FR 2021-02777

General Summary

The document is a notice from the Securities and Exchange Commission (SEC) about a proposed rule change by the NYSE American LLC. The proposal seeks to modify Rule 971.2NY to introduce an "all-or-none" (AON) functionality for larger orders within its Complex Customer Best Execution Auction (CUBE). This feature is intended for trades consisting of at least 500 contracts on the smallest leg. The aim of the proposed change is to provide more competitive pricing and better execution capabilities for these larger orders, similar to mechanisms on other trading platforms.

Significant Issues and Concerns

While the proposed rule may seem beneficial to those familiar with financial markets, the document is fraught with technical jargon and complex terms. Such language can be challenging for those unfamiliar with financial or legal documents. Additionally, the use of numerous footnotes and references to existing rules, like CUBE or AON, implies a necessity for prior knowledge. This could alienate individuals not versed in trading language and regulations.

Another issue is the lack of a detailed explanation regarding how smaller market participants or individual investors might be impacted. The intricacies of how the rule will affect the market dynamics are not fully explored, which may leave readers with questions about broader implications for different stakeholders.

Impact on the Public

For the general public, this rule change might appear to have minimal direct influence since it primarily affects large-scale trading activities that occur in specialized financial sectors. However, indirectly, the ability for larger orders to receive better pricing through a more competitive auction process could lead to increased liquidity and potentially tighter markets. In theory, this could eventually influence the options available to retail investors and the price at which they buy or sell.

Impact on Specific Stakeholders

The primary beneficiaries of this rule change are likely to be ATP Holders—entities authorized to trade on the NYSE American Options market—who manage large orders. The new flexibility might encourage these stakeholders to engage more meaningfully in complex order auctions, knowing that they have greater certainty in execution thanks to this proposed AON mechanism.

Conversely, smaller investors might find themselves at a disadvantage if market competitiveness increasingly favors larger trades, though this document does not specifically address such a concern. The provision to allow immediate implementation of the rule, particularly related to operational needs like potential trading floor closures due to COVID-19, demonstrates adaptability and foresight but could be perceived negatively by those wary of too-rapid changes in trading rules.

Overall, while the proposal is technically sound within its context, a broader explanation might have helped demystify its implications for a more general audience and smaller market players.

In the reviewed document, multiple references to financial allocations and adjustments are embedded within the technical details of the NYSE American LLC's proposed rule change regarding the Complex Customer Best Execution (CUBE) Auction. These financial references predominantly address enhancements to pricing mechanisms for executing larger-sized complex orders through the introduction of All-or-None (AON) functionality.

The document mentions how the CUBE Best Bid Offer (BBO), a critical element in starting a Complex CUBE Auction, needs price improvement over resting interest. This means that the mentioned orders must be priced better than existing ones in the system to be actionable. Specifically, the financial modification involves the CUBE BBO improving by $0.01 over the Complex BBO or the Derived BBO, which itself must be improved by $0.01 multiplied by the smallest leg of the complex order strategy. For example, in a complex order strategy with a ratio of 2, 3, and 6 contracts per leg, the threshold for initiating the auction would require the Derived BBO to be improved by $0.02.

These financial references are directly tied to one of the identified issues, specifically the challenge of understanding the complex financial and trading terminology. The document assumes familiarity with the mechanisms by which these financial improvements and adjustments are applied, which might not be clear to a general audience.

Furthermore, while these monetary elements articulate the conditions under which price improvements need to occur for the auction process, there is no direct spending, appropriations, or financial allocations discussed in the traditional sense that involve transfers of money or budgeting. Instead, the focus is on the pricing criteria and algorithmic requirements necessary for participants to engage in the auction effectively, indicating a more technical financial application rather than direct financial transactions or commitments.

In summary, the financial references in the document primarily serve to provide regulatory and procedural context for how larger-sized orders can achieve price improvement in the CUBE Auction. The lack of explanation on how these changes might impact smaller market participants or individual investors highlights another issue where the potential broader market effects of these financial mechanisms remain ambiguous to those not deeply versed in market operations and the associated technical language.