[Federal Register Volume 78, Number 70 (Thursday, April 11, 2013)]
[Notices]
[Pages 21681-21691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08444]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69335; File No. SR-NYSEArca-2013-34]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change and Amendment No. 1 Thereto To Implement a One-
Year Pilot Program for Issuers of Certain Exchange-Traded Products
(``ETPs'') Listed on the Exchange
April 5, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\
notice is hereby given that, on March 21, 2013, NYSE Arca, Inc.
(``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. On April 5, 2013, the Exchange submitted Amendment No. 1 to
the proposed rule change, which replaces and supersedes the proposed
rule change in its entirety. The Commission is publishing this notice
to solicit comments on the proposed rule change, as modified by
Amendment No. 1 thereto, from interested persons.
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\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to implement a one-year pilot program for
issuers of certain exchange-traded products (``ETPs'') listed on the
Exchange. 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.
[[Page 21682]]
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
This Amendment No. 1 to SR-NYSEArca-2013-34 replaces and supercedes
SR-NYSEArca-2013-34 in its entirety.\4\
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\4\ SR-NYSEArca-2013-34 replaced and superceded SR-NYSEArca-
2012-37, which was withdrawn by the Exchange. See Securities
Exchange Act Release Nos. 66966 (May 11, 2012), 77 FR 29419 (May 17,
2012) and 68616 (Jan. 10, 2013), 78 FR 3482 (Jan. 16, 2013) (SR-
NYSEArca-2012-37). Attached hereto is Exhibit 4, which reflects the
changes made to Exhibit 5.
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The Exchange proposes to create a one-year pilot program for
issuers of certain ETPs listed on the Exchange. The pilot program would
be called the NYSE Arca ETP Incentive Program (``Incentive Program'').
As described in more detail below, the Incentive Program is designed to
enhance the market quality for ETPs by incentivizing Market Makers \5\
to take Lead Market Maker (``LMM'') assignments in certain lower volume
ETPs by offering an alternative fee structure for such LMMs that would
be funded from the Exchange's general revenues. The costs of the
Incentive Program would be offset by charging participating issuers
non-refundable Optional Incentive Fees, which would be credited to the
Exchange's general revenues. Participation would be entirely voluntary
on the part of both LMMs and issuers. The Exchange proposes to add new
NYSE Arca Equities Rule 8.800 to set forth the requirements for the
Incentive Program, including performance standards specific to LMMs
participating in the Incentive Program.
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\5\ A Market Maker is an Equity Trading Permit Holder (``ETP
Holder'') that acts as a Market Maker pursuant to NYSE Arca Equities
Rule 7. See NYSE Arca Equities Rule 1.1(v). An ETP Holder is a sole
proprietorship, partnership, corporation, limited liability company,
or other organization in good standing that has been issued an
Equity Trading Permit. See NYSE Arca Equities Rule 1.1(n).
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Background
Under the current Fee Schedule for listings, an issuer of an ETP is
required to pay a Listing Fee that ranges from $5,000 to $45,000.\6\ An
ETP issuer also pays a graduated Annual Fee based on the number of
shares of the ETP that are outstanding. The Annual Fee ranges from
$5,000 to $55,000.
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\6\ The Exchange has one Schedule of Fees and Charges for
Exchange Services that is for listings (``Listing Fee Schedule'')
and another that is for trade-related charges (``Trading Fee
Schedule''). To differentiate them, the Exchange proposes to change
the name of the former to ``SCHEDULE OF FEES AND CHARGES FOR
EXCHANGE LISTING SERVICES.'' ETPs are generally classified as either
Derivative Securities Products or Structured Products for purposes
of the Listing Fee Schedule. See Listing Fee Schedule, available at
http://www.nyse.com/pdfs/NYSEArca_Listing_Fees.pdf.
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A qualified Market Maker may request an assignment as an LMM for an
ETP, and the request is subject to approval by the Exchange.\7\ For
some ETPs, no Market Maker requests an assignment as an LMM, and the
ETP therefore trades without an LMM assigned to it. The Exchange
operates under the price-time priority model for all market
participants, so there is no distinct transactional benefit to being
assigned as an LMM. However, LMMs must meet certain obligations and
requirements and therefore incur greater risks than other market
participants on the Exchange.
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\7\ See NYSE Arca Equities Rule 7.22(d).
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An LMM is currently subject to the obligations for Market Makers
that are set forth in NYSE Arca Equities Rule 7.23 and the minimum
performance standards that are referenced in NYSE Arca Equities Rule
7.24. Under NYSE Arca Equities Rule 7.24, the minimum performance
standards include (i) Percent of time at the National Best Bid (the
``NBB'') or National Best Offer (the ``NBO'') (collectively, the
``NBBO''), (ii) percent of executions better than the NBBO, (iii)
average displayed size, (iv) average quoted spread, and (v) in the
event that the security is a derivative security, the ability to
transact in underlying markets. An LMM's minimum performance standards
are described in an official NYSE Arca policy, titled NYSE Arca LMM
Requirements, which may be amended from time to time. The minimum
performance standards are measured daily and reviewed as a monthly
average. The Exchange believes that they are stringent and help foster
liquidity provision and stability in the market.\8\
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\8\ References in this rule filing to an LMM's minimum
performance standards outside of the Incentive Program mean those
set forth in NYSE Arca LMM Requirements. The proposed standards for
LMMs in the Incentive Program are referred to as the ``proposed
Incentive Program LMM performance standards.''
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The risks for LMMs that exceed those of other market participants
include risks associated with managing position inventory as well as
risks associated with maintaining quotes. Inventory risks may be higher
for certain ETPs with low volume and low shares outstanding because
there are fewer opportunities to turn over positions in such ETPs and
there is an accumulation of costs from carrying those positions as well
as positions in the underlying securities used for hedging.\9\ LMMs are
currently required to continuously quote on both sides of the market;
therefore, they must be willing to buy as well as sell by posting
displayed and firm quotes on the Exchange. When there is a low volume
of shares outstanding, there is often less supply for securities
lending purposes. In order to meet settlement requirements, LMMs acting
in ETPs with low shares outstanding are often required to maintain long
ETP positions. Quoting risks exist due to the complexity of pricing
ETPs and the potential for human and/or technological errors. ETPs are
open-ended and derivatively priced securities that typically track
returns of underlying assets. LMMs' quotes can diverge from the
underlying assets' values, and in such cases, the LMMs are more likely
to buy (sell) at prices that are above (below) theoretical fair values.
