[Federal Register Volume 80, Number 222 (Wednesday, November 18, 2015)]
[Notices]
[Pages 72126-72129]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29395]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76431; File No. SR-NYSEArca-2015-104]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Adopt a New Policy Relating to Trade Reports
for Exchange Traded Products
November 12, 2015.
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 28, 2015, 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 and II
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.
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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 the
Substance of the Proposed Rule Change
The Exchange proposes a new policy relating to its treatment of
trade reports for Exchange Traded Products that it determines to be
inconsistent with the prevailing market. 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
Trades in Exchange Traded Products (``ETP'') \4\ occasionally occur
at prices that deviate significantly from prevailing market prices and/
or an investment fund's underlying value. These trades may be due to
brief price dislocations caused, for example, by unusually large
orders, momentary reductions in liquidity, or brief trading or pricing
errors by individual market participants. The resulting trades may
occasionally establish a high, a low or last sale price for a security
that does not reflect price discovery in the fund holdings in a manner
that is representative of ongoing trading in an ETP tracking the real-
time value of the fund's underlying securities, and could impact
statistics for the investment fund as computed by third parties in a
way that is inappropriately reflective of very short-term market impact
rather than ongoing fund performance, leading to investor confusion.
For example, trading and quoting in a particular ETF holding a basket
of stocks reflecting the S&P 500 index might track that index with de
minimis tracking error every minute throughout all trading days for
five years, then suddenly trade 1% higher than the S&P 500 index on the
close one day due to a large order that was erroneously entered by a
single broker-dealer as a ``Market'' order rather than a ``Market on
Close'' order, hence trading through multiple price levels in
[[Page 72127]]
the book instantaneously rather than creating a disseminated imbalance
that would attract normally-priced contra-sided interest in a closing
auction. If this trade results in a daily last sale for the ETF that
materially differs from the fund's NAV, an investor using a third-party
Web site that utilizes trade data to compute tracking error statistics
for the ETF could be misled into thinking that the ETF does not provide
desired tracking performance to investors over time, when in fact the
apparent poor tracking was due only to a single aberrant trade. While
such events may occur randomly and on both sides of the market, because
tracking error, for example, is measured as a mean squared deviation
from NAV, both positive and negative divergence increase tracking error
and therefore upside and downside deviations compound, rather than
offset, over time.
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\4\ For purposes of this filing, ETPs include Exchange Traded
Funds (ETFs), Exchange Traded Notes (ETNs) and Exchange Traded
Vehicles (ETVs). An ETF is an open-ended registered investment
company under the Investment Company Act of 1940 that has received
certain exemptive relief from the SEC to allow secondary market
trading in the ETF shares. ETFs are generally index-based products,
in that each ETF holds a portfolio of securities that is intended to
provide investment results that, before fees and expenses, generally
correspond to the price and yield performance of the underlying
benchmark index. An ETV tracks the underlying performance of an
asset or index, allowing investors exposure to underlying assets
such as futures contracts, commodities and currencies without
actually trading futures or taking physical delivery of the
underlying asset. An ETV is traded intraday like an ETF. An ETV is
an open-ended trust or partnership unit that is registered under the
Securities Act of 1933. An ETN is a senior unsecured debt obligation
designed to track the total return of an underlying index, benchmark
or strategy, minus investor fees. ETNs are registered under the
Securities Act of 1933 and are redeemable to the issuer. In 2014,
NYSE Arca's listed ETPs had over $1.89 trillion in assets under
management (AUM), representing over 90% of all U.S. listed Exchange
Traded Products (ETPs). Additional information on ETPs is available
on the Exchange's Web site at https://www.nyse.com/products/etp-funds-etf.
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The Exchange currently has a policy to address such instances of
``aberrant'' trades for equity securities generally.\5\ The purpose of
this proposed rule change is to adopt an additional policy to address
instances of ``aberrant'' trades specific to ETPs traded on the
Exchange.
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\5\ See Securities Exchange Act Release No. 59937 (May 18,
2009), 74 FR 25291 (May 27, 2009) (SR-NYSEArca-2009-24). The NYSE
Arca policy is substantially similar to policies adopted by other
markets. See Securities Exchange Act Release Nos. 59064 (December 5,
2008), 73 FR 76082 (December 15, 2008) (SR-NYSE-2008-91); and 59151
(December 23, 2008), 74 FR 158 (January 2, 2009) (SR-NASDAQ-2008-
100).
