Exchange LOPP functionality.
Continuing Obligations of OTP Holders Under Rule 15c3-5
The proposed Pre-Trade Risk Controls described here are meant to
supplement, and not replace, the OTP Holders' own internal systems,
monitoring, and procedures related to risk management. The Exchange
does not guarantee that these controls will be sufficiently
comprehensive to meet all of an OTP Holder's needs, the controls are
not designed to be the sole means of risk management, and using these
controls will not necessarily meet an OTP Holder's obligations required
by Exchange or federal rules (including, without limitation, the Rule
15c3-5 under the Act \32\ (``Rule 15c3-5'')). Use of the Exchange's
Pre-Trade Risk Controls will not automatically constitute compliance
with Exchange or federal rules and responsibility for compliance with
all Exchange and SEC rules remains with the OTP Holder.\33\
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\32\ See 17 CFR 240.15c3-5.
\33\ See also Commentary .01 to Rule 6.40P-O, which provides
that the Pre-Trade Risk Controls set forth in Rule 6.40P-O ``are
meant to supplement, and not replace, the OTP Holder's or OTP Firm's
own internal systems, monitoring, and procedures related to risk
management and are not designed for compliance with Rule 15c3-5
under the Exchange Act. Responsibility for compliance with all
Exchange and SEC rules remains with the OTP Holder or OTP Firm.'').
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Timing and Implementation
The Exchange anticipates completing the technological changes
necessary to implement the proposed rule change in the second quarter
of 2023, but in any event no later than June 30, 2023. The Exchange
anticipates announcing the availability of the Pre-Trade Risk Controls
introduced in this filing by Trader Update in the first quarter of
2023.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\34\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\35\ in particular, because it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest,
and because it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.\36\
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\34\ 15 U.S.C. 78f(b).
\35\ 15 U.S.C. 78f(b)(5).
\36\ HPR argues that the Exchange should be compelled to submit
this proposal as a fee filing pursuant to Section 19(b)(3)(A)(ii) of
the Exchange Act. See HPR Letter, supra note 6, at 6-8. But that
provision only applies to rule filings ``establishing or charging a
due, fee, or other charge imposed by the [SRO] . . . .'' Because the
Exchange does not propose to charge any fees for the proposed
services here, Section 19(b)(3)(A)(ii) is inapplicable. Notably, the
Commission did not treat any of the other exchanges' filings for
pre-trade risk controls listed above in notes 9-13 as fee filings.
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Specifically, the Exchange believes that the proposed rule change
will remove impediments to and perfect the mechanism of a free and open
market and a national market system because the proposed optional
additional Pre-Trade Risk Controls would provide Entering Firms with
enhanced abilities to manage their risk with respect to orders or
quotes on the Exchange. The proposed additional Pre-Trade Risk Controls
are not novel; they are based on existing risk settings already in
place on NYSE American, as well as those on Cboe, Nasdaq, MEMX and MIAX
Pearl equities exchanges,\37\ and market participants are already
familiar with the types of protections that the proposed risk controls
afford. Moreover, the proposed new Single-Order Risk Controls (like the
existing Single-Order Risk Checks) are options and, as such, Entering
Firms are free to utilize or not at their discretion. As such, the
Exchange believes that the proposed additional Pre-Trade Risk Controls
would provide a means to address potentially market-impacting events,
helping to ensure the proper functioning of the market.
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\37\ See supra notes 9-13.
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In addition, the Exchange believes that the proposed rule change
will protect investors and the public interest because the proposed
additional Pre-Trade Risk Controls are a form of impact mitigation that
will aid Entering Firms in minimizing their risk exposure and reduce
the potential for disruptive, market-wide events. The Exchange
understands that OTP Holders implement a number of different risk-based
controls, including those required by Rule 15c3-5. The controls
proposed here will serve as an additional tool for Entering Firms to
assist them in identifying any risk exposure. The Exchange believes the
proposed additional Pre-Trade Risk Controls will assist Entering Firms
in managing their financial exposure which, in turn, could enhance the
integrity of trading on the securities markets and help to assure the
stability of the financial system.
The Exchange believes that the proposed rule change will remove
impediments to and perfect the mechanism of a free and open market and
a national market system by permitting Entering Firms to set price
controls under paragraph (a)(2)(A)(ii) that are equal to or more
restrictive than the levels established in the Exchange's LOPP
functionality, which protects from aberrant trades, thus improving
continuous trading and price discovery. To the extent that Entering
Firms would like to further manage their exposure to aberrant trades,
this proposed functionality affords such Firms the ability to set price
controls at levels that are more restrictive than the LOPP levels.
Additionally, because price controls set by an Entering Firm under
paragraph (a)(2)(A)(ii) would function as a form of limit order price
protection, the Exchange believes that it would remove impediments to
and perfect the mechanism of a free and open market and a national
market system for an order that would breach such a price control to be
rejected or cancelled as specified per Rule 6.62P-O(a)(3)(A) regarding
the LOPP.
