Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule To Expand the Risk Limitation Mechanism to All Orders, Including Complex Orders

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, notice is hereby given that on December 1, 2016, NYSE MKT LLC (“NYSE MKT” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange proposes to amend Rule 928NY (Risk Limitation Mechanism) to expand the risk limitation mechanism to all orders, including Complex Orders. The proposed rule change is available on the Exchange's Web site at www.nyse.com,, at the principal office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange proposes to amend Rule 928NY (Risk Limitation Mechanism) to expand the risk limitation mechanism to all orders, including Complex Orders.

Existing Risk Limitation Mechanism

Rule 928NY sets forth the risk-limitation system, which is designed to help Market Makers, as well as ATP Holders, better manage risk related to quoting and submitting orders, respectively, during periods of increased and significant trading activity. The Exchange requires Market Makers to utilize its risk limitation mechanism, which automatically removes a Market Maker's quotes in all series of an options class when certain parameter settings are breached. The Exchange permits, but does not require, ATP Holders to utilize its risk limitation mechanism for certain orders, which automatically cancels such orders when certain parameter settings are breached.

Pursuant to Rule 928NY, the Exchange establishes a time period during which the System calculates for quotes and orders, respectively: (1) The number of trades executed by the Market Maker or ATP Holder in a particular options class; (2) the volume of contracts traded by the Market Maker or ATP Holder in a particular options class; or (3) the aggregate percentage of the Market Maker's quoted size or ATP Holder's order size(s) executed in a particular options class (collectively, the “risk settings”). When a Market Maker or ATP Holder has breached its risk settings (i.e., has traded more than the contract or volume limit or cumulative percentage limit of a class during the specified measurement interval), the System will cancel all of the Market Maker's quotes or the ATP Holder's open orders in that class until the Market Maker or ATP Holder notifies the Exchange it will resume submitting quotes or orders. The temporary suspension of quotes or orders from the market that results when the risk settings are triggered is meant to operate as a safety valve that enables Market Makers and/or ATP Holders to re-evaluate their positions before requesting to re-enter the market.

Proposed Expansion of Risk Limitation Mechanism to All Orders

Currently, ATP Holders may voluntarily utilize risk settings for PNP Orders and PNP-Blind Orders submitted via ArcaDirect, which are defined as “Applicable Orders”. Given the importance of risk settings in today's trading environment, the Exchange proposes to expand the availability of the risk settings to all orders traded on the Exc [sic]

The Exchange believes that expanding the availability of the risk settings to all orders would reduce the likelihood of unintended trades and would enable ATP Holders to re-evaluate their positions before requesting to re-enter the market if a risk setting is triggered. The proposed expansion would, for example, prevent the execution of a large set of orders that are improperly priced for any number of reasons (i.e., because of a malfunctioning algorithm, the orders are left over from the prior day, etc.). By preventing the execution of such trades, the Exchange may help parties (including clearing members) avoid large trading losses. Thus, the Exchange believes the proposed expansion of the risk settings to all orders would allow ATP Holders to better manage the potential risks of multiple executions against an ATP Holder's trading interest that, in today's highly automated and electronic trading environment, can occur simultaneously across multiple series and multiple option classes. Consistent with the ability to better manage risk, the Exchange anticipates that the proposed changes would enhance the Exchange's overall market quality as a result of narrowed quote widths and increased liquidity for series traded on the Exchange. This proposed expansion is also being made, in part, to be responsive to requests from ATP Holders that engage in high-volume trading in a multitude of series and classes. The Exchange believes that the proposal to make the risk settings available for all orders would assist ATP Holders in providing a means to calibrate and monitor their risk exposure on all orders. As is the case today, the proposed availability of risk settings for all of an ATP Holder's orders would not be mandated, but risk settings would continue to be mandated for all Market Maker quotes.