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With certain exceptions that are specific to the trading of ETPs,
the proposed rule change is identical to the policy previously adopted
by the Exchange.\6\ The Exchange believes that the derivatively-priced
nature of ETPs necessitates the use of a different, and generally
broader, set of circumstances to determine that trades are
``aberrant.'' Unlike common stocks, the ``fair value'' and arbitrage
pricing bands for an ETP are often known with a reasonably high degree
of accuracy, since creation/redemption baskets reflecting actual fund
holdings are disclosed daily and are available to be exchanged for new
ETP shares, or to be received for redeeming ETP shares, on a daily
basis, along with the dissemination of constituent information and
intraday pricing information such as Intraday Optimized Portfolio
Values (``IOPVs''). As a result, it is often the case that smaller
dislocations in ETP trade prices than in stock prices are manifestly
not reflective of the trading pattern in the security.
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\6\ Id.
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The Consolidated Tape Association (``CTA'') offers each Participant
in the CTA Plan the discretion to append an indicator to a trade report
to indicate that the market believes that the price of a trade executed
on that market does not accurately reflect the prevailing market for
the security (an ``Aberrant Report Indicator'').\7\ During the course
of monitoring by the Exchange or as a result of notification by another
market, listed ETP issuer or market participant, the Exchange may
become aware of ETP trade prices that do not accurately reflect the
prevailing market for an ETP or an investment fund's underlying value.
In such a case, the Exchange proposes to apply a new policy pursuant to
which it:
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\7\ The CTA recommends that data recipients should exclude the
price of any trade to which the Aberrant Report Indicator has been
appended from any calculation of the high, low or last sale prices
for the security.
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(i) May determine to append an Aberrant Report Indicator to any
trade report with respect to any ETP trade executed on the Exchange
that the Exchange determines to be inconsistent with the prevailing
market; and
(ii) Would encourage vendors and other data recipients not to use
prices of trades to which the Exchange has appended the Aberrant Trade
Indicator in any calculation of the high, low or last sale price of an
ETP.
The Exchange would provide to data users an explanation of the
parameters used in its aberrant trade policy and urge vendors to
disclose the exclusion from high, low or last sale price data of any
aberrant trades a vendor chooses to exclude from high, low or last sale
price information it disseminates. Upon initial adoption of the
Aberrant Report Indicator, the Exchange would also contact all of its
listed ETP issuers to explain the aberrant trade policy and inform
users of the information that trades appended with an Aberrant Report
Indicator are still valid trades and not unwound as in the case of a
clearly erroneous trade.\8\ In addition, the Exchange would inform an
NYSE Arca listed ETP issuer each time the Exchange appends an Aberrant
Report Indicator to a trade in such issuer's listed ETP.
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\8\ This proposed rule change would not impact a listed ETP
issuer's ability to seek cancellation of a transaction on the basis
that it was ``clearly erroneous'' under Rule 7.10 (Clearly Erroneous
Executions). In the event that a listed ETP issuer files for a
transaction to be ``clearly erroneous,'' and the transaction is not
cancelled, the Exchange reserves discretion to append an Aberrant
Trade Indicator to the trade report to indicate that the market
believes that the trade price in a trade executed on that market
does not accurately reflect the prevailing market and/or value for
an ETP.
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While the CTA disseminates its own calculations of high, low and
last sale prices, vendors and other data recipients--and not the
Exchange--frequently determine their own, different methodology by
which they wish to calculate high, low and last sale prices. Therefore,
the Exchange would provide to vendors and data recipients an
explanation of the parameters used in its aberrant trade policy and the
potential deleterious effects that can result from including in the
calculations a trade to which the Aberrant Report Indicator has been
appended.
In determining whether to append an Aberrant Report Indicator, the
proposed Exchange policy would be as follows:
1. Absent exceptional circumstances, the Exchange will determine
whether a trade price does not reflect the prevailing market for an ETP
if the trade occurs at the greater of a minimum of 50 cents \9\ or 50
basis points \10\ away from a previous trade or valid ``Reference
Price''. The Exchange believes that these are conservative values that
are much larger than typical ETF arbitrage bounds, as evidenced for
example by bid-ask spreads, and therefore should only be exceeded in
cases where it may be appropriate to mark a given trade as aberrant,
subject to the further conditions in (2) below. For example, the
typical bid-ask spread in the iShares MSCI Emerging Markets ETF
(``EEM'') and the Vanguard FTSE Emerging Markets ETF (``VWO''), which
each hold many emerging-market stocks that may be lightly traded
individually, are both only 3 basis points over the 45 trading days
ending September 23, 2015, which included a particularly volatile
period of trading.\11\ As a result, and based on feedback from ETF
issuers, beyond this level the Exchange believes that issuer
performance measurements may be adversely impacted in a manner not
reflective of long-term fund performance.
