Information Memos

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Number 12-17 28 Jun 2012
 
ATTENTION:    
 
TO:   ALL MEMBERS AND MEMBER ORGANIZATIONS
 
SUBJECT:   AMENDMENTS TO RULE 107B: SLP MARKET MAKER PROGRAM

Purpose

The purpose of this Information Memo is to inform New York Stock Exchange LLC ("NYSE") and NYSE MKT LLC ("NYSE MKT") (collectively, the "Exchange") member organizations of recent amendments to NYSE and NYSE MKT Equities Rule 107B ("Rule 107B") relating to Supplemental Liquidity Providers ("SLP") to add a class of SLPs that are registered as market makers at the Exchange. The amendments to both versions of Rule 107B are effective July 2, 2012.

The amended NYSE and NYSE MKT Rule 107B text is attached.

Amendments to Rule 107B – SLMM Program

Two Classes of SLP: SLP-Prop and SLMM

The Exchange has amended Rule 107B to add a category of SLPs that would be registered as market makers at the Exchange. The existing SLP member organizations and associated requirements are continuing unchanged and will now be referred to as "SLP-Prop." As amended, the term "SLP" refers generally to member organizations that provide supplemental liquidity under Rule 107B.

The Exchange's new class of SLP, referred to as "SLMM," would be registered as market makers at the Exchange. As set forth in the amended rule, SLMMs have differing qualification requirements and increased regulatory obligations as compared to SLP-Props, but would otherwise be subject to the existing SLP quoting and volume program requirements, as applicable for NYSE or NYSE MKT. Because the SLMMs would be subject to specified regulatory obligations, including the requirement to maintain a continuous two-sided quote, SLMMs may be eligible for market maker treatment under federal rules, such as the close-out requirements for fail-to-deliver positions applicable to market makers under Rule 204 of Regulation SHO.

As with the SLP program in general, SLMMs will be supplementing the liquidity provided by DMMs and will assist in the maintenance of a fair and orderly market, as reasonably practicable. While all securities that trade at the Exchange are required to be assigned to a DMM, not all securities are required to be assigned to an SLMM, which is how the SLP program operates today.

SLP Application Process

A prospective SLP member organization can choose to be either an SLP-Prop or an SLMM, or both, subject to restrictions described in section 7 below. As part of the application process, a prospective SLP must make an election of whether it is seeking to be an SLP-Prop or SLMM, or both. Based on this election, the Exchange will review the application for whether the SLP applicant meets the qualification requirements of Rule 107B(c) (for SLP-Props) or Rule 107B(d) (for SLMMs), as applicable. The revised SLP applications are attached.

If a current SLP is interested in converting to be an SLMM, the SLP must complete a new SLP application form. Existing SLPs will otherwise be considered to be SLP-Props.

SLP Qualification Requirements

SLP-Props and SLMMs are subject to the same application and overall program withdrawal process, ADV and quoting requirements (as applicable for either NYSE or NYSE MKT), manner by which SLP securities are assigned, and non-regulatory penalties. For these purposes, the rule continues to refer to "SLP," which term includes both SLP-Prop and SLMM classes of SLP.

The SLP qualification requirements specified in Rule 107B(c) remain unchanged, but are now applicable to SLP-Props. Rule 107B(d) specifies the qualification requirements of SLMMs (the rest of Rule 107B has been renumbered accordingly). As proposed, to be approved, an SLMM would need to meet the qualification requirements currently set forth in Rule 107B(c)(1), and (3) – (5), relating to requirements for adequate technology, performance history, and disciplinary history.

SLMM Regulatory Requirements

If approved as an SLMM, an SLMM will be subject to specified regulatory obligations, which are set forth in Rule 107B(d). Because these are regulatory obligations, failure to comply with these obligations could result in disciplinary action.

First, pursuant to Rule 107B(d)(1), an SLMM must maintain a continuous two-sided quotation in those securities in which the SLMM is registered to trade as an SLP ("Two-Sided Obligation"). The Two-Sided Obligation applicable to SLMMs is virtually identical to the market-maker two-sided quoting obligations adopted by the equities markets in 2010 and is currently applicable to DMMs.

Second, pursuant to Rule 107B(d)(2), an SLMM is required to maintain net capital in accordance with the provisions of Rule 15c3-1 under the Act, which specifies the capital requirements for market makers.

Finally, pursuant to Rule 107B(d)(3), an SLMM is required to maintain unique mnemonics specifically dedicated to SLMM activity. Use of these unique mnemonics will enable SLMMs to meet their requirement under Rule 107B(d)(1)(A) to identify their market-making activity to the Exchange. Such mnemonics may not be used for non-SLMM trading including SLP-Prop trading.