Because LMMs are currently required to continuously quote on both sides
of the market and maintain certain minimum performance standards, they
are more likely to face these types of risks because other market
participants have more freedom to withdraw quotes upon experiencing
difficulties or unusual market conditions.
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\9\ Costs of carrying ETP inventories include the expense ratio,
which includes the management fee, financing costs or the cost of
capital, and the opportunity cost of allocating capital. At times,
it may also include stock loan costs for maintaining a hedge in
hard-to-borrow securities.
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To incentivize firms to take on the LMM designation and foster
liquidity provision and stability in the market, the Exchange currently
provides LMMs with an opportunity to receive incrementally higher
transaction credits and incur incrementally lower transaction fees
(``LMM Rates'') compared to standard liquidity maker-taker rates
(``Standard Rates'').\10\ LMM
[[Page 21683]]
Rates are intended to balance the increased risks and requirements
assumed by LMMs. Accordingly, the value of acting as an LMM can be
measured by the incremental difference in the transaction credits or
fees under the LMM Rates as compared to the Standard Rates. However,
the absolute incremental difference depends on the LMM's trading
volume. Trading volume for different ETPs can vary significantly and
result in a corresponding variance in LMM trading volume. The benefit
of acting as an LMM can therefore vary significantly depending upon the
ETP to which the LMM is assigned. There are fewer financial benefits
for LMM assignments in ETPs with lower CADVs than ETPs with higher
CADVs. The table below provides hypothetical examples based on
assumptions that NYSE Arca market share equals 22%, LMM participation
rate equals 20%, LMM make ratio equals 80%, and LMM take ratio equals
20%: \11\
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\10\ The Exchange generally employs a maker-taker transactional
fee structure, whereby an ETP Holder that removes liquidity is
charged a fee (``Take Rate''), and an ETP Holder that provides
liquidity receives a credit (``Make Rate''). The Take Rate for LMMs
is currently $0.0025 per share. The Make Rate for LMMs is currently
generally between $0.0035 and $0.0045 per share depending on
consolidated average daily volume (``CADV''). See Trading Fee
Schedule, available at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees__4_4__13_copy.pdf.
\11\ Market share is the percentage of CADV traded on NYSE Arca.
Participation rate is the percentage of NYSE Arca volume traded by
the LMM. Make ratio is the percentage of LMM volume that provides
liquidity. Take ratio is the percentage of LMM volume that takes
liquidity. The formula for calculating the transaction credit is as
follows: (LMM make volume * Make Rate) + (LMM take volume * Take
Rate). LMM make volume equals CADV * Arca market share * LMM
participation rate * LMM make ratio. LMM take volume equals CADV *
Arca market share * LMM participation rate * LMM take ratio.
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Annual
Annual transaction Annual
Symbol CADV transaction credit/fee incremental
credit/fee (standard difference
(LMM rates) rates)
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ABC............................................. 25,000,000 $637,560 $332,640 $304,920
DEF............................................. 5,100,000 130,062 67,859 62,204
GHI............................................. 2,500,000 74,844 33,264 41,580
JKL............................................. 1,100,000 32,931 14,636 18,295
MNO............................................. 750,000 25,780 9,979 15,800
PQR............................................. 500,000 17,186 6,653 10,534
STU............................................. 100,000 3,437 1,331 2,107
VWX............................................. 10,000 344 133 211
YZ.............................................. 1,000 34 13 21
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The Exchange believes that the assignment of an LMM, which is held
to higher standards as compared to Market Makers and other market
participants, is a critical component of the promotion of a consistent,
fair and orderly market in ETPs on the Exchange. However, market
participants may be forgoing LMM assignments in ETPs--instead choosing
to trade ETPs as Market Makers or ETP Holders with lower or no
obligations or minimum performance standards--because the incentives to
serve as an LMM in low-volume ETPs are insufficient to outweigh the
obligations, minimum performance standards, and other risks described
above. To illustrate how this change has transpired, the following
table highlights the increasing proportion of new NYSE Arca ETPs that
are listed without an LMM present:
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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New NYSE Arca ETP Listings.......................... 11 34 49 133 223 195 124 196 297 147
Listed with LMM..................................... 11 34 49 133 218 190 121 175 271 135
Listed without LMM.................................. 0 0 0 0 5 5 3 21 26 12
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The Exchange is concerned that this trend will continue or worsen
if there is no mechanism to appropriately remunerate capable Market
Makers to take on the obligations and accountability that are part and
parcel of the LMM assignment. The Exchange also is concerned that this
would not be limited to future listings and that existing listings
could also be subject to LMM withdrawals. Indeed, since January 2008,
nearly 100% of all LMM withdrawal requests for ETPs already listed and
trading were made for securities that exhibited low CADV in the period
prior to the withdrawal requests being made. This behavior further
signals a connection between low CADV and low interest levels from
firms seeking to act as LMMs. Likewise, it supports the assertion that
there is less value relative to the risks of acting as the LMM for
certain ETPs.
The Exchange believes that there is ample evidence, along with
logical inference, to support the assertion that the presence of an
obligated and accountable liquidity provider leads to superior market
quality and thus benefits long-term investors. When there is an LMM
assigned to a security listed on NYSE Arca, long-term investors trading
on the Exchange in the secondary market likely experience enhanced
market quality compared to similar securities for which there are no
LMMs assigned. For instance, in the fourth quarter of 2012, there were
609 ETPs listed on NYSE Arca that traded less than 10,000 shares CADV.
Of those ETPs, 567 had LMMs while 42 did not. The average spread for
the ETPs with LMMs was 0.79% and the average quote size was 3,014
shares. The average spread for the ETPs without LMMs was 11.52% and the
average quote size was 1,655 shares. During the same time period, there
were 410 ETPs listed on NYSE Arca that traded between 10,000 shares and
100,000 shares CADV. Of those ETPs, 396 had LMMs while 14 did not. The
average spread for the ETPs with LMMs was 0.23% and the average quote
size was 6,643 shares. The average spread for ETPs without LMMs was
0.36% and the average quote size was 2,613 shares. Exhibits 1 and 2
illustrate that these observations were consistent over longer time
periods and that there has been a greater variance in market quality
for ETPs without LMMs.\12\
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\12\ All open-ended ETPs trading over 100,000 CADV have LMMs
except SPY, which has significant liquidity without the need for an
LMM, and UBS E-TRACS Alerian MLP Infrastructure ETN (symbol: MLPI).
