Updates to Nyse Rule 122 (Orders with More Than One Broker)

Information Memo

NYSE IM-20-16

November 23, 2020

To: NEW YORK STOCK EXCHANGE LLC MEMBER ORGANIZATIONS

From: NYSE REGULATION

Subject: UPDATES TO NYSE RULE 122 (ORDERS WITH MORE THAN ONE BROKER)

The New York Stock Exchange LLC (“NYSE” or the “Exchange”) has amended NYSE Rule 122 (Orders with More than One Broker), effective November 6, 2020.1 The purpose of this Information Memorandum is to summarize the key amendments.

NYSE Rule 122 – Background

NYSE Rule 122 states, among other things, that “no member organization or subsidiary of such organization within the meaning of Rule 321, shall send to, or maintain with, more than one Floor broker, for execution on the Exchange, orders that may execute at the same price for the purchase or sale of the same security with knowledge that such orders are for the account of the same principal.”

NYSE Rule 122 is designed to prevent member organizations from circumventing the parity allocation rules to obtain preferential execution by splitting a single order among multiple Floor brokers. An exception to this rule is if the orders are not for the account of the same principal, in which case, it is permissible for the member organization to maintain such orders with different Floor brokers. This exception reflects the Exchange’s understanding that some member organizations, or customers of member organizations, have multiple trading desks that do not coordinate trading strategies and are separated by information barriers.

1 See Securities Exchange Act Release No. 90371 (November 6, 2020), 85 FR 48738 (August 12, 2020) (SR-NYSE-2020-66) (Approval Order).

1 NYSE Rule 122 – Updates

The Exchange amended NYSE Rule 122 both to eliminate obsolete text and to provide additional information for both Floor brokers and their off-Floor member organization customers regarding when an order would not be considered for the account of the same principal. In particular, the amended NYSE Rule 122, among other things, is designed to provide additional guidance for member organizations seeking to use more than one Floor broker for orders that they represent on an agency basis. The updates to NYSE Rule 122 are consistent with the Exchange’s previous interpretation and enforcement of the rule.

The Exchange has updated rule text and added new commentary to provide further clarity regarding NYSE Rule 122 as follows.2

 The Exchange added new Commentary .01 to provide further specificity that sending to, maintaining with, or using “more than one Floor broker” means more than one Floor broker member organization or two different individual Floor brokers at the same Floor broker member organization.

 The Exchange added new Commentary .02 to provide further specificity for circumstances when a member organization uses more than one Floor broker for its own orders. In those cases, multiple orders originating from the member organization are presumed not to be for the account of the same principal if each order is from a separate trading unit that is separated by information barriers or other barriers that restrict the trading unit from coordinating trading strategies, sharing capital, and sharing profits and losses with other trading units (an “Independent Unit”).

 The Exchange added new Commentary .03 to provide further specificity for circumstances when a member organization uses more than one Floor broker for orders that it represents on an agency basis. This new Commentary is designed to provide guidance to member organizations seeking to use Floor brokers for orders from non-member customers that have Independent Units within one firm. In such cases, multiple orders that the member organization represents on an agency basis from a single customer are presumed not to be for the account of the same principal

2 The text of the revised rule is attached to this Information Memorandum, and a full description of the revised rule as compared to the Exchange’s former rule is available in the proposed rule change as filed with the U.S. Securities and Exchange Commission, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/rule-filings/filings/2020/SR-NYSE-2020- 66,%20Am.%201.pdf.

2 if the member organization’s customer maintains Independent Units and the orders are from Independent Units.3

 The Exchange added further specificity regarding supervisory systems and written policies and procedures that a member organization must have in place if it seeks to use more than one Floor broker:

o A member organization that uses more than one Floor broker for its own orders must have supervisory systems and written policies and procedures reasonably designed to ensure that it is not using more than one Floor broker for orders that are for the account of the same principal.

o A member organization that represents a customer on an agency basis and uses more than one Floor broker for such customer must have supervisory systems and written policies and procedures reasonably designed to ensure that the orders it receives from the customer are from Independent Units, including that the member organization must:

. Use reasonable diligence to know and retain the essential facts relating to the operation and supervision of its customer’s information barriers or other barriers to ensure there is a prohibition against the coordination of trading strategies and that there is in fact no coordination of trading strategies, and that the orders are from Independent Units;

. Review and document such reviews that the orders received from its customer originated from Independent Units; and

. Obtain an annual written representation from each customer that such orders originate from Independent Units.

Member organizations should familiarize themselves with the revised rule. For questions concerning this Information Memorandum, please contact NYSE Regulation at NYSE- [email protected].

3 With respect to both member organization and agency orders, there is a presumption that multiple orders are for the account of the same principal (i.e., not from Independent Units) if the trading strategies: are part of the same fund, or run by the same desk, group, employee(s), or portfolio manager(s); or are otherwise overseen or supervised by the same fund, desk, group, employee(s), or portfolio manager(s); or share capital or roll up to the same profit and loss center. See NYSE Rule 122, Commentary .04.

3 Attachment:

NYSE Rule 122, amended as of November 6, 2020