Notice2025-04510
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend Rule 7.31-E To Adopt the Selective Midpoint Order
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Published
March 19, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 52 (Wednesday, March 19, 2025)</title>
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[Federal Register Volume 90, Number 52 (Wednesday, March 19, 2025)]
[Notices]
[Pages 12835-12838]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-04510]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102657; File No. SR-NYSEARCA-2024-112]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To Amend Rule 7.31-E To Adopt the Selective Midpoint Order
March 13, 2025.
I. Introduction
On December 18, 2024, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') 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 Exchange Rule 7.31-E to adopt the
Selective Midpoint (``SeMi'') Order. The proposed rule change was
published for comment in the Federal Register on December 30, 2024.\3\
The Commission received comment on the proposal.\4\ On February 11,
2025, pursuant to Section 19(b)(2) of the Act,\5\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to disapprove the proposed rule change.\6\ The
Commission is instituting proceedings pursuant to Section 19(b)(2)(B)
of the Act \7\ to determine whether to approve or disapprove 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. 102005 (Dec. 19,
2024), 89 FR 106630 (Dec. 30, 2024) (``Notice'').
\4\ Comments received on the proposed rule change are available
at: <a href="https://www.sec.gov/comments/sr-nysearca-2024-112/srnysearca2024112.htm">https://www.sec.gov/comments/sr-nysearca-2024-112/srnysearca2024112.htm</a>.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 102401 (Feb. 11,
2025), 90 FR 9782 (Feb. 18, 2025) (designating Mar. 30, 2025, as the
date by which the Commission shall either approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change).
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change <SUP>8</SUP>
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\8\ For a full description of the proposed rule change, refer to
the Notice, supra note 3.
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The Exchange offers the Discretionary Pegged Order (``DPO''), which
is a non-displayed order to buy (sell) that is pegged to the same side
of the PBBO. Upon entry, a DPO is assigned a working price equal to the
lower (higher) of the midpoint of the PBBO (the ``Midpoint Price'') or
the limit price of the order.\9\ Any untraded shares of such order are
assigned a working price equal to the lower (higher) of PBB (PBO) or
the order's limit price, which is automatically adjusted in response to
changes to the PBB (PBO) for buy (sell) orders up (down) to the order's
limit price. A DPO exercises the least amount of discretion necessary
from its working price to its discretionary price (defined as the lower
(higher) of the Midpoint Price or the limit price of the order) to
trade with contra-side interest.
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\9\ See NYSE Arca Rule 7.31-E(h)(3). As defined in NYSE Arca
Rule 1.1, ``PBBO'' means the Best Protected Bid and the Best
Protected Offer. NYSE Arca Rule 1.1 also defines ``PBB'' as the
highest Protected Bid and ``PBO'' as the lowest Protected Offer.
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The Exchange proposes to modify NYSE Arca Rule 7.31-E(h)(3) to
replace the DPO with the SeMi Order. As described in the Notice, the
SeMi Order would be similar to the DPO in that the SeMi Order would be
a non-displayed order to buy (sell) that is pegged to the same side of
the PBBO that is assigned a working price equal to the lower (higher)
of the Midpoint Price or the limit price of the order.\10\ Any untraded
shares of a SeMi Order would be assigned a working price equal to the
lower (higher) of the PBB (PBO) or the order's limit price and
automatically adjusted in response to changes to the PBB (PBO) for buy
(sell) orders up (down) to the order's limit price.\11\ In order to
trade with contra-side orders on the NYSE Arca Book,\12\ a SeMi Order
to buy (sell) would exercise the least amount of price discretion
necessary from its working price to its discretionary price, which is
defined as the lower (higher) of the Midpoint Price or the SeMi Order's
limit price.\13\ When exercising discretion, SeMi Orders (like DPOs)
would maintain their time priority at their working price as Priority
3--Non-Display Orders and be prioritized behind Priority 3--Non-Display
Orders with a working price equal to the discretionary price of a SeMi
Order at the time of execution.\14\ If multiple SeMi Orders are
exercising price discretion during the same book processing action,
they would maintain their relative time priority at the discretionary
price.\15\
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\10\ See proposed NYSE Arca Rule 7.31-E(h)(3).
