[Federal Register Volume 77, Number 221 (Thursday, November 15, 2012)]
[Notices]
[Pages 68163-68167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27712]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68179; File No. SR-NYSEARCA-2012-121]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the NYSE
Arca Options Fee Schedule Relating to Pricing Applicable to Electronic
Transactions in Non-Penny Pilot Issues
November 8, 2012.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 25, 2012, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the NYSE Arca Options Fee Schedule
(``Fee Schedule'') to restructure the pricing applicable to electronic
transactions in non-Penny Pilot issues. The text of 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 restructure the pricing applicable to
electronic transactions in non-Penny Pilot issues.\4\ The Exchange
proposes to make the fee change operative on November 1, 2012.
---------------------------------------------------------------------------
\4\ As provided under NYSE Arca Options Rule 6.72, options on
certain issues have been approved to trade with a minimum price
variation of $0.01 as part of a pilot program that is currently
scheduled to expire on December 31, 2012. The proposed change will
not have an impact on pricing applicable to manual transactions in
non-Penny Pilot issues, except that, as proposed, Marketing Charges
would no longer apply. However, the Exchange does propose to amend
the Fee Schedule to reflect that Firm, Broker Dealer and Customer
electronic executions would become ``N/A'' with respect to standard
executions.
---------------------------------------------------------------------------
Currently, all transactions in non-Penny Pilot issues are
considered ``standard executions,'' as opposed to the ``Post-Take''
pricing structure that
[[Page 68164]]
currently applies only to electronic executions in Penny Pilot
issues.\5\ The Exchange now proposes to apply the Post-Take pricing
structure to electronic executions in non-Penny Pilot issues. As a
result, electronic transactions in non-Penny Pilot issues would be
subject to Post-Take credits and fees, as is currently applicable for
Penny Pilot issues. Under this structure, an electronic order or quote
is charged a fee upon execution if it executes against a resting order
or quote in the Consolidated Book (i.e., taking liquidity), or,
alternatively, a resting electronic order or quote in the Consolidated
Book (i.e., posted liquidity) generally receives a liquidity credit
when an incoming order or quote executes against it.\6\
---------------------------------------------------------------------------
\5\ Manual transactions in Penny Pilot issues are considered
standard executions and billed as such.
\6\ As described below, a Firm or Broker Dealer electronic
transaction in a non-Penny Pilot issue would be charged a fee, even
if it is posting liquidity.
---------------------------------------------------------------------------
To remain competitive, the Exchange is adopting Post-Take pricing
for electronic transactions in all non-Penny Pilot issues, but the
rates would be different than those that currently apply to Penny Pilot
issues. To encourage greater Customer participation, the proposed new
rates would provide a higher rebate to Customers that post liquidity,
as compared to other market participants, and a rate for Customer
orders that take liquidity that is comparable to other market
participants. The proposed rates for Lead Market Makers (``LMMs'') and
Market Makers for taking liquidity would be similar to each other,
although not identical because of differing levels of obligations. The
proposed rates also provide for higher rebates for posting liquidity
for Market Makers, in order to offset the higher fees for taking
liquidity. Firm and Broker Dealer electronic orders that are posted in
the Consolidated Book will continue to be charged an execution fee,
which would be the same as the current fee, despite such transactions
posting liquidity.
The proposed new fees would be as follows:
------------------------------------------------------------------------
Electronic executions
in non-Penny Pilot
issues
-----------------------
Post Take
liquidity liquidity
------------------------------------------------------------------------
Customer Electronic............................. -$0.75 $0.79
LMM............................................. -0.40 0.78
NYSE Arca Market Maker.......................... -0.30 0.80
Firm and Broker Dealer Electronic............... 0.50 0.85
------------------------------------------------------------------------
As with the Penny Pilot issues, there would be no charges for
executions in non-Penny Pilot issues on the opening auction. Also,
orders originating from the Trading Floor that execute against the
Consolidated Book so as to complete a manual transaction would continue
to be charged manual order fees, as is currently the case for Penny
Pilot issues, for which standard execution fees apply.\7\
---------------------------------------------------------------------------
\7\ See endnote 5 in the Fee Schedule.
---------------------------------------------------------------------------
In addition, the Exchange proposes to eliminate Marketing Charges
on the Exchange.\8\ Marketing Charges do not currently apply to
transactions in Penny Pilot issues and, related to the proposal to
apply Post-Take pricing to non-Penny Pilot issues, the Exchange has
decided to eliminate Marketing Charges entirely.
---------------------------------------------------------------------------
\8\ A Marketing Charge of $0.65 currently applies to LMM and
Market Maker transactions against Customers.