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\9\ As proposed, the 50 cent threshold would be applicable when
the trade price or Reference Price is $100 or below.
\10\ As proposed, the 50 basis point threshold would be
applicable when the trade price or Reference Price is more than
$100.
\11\ http://www.etf.com/EEM and http://www.etf.com/VWO, each
accessed September 24, 2015.
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The ``Reference Price'' refers to (a) if the primary market for an
ETP is open at the time of the trade, the national best bid or offer
for the ETP, or (b) if the primary market for an ETP is not open at the
time of the trade, the first executable quote or print for the ETP on
the primary market after execution of the trade in question. However,
if the circumstances suggest that a different Reference Price would be
more appropriate, the Exchange will use the different Reference Price.
For instance,
[[Page 72128]]
if the national best bid and offer for an ETP are so wide apart as to
fail to reflect the market for an ETP, the Exchange might use as the
Reference Price a trade price or best bid or offer that was available
prior to the trade in question.
2. If the conditions in (1) above are met, the Exchange will
determine whether to append an Aberrant Report Indicator upon
consideration of all factors related to a trade, including the
following: \12\
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\12\ A majority of the factors listed are identical to factors
the Exchange considers in determining whether or not to append an
Aberrant Report Indicator to trades in equity securities under the
current policy. The Exchange has listed additional factors that it
will consider in determining whether or not to append an Aberrant
Report Indicator because these factors are specific to trading in
ETPs, such as Index change, reconstitutions and rebalances, changes
in availability of ETP creations and/or redemptions.
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Index changes, reconstitutions and rebalances;
News released in the market where the ETP's assets are
primarily invested;
Changes in availability of ETP creations and/or
redemptions;
Executions in other derivative instruments tracking the
same underlying indices;
ETP issuer credit risk changes;
Whether the trade price represents a 52-week high or low
for the ETP;
Whether the trade price reflects a share-split,
reorganization or other corporate action;
System malfunctions or disruptions;
Validity of consolidated tape trades and quotes;
General market volatility of market conditions;
Historical volume and volatility for the ETP;
Material news released pertaining to the ETP;
Whether trading in the ETP was recently halted/resumed;
Trading bands, collars or circuit breakers;
A request from the ETP issuer, provided with documentation
of a factual basis for believing that an execution is representative of
market impact or trading issues outside of the issuer's control, rather
than true price discovery; and
Executions otherwise inconsistent with the trading pattern
in the ETP.
The Exchange would consider each of these factors with a view
towards maintaining a fair and orderly market and the integrity of
reported trade data. If the Exchange determines to append the Aberrant
Report Indicator to a trade which represented the last sale of that ETP
on the Exchange during a trading session, the Exchange may also
determine to remove that trade's designation as the last sale. The
Exchange may do so either on the day of the trade or at a later date,
so as to provide reasonable time for the Exchange to conduct due
diligence regarding the trade, including the consideration of input
from markets and other market participants.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Securities Exchange Act of 1934 (the ``Act''),\13\ in general, and
furthers the objectives of Section 6(b)(5),\14\ in particular, because
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, to remove impediments to, and perfect the
mechanism of, a free and open market and a national market system and,
in general, to protect investors and the public interest.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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In particular, the Aberrant Report Indicator is consistent with the
protection of investors and the public interest in that the Exchange
will seek to ensure a proper understanding of the Aberrant Report
Indicator among securities market participants by: (i) Urging vendors
to disclose the exclusion from high, low or last sale price data of any
aberrant trades excluded from high, low or last sale price information
they disseminate and to provide to data users an explanation of the
parameters used in the Exchange's aberrant trade policy; (ii) informing
the affected listed ETP issuer each time the Exchange appends the
Aberrant Report Indicator to a trade in an NYSE Arca listed ETP; and
(iii) reminding the users of the information that these are still valid
trades in that they were executed and not unwound as in the case of a
clearly erroneous trade.
The Exchange believes its proposal to append an Aberrant Report
Indicator to certain trades is a reasonable means to alert investors
and other market participants that the Exchange believes that the trade
price of an ETP executed on its market does not accurately reflect the
prevailing market for the ETP.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed change is not
designed to address any competitive issue but rather to adopt a new
policy that is similar to an existing policy to alert investors and
other market participants that the Exchange believes that the trade
price of an ETP executed on its market does not accurately reflect the
prevailing market for the ETP.
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 such longer time period up to 90 days (i) as the
Commission may designate 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 such 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. 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-2015-104 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2015-104. 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
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submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of 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-2015-104 and should
be submitted on or before December 9, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29395 Filed 11-17-15; 8:45 am]
BILLING CODE 8011-01-P