Exemption Under Rule 608(e) of Regulation NMS from Certain Provisions of the Tick Size Pilot Plan to NYSE Arca Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
DIVISION OF

TRADING AND MARKETS

M ay 3 1,2016
Ms. he rry Sandl er
Associate Genera l Counsel
YS E Area, Inc.
I I Wall Street, l91 h Floor cw York, NY I 0005 Re: Exemption Under Rule 608(e) of Regulation NMS under the Securities Exchange Act of 1934 from Certain Provisions of the " Plan to Implement a Tick Size Pilot Program" Dear Ms. Sand le r:
In its letter dated October 14, 20 15,
1 the New York Stock Excha nge LLC ( "N YS E" ), o n behalf of itself a nd BATS Excha nge, Inc., BATS Y -Excha nge, Inc., Chi cago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulato ry Authority, Inc. ("FfNRA"), NASDAQ OMX BX, Inc. , NASDAQ OMX PHLX LLC, the Nasdaq Stock Ma rket LLC, NYSE MKT LLC, and NYSE Area, Inc. ("N YS E Area" or the "Exchange" ) (collecti vely, " Participants") 2 requested an exemption from certain quoting and trading requirements set forth in the Pla n to Implement a Tick Size Pil ot Prog ram ("Tick Size Pil ot Plan").3 Specifically, in the October Exemption Request, the Pa rti cipants requested that the Commi ssion, pursuant to Rule 608(e) of Regulati on N MS under the Securities Excha nge Act of 1934 ("Exchange Act"), exempt the Participants from the require ments o f Rule 608(c) of Regulation NMS that they comply, and enforce the compliance by its me mbers with certain See letter from E lizabeth K. King, New York Stock Exchange, to Bre nt J. Fields, Secretary, Security and Exchange Commi ssio n ("Commission") dated October 14, 2015 ("October Exemption Request"). 2 The Commission notes that on February 5, 20 16 , the National Stock Exchange, Inc. ("NSX") filed a Plan amendment with the Commission to become a Pla n Participant pursuant to Sectio n li.C of the Pla n. See Securities Exc ha nge Act Release No . 77277 (March 3, 20 16), 81 FR 12 162 (Ma rc h 8, 20 16). 3 See Securiti es Exchange Act Release No. 74892 (May 6, 20 15), 80 FR 275 13 (May 13, 20 15).

prov isions of Secti o n VI of the Ti ck Size Pilot Plan whe n the C losing Price 4 o f a Pilot Securit y ass igned to any Tes t Gro up is below $ 1.00 . On Februa ry 23,20 16, FINRA, o n be half of itselfand the Participa nts, submitted an additi o nal reques t fo r exempti on from certain quotin g a nd tradin g provisio ns se t fo rth in the T ic k Size Pilo t Pla n. 5 S pecifica ll y, FfN RA , on behalf of the Participa nts, req uested that the Commiss ion, pursua nt to Rule 608(e) of Regulatio n NMS under the Excha nge Act, exempt them fro m the require ments of Rul e 608(c) of Regulati on NMS that they co mpl y, and e nforce compli a nce by its members, with (I ) cer1ain prov isio ns of Sectio n VI. C a nd Sectio n VI.O ofthe Ti ck Size Pil ot Plan to permit a me mber to execute certain orde rs in inc re me nts othe r tha n $0.05 whe n a membe r has exec uted a prop rie tary trade in a n increme nt othe r tha n $0.05 that tri gge rs the o bli gati on to exec ute anothe r c ustom e r o rder held by the membe r; and (2) certain prov isions of Secti on VI.O to pe rmit me mbe rs to execute certain e rror co rrectio n transac ti ons in Tes t G roup Three as an additi o na l excepti o n to the Trade-at Prohibitio n; and (3) Secti on VI.O( 12) co ncernin g stopped orde rs of the Tick Size Pilot Plan. The Commi ssio n notes that NYSE Area s ubmitted a proposed rul e c ha nge to impl eme nt the quotin g and trading require me nts se t fo rth in the T ick Size Pilo t Pla n and tha t the proposed rul e cha nge inc ludes rules tha t address the ite ms descri bed he rein fo r which N YSE Area see ks exe mpti on from Rule 608 (c) o f Regul atio n NMS . 6 Rule 608(c) of Regulatio n NMS requires the Parti cipa nts to co mpl y with the term s o f the T ic k Size Pilo t Pla n. 7 Furthe r, Rul e 608(c) of Regul atio n NMS requires eac h Pa rticipant to enfo rce co mpli a nce with the T ic k Size Pilo t Plan by its me mbers a nd persons associated with its members.8 Rul e 608 (e) of Regulatio n NMS provides that the Co mmi ss io n may exe mpt from the provisio ns of Rule 608 of Regulation NMS, eithe r conditi o nall y o r o n spec ifi ed te rms and co nditi o ns, a ny se lf-regulatory o rgani za tion, ifthe Co mmi ssio n determines tha t suc h exempti on is co nsiste nt with the publi c inte res t, the protecti on of inves to rs, the ma intena nce of fair and o rde rl y ma rkets, a nd the remova l of imp edime nts to, a nd the pe rfec ti o n o f the mec hani sms of, a national ma rke t sys tem.9 As di scussed be low, the Commiss ion, purs uant to its auth orit y unde r Rule 608(e) of Reg ula tion N MS , is here by grantin g N YSE Area a limited exemption fro m the require ment to 4 Unless o therwise spec ified, capitalized te rms in this rul e filin g a re based o n the defined terms of the Pla n See lette r fro m Ma rcia E. Asquith , Senio r Vice President and Corpora te Sec reta ry, FIN RA, to Ro be rt W. Errett , Dep uty Secreta ry, Co mmi ss ion dated
Februa ry 23, 20 16 (" Februa ry Exe mpti on Requ est"). 6 See Securities Excha nge Act No. 77947 (May 3 1, 20 16) ("NYSE Area Proposal" ). 7 17 CFR 242.608 (c). 8 1s!..:
9 17 C FR 242.608(e).
2