---------------------------------------------------------------------------
The Exchange also proposes conforming changes to the endnotes in
the Fee Schedule to account for the application of Post-Take pricing
for non-Penny Pilot issues. Specifically, the Exchange proposes to
amend endnote 5 to specify that only manual executions would be
considered ``standard executions'' (i.e., they would not be subject to
Post-Take pricing). The Exchange also proposes to amend endnote 6 to
specify that, as is currently the case for Penny Pilot issues,
transaction fees do not apply to executions occurring during the
Opening Auction, as described above. The Exchange also proposes to
amend endnote 6 to address the proposal that Firms and Broker Dealers
be charged a fee for posting liquidity in non-Penny Pilot issues.
The Exchange notes that the proposed fees are similar to those
recently adopted by the NASDAQ Stock Market LLC (``NASDAQ'') for
transactions on the NASDAQ Options Market (``NOM'') in non-Penny Pilot
Options.\9\ Additionally, the proposed fees and credits for non-Penny
Pilot issues are similar to fees and rebates currently in place at BATS
Exchange, Inc. (``BATS'') Options (``BATS Options'').\10\
---------------------------------------------------------------------------
\9\ See Exchange Act Release No. 68029 (October 10, 2012), 77 FR
63384 (October 16, 2012) (SR-NASDAQ-2012-114).
\10\ BATS assesses a Non-Penny Pilot Option Fee of $0.80 [sic]
per contract for accessing liquidity for a Professional, Firm or
Market Maker order that removes liquidity from the BATS Options
order book and a $0.75 per contract rebate for a Customer order that
removes liquidity from the BATS Options order book. Additionally,
BATS pays a $0.70 per contract rebate for a Professional, Firm or
Market Maker order that adds liquidity to the BATS Options order
book and a $0.75 rebate per contract for a Customer order that adds
liquidity to the BATS Options order book.
---------------------------------------------------------------------------
The Exchange notes that the proposed changes are not otherwise
intended to address any other issues surrounding fees for non-Penny
Pilot issues and the Exchange is not aware of any problems that OTP
Holders and OTP Firms would have in complying with the proposed change.
The Exchange proposes to make the fee change operative on November
1, 2012.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (the
``Act''),\11\ in general, and furthers the objectives of Section
6(b)(4) of the Act,\12\ in particular, because it provides for the
equitable allocation of reasonable dues, fees, and other charges among
its members, issuers and other persons using its facilities and does
not unfairly discriminate between customers, issuers, brokers or
dealers.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The Exchange operates in a highly competitive market, comprised of
10 U.S. options exchanges, in which sophisticated and knowledgeable
market participants can and do send order flow to competing exchanges
if they deem fee levels at a particular exchange to be excessive or the
rebate offered to be inadequate. The Exchange believes that the
proposed fee and rebate structure is competitive and similar to other
fees and rebates in place on other exchanges.\13\ The Exchange believes
that this competitive marketplace materially impacts the fees and
rebates present on the Exchange today and substantially influences the
proposal set forth herein. The Exchange believes that it is equitable
and not unfairly discriminatory to apply the proposed non-Penny Pilot
issue pricing to the various market participants, as noted in this
proposal. In this regard, all market participants transacting in non-
Penny Pilot issues would be subject to the fees and rebates proposed
herein.
---------------------------------------------------------------------------
\13\ See supra notes 9 and 10.
---------------------------------------------------------------------------
The Exchange believes that the proposed Customer credit to post
liquidity in non-Penny Pilot issues is reasonable because it would
continue to incent OTP Holders and OTP Firms to transact Customer order
flow on the Exchange. In this regard, Customer order flow benefits all
market participants through the increased liquidity that it brings to
the market. Customers would be subject to a $0.79 per contract fee to
remove liquidity in non-Penny Pilot issues, as compared to
[[Page 68165]]
no fee today, which the Exchange believes is reasonable due to the
opportunity to receive the proposed credit. The Exchange believes that
its proposal to offer a Customer credit to post liquidity in non-Penny
Pilot issues (from no credit today, to $0.75 per contract as proposed)
is reasonable because other market participants will benefit from the
increased order flow to the Exchange.
The Exchange believes that charging a fee for Firm and Broker
Dealer executions that post liquidity and increasing the fee for their
executions that take liquidity in non-Penny Pilot issues is reasonable
because the fees would enable the Exchange to incentivize Customers to
post greater amounts of liquidity in non-Penny Pilot issues. The
Exchange believes that its success at attracting Customer order flow
benefits all market participants by improving the quality of order
interaction and executions at the Exchange, including for Firms and
Broker Dealers.
The Exchange believes that it is equitable and not unfairly
discriminatory to assess Firms and Broker Dealers a fee for posting
liquidity in non-Penny Pilot issues, but to provide a credit to other
market participants for posting liquidity in non-Penny Pilot issues.