To effect this change, the Exchange proposes to amend Rule 928NY(a)(1) to provide that the Exchange would maintain separate “trade counters” for each of the following scenarios: (i) When any order, including a single-leg order or any leg of a Complex Order submitted by an ATP Holder is executed in any series in a specified class; and (ii) when a Market Maker quote is executed in any series in an appointed class. The Exchange proposes this rule text to replace the current rule text that covers the Applicable Orders of non-Market Makers and Market Makers, respectively. Because Market Makers are also ATP Holders, and because the operation of the risk settings for orders are identical for all ATP Holders, the Exchange proposes to streamline the rule text—in Rule 928NY(a)(1) and throughout the Rule—by removing reference to “non-Market Makers” as superfluous and potentially confusing. Instead of separately addressing risk settings for orders that are available to Market Makers and non-Market Makers, the proposed rule would simply address the option as being available to all ATP Holders. Proposed Rule 928NY(a)(1) would further provide that for each of these scenarios, the trade counters would be incremented every time a trade is executed, in accordance with Commentary .07 to Rule 928NY.

The Exchange proposes to amend paragraphs (b), (c), (d), (e), and (f) to make similar changes so that each of these paragraphs would have two sub-paragraphs that would be parallel to the proposed changes to Rule 928NY(a)(1):

• The first sub-paragraph of each paragraph would address how the specific risk setting would be applied to an ATP Holder's orders, which would be the substantive change, as further described below. These proposed sub-paragraphs would replace current rule text in each paragraph governing how the specific risk setting would apply to a non-Market Maker's or Market Maker's Applicable Orders. Accordingly, current sub-paragraph (2) to each of paragraphs (b), (c), (d), (e), and (f) would be deleted.
• The proposed second sub-paragraph of each paragraph would address how the specific risk setting would be applied to a Market Marker's quotes, as further described below. Accordingly, current sub-paragraph (3) to each of paragraphs (b), (c), (d), (e), and (f) would be re-numbered as sub-paragraph (2).

In addition to the substantive change to expand risk settings to all orders, the Exchange further proposes to make non-substantive amendments to each of the proposed sub-paragraphs to paragraphs (b), (c), and (d). The Exchange believes that the proposed rule text would simplify and streamline the rule by describing a risk setting being triggered when an ATP Holder's orders or Market Marker's quotes “have traded” rather than using the more cumbersome text that an order or quote has been traded “against.” When addressing an ATP Holder's orders, the proposed rules would provide that the risk setting would be applicable to all orders in a specific class. When addressing a Market Maker's quotes, the proposed rules would provide that the risk setting would be applicable to all of the Market Maker's quotes in an appointed class. For each risk setting, the proposed new text would provide as follows.

• The Transaction-Based Risk Limitation Mechanism, described in Rule 928NY(b), would be triggered under the following conditions:

○ When a trade counter indicates that within a time period specified by the Exchange, “n” executions of an ATP Holder's open orders have traded in a specific class (proposed Rule 928NY(b)(1)); or

○ when a trade counter indicates that within a time period specified by the Exchange, “n” executions of a Market Marker's quotes have traded in an appointed class (proposed Rule 928NY(b)(2)).

• The Volume-Based Risk Limitation Mechanism, described in Rule 928NY(c), would be triggered under the following conditions:

○ When a trade counter indicates that within a time period specified by the Exchange, “k” contracts of an ATP Holder's open orders have traded in a specific class (proposed Rule 928NY(c)(1)); or

○ when a trade counter indicates that within a time period specified by the Exchange, “k” contracts of a Market Maker's quotes have traded in an appointed class (proposed Rule 928NY(c)(2)).

• The Percentage-Based Risk Limitation Mechanism, described in Rule 928NY(d), would be triggered under the following conditions:

○ When a trade counter has calculated that within a time period specified by the Exchange, “p” percentage of an ATP Holder's open orders have traded in a specific class (proposed Rule 928NY(d)(1)); or

○ when a trade counter has calculated that within a time period specified by the Exchange, “p” percentage of a Market Maker's quotes have traded in an appointed class (proposed Rule 928NY(d)(2)).