comply with certain provis ions of the Tick Size Pilot Plan as required und e r Rule 608(c) of Regulation NMS. 10 Exemption from Certain Provisions of the Tick Size Pilot Plan
I. Exemption from the Requirement to Enforce Com plia nce with Ce rtain Gro uping,
and Quoting and Trading Requirements for Pilot Securities Unde r Sections VI of the Tick Size Pilo t Plan
Section V of the Tick Size Pilot Plan sets forth the criteria for identifying Pilo t Securi ti es
and the me thod by which Pilot Securities will be g rouped and placed into the three Test Groups. Pursuant to Section V ofthe Tick Size Pilot Plan, Pilot Securities that a re not placed into the three Test Groups will constitute the Control Group. Section VI of the Tick Size Pilot Pl an sets forth the quoting and trading requirements established for the Control Gro up and each Test Group. In the October Exemption Request, the Participa nts requested a n exe mpti on from Sectio n VI of the Tick Size Pilot Plan to pe rmit Participants to move a Pilo t Securi ty from its ass igned Test Group to the Co ntrol Group if the C losing Price of a Pilo t Security is below $ 1.00 o n any trading da y during the Pilot Period . 11 A Pilot Securit y tha t is reass igned to the Control Group would be subj ect to the quoting and trading require ments of the Co ntrol Group. In addition, a ny reassi gned Pil ot Security would continue to be subj ect to the data collection provi sio ns of the Tick Size Pilot Plan. In the NYSE Area Proposal, NYSE Area Rule 7.46(a)(5) prov ides , in pe rtin e nt part, that if a Pilot Security's Clo sing Price is below $ 1.00, the n that Pilot Securit y would be moved from its respectiv e Test G roup to the Control Gro up, and would quote and trade in accordance with the rules for Pilot Securities in the Control Group for the re maind er of the Pilo t Period. 12 In addition, such Pilot Security would continue to be subject to the data co llecti on require ments under the T ick Size Pilot Plan and NYSE Area Rule 7.46(b). In the October Exemption Request, the Participants stated that requiring a Pilot Securit y whose price falls below $1 .00 to quote an d/or trad e in $0.05 increme nts co uld be potenti ally 10 The Co mmi ss ion notes that while the October Exe mption Requ es t and the February Exemption Request seek exemptive relie f for all of the Parti cipants, the Commi ssio n is gra nting exemptive relief only to NYSE Area. The Commi ss ion would consider granting simil ar limited exempti ons to other Participants should they submit proposed rule cha nges purs uant to Secti o n 19(b) ofthe Exchange Act that are sub sta ntiall y similar to . the NYSE Area Proposal. II See October Exemptio n Request, supra no te I. 12 NYSE Area Rule 7.46(a)(5) also provides that if a Pilot Security's price drops below $1.00 d urin g regular trad ing hours but does not have a C lose Price below $ 1.00 the Pilot Security will continue to trade acco rdin g to the quotin g a nd trading of its assigned Test Group . 3