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[[Page 21684]]
For ETPs <10,000 Shares CADV:
[GRAPHIC] [TIFF OMITTED] TN11AP13.000
[[Page 21685]]
For ETPs between 10,000 and 100,000 Shares CADV:
[GRAPHIC] [TIFF OMITTED] TN11AP13.001
Proposed Incentive Program
To address these issues, the Exchange proposes to establish the
Incentive Program as a one-year pilot to enhance the market quality for
ETPs by incentivizing Market Makers to take LMM assignments in certain
lower volume ETPs by offering an alternative fee structure for such
LMMs funded from the Exchange's general revenues. Incentive Program
costs would be offset by charging participating issuers non-refundable
Optional Incentive Fees, which would be credited to the Exchange's
general revenues. Participation would be entirely voluntary on the part
of both LMMs and issuers. The Exchange proposes to add new NYSE Arca
Equities Rule 8.800, which would set forth Incentive Program
requirements, including performance standards specific to LMMs
participating in the Incentive Program, as described in more detail
below.
Proposed Rule
Proposed NYSE Arca Equities Rule 8.800(a) would describe the ETPs
that would be eligible to participate in the Incentive Program. An ETP
would be eligible to participate in the Incentive Program if:
(1) It is listed on the Exchange as of the commencement of the
pilot period or becomes listed during the pilot period;
(2) the listing is under NYSE Arca Equities Rules 5.2(j)(3)
(Investment Company Units), 5.2(j)(5) (Equity Gold Shares), 8.100
(Portfolio Depositary Receipts), 8.200 (Trust Issued Receipts), 8.201
(Commodity-Based Trust Shares), 8.202 (Currency Trust Shares), 8.203
(Commodity Index Trust Shares), 8.204 (Commodity Futures Trust Shares),
8.300 (Partnership Units), 8.600 (Managed Fund Shares), or 8.700
(Managed Trust Securities);
(3) with respect to an ETP that listed on the Exchange before the
commencement of the Incentive Program, the ETP has a CADV of one
million shares or less for at least the preceding three months and the
issuer of such ETP has not suspended the issuance or redemption of new
shares; \13\ and
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\13\ The Exchange maintains a list of ETPs that have suspended
the issuance of new shares, which is available at https://etp.nyx.com/en/trading-information/us/funds-closed-creation.
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(4) it is compliant with continuing listing standards, if the ETP
was added to the Incentive Program after listing on the Exchange.
Proposed NYSE Arca Equities Rule 8.800(b) would describe the issuer
application and LMM assignment process. Specifically, under proposed
NYSE Arca Equities Rule 8.800(b)(1), an issuer that wished to have an
ETP participate in the Incentive Program and pay the Exchange an
Optional Incentive Fee would be required to submit a written
application in a form prescribed by the Exchange for each ETP. The
issuer could apply to have its ETP participate at the time of listing
or thereafter at the beginning of each quarter during the pilot period.
An issuer could not have more than five ETPs that were listed on the
Exchange prior to the pilot period participate in the Incentive
Program.\14\ However, there would not be a limitation on the number of
an issuer's ETPs listed during the pilot period that could participate.
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\14\ In light of this limitation, the Exchange does not believe
that there would be any improper incentive for an LMM to pressure an
issuer to place currently listed ETPs in the Incentive Program.
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Proposed NYSE Arca Equities Rule 8.800(b)(2) would set forth
eligibility requirements for issuers. Specifically, in order for its
ETP to be eligible to participate in the Incentive Program, an issuer
must be current in all payments due to the Exchange.
Proposed NYSE Arca Equities Rule 8.800(b)(3) would provide that the
Exchange would communicate the ETP(s) proposed for inclusion in the
Incentive Program on a written solicitation that would be sent to all
qualified LMMs \15\ along with the
[[Page 21686]]
Optional Incentive Fee the issuer would pay the Exchange for each ETP.
The issuer would determine the amount of the Optional Incentive Fee for
each ETP within a permitted range that would be set forth in the
Exchange's Listing Fee Schedule. In this regard, the Exchange proposes
to amend its Listing Fee Schedule to provide that the Optional
Incentive Fee under NYSE Arca Rule 8.800 may initially range from
$10,000 to $40,000, as determined by the issuer of an ETP.\16\ The
Optional Incentive Fee would be paid by the issuer to the Exchange in
quarterly installments for each participating ETP at the beginning of
each quarter and prorated if the issuer commenced participation for an
ETP in the Incentive Program after the beginning of a quarter. If the
LMM did not meet its proposed Incentive Program LMM performance
standards for an ETP in any given month in such quarter, the issuer
would not receive any refund or credit from the Exchange following the
end of the quarter.\17\ If the ETP had a sponsor, the sponsor could pay
the Optional Incentive Fee to the Exchange.\18\
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\15\ The written solicitation would be included in the Green
Sheet, which is the common term for an email communication sent by
NYSE Arca staff members to all qualified LMMs prior to an LMM
selection. The Green Sheet includes, among other things, the name,
symbol and description of the ETP(s) as well as the name of the
issuer and a link to the ETP prospectus. A qualified LMM must
complete the application for a specific ETP or group of ETPs.
\16\ Optional Incentive Fees would be credited to the Exchange's
general revenues. The issuer would still be required to pay
applicable Listing Fees and Annual Fees.
\17\ However, as described below, if an issuer did not pay its
quarterly installments to the Exchange on time and the ETP continued
to be listed, the Exchange would continue to credit the LMM as long
as the LMM met its performance standards.
\18\ The term ``sponsor'' means the registered investment
adviser that provides investment management services to an ETP or
any of such investment adviser's parents or subsidiaries.
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Proposed NYSE Arca Equities Rule 8.800(b)(4) would provide that
after the Exchange provided the written solicitation to LMMs, no
individual associated with an LMM could contact such issuer or the
Exchange staff about that ETP until the assignment of the LMM is made,
except as otherwise permitted in the rules.
Proposed NYSE Arca Equities Rule 8.800(b)(5) would describe the
assignment of an LMM if more than one qualified LMM proposed to serve
as such for a particular ETP.\19\ If more than one qualified LMM
proposed to serve as such for a particular ETP, Exchange staff would
select the LMM. Each LMM could provide material to the Exchange staff,
which could include a corporate overview of the LMM and the trading
experience of its personnel. Exchange staff would meet with
representatives of each LMM if requested by the LMM. No more than three
representatives of each LMM could participate in the meeting, each of
whom must be employees of the LMM, and one of whom must be the
individual trader of the LMM who is proposed to trade the ETP. If the
LMM were unavailable to appear in person, a telephone interview with
that LMM would be acceptable. Meetings would normally be held at the
Exchange, unless the Exchange agreed that they may be held elsewhere.
