Notice2024-03100
Self-Regulatory Organizations; New York Stock Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Regarding Enhancements to Its DMM Program
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Published
February 15, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 32 (Thursday, February 15, 2024)</title>
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[Federal Register Volume 89, Number 32 (Thursday, February 15, 2024)]
[Notices]
[Pages 11893-11896]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-03100]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99511; File No. SR-NYSE-2023-36]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change Regarding Enhancements to Its DMM Program
February 9, 2024.
I. Introduction
On October 23, 2023, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend its Designated Market Maker (``DMM'')
program. The proposed rule change was published for comment in the
Federal Register on November 13, 2023.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98869 (November 6,
2023), 88 FR 77625 (November 13, 2023) (SR-NYSE-2023-36)
(``Notice'').
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On December 13, 2023, the Commission extended to February 11, 2024,
the time period in which to approve the proposal, disapprove the
proposal, or institute proceedings to determine whether to approve or
disapprove the proposal.\4\ The Commission has received one comment
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\4\ See Securities Exchange Act Release No. 99161 (December 13,
2023), 88 FR 87829 (December 19, 2023).
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[[Page 11894]]
on the proposal.\5\ This order institutes proceedings under Section
19(b)(2)(B) of the Act \6\ to determine whether to approve or
disapprove the proposal.
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\5\ See Letter from Thomas M. Merritt, Deputy General Counsel,
Virtu Financial, Inc. (``Virtu'') dated January 29, 2024. Virtu
supports the proposed rule change and states that it will: (i) level
the playing field regarding access to information among different
market participants; (ii) eliminate restrictions on cell phone
communication from the floor and the prohibition on aggressing
transactions during the close that will ensure that all participants
engaging in market making are on the same footing; and (iii) attract
new DMMs.
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposal
As described in more detail in the Notice,\7\ the Exchange proposes
changes to its DMM program by (1) amending Rule 7.35B(d)(2) (DMM-
Facilitated Closing Auctions); Rule 36 (Access to and Communication
with Floor); Rule 76 (``Crossing'' Orders); Rule 98 (Operation of a DMM
Unit); Rule 103 (Registration and Capital Requirements of DMMs and DMM
Units); Rule 103B (Security Allocation and Reallocation); and Rule 104
(Dealings and Responsibilities of DMMs); (2) deleting Rule 104A (DMMs--
General) and Rule 106A (Taking Book or Order of Another Member); and
(3) adopting a new Rule 104B establishing the DMM Unit Introductory
Program in ETPs.
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\7\ See Notice, supra note 3.
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The Exchange proposes to amend Rule 104 to eliminate DMMs' access
to aggregate order information during Core Trading Hours \8\ with
exception for reopenings and to limit DMMs' ability to utilize and
disseminate this information to other market participants on the
Trading Floor \9\ when it is provided by the Exchange.\10\
Specifically, in order to facilitate openings and reopenings, the
Exchange proposes to limit DMMs' access to non-public aggregate order
information on an as-needed basis and only before the open or until a
security opens for trading. Moreover, DMMs' access to aggregate order
information to facilitate the Closing Auction \11\ would be only on an
as-needed basis and outside Core Trading Hours. Further, revised Rule
104 would continue to permit DMMs to provide aggregate order
information and post-trade information in response to an inquiry from a
Floor broker, provided that aggregate order information can only be
provided in response to an inquiry before the open or until a security
opens for trading, or while trading is halted and only until a security
is reopened for trading.
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\8\ See Rule 1.1(d) for the definition of ``Core Trading
Hours.''
\9\ See Rule 6A for the definition of ``Trading Floor.''
\10\ See Notice, supra note 3 at 77631.
\11\ See Rule 7.35(a)(1)(C) for the definition of ``Closing
Auction.''
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The Exchange also proposes to amend Rule 76 to permit the Exchange
to announce manual cross transactions. Namely, rather than perpetuating
the current practice of a Floor broker verbally announcing a cross
trade at a DMM post/panel and having a DMM acknowledge the Floor broker
announcement, the Exchange would announce and acknowledge Floor broker
cross transactions, thereby eliminating any interaction between a Floor
broker and a DMM during cross transactions.
Based on these changes to Rules 104 and 76, the Exchange believes
it would be appropriate to remove the restrictions in Rule 36 on a DMM
unit's communications from the Trading Floor and the specific Rule 98
restrictions arising from the presence of Floor-based non-public order
information. The Exchange also believes that these changes justify the
elimination of the prohibition on Aggressing Transactions \12\ in the
final ten minutes of the trading day.