harmful as the s pread fo r s uch Pilot Security could become too large in comparison to its price. Further, the Partic ipa nts beli eve that thi s could have a negati ve impact on the tra ding acti vity for s uch securities. Fina lly, the Pa rti c ipa nts be li eved tha t if such Pilot Securiti es a re not moved into the Contro l G ro up, the qua lity of data gene ra ted a nd collected could be impacted because the spreads associated w ith s uc h Pilot Securities would not co rrela te w ith the ir ac tua l price. The Commission grants the exemptio n to N YSE Area from the require me nts in Section VI o f the Tic k S ize Pil ot Plan that Pil ot Securities w ith a C losing Pri ce below $ 1.00 mus t quote and trade according to the provisio ns of its assigned T est Group, so long as N YS E Area complies, a nd e nforces complia nce by its member w ith, N YS E Area Rul e 7 .46(a)(5). Accordingly, N YSE Area may move any Pilot Security that has a C losing Pri ce be low $ 1.00 during the Pilo t Perio d from a T ick S ize Pilot Pl a n Test G roup to the Contro l Group. The reafte r, such Pilot Security would be pe rmitted to quote a nd trade according to the pro visions of th e Contro l G ro up fo r the re ma inder of the Pil ot Pe riod . Further, N YSE Area a nd its membe r must continue to collect and s ubmit the data re lated to s uch Pilot Security as set fo rth in the Tick Size Pilot Pla n and N YSE Area Rul e 7.46(b). The Commission has d etermined tha t thi s exemptio n is consistent with the public interest, the protectio n of investo rs, the ma inten ance of fa ir a nd orderl y markets and the re moval o f impedime nts to, and the pe rfection o f a na tional market system, because requiring Pilo t Securities with a C losing Price of less than $ 1.00 to quo te a nd/o r trade at incre me nts la rger tha n as provided unde r the Contro l G roup co uld ca use the spread fo r such Pilot Securities to become too large re lati ve to its price, whi ch co uld pote nti a ll y ha rm the tradin g o f such sec urities a nd the q ua lity of the d ata generated unde r the Pl an .
II. Exe mption from the Requireme nt to Enforce Com p liance w ith Certa in Tradi ng
Require ments Under Sections VI.C a nd VI.D of the T ick S ize Pilot Plan
Section YI. C of the T ic k S ize Pilot Pl a n sets fo rth the quo ting and tra ding require me nts
for Pilot Securities in T est G ro up T wo. Specifically, Test G roup Two Pilo t Securities may only be quoted and traded in $0 .0 5 inc re me nt s, subj ect to th e fo llowing c ircum sta nces:
13 (A) trad ing may occur a t the mid po int between the Nationa l Best Bid a nd Natio na l Best offe r ("N BBO" ) or the midpo int be tween the best protected bid a nd best protected o ffer ("PBBO"); (B) Reta il In vestor O rd ers may be provided price improveme nt of a t least $0.005 be tte r tha n the PBBO; a nd (C) Negoti ated Trades may trade in increme nts less tha n $0.05 . N YSE Are a proposes to implement these provi sio n in NYSE Area Rule 7.46(d)(3)(A), (B), a nd (C). 14 Sectio n VI.D o f the T ick S ize Pil o t Pla n sets forth the quo ting and trading re quirements fo r Pilo t Securiti es in T est G roup T hree. Specificall y, Test Group T hree Pil ot Securities may onl y be quoted and tra de d in $0.05 incre ments, subj ect to the same three trading c ircums ta nces noted a bove fo r T est Group T wo, 15 and are s ubj ect to the T rade-at Prohibitio n. N YSE A rea 13 Secti on Yl.C o f the Ti ck S ize Pil ot Pl a n a lso provides ce rta in q uo ting exceptio ns. 14 See N YSE Area Proposa l, s upra note 6.