The Exchange also proposes clarifying changes to how the Percentage-Based Risk Limitation Mechanism operates. The Exchange proposes to modify Rule 928NY(d)(2)(i)-(ii) to make clear that the trade counter would first calculate, for each series of an option class, “the percentage(s) of an ATP Holder's order size(s) or a Market Maker's quote size that is executed on each side of the market, including both displayed and non-displayed size,” and would then “sum the overall percentages of the size(s) for the entire option class to calculate the `p' percentage.” The proposed changes are designed to account for the fact that ATP Holders may submit multiple orders on each side of the market that may be counted by the risk settings (whereas Market Makers have only one quote on each side of the market) and to reduce excess verbiage to streamline and condense the rule text, which the Exchange believes adds clarity and transparency to the Rule.

Proposed Changes Regarding Routable Orders

Because the proposed expansion of risk settings for orders would include routable orders, the Exchange proposes to amend Rule 928NY to address the counting and cancellation of such orders (or unexecuted portions thereof). First, the Exchange proposes to add rule text to Commentary .07 to Rule 928NY to provide that executions of routable orders on away markets would be considered by a trade counter once the execution report is received by the Exchange. The Exchange also proposes to amend Commentary .07 to Rule 928NY to provide that executions of each leg of a Complex Order would be considered by a trade counter as an individual transaction.

Regarding cancellations, the Exchange proposes to amend Commentary .01 to Rule 928NY to provide that once the risk settings have been triggered, pursuant to paragraphs (e) and (f) of the Rule, the System would automatically generate a “bulk cancel” message to cancel Market Maker quotes and electronic orders, or portions thereof, that have not been routed to away markets, excluding intraday and prior day Good-Till-Cancel (“GTC”), All-or-None (“AON”), Customer Best Execution (“CUBE”) orders, and orders entered in response to an electronic auction that are valid only for the duration of the auction (“GTX”). The Exchange has determined that it would not cancel GTC, AON, CUBE, or GTX orders because these order types are typically retail orders which, if automatically cancelled by the Exchange, could cause an operational issue for any firm that entered the order(s) (i.e., exposing a firm to the risk of a missed execution on an order that has come due). Given these potential operational issues, and for the protection of investors and the investing public, the Exchange has determined to exempt these order types from automatic cancellation when the risk settings are triggered. The Exchange also proposes to amend Commentary .01 to Rule 928NY to provide that “[o]rders and quotes residing in the Consolidated Book received prior to processing of the bulk cancel message may trade. Any unexecuted portion of an order subject to a `bulk cancel' message that had routed away, but returned unexecuted, will be immediately cancelled.”

In addition to the foregoing changes to paragraphs (e) and (f) of Rule 928NY, the Exchange also proposes to amend these paragraphs to address the action (i.e., cancellations) that the System would effect upon the triggering of the risk settings to account for the proposed amendments to Commentary .01 to the Rule. Specifically, the Exchange proposes to modify sub-paragraph (1) to both paragraphs (e) and (f) to provide that if a risk setting is triggered, the System would automatically cancel an ATP Holder's orders, “except as provided in Commentary .01 to this Rule.” Finally, the Exchange proposes to make additional conforming changes to Commentary .02 to Rule 928NY to specify that once the risk settings have been breached, any new orders (or quotes) would not be accepted until the ATP Holder or Market Maker contacts the Exchange and requests to be re-enabled.

Proposed Changes to Persistence of Risk Settings for Orders

The Exchange also proposes to amend Commentary .04 to Rule 928NY to specify the persistence of the risk settings, once activated, by an ATP Holder for orders to conform this Commentary to the changes described above to delineate risk settings between an ATP Holder's orders and a Market Maker's quotes. Specifically, the Exchange proposes to divide Commentary .04 into two paragraphs to make it easier to navigate—paragraph (a) would address the persistence of risk settings for quotes, and paragraph (b) would address the persistence of risk settings for orders.