\11\ Id.
\12\ See NYSE Arca Rule 1.1.
\13\ Id.
\14\ See proposed NYSE Arca Rule 7.31-E(h)(3)(B).
\15\ Id.
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The Exchange is proposing to adopt new NYSE Arca Rule 7.31-
E(h)(3)(D) to allow SeMi Orders to be optionally designated as
Liquidity Providing.\16\ This functionality is not available for DPOs.
An incoming SeMi Order designated as Liquidity Providing would only
execute against resting orders that include a Non-Display Remove
Modifier and are priced within the discretionary range of the Liquidity
Providing SeMi Order. If a resting contra-side order without a Non-
Display Remove Modifier is priced within an arriving Liquidity
Providing SeMi Order's discretionary range, the Liquidity Providing
SeMi Order would be placed on the NYSE Arca Book, and its discretionary
range would be adjusted to equal the resting price of the non-displayed
contra-side order or one minimum price variation (``MPV'') less
aggressive than the resting price of the displayed contra-side
order.\17\ Further, a resting Liquidity Providing SeMi Order would not
trade with an arriving contra-side order that cannot remove
liquidity.\18\ Once such arriving contra-side order is placed on the
NYSE Arca Book, the discretionary range of the Liquidity Providing SeMi
Order would be adjusted to equal the resting price of a non-displayed
contra-side order or to one MPV less aggressive than the resting price
of a displayed contra-side order. Once resting on the NYSE Arca Book,
the discretionary range of a Liquidity Providing SeMi Order would be
adjusted based on resting contra-side interest.\19\ A Liquidity
Providing SeMi Order to buy (sell) would not be eligible to trade at a
price equal to or above (below) any sell (buy) orders that are
displayed and have a working price equal to or below (above) the
working price of such Liquidity Providing SeMi Order, or at a price
above (below) any
[[Page 12836]]
sell (buy) orders that are not displayed and that have a working price
below (above) the working price of such Liquidity Providing SeMi
Order.\20\
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\16\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D).
\17\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(ii). The
Exchange states that allowing Liquidity Providing SeMi Orders to
trade with resting orders with a Non-Display Remove Modifier, as
well as adjusting the discretionary range of such orders, would be
consistent with the operation of discretionary order types on other
equities exchanges. See Notice, supra note 3 at 106631.
\18\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(iii). The
Exchange states that this proposed handling is also consistent with
the handling of similar discretionary order types by other equities
exchanges.
\19\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(iv).
\20\ See proposed NYSE Arca Rule 7.31-E(h)(3)(D)(iv)(a) and (b).
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The Exchange also proposes to add new NYSE Arca Rule 7.31-
E(h)(3)(C) to provide that the SeMi Order would be ineligible to trade
during unstable market conditions, as identified by the Selective
Midpoint Indicator (``SMI'') (as discussed in further detail below),
and would remain ineligible to trade at any price until market
conditions stabilize, as determined by the SMI. The Exchange previously
calculated quote stability and, when in operation, only restricted the
execution of a DPO within its discretionary price range; DPOs remained
eligible to execute at their working price during times determined to
be unstable.\21\ If the SMI determines the PBB (PBO) for a particular
security to be an unstable quote, both an arriving and resting SeMi
Order would be ineligible to trade until there is a stable PBB (PBO) at
which point the order's working price would be adjusted. As described
by the Exchange in the Notice, this functionality is designed to
prevent potentially undesirable executions during volatile or unstable
market conditions.
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\21\ See Securities Exchange Act Release No. 96322 (Nov. 15,
2022), 87 FR 69376 (Nov. 18, 2022) (SR-NYSEARCA-2022-76) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Amend
Rule 7.31-E). Following a temporary suspension of the order type,
the Exchange amended Rule 7.31-E(h)(3) in order to resume the use of
the DPO and eliminate the functionality that calculated quote
stability and potentially restricted the use of DPO discretionary
range during periods of instability.