The Exchange notes that Firms and Broker Dealers would be assessed the
same $0.50 per contract fee that they are currently assessed for
posting liquidity in non-Penny Pilot issues. More specifically, the
Exchange believes that not assessing a Customer, LMM or NYSE Arca
Market Maker a fee for posting liquidity in non-Penny Pilot issues, as
compared to Firms and Broker Dealers, is equitable and not unfairly
discriminatory because Customers, LMMs, and NYSE Arca Market Makers
differ from Firms and Broker Dealers. In this regard, the Exchange
believes that Customer order flow benefits all market participants by
improving liquidity and the quality of order interaction. Additionally,
LMMs and Market Makers have obligations to the market and regulatory
requirements,\14\ which normally do not apply to other market
participants. For example, an LMM has the obligation to make continuous
markets 90% of the time that the Exchange is open for trading, while
other Market Makers have the obligation to make continuous markets 60%
of the time that the Exchange is open for trading. Both LMMs and other
Market Makers must also engage in a course of dealing that is
consistent with the maintenance of a fair and orderly market.
Accordingly, the Exchange believes that it is equitable and not
unfairly discriminatory to charge Firms and Broker Dealers for posting
liquidity but to not charge other market participants for doing so.
---------------------------------------------------------------------------
\14\ See NYSE Arca Rules 6.32 (Market Maker Defined), 6.37
(Obligations of Market Makers), 6.37A (Obligations of Market
Makers--OX) and 6.37B (Market Maker Quotations--OX).
---------------------------------------------------------------------------
The proposed differentiation between pricing for Customers, LMMs,
NYSE Arca Market Makers and other market participants is also equitable
and not unfairly discriminatory because it reflects the differing
contributions made to the liquidity and trading environment on the
Exchange by Customers, LMMs, and NYSE Arca Market Makers, as well as
the differing mix of orders entered. The Exchange believes that
increasing the Firm and Broker Dealer fees for taking liquidity in non-
Penny Pilot issues to $0.85 per contract is equitable and not unfairly
discriminatory because Firms and Broker Dealers will be assessed the
same fee. Further, the amount of the fee is reasonable because it is
the same as the rate charged to Firms and Broker Dealers on other
exchanges. For example, NOM charges Professionals, Non-NOM Market
Makers and Firms $0.85 per contract to take liquidity in non-Penny
Pilot issues. Customers, LMMs and Market Makers would be assessed a
lower fee for taking liquidity in non-Penny Pilot issues, as compared
to Firms and Broker Dealers, because, as mentioned above, the fees
reflect the differing contributions made to the liquidity and trading
environment on the Exchange by Customers, LMMs, and Market Makers, as
well as the differing mix of orders.
The Exchange believes that the rates proposed for LMMs and Market
Makers are equitable and not unfairly discriminatory. In this regard,
non-Penny Pilot issues are typically less liquid than Penny Pilot
issues and thus the heightened quoting obligation of the LMM in these
issues requires a differentiated posting incentive as compared to Penny
Pilot issues. Accordingly, since there is much greater risk for a
liquidity provider when posting versus taking in less liquid names and
the LMM's quoting obligation is 50% higher than a regular Market Maker,
they require a meaningfully higher posting rebate. Taking liquidity is
not as much of the core function of the liquidity provider, thus the
difference in take rates do not have to be as substantial, which the
Exchange believes is reasonable.
The Exchange also believes that, overall, the proposed fees for
taking liquidity are reasonable because in the current U.S. options
market, many of the contracts are quoted in pennies. Under this pricing
structure, the minimum penny tick increment equates to a $1.00 economic
value difference per contract, given that a single standardized U.S.
option contract covers 100 shares of the underlying stock.
For contracts that are quoted in $0.05 increments (non-pennies),
the value per tick is $5.00 in proceeds to the investor transacting in
these contracts. Liquidity rebate and access fee structures on the
make-take exchanges, including the Exchange's Post-Take pricing
structure, for securities quoted in penny increments are commonly in
the $0.30 to $0.45 per contract range. A $0.30 per contract rebate in a
penny quoted security is a rebate equivalent to 30% of the value of the
minimum tick. A $0.45 per contract fee in a penny quoted security is a
charge equivalent to 45% of the value of that minimum tick. In other
words, in penny quoted securities, where the price is improved by one
tick with an access fee of $0.45 per contract, an investor paying to
access that quote is still $0.55 better off than trading at the wider
spread, even without the access fee ($1.00 of price improvement less a
$0.45 access fee equals $0.55 better economics). This computation is
equally true for securities quoted in wider increments. Rebates and
access fees near the $0.85 per contract level equate to only 17% of the
value of the minimum tick in non-Penny Pilot issues, less than the
experience today in Penny Pilot issues. For example, a retail investor
transacting a single contract in a non-penny quoted security quoted a
single tick tighter than the rest of the market, and paying an access
fee of $0.79 per contract, is receiving an economic benefit of $4.21
($0.05 improved tick equals $5.00 in proceeds less $0.79 access fee,
which equals $4.21). The Exchange believes that encouraging LMMs and
Market Makers to quote more aggressively by giving credits to post
liquidity and incenting Customer orders to post on NYSE Arca will
narrow the spread in non-Penny Pilot issues to the benefit of investors
and all market participants by improving the overall economics of the
resulting transactions that occur on the Exchange, even if the access
fee paid in connection with such transactions is higher. Accordingly,
the Exchange believes that the proposed fees and rebates for the non-
Penny Pilot issues are reasonable, equitable and not unfairly
discriminatory.