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\12\ See Rule 104(d)(1)(A) for the definition of ``Aggressing
Transaction.''
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The Exchange proposes to amend Rule 36 to permit DMM units to use
any telephone registered with the Exchange, including cellular or
wireless telephones, to communicate with persons off the Trading Floor.
A DMM would be permitted to engage in direct voice communication to an
off-Floor location with any individual with whom telephone
communications are permitted under Rule 98. DMM units would be required
to: (i) register, prior to use any new telephone, including cellular or
wireless phones, to be used on the Trading Floor; (ii) maintain records
of the use of telephones and all other approved alternative
communication devices, including logs of calls placed; and (iii)
establish policies and procedures reasonably designed to ensure that
use of telephones and alternative communication devices is consistent
with all SEC rules and Exchange rules.
In addition, the Exchange proposes to delete current Rule 36.30
permitting DMMs to use a telephone connection or order entry terminal
at the DMM's post to enter a proprietary order in an Investment Company
Unit \13\ or a Trust Issued Receipt \14\ in another market center in
either a component security of an Investment Company Unit or Trust
Issued Receipt, or in an options or futures contract related to such
securities.
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\13\ See Rule 5.2(j)(3) for the definition of ``Investment
Company Unit.''
\14\ See Rule 8.200 for the definition of ``Trust Issued
Receipt.''
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And related to the proposed changes to Rule 36, the Exchange also
proposes to amend Rule 104(g) to permit employees of a DMM unit to
communicate with a listed issuer contact from the Trading Floor via
telephone or written electronic communications, consistent with Rule
36.30 and Rule 98.
The Exchange also proposes to amend Rue 98 to, among other things,
delete the definition of ``Floor-based non-public order,'' \15\ and
delete the requirement to protect against the misuse of Floor-based
non-public order information and the requirement to only permit access
to Floor-based non-public order information to Floor-based DMM
employees and individuals responsible for the direct supervision of the
DMM's Floor-based operations. Instead, DMMs would be prohibited from
misusing material, non-public information.
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\15\ Rule 98(b)(4) defines ``Floor-based non-public order'' to
mean any order, whether expressed electronically or verbally, or any
information regarding a reasonably imminent non-public transaction
or series of transactions entered or intended for entry or execution
on the Exchange and which is not publicly available on a real-time
basis via an Exchange-provided datafeed, such as NYSE
OpenBook[supreg] or otherwise not publicly available. Non-public
orders include order information at the opening, re-openings, the
close, and order information in Exchange systems that is not
available via NYSE OpenBook[supreg].
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In addition, the Exchange proposes to redefine an Aggressing
Transaction in Rule 104 as a purchase (sale) that reaches across the
market to trade as the contra-side of the Exchange published bid
(offer) priced above (below) the last consolidated trade. Currently,
Rule 104 defines an Aggressing Transaction as a DMM unit transaction
that is a purchase (sale) that reaches across the market to trade as
the contra-side to the Exchange published offer (bid), and is priced
above (below) the last differently-priced trade on the Exchange and
above (below) the last differently-priced published offer (bid) on the
Exchange.
The Exchange also proposes to make DMM re-entry, following an
Aggressing Transaction, on the opposite side of the market at or before
the applicable Price Participation Point (``PPP'') \16\ for that
security to be more deterministic. Namely, rather than the current
requirement that DMMs re-enter ``commensurate with the size of the
[[Page 11895]]
Aggressing Transaction,'' the Exchange proposes to require re-entry to
be in the same size as the Aggressing Transaction. Further, the
Exchange proposes to eliminate DMMs' restriction against Prohibited
Transactions--the prohibition on DMMs engaging in Aggressing
Transactions during the last ten minutes prior to the scheduled close
of trading.
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\16\ Rule 104(d)(3)(A) (PPP Guidelines) states that ``[t]he
Exchange will periodically issue PPP Guidelines that identify the
price at or before which a DMM unit is expected to re-enter the
market following an Aggressing Transaction. PPPs are only minimum
guidelines and compliance with them does not guarantee that a DMM
unit is meeting its obligations.''