15 Secti on VI.D ofthe Tic k S ize Pilot Pl a n a lso pro vides certa in quoting exceptions.

4

proposes to impl ement these prov isions in NYSE Area Rul e 7.46(e)(3)(A), ( B) and (C) along with NYSE Area Rule 7.46(e)(4). 16 In the February Exe mpti o n Request, the Participants no ted that a memb er of a Participant may be o bli gated und e r its rul es(~, NYSE Area Rule 5320) to exec ute a c usto mer order in a Pilot Security after executing a propri etary trade in the same Pi lot Security. In these instances, the Participants requested that members be exempt fro m having to execute s uc h a customer order in a Test Group Two Pil ot Sec urity or a Tes t Gro up Three Pilot Sec urity in a $0.05 increme nt. Rat her, the Pa rticipants propose to allow its members in these instances to execute the customer order at the sa me price as (o r within the presc ribed a mo unt of), for the same Pilot Securit y, on the same side as the triggering proprietary trade. In the NYSE Area Pro posal, NYSE Area Rule 7.46(d)(3)(0) wou ld provide a n excepti on in Test Group Two to the require me nt of exec utin g a n o rde r in a $0.05 increme nt for executi o n of customer o rd ers to comply w ith NYSE Area Rule 5320 following the execution of a proprietary trade by the member a t a no n $0.0 5 increment, where such propri etary trade was permissible pursuant to an exception unde r the Tick Size Pilot Pl an. NYS E Area Rule 7.46(e)(3)(0) would prov ide fo r the same exceptio n for Test G roup Three. In the Feb rua ry Exe mpti on Request, the Pa rticipants note tha t they be lieve that a n additi ona l excepti on to the require ment of exec utin g orders in a $0.05 trad ing increment in Test Group Two and Test Group Three would bes t facili tate the ability of membe rs to continue to protect a custo mer order while retaining the fl ex ibility to e ngage in propri etary trades that are permi ssible under the Tick Size Pilot Plan. The Commi ssio n gra nts the exe mpti on to NYSE Area fro m the $0.05 inc re me nt tradin g require me nts of Sections YI.C and Yl.D for ce rtain transactions so long as NYSE Area co mpli es wi th, and enforces compli ance with NYSE Area Rule 7.46(d)(3)(0) a nd Rul e 7.46(e)(3)(0). The Commi ssio n has determined that this exempti on is cons istent with the publi c interest, the protection of investo rs, the maintena nce of fair and o rderl y ma rkets a nd the remova l of imped iments to, and the perfection of a natio nal market system because it will fac ilita te the execution of c ustome r ord ers.
III. Exe mption from the Require ment to Enforce Compli ance with Certain Trading
Requirements Under Section Yl.D of the Tick S ize Pilot Pl an for Erro r Correcti on Transactions As noted above , Section VT.D o f the Tick Size Pilot Pl an se ts fo rth the quoting a nd trad ing requireme nts fo r Pilot Sec urities in Test Gro up Three, whic h inc ludes the Trade-at Pro hibiti o n. In the February Exempti o n Request, the Pa1ticipants requested a n exempti on from havin·g to comply, a nd enforce compliance by its members with , the Trade-at Pro hibition for certain e rro r correction transactio ns. Rathe r, as set forth in NYSE Area Rul e 7.46(e)(4)(C)(xv), certain erro r correction tr ansactions as defi ned in NYSE Area Rul e 7.46(e)(4)(C)(xv) wo uld be excepted from the Trade -at Prohibiti on. In ad diti o n, NYSE Area no tes in its proposal tha t its See NYSE Area Proposa l, s upra note 6. 5