Finally, the Exchange believes that the proposed rule change does
not unfairly discriminate among the Exchange's OTP Holders because use
of the proposed additional Pre-Trade Risk Controls is optional and is
not a prerequisite for participation on the Exchange. In addition,
because all orders on the Exchange would pass through the risk checks,
there would be no difference in the latency experienced by OTP Holders
who have opted to use the proposed additional Pre-Trade Risk Controls
versus those who have not opted to use them. The Exchange does not
believe it is unfairly discriminatory to have all orders on the
Exchange pass through the risk checks, even for OTP Holders or OTP
Firms that opt not to use the Exchange's pre-trade risk controls. As
described above, the proposed risk checks are a functional enhancement
to the Exchange's trading systems that the Exchange proposes to apply
uniformly to all orders and quotes on the Exchange; by applying them
uniformly, the Exchange would avoid producing incentives for all firms
to
[[Page 17076]]
avoid using the risk controls for fear of suffering a competitive
disadvantage. Additionally, any latency imposed by the pre-trade risk
controls proposed here is de minimis and would not have a material
impact on the order flow of OTP Holders and OTP Firms that choose to
employ non-exchange providers (such as HPR) to provide them with risk
control solutions.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. In fact, the Exchange
believes that the proposal will have a positive effect on competition
because, by providing Entering Firms additional means to monitor and
control risk, the proposed rule will increase confidence in the proper
functioning of the markets. The Exchange believes the proposed
additional Pre-Trade Risk Controls will assist Entering Firms in
managing their financial exposure which, in turn, could enhance the
integrity of trading on the securities markets and help to assure the
stability of the financial system. As a result, the level of
competition should increase as public confidence in the markets is
solidified.
In its letter, HPR contends that it is an unnecessary burden on
competition for the Exchange to have all orders--even the orders of OTP
Holders and OTP Firms that choose not to use the proposed pre-trade
risk controls--to pass through the Exchange's checks because doing so
will reduce customer demand for HPR's risk control services. HPR argues
that by imposing latency from its risk checks on all orders, the
Exchange has created a ``latency tax'' that would encourage customers
to use the Exchange's risk controls instead of third-party risk
solutions like HPR's.\38\ These assertions are factually incorrect and
obscure the very real differences between the Exchange's pre-trade risk
controls and the services that HPR offers. The Exchange understands
that HPR's enterprise risk management solutions, like those of its
competitors, permit its clients to track aggregated risk across all
markets and provide consolidated risk management capabilities. In
contrast, exchange based-solutions such as the Exchange's only offer
tools to manage risk across the Exchanges and its affiliate exchanges
(e.g., the NYSE Group exchanges). The Exchange's proposed risk checks
would not and could not replace HPR's far broader offering. In
addition, as the Exchange made clear in its filing for the Initial Pre-
Trade Risk Controls and repeats here, the Exchange's pre-trade risk
controls are not a complete Rule 15c3-5 solution. The Exchange's risk
controls are meant to supplement, and not replace, an OTP Holder's or
OTP Firm's own internal risk management systems (which firms may
outsource to providers like HPR), and the Exchange's controls are not
designed to be the sole means of risk management that any firm uses.
Additionally, any latency imposed by the proposed pre-trade risk
controls proposed here is de minimis and would not have a material
impact on the order flow of OTP Holders and OTP Firms that choose to
employ non-exchange providers (such as HPR) to provide them with risk
control solutions.
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\38\ See HPR Letter, supra note 6, at 4 (claiming the Exchange
has ``architected the proposed risk controls to give [itself] an
unfair and anti-competitive latency advantage over non-exchange
offerings provided by broker-dealers or vendors such as HPR.'').
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Finally, the Exchange believes it would be an unfair burden on
competition for the Commission to suspend and ultimately disapprove the
pre-trade risk controls proposed here, where substantially identical
controls are already in place on numerous of the Exchange's competitor
exchanges.\39\ Since 2017, equities exchanges have been adding pre-
trade risk controls to their trading systems. And, in 2022, the
Exchange adopted the Initial Pre-Trade Risk Controls. It would be an
unjustifiable burden on competition and on the Exchange for the
Commission to permit all equities exchanges to offer such functionality
except for the Exchange and its affiliates mentioned in the HPR Letter.
Specifically, the Exchange would be at a significant competitive
disadvantage vis-[agrave]-vis other equities exchanges that already
offer the type of pre-trade risk controls proposed in this filing as
OTP Holders and OTP Firms may choose to direct order flow away from the
Exchange until it is able to offer such competing pre-trade risk
controls.
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\39\ See supra notes 9-13.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \40\ and Rule 19b-4(f)(6) thereunder.\41\
Because the proposed rule change does not: (i) significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\42\
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\40\ 15 U.S.C. 78s(b)(3)(A)(iii).
\41\ 17 CFR 240.19b-4(f)(6).
\42\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \43\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\43\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f785829b92da94989a9a92998384b7849294d9909881"><span class="__cf_email__" data-cfemail="fb898e979ed6989496969e958f88bb889e98d59c948d">[email protected]</span></a>. Please include
File Number SR-NYSEARCA-2023-24 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to: Secretary,
Securities and Exchange
[[Page 17077]]
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEARCA-2023-24. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEARCA-2023-24 and should be submitted
on or before April 11, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05686 Filed 3-20-23; 8:45 am]
BILLING CODE 8011-01-P
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