The issuer of the ETP could choose to submit a letter to the Exchange
staff indicating its preference and supporting justification for a
particular LMM, and the Exchange staff could consider such letter in
performing its duty to select an LMM, but such letter would not be
determinative of the particular LMM selected by the Exchange. Within
two business days after the final LMM interview, the Exchange staff, in
its sole discretion, would select an LMM and notify the LMM and the
issuer.\20\
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\19\ As is the case with all securities traded on the Exchange,
only one LMM would be assigned per ETP participating in the
Incentive Program. The Exchange's market structure has long included
a single LMM structure and the Exchange does not propose to change
this for the Incentive Program. Indeed, the Exchange believes that
its proposed payment (the range of which was established after
significant analysis) might not be sufficient if it had to be
divided among multiple Market Makers.
\20\ Proposed NYSE Arca Equities Rule 8.800(b)(5) is modeled in
part on New York Stock Exchange (``NYSE'') Rule 103B(III)(B)(1),
which governs Designated Market Maker unit assignments for equities
listed on the NYSE.
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Proposed NYSE Arca Equities Rules 8.800(b)(6) and (7) would
describe required public notices relating to the Incentive Program.
Under proposed NYSE Arca Equities Rule 8.800(b)(6), the Exchange would
provide notification on a dedicated page on its Web site regarding (i)
The ETPs participating in the Incentive Program, (ii) the date a
particular ETP began participating in the Incentive Program, (iii) the
date a particular ETP ceased participating in the Incentive Program,
(iv) the LMM assigned to each ETP participating in the Incentive
Program, and (v) the amount of the Optional Incentive Fee for each ETP.
This page would also include a fair and balanced description of the
Incentive Program, including (i) A description of the Incentive
Program's operation as a pilot, including the effective date thereof,
(ii) the potential benefits that may be realized by an ETP's
participation in the Incentive Program, (iii) the potential risks that
may be attendant with an ETP's participation in the Incentive Program,
(iv) the potential impact resulting from an ETP's entry into and exit
from the Incentive Program, and (v) how interested parties can request
additional information regarding the Incentive Program and/or the ETPs
participating therein.
Under proposed NYSE Arca Equities Rule 8.800(b)(7), an issuer of an
ETP that is approved to participate in the Incentive Program would be
required to issue a press release to the public when an ETP commences
or ceases participation in the Incentive Program. The press release
would be in a form and manner prescribed by the Exchange, and if
practicable, would be issued at least two days before the ETP commences
or ceases participation in the Incentive Program.\21\ For example,
there could be instances in which it would not be known two days in
advance that an ETP would be ceasing participation in the Incentive
Program, in which case the Exchange would request that the issuer
distribute the press release as soon as possible under the particular
circumstances. The issuer also would be required to dedicate space on
its Web site, or, if it does not have a Web site, on the Web site of
the adviser or sponsor of the ETP, that (i) included any such press
releases and (ii) provided a hyperlink to the dedicated page on the
Exchange's Web site that describes the Incentive Program.\22\
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\21\ The issuer's press release would be required to include
language describing, for example, that while the impact of
participation in or exit from the Incentive Program, which is
optional, cannot be fully understood until objective observations
can be made in the context of the Incentive Program, potential
impacts on the market quality of the issuer's ETP may result,
including with respect to the average spread and average quoted size
for the ETP.
\22\ These disclosure requirements would be in addition to, and
would not supersede, the prospectus disclosure requirements under
the Securities Act of 1933 or the Investment Company Act of 1940.
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Proposed NYSE Arca Equities Rule 8.800(c) would describe the
proposed Incentive Program LMM performance standards that would apply
to an LMM for each Incentive Program security it is assigned.\23\ Under
proposed NYSE Arca Equities Rule 8.800(c)(1), an LMM in the Incentive
Program would remain obligated to satisfy the general requirements of
NYSE Arca Rule 7.23.
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\23\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that only displayed quotes and orders would be considered
for purposes of the LMM performance standards of proposed Rule
8.800(c).
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Under proposed NYSE Arca Equities Rule 8.800(c)(2), an LMM would be
subject to a ``market wide'' requirement. Specifically, an LMM would be
required to maintain quotes or orders at the NBBO or better (the
``Inside'') during the month during Core Trading Hours in accordance
with certain maximum width and minimum depth thresholds, which would be
provided in
[[Page 21687]]
Commentary .01 to Rule 8.800.\24\ However, this requirement would not
apply to an LMM if the thresholds provided in Commentary .01 were
otherwise met by quotes or orders of other market participants on the
Exchange or across all other markets trading the security.
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\24\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that (i) the spread thresholds would be calculated as the
time-weighted average throughout the trading day and then averaged,
by day, across the month and (ii) the depth thresholds would be
calculated as the average of (a) the average time-weighted bid depth
and (b) the average time-weighted ask depth.
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Under proposed NYSE Arca Equities Rule 8.800(c)(3), an LMM would
also be subject to an NYSE Arca-specific requirement, which could be
satisfied in one of two ways. First, an LMM could choose to satisfy the
``Time-at-the-Inside Requirement'' under proposed NYSE Arca Equities
Rule 8.800(c)(3)(A), pursuant to which an LMM would be required to
maintain quotes or orders on NYSE Arca at the NBBO or better at least
15% of the time when quotes may be entered during Core Trading Hours
each trading day, as averaged over the course of a month.\25\
Alternatively, an LMM could choose to satisfy the ``Size-Setting NBBO
Requirement'' under proposed NYSE Arca Equities Rule 8.800(c)(3)(B),
pursuant to which an LMM would be required to maintain ``Size-Setting''
quotes or orders on NYSE Arca, as compared to trading interest on other
markets, at the NBBO or better at least 25% of the time when quotes may
be entered during Core Trading Hours each trading day, as averaged over
the course of a month.\26\ However, this requirement would not apply to
an LMM if this threshold is otherwise met by quotes or orders of other
market participants on NYSE Arca.
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\25\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that the Time-at-the-Inside Requirement would be
calculated as the average of (a) the percentage of time the LMM has
a bid on NYSE Arca at the NBB and (b) the percentage of time the LMM
has an offer on NYSE Arca at the NBO.
\26\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that the Size-Setting NBBO Requirement would be
calculated throughout the trading day and then averaged, by day,
across the month. Quotes and orders of all market participants
across all markets trading the security would be considered when
calculating the Size-Setting NBBO Requirement. A quote or order
would be considered ``Size-Setting'' if it is at the NBB or NBO. If
multiple quotes or orders exist at the same price, the quote or
order with the largest size would be considered ``Size-Setting.'' If
multiple quotes or orders exist at the same price and the same size,
the quote or order with the earliest entry time would be considered
``Size-Setting.''