Current Commentary .04 to Rule 928NY provides that an ATP Holder must activate its risk settings for orders on a daily basis. The Exchange proposes to amend this Commentary .04 to specify that “[o]nce an ATP Holder activates a Risk Limitation Mechanism for its orders in a specified class, the mechanism and the settings established will remain active unless, and until, the ATP Holder deactivates the Risk Limitation Mechanism or changes the settings.” While the risk settings for orders remain an optional feature, the Exchange believes this change would enable each ATP Holder to calibrate its settings as needed, as opposed to re-establishing the settings on a daily basis.

Proposed Modifications to Parameters for Each Risk Limitation Mechanism

The Exchange proposes to adjust the minimum and maximum parameters for the Risk Limitation Mechanism as set forth in Commentary .03 to the Rule. The current Rule provides that the Exchange would not exceed the following minimum and maximum parameters, applicable to quotes and orders:

• Minimum of 1 and maximum of 100 for transaction-based risk setting;
• Minimum of 20 and a maximum of 5,000 for volume-based risk setting; and
• Minimum of 100 and a maximum of 2,000 for percentage-based risk setting.

The existing parameters have been in place since 2012 and the Exchange has not modified or increased these parameters in the past four years. Since 2012, the markets have experienced more volatility and fragmentation. To account for these changes, as well as the ever-increasing automation, speed and volume transacted in today's electronic trading environment, the Exchange proposes to modify the minimum and maximum parameters, applicable to quotes and orders, as follows:

• Minimum of 3 and maximum of 2,000 for the transaction-based setting;
• Minimum of 20 and a maximum of 500,000 for volume-based setting; and
• Minimum of 100 and a maximum of 200,000 for percentage-based setting.

Although this proposal establishes the outside parameters of allowable settings, Rule 928NY would still obligate the Exchange to announce via Trader Update “any applicable minimum, maximum and/or default settings for the Risk Limitation Mechanisms,” which would afford Market Makers and ATP Holders the opportunity to adjust their own risk settings within the announced parameters. The Exchange further believes the proposed adjustments to the minimum/maximum parameters would enable the Exchange to strike the appropriate balance to ensure that risk settings may be established at a level that is consistent with existing market conditions, which would enable the risk settings to operate in the manner intended. The Exchange believes that setting the parameters within this broad range would provide ATP Holders with ample flexibility in setting their tolerance for risk. For example, ATP Holders with a lower risk tolerance may opt to select a lower threshold within the range established by the Exchange, thereby optimizing the protection afforded by this proposed rule change, whereas ATP Holders with a higher risk tolerance may select the maximum allowable parameter afforded by the proposed rule change. Moreover, while the Exchange retains discretion with respect to the levels at which it could adjust these settings, the Exchange would not be permitted to adjust the settings below the minimum or above the maximum proposed, which, the Exchange believes would ensure that the settings are at all times within a reasonable range. Finally, given that the risk settings would now be available for all order types, the Exchange believes it would be prudent to provide ample flexibility for setting the maximum thresholds.

Implementation

The Exchange will announce by Trader Update the implementation date of the proposed rule change to expand the availability of the Risk Limitation Mechanism to all orders, which implementation will be no later than 90 days after the effectiveness of this rule change.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the “Act”), in general, and furthers the objectives of Section 6(b)(5) of the Act, in particular, in that it is 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.

ATP Holders are vulnerable to the risk from a system or other error or a market event that may cause them to send a large number of orders or receive multiple, automatic executions before they can adjust their order exposure in the market. Without adequate risk management tools, such as the proposed expanded risk settings for orders, ATP Holders may opt to reduce the amount of order flow and liquidity that they provide to the market, which could undermine the quality of the markets available to market participants. Thus, the Exchange believes that the proposed rule change to expand the availability of the risk settings to all orders removes impediments to and perfects the mechanism of a free and open market by providing ATP Holders with greater control and flexibility over setting their risk tolerance and more protection over risk exposure, if the market moves in an unexpected direction. The proposed expansion of the risk settings to all orders would promote just and equitable principles of trade because it would help ATP Holders not only avoid transacting against their interests but would also reduce the potential for executions at erroneous prices, which should encourage OTPs [sic] to submit additional order flow and liquidity to the Exchange.