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Finally, the Exchange proposes a DMM Unit Introductory Program in
ETPs (the ``Program''), which would be set forth in proposed Rule
104B(a). The Program would be open to all member organizations in good
standing registered as a non-DMM Market Maker or a Supplemental
Liquidity Providers on the Exchange. The Program is limited to exchange
traded products and is designed to provide eligible member
organizations with a 12-month ramp up period to becoming fully
operational, Trading Floor-based DMM units. As proposed, during the 12-
month Program period, DMM units and their DMMs would be subject to the
duties and responsibilities set forth in Rules 104 and 98. Further,
DMMs operating in the Program would be permitted to conduct business
for the DMM unit such as entering orders and quotations for the account
of the DMM unit during the Program. In addition, the proposed rule
would provide that during the 12-month Program period, DMM units would
not be required to comply with the requirements of Rule 35.20 \17\
regarding personnel available to DMM units on the Trading Floor.\18\
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\17\ Rule 35.20 requires each DMM unit to have (1) at least one
employee approved by the Exchange for admittance to the Floor for
every Post space assigned to the unit, and (2) an adequate number of
additional approved employees to provide proper service during the
trading day.
\18\ The Exchange also proposes other changes, including: (1)
deleting Rules 104(e) (Trading Floor Functions of DMMs) and (f)
(Temporary DMMs); (2) deleting Rule 103B(III)(C) (DMM One Year
Obligation); (3) deleting Rule 7.35(d)(2) (Publication of Manual
Closing Imbalance); (4) deleting Rule 104A, Supplementary Material
.50 (Equity Trading Reports); and (5) other technical changes
described in the Notice.
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III. Proceedings to Determine Whether To Disapprove SR-NYSE-2023-36 and
Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \19\ to determine whether the proposal should be
disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the proposal, as
discussed below. Institution of disapproval proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, as described in greater detail
below, the Commission seeks and encourages interested persons to
provide additional comment on the proposal.
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\19\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act,\20\ which requires that the rules of an exchange be
designed, among other things, to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
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. In addition, Section 6(b)(5) of the
Act prohibits the rules of an exchange from being designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
Further, Section 6(b)(8) of the Act requires that the rules of an
exchange not impose any burden on competition that is not necessary or
appropriate under the Act.\21\
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\20\ 15 U.S.C. 78f(b)(5).
\21\ 15 U.S.C. 78f(b)(8).
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The Exchange proposes a comprehensive change to its rules
pertaining to the obligations of DMMs based on its contemporaneous
proposal to eliminate DMMs' access to intraday aggregate order
information except under certain circumstances and DMMs' interaction
with Floor brokers during cross transactions. Chief among the changes,
the Exchange proposes to eliminate the Prohibited Transactions rule;
eliminate rules designed to mitigate concerns related to DMM
communication from the Trading Floor with certain off-Floor locations;
and eliminate rules designed to mitigate the misuse of Floor-based non-
public order information.
Given the scope of changes proposed by the Exchange, the Commission
analyzes the proposal in the context of the unique role played by DMMs
on the Exchange, namely their role to assist in the maintenance of a
fair and orderly market in securities for which they have been assigned
responsibility as the DMM (e.g., the maintenance of price continuity
with reasonable depth) and to facilitate certain transactions in their
assigned securities, most notably the opening, reopening, and closing
auctions.\22\ And because the Exchange's proposal would significantly
alter the benefits and obligations of DMMs, the Commission takes into
consideration questions as to whether the Exchange rules, as amended,
would continue to strike an appropriate balance between such benefits
and obligations, consistent with Section 6 of the Act.
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\22\ DMMs also have the affirmative obligation to maintain
quotes in their assigned securities at the inside market a specified
percentage of time. See Rule 104.
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One obligation that the Exchange proposes to delete is the negative
obligation the Exchange currently imposes on DMMs to restrict
aggressive trading in the last ten minutes before the close, i.e.,
Prohibited Transactions. This raises questions as to whether the
elimination of Prohibited Transactions is both consistent with a DMM's
obligation to maintain a fair and orderly market and, more generally,
designed to prevent fraudulent or manipulative acts and practices.
According to the Exchange, the deletion is appropriate because:
removing DMMs' intraday access to aggregate order information would
place DMMs on the same informational footing as all other market
participants; the proposal would retain the re-entry requirement
following an Aggressing Transaction; and there may be a variety of
reasons related to the DMM unit's obligations to the marketplace for a
DMM to quote aggressively in its assigned securities at the close. In
light of the Exchange's arguments, the Commission seeks comments on
whether commenters agree. Has the Exchange adequately justified how
allowing DMMs to aggressively take liquidity and potentially move
prices on the Exchange immediately before the closing auction is
consistent with the Act and DMM obligations under Exchange rules?