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As discussed above, in the past, the DPO relied on a static
logistical regression model to forecast market instability and only
prevented DPOs in any symbol from exercising discretion to trade when
the model anticipated an unstable market.\22\ As proposed, the SeMi
Order would rely on the SMI, a gradient-boosting machine learning
model,\23\ to predict market instability and, if the SMI determined the
market unstable, SeMi Orders would be prevented from trading at any
price (as opposed to only suspending the ability to execute within
price discretion). According to the Exchange, the SMI would facilitate
the SeMi Order's ability to provide protection against potentially
unfavorable executions. The Exchange developed the SMI to predict
market instability, which is defined by the Exchange as relatively
large price moves during a relatively short time frame using PBBO
updates as the fundamental data points.\24\
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\22\ The Exchange eliminated its quote stability calculation in
Nov. 2022. Accordingly, DPOs exercise discretion during periods that
may have been considered unstable. See Notice at 102005 for a
description of the Exchange's previous use of quote instability
calculations. See also supra note 19.
\23\ The Exchange filed a white paper as Exhibit 3 to the
proposed rule change that discusses details of the SMI, which is
available at <a href="https://www.sec.gov/files/rules/sro/nysearca/2024/34-102005-ex3.pdf">https://www.sec.gov/files/rules/sro/nysearca/2024/34-102005-ex3.pdf</a>.
\24\ See Notice, supra note 3 at 106632.
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The Exchange proposes to use two types of SMI models: (1) an
individualized model for more active stocks, and (2) a market model for
less active stocks that are not assigned to the individual SMI. As
proposed, the Exchange would identify at least 200 (and up to 1,000)
symbols that have the highest volume and quote updates and evaluate
whether an individualized SMI or the market model SMI would yield
better performance for those symbols. As described by the Exchange in
the Notice, the symbols that would have an individual SMI model would
be published on the Exchange website.
The SMI would use NYSE Arca Book data, and the 83 Exchange-selected
features described in the Exchange's white paper.\25\ The SMI models
would be retrained on a nightly basis using the data from the previous
three trading days. As described in the Notice, the SMI models will use
the feature weights determined from the previous night's training and
the features will be calculated using real-time intraday data.
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\25\ See id.
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As proposed, the SMI would be integrated into the Pillar Trading
platform and would have access to real-time trading data to evaluate
whether the market is stable or unstable. Generally, a SeMi Order would
be allowed to trade unless the SMI determines that the market is
unstable, in which case a SeMi Order would be prevented from trading at
any price for as long as the SMI predicts the market to be unstable.
The SeMi Order would remain ineligible to trade at any price until the
SMI determines that there is a return to market stability. The Exchange
states that the models underlying the SMI are objective and designed to
avoid bias and discrimination, and use of the SeMi Order (like use of
the DPO) would be voluntary for all market participants.
III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEARCA-2024-112, and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \26\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change and the comment received
thereon. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described below, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change to inform the Commission's analysis of whether to
approve or disapprove the proposed rule change.
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\26\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\27\ the Commission is
providing notice of the grounds for possible disapproval under
consideration. As described above, the Exchange has proposed to (i)
replace the DPO with the SeMi Order, (ii) implement the SMI to identify
periods of market instability using machine learning methods, (iii)
prevent SeMi Orders from trading during such periods of instability,
and (iv) permit SeMi Orders to be optionally designated as Liquidity
Providing.
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\27\ Id.
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The Commission received comment on the proposal.\28\ The commenter
stated that ``machine learning technology is not an `established, non-
discretionary method' under 3b-16.'' \29\ The commenter questioned how
the SMI's use of immediate-or-cancel (``IOC'') orders and book data in
its calculations is consistent with Sections 6(b)(5) and 6(b)(8) of the
Act.\30\ The commenter stated that ``not only will data from (a) an
unrelated and non-displayed order type, but orders dictated by (b) a
regulatory mandate, will be used as fuel in a commercial offering'' and
that ``[t]o my knowledge something like that hasn't been done before.''
