Notice2024-28897
Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving a Proposed Rule Change To Amend NYSE Rule 7.31(f)(1)
Primary source
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Published
December 10, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 237 (Tuesday, December 10, 2024)</title>
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[Federal Register Volume 89, Number 237 (Tuesday, December 10, 2024)]
[Notices]
[Pages 99320-99322]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28897]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101812; File No. SR-NYSE-2024-67]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving a Proposed Rule Change To Amend NYSE Rule 7.31(f)(1)
December 4, 2024.
I. Introduction
On October 24, 2024, New York Stock Exchange LLC (the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend NYSE Rule 7.31(f)(1). The proposed rule change was published for
comment in the Federal Register on November 4, 2024.\3\ The Commission
has received no comment letters on the proposed rule change. This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 101471 (October 29,
2024), 89 FR 87675 (``Notice'').
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II. Description of the Proposal
The Exchange has proposed to amend NYSE Rule 7.31(f)(1) regarding
Directed Orders. NYSE Rule 7.31(f)(1) currently defines a Directed
Order as a Limit Order with instructions to route on arrival at its
limit price to a specified alternative trading system (``ATS'') with
which the Exchange maintains an electronic linkage. According to the
Exchange, Directed Orders are available for all securities eligible to
trade on the Exchange, are not assigned a working time, and do not
interact with interest on the Exchange Book.\4\ NYSE Rule 7.31(f)(1)
further provides that the ATS to which a Directed Order is routed is
responsible for validating whether the order is eligible to be
accepted, and if that ATS determines to reject the order, the order
would be canceled.
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\4\ See id. at 87675.
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The Exchange has proposed to amend NYSE Rule 7.31(f)(1) to provide
for Directed Orders to be routed to a broker-dealer algorithm for
execution. Specifically, the Exchange has proposed to permit Directed
Orders to be designated by the entering member organization to route to
a broker-dealer algorithm selected from of a set of broker-dealer
algorithms with which the Exchange has established connectivity. The
Exchange proposes to route Directed Orders only to a range of broker-
dealer algorithms that have completed its onboarding process and
established routing connectivity with the Exchange.\5\ The Exchange
represents that any FINRA-registered broker-
[[Page 99321]]
dealer \6\ will be eligible to complete this process, which is
intended, among other things, to ensure that algorithm providers attest
to compliance with applicable Exchange rules, FINRA rules, and federal
securities laws and regulations and to confirm that the algorithm
providers can meet the applicable technical specifications to connect
to the Exchange. The Exchange states that algorithm providers will also
be required to enter into routing agreements with the Exchange's
routing broker, Archipelago Securities LLC (``ArcaSec''), to facilitate
ArcaSec's routing of Directed Orders on behalf of member organizations
to designated algorithms.\7\
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\5\ All broker-dealer algorithms to which Directed Orders can be
routed will operate on the broker-dealers' respective systems, not
on Exchange systems. The Exchange represents that it does not
currently have and will not enter into any financial or other
arrangements with any algorithm provider with respect to the
proposed Directed Orders. The member organization initiating a
Directed Order to an algorithm has ultimate responsibility for any
transaction fees associated with the execution of that order. The
Exchange states that it may facilitate the process by which such
fees are passed through from the algorithm providers to the member
organizations utilizing Directed Orders, but will not determine,
subsidize, or benefit from any such fees. Subject to approval and
implementation of this proposed rule change, the Exchange states
that it intends to adopt a routing fee for Directed Orders to an
algorithm, similar to the existing routing fee for Directed Orders
to an ATS. See New York Stock Exchange Price List 2024, available at
<a href="https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf">https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf</a> (providing for Routing Fee for Directed Order to
OneChronos LLC). See Notice, supra note 3, 89 FR 87675.
\6\ The Exchange states that the ability to become an NYSE
algorithm provider is open to all FINRA-registered broker-dealers,
on an equal and non-discriminatory basis, regardless of whether they
are also Exchange members. See id.
\7\ See id.