Another issue raised by the Exchange's proposal is whether the
changes are adequately designed to mitigate concerns related to access
by DMMs to non-public information from the Trading Floor. According to
the Exchange, based on its proposal to limit DMMs' access to aggregate
order information intraday, and to remove DMMs from involvement in
manual cross transactions, it is appropriate to delete the restrictions
on DMM communications from the Trading Floor, including restrictions
involving Floor-based non-public order information. Applying the same
rationale, the Exchange also proposes to delete its rule prohibiting
DMM communications with a listed issuer contact from the Trading Floor
via
[[Page 11896]]
telephone, and proposes instead to rely on the requirement that DMMs
comply with current Rule 98 and the Exchange's proposed general
requirement that DMM units establish policies and procedures reasonably
designed to ensure that the use of communication devices is consistent
with all SEC rules and Exchange rules. DMMs, however, have a unique
position on the Trading Floor and would still have access to non-public
aggregate order information--namely before the open or until a security
opens for trading; while trading is halted and until a security is
reopened for trading; and after the end of Core Trading Hours. DMMs
would also continue to have the ability to observe negotiations and
other interactions on the Trading Floor. Accordingly, Commission seeks
comments regarding the sufficiency of the remaining Exchange rules to
address concerns regarding the unique access to, and potential misuse
of, non-public trading, issuer, and other information, including the
Floor-based non-public order information as it is currently defined in
the rules. Do the changes to remove DMMs' access to intraday aggregate
order information and eliminate DMMs' involvement in cross transactions
sufficiently limit DMMs ability to obtain non-public information such
that prescriptive restrictions on DMM communication from the Trading
Floor, including those listed issuer contact, is no longer necessary?
Do they mitigate concerns that restrictions pertaining to Floor-based
non-public order information are meant to address?
In addition to the above requests for comments, the Commission also
seeks comments regarding the Exchange's proposal relating to the
following:
1. The Exchange proposes to use the last consolidated trade rather
than the last trade on the Exchange in the definition of Aggressing
Transaction. The Exchange states that the last consolidated trade is a
more meaningful benchmark for the underlying security. What effect
would this change have for the operation of Rule 104?
2. The Exchange proposes to delete Rule 104A in its entirety,
including DMM recordkeeping and/or reporting obligations pertaining to
securities, options, single stock futures, and foreign securities.
According to the Exchange, it is appropriate to delete the rule as it
is duplicative of Exchange and SEC books and recordkeeping
requirements. Do commenters agree? Why or why not?
3. The Exchange also proposes to delete in Rule 36.30 the provision
that stipulates that DMMs can only enter proprietary order in Component
Securities of Investment Company Units or Trust Issued Receipts for the
purpose of hedging a position in the Investment Company Units or Trust
Issued Receipts. According to the Exchange, this provision is obsolete
but does not explain why. Do commenters agree with the Exchange's
statement that the provision is obsolete?
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) \23\ of the Act or any other provision
of the Act, or the rules and regulations thereunder. Although there do
not appear to be any issues relevant to approval or disapproval that
would be facilitated by an oral presentation of views, data, and
arguments, the Commission will consider, pursuant to Rule 19b-4 under
the Act,\24\ any request for an opportunity to make an oral
presentation.\25\
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\23\ 15 U.S.C. 78f(b)(5).
\24\ 17 CFR 240.19b-4.
\25\ Rule 700(c)(2) of the Commission's Rules of Practice
provides that ``[t]he Commission, in its sole discretion, may
determine whether any issues relevant to approval or disapproval
would be facilitated by the opportunity for an oral presentation of
views.'' 17 CFR 201.700(c)(2).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by March 7, 2024. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by March 21,
2024.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6d1f180108400e0200000803191e2d1e080e430a021b"><span class="__cf_email__" data-cfemail="2c5e594049014f4341414942585f6c5f494f024b435a">[email protected]</span></a>. Please include
file number SR-NYSE-2023-36 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NYSE-2023-36. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSE-2023-36 and should be
submitted by March 7, 2024. Rebuttal comments should be submitted by
March 21, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03100 Filed 2-14-24; 8:45 am]
BILLING CODE 8011-01-P
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