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Finally, under proposed NYSE Arca Equities Rule 8.800(c)(4), for at
least 90% of the time when quotes may be entered during Core Trading
Hours each trading day, as averaged over the course of a month, an LMM
would be required to maintain (A) at least 2,500 shares of
attributable, displayed posted buy liquidity on the Exchange that is
priced no more than 2% away from the NBB for the particular ETP; and
(B) at least 2,500 shares of attributable, displayed posted offer
liquidity on the Exchange that is priced no more than 2% away from the
NBO for the particular ETP.
Proposed NYSE Arca Equities Rule 8.800(d) would describe the
payment to an LMM by the Exchange (``LMM Payment''). Under this
provision, the Exchange would credit an LMM for the LMM Payment, which
would be determined by the Exchange and set forth in the Trading Fee
Schedule. An LMM participating in the Incentive Program would not be
entitled to an LMM Payment unless and until it meets or exceeds the
proposed Incentive Program LMM performance standards for an assigned
ETP, as determined by the Exchange. In this regard, the Exchange
proposes to amend its Trading Fee Schedule to provide that at the end
of each quarter the Exchange would credit an LMM an ``LMM Payment'' for
each month during such quarter that the LMM meets or exceeds its
proposed Incentive Program LMM performance standards for an assigned
ETP. If an LMM does not meet or exceed its proposed Incentive Program
LMM performance standards for an assigned ETP for a particular month,
or the ETP is withdrawn from the Incentive Program pursuant to
paragraph (e) of NYSE Arca Equities Rule 8.800, then the LMM Payment
would be zero for such month. The amount of the LMM Payment for a
particular month would not exceed \1/3\ of the quarterly Optional
Incentive Fee, less an Exchange administration fee of 5%, and such LMM
would be subject to Standard Rates during that quarter instead of LMM
Rates. As is the case with all liquidity-adding credits currently
payable to NYSE Arca ETP Holders, LMM Payments would be paid by the
Exchange from its general revenues. The Trading Fee Schedule would also
reflect that if an issuer did not pay its quarterly installments to the
Exchange on time and the ETP continued to be listed, the Exchange would
continue to credit the LMM if the LMM met its proposed Incentive
Program LMM performance standards.
Proposed NYSE Arca Equities Rule 8.800(e) would describe the
circumstances for withdrawal from the Incentive Program. First, if an
ETP no longer met continuing listing standards, suspended the creation
and/or redemption of shares, or liquidated, it would be automatically
withdrawn from the Incentive Program as of the ETP suspension date.
Second, NYSE Arca, in its discretion, could allow an issuer to
withdraw an ETP from the Incentive Program before the end of the pilot
period if the assigned LMM was unable to meet its proposed Incentive
Program LMM performance standards for any two of the three months of a
quarter or for five months during the pilot period and no other
qualified ETP Holder was able to take over the assignment.
Third, an LMM also could withdraw from all of its ETP assignments
in the Incentive Program. Alternatively, NYSE Arca, in its discretion,
could allow an LMM to withdraw from a particular ETP before the end of
the pilot period if the Exchange determined that there were extraneous
circumstances that prevented the LMM from meeting its proposed
Incentive Program LMM performance standards for such ETP that did not
affect its other ETP assignments in the Incentive Program. In either
such event, the LMM's ETP(s) would be reallocated as described below.
Fourth, if an ETP maintained a CADV of one million shares or more
for three consecutive months, it would be automatically withdrawn from
the Incentive Program within one month thereafter. If after such
automatic withdrawal the ETP failed to maintain a CADV of one million
shares or more for three consecutive months, the issuer of the ETP
could reapply for the Incentive Program one month thereafter. The
Exchange believes that setting a one-million-share threshold would
focus Incentive Program resources on particularly low volume ETPs and
provide an objective measurement for evaluating the effectiveness of
the Incentive Program.
Fifth, if the issuer was not current in all payments due to the
Exchange for two consecutive quarters, its ETP would be automatically
terminated from the Incentive Program.
Finally, proposed NYSE Arca Equities Rule 8.800(f) would describe
the LMM reallocation process. If the LMM for a particular ETP did not
meet or exceed its proposed Incentive Program LMM performance standards
for any two of the three months of a quarter or for five months during
the pilot period, or chose to withdraw from the Incentive Program, and
at least one other qualified Market Maker had agreed to become the
assigned LMM under the Incentive Program, then the ETP would be
reallocated. If more than one qualified LMM proposed to serve as such,
another
[[Page 21688]]
LMM would be selected in accordance with the written solicitation and
assignment processes described above. The reallocation process would be
completed no sooner than the end of the current quarter and no later
than the end of the following quarter.
Implementation of Incentive Program
The Incentive Program would be offered to issuers from the date of
implementation, which would occur no later than 90 days after
Securities and Exchange Commission (``Commission'') approval of this
filing, until one calendar year after implementation. As described
above, each issuer could select ETPs to participate in the Incentive
Program. During the pilot period, the Exchange would assess the
Incentive Program and could expand the criteria for ETPs that are
eligible to participate, for example, to permit issuers to include more
than five ETPs that were listed on the Exchange before the pilot period
commenced. At the end of the pilot period, the Exchange would determine
whether to continue or discontinue the Incentive Program or make it
permanent and submit a rule filing as necessary. If the Exchange
determined to change the terms of the Incentive Program while it was
ongoing, it would submit a rule filing to the Commission.
During the Incentive Program, the Exchange would provide the
Commission with certain market quality reports each month, which would
also be posted on the Exchange's Web site. Such reports would include
the Exchange's analysis regarding the Incentive Program and whether it
is achieving its goals, as well as market quality data such as, for all
ETPs listed as of the date of implementation of the Incentive Program
and listed during the pilot period (for comparative purposes), volume
(CADV and NYSE Arca ADV), NBBO bid/ask spread differentials, LMM
participation rates, NYSE Arca market share, LMM time spent at the
inside, LMM time spent within $0.03 of the inside, percent of time NYSE
Arca had the best price with the best size, LMM quoted spread, LMM
quoted depth, and Rule 605 statistics (one-month delay) as agreed upon
by the Exchange and the Commission staff. In connection with this
proposal, the Exchange would provide other data and information related
to the Incentive Program as may be periodically requested by the
Commission. In addition, and as described further below, issuers could
utilize ArcaVision to analyze and replicate data on their own.\27\
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\27\ NYSE Arca provides ArcaVision free of charge to the public
via the Web site www.ArcaVision.com. ArcaVision offers a significant
amount of trading data and market quality statistics for every
Regulation NMS equity security traded in the United States,
including all ETPs. Publicly available reports within ArcaVision,
which include relevant comparative data, are the Symbol Summary,
Symbol Analytics, Volume Comparison and Quotation Comparison
reports, among others. In addition, users can create the reports on
a per[hyphen]symbol basis over a flexible time frame. They can also
take advantage of predefined, accurate and up[hyphen]to[hyphen]date
symbol sets based on type of ETP or issuer. Users can also create
their own symbol lists. ArcaVision also allows an ETP issuer to see
additional information specific to its LMM and other Market Makers
in each ETP via the ``ArcaVision Market Maker Summary'' reporting
mechanism.