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As proposed, the member organization entering the Directed Order
would select the algorithm to which the Directed Order would be routed
and provide instructions for the handling of such order by the routing
destination. The Exchange states that member organizations would select
from the available algorithm providers without any input or control
from the Exchange.\8\ As with the existing Directed Order routing to an
ATS, the Exchange states that its only role would be to route the order
to the designated algorithm as instructed. The Exchange states that
neither the Exchange nor ArcaSec will make any routing decisions and
will only route Directed Orders to valid destinations as instructed by
the member organization. The Exchange further states that it will not
have any visibility into where or how a Directed Order is executed by
an algorithm, including whether that order may be routed back to the
Exchange or one of its affiliated exchanges, at the time of
execution.\9\ According to the Exchange, a Directed Order designated
for an algorithm would not interact with the Exchange Book, and the
Exchange would not exercise any discretion in determining where the
order is routed.\10\ Similarly, according to the Exchange, the
algorithm selected by the member organization entering the Directed
Order would be responsible for validating whether the order is eligible
to be accepted, and if the algorithm determines to reject the order,
the Directed Order would be canceled.\11\
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\8\ The Consolidated Audit Trail (``CAT'') for a Directed Order
would reflect entry of the order at the Exchange; ArcaSec's receipt
of the order from the Exchange; ArcaSec's routing of the order to
the designated algorithm; and the algorithm's routing of the order
to the execution venue(s) selected to effectuate its strategy. The
Exchange states that it will not be involved in the clearing or
settlement of Directed Orders, except to the extent that it may
submit certain trades to clearing on behalf of member organizations
(similar to the capacity in which it participates in the clearing
process for orders that it routes for Regulation NMS purposes). See
id.
\9\ The Exchange represents that its systems would not be able
to determine, upon receipt of a routed order, whether such order had
originated in whole or in part from an algorithm or originated at
the Exchange as a Directed Order to an algorithm. See Notice, supra
note 3, 89 FR 87675-76.
\10\ See Notice, supra note 3, 89 FR 87676.
\11\ See id.
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To effect this change, the Exchange first has proposed to amend the
definition of a Directed Order in NYSE Rule 7.31(f)(1) to provide that
a Directed Order is a Limit Order with instructions to route on arrival
to an ATS or algorithm with which the Exchange maintains an electronic
linkage. According to the Exchange, Directed Orders would continue to
be available for all securities eligible to trade on the Exchange and
would not be assigned a working time or interact with interest on the
Exchange Book. The Exchange has further proposed to amend NYSE Rule
7.31(f)(1) to specify that the ATS or algorithm to which the Directed
Order is routed, as applicable, would validate whether the order is
eligible to be accepted, and if it rejects the order, the order would
be canceled.
The Exchange has proposed to permit Directed Orders designated to
route to an algorithm to be Market Orders. The Exchange states that
permitting these Directed Orders to be entered as Market Orders would
facilitate market participants' existing functional workflows when
routing to algorithms.\12\ According to the Exchange, a member
organization routing a Directed Order to an algorithm may, for example,
wish to send a parent order with Market Order instructions for
execution via smaller limited child orders over several hours of the
trading day.
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\12\ See id.
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The Exchange has proposed to delete the first sentence of current
NYSE Rule 7.31(f)(1)(A), which provides that Directed Orders must be
designated for the Exchange's Core Trading Session. The Exchange has
also proposed to delete current NYSE Rule 7.34(c)(1)(E), which provides
that Directed Orders designated for the Early Trading Session will be
rejected, and to make a conforming change in Rule 7.34(c)(1) to
reference ``paragraphs (c)(1)(A) through (D)'' to reflect the deletion
of Rule 7.34(c)(1)(E). The Exchange states that its proposal to permit
Directed Orders to be routed during any trading session is intended to
allow the routing destinations receiving such orders to determine
whether they are eligible to trade in a given trading session.\13\ The
Exchange states that it will pass on the instructions provided by the
member organization entering the Directed Order, and the routing
destination will be responsible for validating whether the order will
be accepted or rejected, as contemplated by NYSE Rule 7.31(f)(1).\14\
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\13\ See id.