Unlike SLP-Props, SLMMs will not be required to maintain information barriers between the SLMM unit and the member organization's customer, research and investment-banking business solely for Rule 107B purposes. However, it is important to note that a member organization may be required to implement or maintain information barriers between its SLMM unit and other business units (e.g. research, investment banking), for other regulatory purposes or pursuant to any other rule (e.g. Reg SHO aggregation unit requirements, limit order protection, insider trading prevention).

SLMM Order Entry Requirements

The Exchange has amended Rule 107B(i) (as new Rule 107B(j)) to modify the entry of order requirements. SLP-Props would continue to be required to enter proprietary orders only. SLMMs are similarly required to enter orders for their own account. However, SLMM orders/quotes could be entered in either a proprietary capacity or a principal capacity on behalf of an affiliated or unaffiliated person.

SLMM Security-by-Security Temporary Withdrawal

SLMMs may voluntarily withdraw from registration as a market maker in a particular security. The Exchange has included the security-by-security withdrawal provision to enable SLMMs to comply with legal or regulatory requirements that may conflict with meeting the SLMM requirements. For example, permitting an SLMM to withdraw its quotations may enable it to meet otherwise conflicting obligations under Regulation M.

To withdraw its registration in a security, the SLMM must give written notice to the SLP Liaison Committee and FINRA before 9:30 a.m. on the trading day immediately preceding the first day that the SLMM proposes to withdraw in the security. Accordingly, if an SLMM seeks to withdraw from a security on a Wednesday, notice must be received in writing prior to 9:30 a.m. on the preceding Tuesday.

Such notice must be provided by email to the following:

HYPERLINK "mailto:rairo@nyx.com"rairo@nyx.com

HYPERLINK "mailto:aprice@nyx.com"aprice@nyx.com

HYPERLINK "mailto:kross@nyx.com"kross@nyx.com

HYPERLINK "mailto:wzeichner@nys.com"wzeichner@nys.com

HYPERLINK "mailto:slpnotice@finra.org"slpnotice@finra.org

An SLMM that fails to give advanced written notice of termination to the Exchange may be subject to disciplinary action.

The SLMM must also provide written notice of the date that it would be resuming as an SLMM in the particular security. Such notice must be provided to the NYSE and FINRA contacts above at least one business day prior to the date the SLMM would like to resume acting as an SLMM in that security, provided that the notice is provided no later than 2:00 p.m.

The Exchange notes that it will not be assessing the basis for why an SLMM is seeking to temporarily withdraw its registration in a security. The SLMM has an independent obligation to assure that the time frame that it is withdrawing from registration meets the regulatory or legal purpose for withdrawal.

Acting as SLMM and SLP-Prop

The Exchange has also added to Rule 107B(h) (as Rule 107B(i)) that an SLP-Prop may not also act as an SLMM in the same securities in which it is registered as an SLP-Prop and vice versa. The Exchange believes that under the SLP program, a member organization should be either an SLP-Prop or SLMM. However, if a member organization has more than one business unit and employs the appropriate information barriers, including but not limited to having the SLP-Prop business unit "walled off" from the SLMM business unit, the member organization may engage in both an SLP-Prop and SLMM business from those different business units. Provided the information barriers preclude any coordinated trading between the SLP-Prop and SLMM business units, they may be assigned the same securities.

Staff Contact Information

Questions regarding the rule requirements applicable to SLPs should be directed to:

Clare Saperstein, Vice President, NYSE Regulation, Inc., 212.656.2355, or

David De Gregorio, Chief Counsel, NYSE Regulation, Inc., 212.656.4166,

Questions regarding the SLP application process and assignment of SLP securities should be directed to:

Robert Airo, Senior Vice President, NYSE Operations, 212.656.5663


NYSE Regulation, Inc




1. Among other things, a “market maker” is defined under the Securities Exchange Act of 1934 (the “Act”) as “any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communication system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous basis.” 15 U.S.C. 78c(a)(38).
2. 17 CFR 242.204(a)(3).
3. See Securities Exchange Act Release No. 63255 (Nov. 5, 2010), 75 FR 69484 (Nov. 12, 2010) (SR-BATS-2010-025; SR-BX-2010-66; SR-CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; SR-NASDAQ-2010-115; SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-96; and SR-NYSEArca-2010-83) (order approving enhanced quoting requirements for market makers).
4. 17 CFR 240.15c3-1. For purposes of that rule, the term “market maker” is defined as “a dealer who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized interdealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers.” 17 CFR 240.15c3-1(c)(8).
5. See NYSE Regulation Information Memo 12-11, dated April 13, 2012, for further guidance on Regulation M notifications.




Attachments

SLMM and SLP-Prop Applications .pdf


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