As with Penny Pilot issues, there will be no fees for transactions
on the Opening Auction. The Exchange believes that this is equitable
and not unfairly discriminatory because it
[[Page 68166]]
would apply to trading interest from all market participants, and is
reasonable because a determination of posting liquidity or taking
liquidity is difficult prior to the establishment of the opening
market.
The Exchange believes the application of manual fees to orders
represented by a Floor Broker and partially executed against the
Consolidated Book are reasonable, equitable and not unfairly
discriminatory, because the fees are those expected by the market
participant that submits the order, and does not alter the fees or
credits expected by the market participant whose order or quote is
resting in the Consolidated Book.
The Exchange believes that eliminating Marketing Charges on the
Exchange is reasonable because it would eliminate a fee for Market
Makers and LMMs that the Exchange has decided to no longer apply in
light of the proposed application of Post-Take pricing to non-Penny
Pilot issues--currently, Marketing Charges do not apply to Penny Pilot
issues. This is equitable and not unfairly discriminatory because the
charges are currently collected only from LMMs and Market Makers who
interact with Customer orders, and, as a result of the proposed change,
would no longer be collected from any participant on the Exchange. As a
result, Customers would receive direct credit for posted liquidity,
rather than a payment for order flow in an indirect manner.
Finally, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues. In such an environment, the Exchange must continually
review, and consider adjusting, its fees and credits to remain
competitive with other exchanges. For the reasons described above, the
Exchange believes that the proposed rule change reflects this
competitive environment.
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one unsolicited, written comment on the
proposed rule change from an LMM on the Exchange. The LMM commented
that the proposed pricing structure would negatively impact its
business because it trades less liquid issues with wider markets, and
that the restructuring of the fees will not provide a sufficient
incentive to him to provide tighter markets to receive credits for
posting liquidity. The LMM also stated that the proposed pricing
structure will encourage order flow providers to send mid-market trades
(orders between the bid and offer) to the Exchange to collect payment
(posted liquidity credits) and gain priority, and then direct market-
taking orders to other exchanges where the order flow provider would
not be charged a market taker fee.
Additionally, the LMM believed that the proposed pricing structure
would encourage competition from Customers who would have an incentive
to improve on the LMM's markets to collect posted liquidity credits and
also gain priority, diminishing the value of being an OTP-holding
market maker on the Exchange. Lastly, the LMM commented that there
might or might not be an increase in order flow between the bid and
offer, but that other, more sophisticated firms would be more
competitive, and, therefore, the LMM would not see the benefits of the
proposed pricing structure.
In response to the LMM's statements, the Exchange believes, as
described above, that the proposed fee and rebate structure is
competitive and similar to other fees and rebates in place on other
exchanges. The LMM's complaints are that he will not be able to compete
against Customers or more sophisticated firms. The Exchange believes
that attracting Customer order flow benefits all market participants by
improving the quality of order interaction and executions at the
Exchange, including for Firms and Broker Dealers. Encouraging LMMs and
Market Makers to quote more aggressively by giving credits to post
liquidity and incenting Customer orders to post on NYSE Arca will
narrow the spread in non-Penny Pilot issues to the benefit of investors
and all market participants by improving the overall economics of the
resulting transactions that occur on the Exchange, and by increasing
competition between the LMM and Customers and competing Market Makers,
spreads will narrow and more attractive order flow will be available on
the Exchange, enhancing the markets for all participants.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \15\ of the Act and subparagraph (f)(2) of Rule
19b-4 \16\ thereunder, because it establishes a due, fee, or other
charge imposed by the NYSE Arca.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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.
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 [email protected]. Please include
File Number SR-NYSEARCA-2012-121 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEARCA-2012-121. 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 20549-1090, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Copies of such
[[Page 68167]]
filing also will be available for inspection and copying at the NYSE's
principal office and on its Internet Web site at www.nyse.com. 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-NYSEARCA-2012-121, and
should be submitted on or before December 6, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27712 Filed 11-14-12; 8:45 am]
BILLING CODE 8011-01-P