\14\ See id.
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Further, the Exchange has proposed to amend NYSE Rule 7.31(f)(1)(A)
to provide that a Directed Order to an ATS must be designated as IOC or
Day and would be routed as such, whereas a Directed Order to an
algorithm may only be designated as Day and routed as such, consistent
with market participants' existing functional workflows when routing to
algorithms. The Exchange also has proposed to clarify language
currently in NYSE Rule 7.31(f)(1)(A) providing that Directed Orders may
not be combined with any other modifiers set forth in this Rule, to
instead provide that Directed Orders would not be processed with any
other modifiers set forth in this Rule.
The Exchange has also proposed to amend NYSE Rule 7.31(f)(1)(C) to
specify that, during a trading halt or pause, Directed Orders routed to
an ATS would continue to be rejected, whereas Directed Orders to an
algorithm would be routed as specified. The Exchange states that it has
proposed that Directed Orders routed to an algorithm would be routed
during a trading halt or pause, consistent with market participants'
existing functional workflows when routing to algorithms. The Exchange
states that the proposed elimination of certain restrictions on
Directed Orders currently set forth in Rules 7.31(f)(1)(A) and (C)
would provide member organizations with additional flexibility when
entering Directed Orders, which would remain subject to the rules and
specifications of the destinations to which such orders are routed. As
provided in Rule 7.31(f)(1), as amended, the ATS or algorithm to which
a Directed Order is routed would validate whether the order is eligible
to be accepted.\15\
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\15\ See id.
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Finally, the Exchange has proposed to amend Rule 7.31(f)(1)(D) to
provide that a request to cancel a Directed Order designated Day will
be routed to the ATS or algorithm to which the order was routed.
According to the Exchange, the proposed change would provide member
organizations with a technology
[[Page 99322]]
solution to leverage their existing Exchange connectivity to route
Directed Orders to either an ATS or algorithm, thereby affording them
increased access to execution tools and enhanced operational
efficiency.\16\ The Exchange states that the proposed change would
offer member organizations greater choice and flexibility, and further
believes that the proposed change could create efficiencies for member
organizations by enabling them to send orders that they wish to route
to an alternate destination through the Exchange, thereby leveraging
order entry protocols and specifications already configured for their
interactions with the Exchange.\17\ The Exchange states that Directed
Orders designated to route to an algorithm would generally operate in
the same manner as Directed Orders that are currently eligible to be
routed to an ATS selected by the member organization entering the order
(except as proposed above). The Exchange further states that the
Directed Order would continue to provide functionality similar to order
types with specific execution instructions (such as the Auction Only
Order defined in NYSE Rule 7.31(c)) or routing instructions (such as
Primary Only Orders that route to the primary market that are available
on the Exchange's affiliated equities exchanges).\18\
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\16\ The Exchange states that this proposed rule change could be
particularly beneficial for smaller member organizations that
cannot, for various reasons including cost, connect to multiple
algorithm providers on their own. See id.
\17\ See id.
\18\ See id.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\19\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\20\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
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\19\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\20\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposed rule change is reasonably
designed to remove impediments to and perfect the mechanism of a free
and open market and a national market system because it is reasonably
designed to offer member organizations greater choice and flexibility
in executing orders by providing routing to broker-dealer algorithms
that have established connectivity with the Exchange and to ensure that
such connectivity is provided to broker-dealer algorithms on a fair and
equitable basis. The Commission also believes that the proposed rule
change would not permit unfair discrimination among customers, brokers,
or dealers because Directed Orders will be available to all Exchange
members on an equal basis and because the Exchange has represented that
it would not direct orders to any algorithm with which the Exchange has
a financial relationship.
Based on the foregoing, the Commission finds that the proposed rule
change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-NYSE-2024-67) be, and hereby
is, approved.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28897 Filed 12-9-24; 8:45 am]
BILLING CODE 8011-01-P
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