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Benefits of the Incentive Program
The proposed LMM Payment is designed to encourage additional Market
Makers to pursue LMM assignments and thereby support the provision of
consistent liquidity in lower-volume ETPs listed on the Exchange. The
Exchange believes that providing a quarterly LMM Payment would create a
more equitable system of incentives for LMMs. The Exchange would
administer all aspects of the LMM Payments, which, as noted above,
would be paid by the Exchange to LMMs out of the Exchange's general
revenues.
The Exchange believes that the Incentive Program would increase the
supply of Market Makers seeking to take on LMM assignments, ultimately
leading to improved market quality for long[hyphen]term investors in
ETPs, which would lead to multiple benefits. It would help to ensure
that a diversified pool of qualified LMM candidates exists in the
present and future. It would also help to discover a competitive
balance to set the fair Optional Incentive Fees within the proposed
range of $10,000 to $40,000 per ETP annually, based on the risk/reward
of receiving specific LMM assignments. Issuers would be able to monitor
the performance of LMMs as well as registered Market Makers and other
participants that opted into the ``ArcaVision Market Maker Summary''
reporting mechanism. Thus, issuers would be able to compare and
contrast the performance of various Market Makers to ensure that they
were optimizing benefits vis[hyphen]a[hyphen]vis cost.
Consistency with FINRA Rule 5250
The Exchange believes that the Incentive Program is designed to
mitigate risks and concerns that Financial Industry Regulatory
Authority (``FINRA'') Rule 5250 addresses. FINRA Rule 5250 prohibits a
FINRA member or a person associated with a FINRA member from accepting
any payment or other consideration, directly or indirectly, from an
issuer of a security, or any affiliate or promoter thereof, for
publishing a quotation, acting as market maker in a security, or
submitting an application in connection therewith.
FINRA Rule 5250 is designed to preserve the integrity of the
marketplace by ensuring that quotations accurately reflect a broker-
dealer's interest in buying or selling a security and that the decision
by a firm to make a market in a given security and the question of
price should not be influenced by payments to members from issuers or
promoters.\28\ The Exchange believes that the Incentive Program is
carefully tailored to promote the beneficial purpose of improved market
quality, while at the same time being designed to mitigate the public
policy risks and concerns that FINRA Rule 5250 addresses and to not
adversely affect market integrity.
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\28\ See Securities Exchange Act Release No. 60066 (June 8,
2009), 74 FR 28308 (June 15, 2009) (SR-FINRA-2009-36). See also
Securities Exchange Act Release No. 38812 (July 3, 1997), 62 FR
37105 (July 10, 1997) (SR-NASD-97-29) (order approving NASD Rule
2460, predecessor to FINRA Rule 5250).
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First, the derivative and open-ended nature of many of the ETPs
eligible to participate in the Incentive Program would allow for
transparent intrinsic intraday pricing. As such, the Exchange does not
believe that such products would lend themselves to the type of market
manipulation that FINRA Rule 5250 was designed to prevent. The
transparent nature of many ETPs' portfolio composition as well as their
accessibility and the elasticity of shares outstanding contribute to an
arbitrage process that will lead to executions of orders of many ETPs
priced at or near net asset values (``NAVs''). The typical unit size is
50,000 shares to 100,000 shares and each share represents fractional
ownership of the portfolio, allowing low minimum investments to access
the exposure of a large notional portfolio. ETP supply (i.e., shares
outstanding) can be increased or decreased through the creation and
redemption process. Clearing firms that are authorized participants
will have the opportunity to deliver, or take delivery of, unit-sized
amounts of the underlying securities. Proprietary traders engaging in
arbitrage are able to calculate an estimated intraday NAV. Such traders
understand what the intrinsic per-share price is, hedge themselves
using the underlying securities or correlated equivalents, and manage
their positions by either creating or redeeming units. If and when the
quote is priced beyond
[[Page 21689]]
the intrinsic value of an ETP, an arbitrage opportunity can arise, and
market participants will arbitrage such spread until price equilibrium
is restored.
Second, the Incentive Program would have numerous structural
safeguards that were designed to prevent any adverse effect on market
integrity. First, the Incentive Program would be administered by the
staff of the Exchange, which is a self-regulatory organization,\29\ and
which would be interposed between LMMs and issuers. Second, both LMMs
and issuers would be required to apply to participate in the program
and to meet certain standards. The Exchange would collect the Optional
Incentive Fees from issuers and credit them to the Exchange's general
revenues. An LMM would be eligible to receive an LMM Payment, again
from the Exchange's general revenues, only after it met the proposed
Incentive Program LMM performance standards set and monitored by the
Exchange. Third, the Incentive Program is rules based and subject to
significant public disclosure. Application to, continuation in, and
withdrawal from the Incentive Program would be governed by published
Exchange rules and policies, and there would be extensive public notice
regarding the Incentive Program and payments thereunder on both the
Exchange's and the issuers' Web sites.
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\29\ FINRA surveils trading on the Exchange, including ETP
trading, pursuant to a Regulatory Services Agreement (``RSA''). The
Exchange is responsible for FINRA's performance under this RSA.
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In light of the pricing mechanisms of ETPs and the structural
safeguards of the Incentive Program, the Exchange believes that the
payments under the Incentive Program are designed to mitigate the risks
and concerns that FINRA Rule 5250 addresses. In this regard, the
Exchange understands, based upon discussions with FINRA, that FINRA
will file an immediately effective rule change with the Commission
indicating that participation by LMMs and issuers in the Incentive
Program would not violate Rule 5250.
Consistency With Regulation M
Rule 102 of Regulation M prohibits an issuer from directly or
indirectly attempting ``to induce any person to bid for or purchase, a
covered security during the applicable restricted period'' unless an
exemption is available.\30\ For the reasons discussed below, the
Exchange believes that exemptive relief from Rule 102 should be granted
for the Incentive Program.