This proposed expansion, which was specifically requested by some ATP Holders, would foster cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in, securities as it will be available to all ATP Holders for all orders entered on the Exchange. In addition, the expanded risk settings may prevent the execution of erroneously priced trades, which would help parties (including clearing members) avoid large trading losses, thereby fostering cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in, securities.

The Exchange believes the proposed adjustments to the minimum/maximum parameters for each risk limitation mechanism, which have not been increased since 2012, are consistent with the Act because they would allow the Exchange to strike the appropriate balance to ensure that risk settings could be established at a level that is consistent with existing market conditions, which would enable the risk settings to operate in the manner intended. The Exchange believes that setting the parameters within the broad range, as proposed, would provide OTPs [sic] with ample flexibility in setting their tolerance for risk. For example, OTPs [sic] with a lower risk tolerance may opt to select a lower threshold within the range established by the Exchange, thereby optimizing the protection afforded by this proposed rule change, whereas OTPs [sic] with a higher risk tolerance may select the maximum allowable parameter afforded by the proposed rule change. Moreover, because the Exchange would not be permitted to adjust the settings below the minimum or above the maximum proposed, the settings should remain at all times within a reasonable range. Finally, given that the risk settings would now be available for all order types, the Exchange believes it would be prudent to provide ample flexibility for setting the maximum thresholds.

Consistent with the ability to better manage risk, the Exchange anticipates that the proposed enhancement to the existing Risk Limitation Mechanism would likewise enhance the Exchange's overall market quality as a result of narrowed quote widths and increased liquidity for series traded on the Exchange, which would benefit investors and the public interest because they receive better prices and because it lowers volatility in the options market. Moreover, the Exchange believes that the proposal is consistent with the protection of investors and the public interests because it would permit ATP Holders to better manage the potential risks of multiple executions against an ATP Holder's proprietary interest that, in today's highly automated and electronic trading environment, can occur simultaneously across multiple series and multiple option classes.

Finally, the Exchange believes that the proposed changes to streamline and clarify the rule text, including updated cross references that conform rule text to proposed changes, promotes just and equitable principles of trade, fosters cooperation and coordination among persons engaged in facilitating securities transactions, and removes impediments to and perfects the mechanism of a free and open market by ensuring that members, regulators and the public can more easily navigate the Exchange's rulebook and better understand the defined terms used by the Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange is proposing a market enhancement that would provide ATP Holders with greater control and flexibility over setting their risk tolerance and more protection over risk exposure, if the market moves in an unexpected direction. The Exchange believes the proposal would provide market participants with additional protection from unintended executions. The proposal is structured to offer the same enhancement to all ATP Holders, regardless of size, and would not impose a competitive burden on any participant. The Exchange does not believe that the proposed enhancement to the existing risk limitation mechanism would impose a burden on competing options exchanges. Rather, the availability of this mechanism may foster more competition. Specifically, the Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues. When an exchange offers enhanced functionality that distinguishes it from the competition and participants find it useful, it has been the Exchange's experience that competing exchanges will move to adopt similar functionality. Thus, the Exchange believes that this type of competition amongst exchanges is beneficial to the market place as a whole as it can result in enhanced processes, functionality, and technologies.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

No written comments were solicited or received with respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act and Rule 19b-4(f)(6) thereunder. Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6)(iii) thereunder.

At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) of the Act to determine whether the proposed rule change should be approved or disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number SR-NYSEMKT-2016-110 on the subject line.

Paper Comments

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2016-110. 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 Web site ( http://www.sec.gov/rules/sro.shtml ). 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 Web site 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 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEMKT-2016-110, and should be submitted on or before December 30, 2016.