\31\ The commenter also stated that self-regulatory organizations
should provide more specificity when using the terms ``price'' or
``volume'' in a proposed rule change as to whether the terms considered
displayed or non-displayed information so that ``the public has all the
information it needs to provide meaningful comment.'' \32\ The
commenter also stated that the use of book data ``includes non-
displayed prices and volumes from all participants'' for commercial
purposes
[[Page 12837]]
``even if that commercial use is of no benefit to and could be adverse
to the participant itself.'' \33\ In this regard, the commenter stated
that ``a threshold question for any exchange method that mines past or
present non-displayed behavior to affect its market'' to advantage
unrelated participants would be ``how is that consistent with 6(b)(5)
and 6(b)(8)?'' \34\
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\28\ See letter from R.T. Leuchtkafer dated Jan. 16, 2025
(``Leuchtkafer Letter'').
\29\ See Leuchtkafer Letter at 1.
\30\ See Leuchtkafer Letter at 2.
\31\ Id.
\32\ See Leuchtkafer Letter at 3.
\33\ See Leuchtkafer Letter at 2.
\34\ Id.
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Further, the commenter raised questions about the Exchange proposal
to suspend some SeMi Orders but not others.\35\ The commenter stated
that ``[i]f exchanges can make their own indeterminate and undisclosed
judgements about market conditions and direction using any participant
data they like--related or unrelated, displayed or non-displayed,
whether with a commercial or regulatory purpose--from any time period
they like to (a) change an order's material terms . . . or if exchanges
can make their own indeterminate and undisclosed judgements about
market direction using any data they like to (b) work some orders and
not others in a stock (as with SeMi), in what sense are they still
exchanges? '' \36\ In this regard, the commenter questioned the effect
of the proposal on competition. The commenter also raised questions
about (1) how the Exchange would assign the individual SMI models; (2)
whether the Exchange would be able to use other indices or exchange-
traded funds for the market model; and (3) ``what principles, if any--
distinguish permissible factors in these calculations from
impermissible factors? '' \37\ Finally, the commenter stated that the
proposal described that the Exchange would make changes to parameters
in the SMI and decisions about whether to ``implement a retrained model
in production.'' \38\ The commenter questioned ``how these apparently
staff-made, indeterminate, and unqualified decisions are `established,
nondiscretionary methods.' '' \39\
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\35\ See Leuchtkafer Letter at 3.
\36\ Id.
\37\ Id.
\38\ Id.
\39\ Id.
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The Commission is instituting proceedings to allow for additional
analysis of, and input from commenters with respect to, the proposed
rule change's consistency with the Act, and in particular, Section
6(b)(5) and 6(b)(8) of the Act. Section 6(b)(5) of the Act 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 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 not be designed to permit unfair discrimination between
customers, issuers, brokers or dealers.\40\ Section 6(b)(8) of the Act
requires that the rules of a national securities exchange not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.\41\
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\40\ 15 U.S.C. 78f(b)(5).
\41\ 15 U.S.C. 78f(b)(8).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice, in addition to any other comments they may wish to
submit about the proposed rule change.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their data, views, 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 proposed rule
change, is consistent with Sections 6(b)(5) and 6(b)(8) 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 data,
views, and arguments, the Commission will consider, pursuant to Rule
19b-4 under the Act,\42\ any request for an opportunity to make an oral
presentation.\43\
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\42\ 17 CFR 240.19b-4.
\43\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (Jun. 4, 1975), grants to
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975,
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75,
94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by April 9, 2025. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
April 23, 2025. The Commission asks that commenters address the
sufficiency of the Exchange's statements in support of the proposal, in
addition to any other comments they may wish to submit about the
proposed rule change.
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#fd8f889198d09e9290909893898ebd8e989ed39a928b"><span class="__cf_email__" data-cfemail="81f3f4ede4ace2eeecece4eff5f2c1f2e4e2afe6eef7">[email protected]</span></a>. Please include
file number SR-NYSEARCA-2024-112 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-NYSEARCA-2024-112. 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. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NYSEARCA-2024-112 and should
be submitted by April 9, 2025. Rebuttal comments should be submitted by
April 23, 2025.
[[Page 12838]]
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)(57).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-04510 Filed 3-18-25; 8:45 am]
BILLING CODE 8011-01-P
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