16

17
N YSE Area Rule 7.46(e)(4)(C)(xv) would be subj ect to cond iti ons set forth in the Commission's Order exempting erro r correctio n tra nsacti ons fro m Rule 6 11 of Regul atio n N MS. 17 The Parti cipants note tha t certa in error correctio n transactio ns are exempt from the provisions of Rul e 6 11 of Regul atio n NM S. Accordingly, the Participants believe that certain transactio ns to correct bona fide errors in the execution of c ustomer orders should Iikewise be excepted fro m the Trad e-at Pro hibiti on. The Commission gra nts the exempti on to N YSE Area fro m the require ments of Section VI.O ofthe Tic k Size Pilo t Pl an so th at certain error correctio n tra nsactions would be excepted fro m the T rad e-at Prohi biti o n, so long as NYSE A rea complies w ith and e nfo rces compliance with NYSE Area Rule 7.46(e)(4)(C)(xv). T he Commi ssion has determined that th is exempti on is co nsistent with the public inte rest, the protecti on o f in vesto rs, the ma inte na nce of fa ir a nd orderly ma rkets a nd the re moval o f im pedime nts to, and the pe rfecti o n of a na ti ona l market syste m beca use it would provide co nsiste ncy in how erro r correcti on tra nsacti ons are treated. N YSE Area has pro posed to use the same d efiniti on a nd process fo r e rror correction transactions under the T ick S ize Pil ot Pla n as it does unde r Rul e 6 11 of Regula ti o n N MS. IV . Exemptio n fro m the Requirement to Enforce Compliance w ith Certa in Trading Requireme nts Unde r Section Vl.D of the Tick Size Pilo t Plan fo r "Stopped O rde rs"
Section V1.0( 12) o fthe T ic k Size Pil ot Pla n provides a n exceptio n to th e T rade-at
Prohibition fo r "stopped orders" that provides, amo ng othe r things. that "the price o f the trade-at transacti on was, fo r a sto pped buy order, equal to the natio nal best bid in the Pilot Security at the time of executi o n o r, for a sto pped sell o rder, equal to th e natio nal best offe r in the Pilot Security at the time of executi on. " N YSE Area p ro poses to adopt a modified sto pped orde r exceptio n in NYSE Area Rule 7.46(e)(4)(C)(xiii ). S pecificall y, NYSE A rea proposes NYSE Area Rul e 7.46(e)(4)(C) to provide that " [t]he price of the T rade-at transaction was, for a stopped bu y o rde r, equa l to or less than the Nationa l Best Bid in the Pilot Security at the time o f executio n o r, fo r a sto pped sell See NYSE A rea Pro posa l, supra note 6. See also Securiti es Excha nge Act Re lease No. 55884 (June 8, 2007, 72 FR 32926 (June 14, 2007) (o rde r exempting certain eJTo r correctio n tra nsactions fro m Rule 6 I I of Regulation NMS). S pecificall y, the bona fide error must be evide nced by obj ecti ve facts a nd circumstances. T he T rading Cente r must mainta in docume ntatio n of suc h facts and circ umsta nces. T he T rading Cente r must record the transactio n in its error acco unt. Furthe r, the T rading Cente r must establish, ma in tain, a nd e nforce written po licies a nd proced ures tha t are reaso nably desig ned to address the occurrence o f erro rs, and, in the event of an erro r, the use and te rms of a tra nsactio n to correct the e rro r in com pliance w ith thi s exemptio n. Finall y, the T rad in g Cente r must regularly surveil to asce rtain the effecti veness o f its po lic ies a nd procedures to address errors and transactio ns to correct erro rs and take prompt action to remedy defic ie ncies in such po lic ies and procedures. 6

order, equal to or greater than the Nation Best Offer in the Pilot Security at the time of execution, as long as such order is priced at an acce ptab le increment." According to the Participa nts, the stopped order exception to the Trade-at Pro hibition is based upon the except io n provided for stopped o rde rs in Rule 61 1 of Regulation NMS . 18 Howeve r, as cu rrentl y drafted , the Trade -at Prohibition exception fo r stopped orde rs wou ld result in an inco nsiste nt resu lt compared to the analogous exception to Rule 611 of Regul atio n NMS . Accordi ngly, the Participants believe that the proposed stopped order exception to the Trade-at Prohibi tion would result in a more consiste nt app roach for stopped o rders . The Co mmissio n gran ts the exemption to NYS E Area from the requirements of Sectio n YI. D( 12)(c) so long as NYSE Area com plies with, and e nfo rces comp li ance with NYSE Area Rule 7.46(e)(4)(C)(x iii). The Com mission has determined that this exemption is co nsistent wi th the public interest, the protection of investors, the maintenance of fair and orderl y markets and the removal of imped iments to, a nd the perfection of a national market system , becau se it would provide cons istency in the treatme nt of stopped order tra nsac tions under both Regu lat ion NMS and the Tick S ize Pilot Plan. Therefore, the exemptio n sho uld facilitate and ease imple mentatio n of the stopped o rde r exceptio n to the Trade-at Prohibit io n.

---

Thi s exemptio n is co nditi o ned o n the fact s and re presentations presented in your letter. In the event any ma te ri al c ha nge occur s with respect to any of the facts or re presentat ions presented , the exempti on wi ll expire and the Exchange must immediate ly res ume opera ting in accorda nce wi th all of the provi sions in the Tick i ze Pil ot Plan. For the Com mission ,

by the Divisio n of Trad ing and Markets,

pursuant to de legated authority.
19

DavidS. Shillm an

Assoc iate Director

18 Rule 6 11 (b)(9)(iii) of Regulation NMS prov ides that ·' the price is the trade-through transac tio n was, for a stopped buy order, lower than the nationa l best bid in the NMS stock at the time of executi on or, for a sto pped se ll ord er, higher than the national best offer in the NMS stock at the time of execution." 19 17 CF R 200.30-J (a)( 42). 7