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\30\ Rule 102 provides that ``[i]n connection with a
distribution of securities effected by or on behalf of an issuer or
selling security holder, it shall be unlawful for such person, or
any affiliated purchaser of such person, directly or indirectly, to
bid for, purchase, or attempt to induce any person to bid for or
purchase, a covered security during the applicable restricted
period'' unless an exception is available. See 17 CFR 242.102.
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First, the Exchange notes that the Commission and its staff have
previously granted relief from Rule 102 to a number of ETPs (``Existing
Relief'') in order to permit the ordinary operation of such ETPs.\31\
In granting the Existing Relief, the Commission has relied in part on
the exclusion from the provisions of Rule 102 provided by paragraph
(d)(4) of Rule 102 for securities issued by an open-end management
investment company or unit investment trust. In granting the Existing
Relief from Rule 102 to other types of ETPs, for which the (d)(4)
exception is not available, the staff has relied on (i) representations
that the fund in question would continuously redeem ETP shares in
basket-size aggregations at their NAV and that there should be little
disparity between the market price of an ETP share and the NAV per
share and (ii) a finding that ``[t]he creation, redemption, and
secondary market transactions in [shares] do not appear to result in
the abuses that * * * Rules 101 and 102 of Regulation M * * * were
designed to prevent.''\32\ The crux of the Commission's findings in
granting the Existing Relief rests on the premise that the prices of
ETP shares closely track their per-share NAVs. Given that the Incentive
Program neither alters the derivative pricing nature of ETPs nor
impacts the arbitrage opportunities inherent therein, the conclusion on
which the Existing Relief is based remains unaffected by the Incentive
Program. In this regard, most ETPs that would be eligible to
participate in the Incentive Program would have previously been granted
relief from Rule 102. Moreover, and as noted above, an ETP that
suspended the creation and/or redemption of shares, or liquidated,
would be automatically withdrawn from the Incentive Program as of the
ETP suspension date.
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\31\ See, e.g., Letter from James A. Brigagliano, Acting
Associate Director, Division of Market Regulation, to Stuart M.
Strauss, Esq., Clifford Chance US LLP (Oct. 24, 2006) (regarding
class relief for exchange traded index funds).
\32\ See Rydex Specialized Products LLC, SEC No-Action Letter
(June 21, 2006).
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Second, the Incentive Program requires, among other things, that an
LMM make two-sided quotes and not just bids. It is not intended to
raise ETP prices but rather to improve market quality. In light of the
derivative nature of ETPs described above, the Exchange does not expect
that LMMs would quote outside of the normal quoting ranges for these
products as a result of the LMM Payment, but rather would quote within
their normal ranges as determined by market factors. Indeed, the
Incentive Program would not create any incentive for an LMM to quote
outside such ranges.
Finally, the staff of the Exchange, which is a self-regulatory
organization, would be interposed between the issuer and the LMM,
administering a rules-based program with numerous structural safeguards
described in the previous section. Specifically, both LMMs and issuers
would be required to apply to participate in the program and to meet
certain standards. The Exchange would collect the Optional Incentive
Fees from issuers and credit them to the Exchange's general revenues.
An LMM would be eligible to receive an LMM Payment, again from the
Exchange's general revenues, only after it met the proposed Incentive
Program LMM performance standards set and monitored by the Exchange.
Application to, continuation in, and withdrawal from the Incentive
Program would be governed by published Exchange rules and policies, and
there would be extensive public notice regarding the Incentive Program
and payments thereunder on both the Exchange's and the issuers' Web
sites. Given these structural safeguards, the Exchange believes that
payments under the Incentive Program are appropriate for exemptive
relief from Rule 102.
In summary, the Exchange believes that exemptive relief from Rule
102 should be granted for the Incentive Program because, for example,
(1) The Incentive Program would not create any incentive for an LMM to
quote outside of the normal quoting ranges for the ETPs included
therein; (2) the Incentive Program has numerous structural safeguards,
such as the application process for issuers and LMMs, the
interpositioning of the Exchange between issuers and LMMs, and
significant public disclosure surrounding the Incentive Program, which
in general is designed to help inform investors about the potential
impact of the Incentive Program; and (3) the Incentive Program does not
alter the basis on which Existing Relief is based and, furthermore,
most ETPs that would be eligible to participate in the Incentive
Program would have previously been granted relief from Rule 102.\33\
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\33\ The Exchange notes that the Commission granted a limited
exemption from Rule 102 of Regulation M to The NASDAQ Stock Market
LLC (``NASDAQ'') for a program similar to the Exchange's proposed
Incentive Program. See Securities Exchange Act Release No. 69196
(March 20, 2013), 78 FR 18410 (March 26, 2013) (Order Granting a
Limited Exemption From Rule 102 of Regulation M Concerning the
NASDAQ Market Quality Program Pilot Pursuant to Regulation M Rule
102(e)) (the ``NASDAQ Exemption''). The NASDAQ Exemption includes
certain conditions related to, among other things, notices to the
public and disclosures with respect to NASDAQ's program. The
Exchange notes that if the Commission were to provide exemptive
relief from Rule 102 of Regulation M for the Incentive Program it
may include similar conditions.
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[[Page 21690]]
Surveillance
The Exchange believes that its surveillance procedures would be
adequate to properly monitor the trading of Incentive Program ETPs on
the Exchange during all trading sessions and to detect and deter
violations of Exchange rules and applicable federal securities laws.
Trading of the ETPs through the Exchange would be subject to FINRA's
surveillance procedures for derivative products including ETFs.\34\ The
Exchange may obtain information via the Intermarket Surveillance Group
(``ISG'') from other exchanges that are members or affiliates of the
ISG;\35\ and from issuers and public and non-public data sources such
as, for example, Bloomberg.
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\34\ See supra note 29.
\35\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\36\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\37\ in particular. The
proposed rule change is consistent with Section 6(b)(5) of the Act 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 facilitating
transactions in securities, and to remove impediments to and perfect
the mechanism of a free and open market and a national market system.
The Exchange believes that the Incentive Program would enhance quote
competition, improve liquidity, support the quality of price discovery,
promote market transparency, and increase competition for listings and
trade executions while reducing spreads and transaction costs. The
Exchange further believes that enhancing liquidity in Incentive Program
ETPs with all of the structural safeguards described above would help
raise investors' confidence in the fairness of the market generally and
their transactions in particular. As such, the Incentive Program would
foster cooperation and coordination with persons engaged in
facilitating securities transactions, enhance the mechanism of a free
and open market, and promote fair and orderly markets in ETPs on the
Exchange.
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\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange further believes that designating ETPs as the products
eligible for inclusion in the Incentive Program is reasonable because
it would incentivize Market Makers to undertake LMM assignments in ETPs
with lower trading volume. As described earlier in the filing, there is
ample data demonstrating that there are generally fewer financial
benefits for such ETPs as compared to ETPs with higher CADVs and that
market quality has been affected.
The Exchange believes that its implementation plan and the pilot
period are reasonable in that they would permit the Commission, the
Exchange, LMMs, and issuers to assess the impact of the Incentive
Program before making it available to other securities. In particular,
the Exchange believes that it is beneficial and not unfairly
discriminatory to limit the ETPs participating so that the Exchange and
issuers could measure the experience against nonparticipating ETPs and
thereby conserve the commitment of resources to the Incentive Program.
In particular, by setting an objective one-million-share CADV
threshold, the Exchange and the Commission will have an opportunity to
observe the impact, if any, on ETPs that exceed the threshold and
``graduate'' from the Incentive Program and compare them to other ETPs.
The Exchange believes that the proposed LMM minimum performance
standards are reasonable, including aspects thereof that can be met by
quotes or orders of other market participants on the Exchange or across
all other markets trading the security, because such standards would
contribute to reasonably ensuring that there is sufficient liquidity
for the ETPs participating in the Incentive Program. In this regard,
the role of the LMM is to reasonably ensure that sufficient liquidity
exists for investors when such liquidity is not provided by other
market participants, whether on the Exchange or across other markets
trading the particular security, by submitting quotes and orders that
contribute to the quality of the width and depth of liquidity for the
ETP. Accordingly, when the quotes or orders of other market
participants on the Exchange or across all other markets trading the
security result in such sufficient liquidity, there is not a need for
an LMM to quote according to the proposed LMM minimum performance
standards, which are designed to reasonably ensure that such liquidity
exists. However, when such liquidity is not otherwise present, the
proposed LMM minimum performance standards would reasonably ensure that
such liquidity exists and is available for investors.
With respect to the proposed fees, the Exchange believes that the
proposed rule change is consistent with Sections 6(b)(4) and 6(b)(5) of
the Act, in that it is designed to provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities and that it is not
unfairly discriminatory. The Exchange believes that the proposed
Optional Incentive Fees for ETPs are reasonable, given the additional
costs to the Exchange of providing the LMM Payments, which are paid by
the Exchange out of the Exchange's general revenues. The Exchange also
believes that the proposed fees are reasonable because they would be
used by the Exchange to offset the cost that the Exchange incurs to
provide listing services for ETPs. These costs include, but are not
limited to, ETP rulemaking initiatives, listing administration
processes, issuer services, consultative legal services provided to ETP
issuers in support of new product development, and administration of
the proposed quarterly LMM Payment. As such, the Exchange believes that
it is reasonable for it to retain an administration fee to recover the
costs of administering the Incentive Program.
The Exchange believes that the Optional Incentive Fee is
reasonable, equitably allocated, and not unreasonably discriminatory
because it is entirely voluntary on an issuer's part to join the
Incentive Program. The amount of the fee would be determined and paid
by the issuer within the $10,000 to $40,000 band per ETP and credited
to the Exchange's general revenues. Only issuers that voluntarily join
the Incentive Program would be required to pay the fees. The Exchange
believes that this is fairer than requiring all issuers to pay higher
fees to fund the Incentive Program.
The Exchange believes that the LMM Payment and standard transaction
fees and credits are equitable and not unfairly discriminatory in that
any Market Maker could seek to participate in the Incentive Program as
an LMM. Moreover, an LMM participating in the Incentive Program would
not be entitled to an LMM Payment unless and until it
[[Page 21691]]
meets or exceeds the proposed Incentive Program LMM performance
standards for an assigned ETP, as determined by the Exchange. The
Exchange further believes that the range of credits, which would be
paid from the Exchange's general revenues, is fair and equitable in
light of the LMM's obligations and proposed Incentive Program LMM
performance standards, which would be higher than the standards for
LMMs not participating in the Incentive Program.
Finally, for the reasons stated above, the Exchange believes that
the Incentive Program would be designed to mitigate risks and concerns
that FINRA Rule 5250 addresses and that the Commission should provide
exemptive relief from Rule 102 of Regulation M for the Incentive
Program.\38\
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\38\ See supra note 33.
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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. To the contrary, the
Exchange believes that the Incentive Program, which is entirely
voluntary, would encourage competition among markets for issuers'
listings and among Market Makers for LMM assignments. The Incentive
Program is designed to improve the quality of market for lower-volume
ETPs, thereby incentivizing them to list on the Exchange. The
competition for listings among the exchanges is fierce. The Exchange
notes that BATS Exchange, Inc. (``BATS'') has already implemented a
program similar to the Exchange's proposed Incentive Program,\39\ and
NASDAQ has received approval to do so as well.\40\
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\39\ See Interpretation and Policy .02 of BATS Rule 11.8. See
also Securities Exchange Act Release Nos. 66307 (February 2, 2012),
77 FR 6608 (February 8, 2012) (SR-BATS-2011-051) and 66427 (February
21, 2012), 77 FR 11608 (February 27, 2012) (SR-BATS-2012-011).
\40\ See Securities Exchange Act Release No. 69195 (March 20,
2013), 78 FR 18393 (March 26, 2013) (SR-NASDAQ-2012-137).
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In addition, the Exchange believes that the Incentive Program will
properly promote competition among Market Makers to seek assignment as
the LMM for eligible ETPs. As described in detail above, the Exchange
believes that market quality is significantly enhanced for ETPs with an
LMM as compared to ETPs without an LMM. The Exchange believes that
market quality would be even further enhanced as a result of the
proposed Incentive Program LMM performance standards that the Exchange
would impose on LMMs in the Incentive Program. The Exchange anticipates
that the increased activity of these LMMs would attract other market
participants to the Exchange, and could thereby lead to increased
liquidity on the Exchange in such ETPs. For these reasons, the Exchange
does not believe that the proposed rule change would impose any
unnecessary or inappropriate burden on competition.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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. The Commission previously received
comments on SR-NYSEArca-2012-37, which proposed rule change was
withdrawn by the Exchange,\41\ and all such comments are available on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.
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\41\ See supra note 4.
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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-2013-34 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-2013-34. 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 Section, 100 F Street
NE., Washington, DC 20549-1090, on official business days between 10:00
a.m. and 3:00 p.m. Copies of the 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-NYSEArca-2013-34 and should
be submitted on or before May 2, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08444 Filed 4-10-13; 8:45 am]
BILLING CODE 8011-01-P