Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Proposing a Pilot Program To Create a Lead Market Maker Issuer Incentive Program for Issuers of Certain Exchange-Traded Products Listed on NYSE Arca, Inc., 29419-29425 [2012-11914]
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Federal Register / Vol. 77, No. 96 / Thursday, May 17, 2012 / Notices
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 such
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–2012–38 and should be
submitted on or before June 7, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–11913 Filed 5–16–12; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Proposing a Pilot
Program To Create a Lead Market
Maker Issuer Incentive Program for
Issuers of Certain Exchange-Traded
Products Listed on NYSE Arca, Inc.
mstockstill on DSK6TPTVN1PROD with NOTICES
May 11, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that,
on April 27, 2012, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II and III below, which Items
have been substantially prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 17 CFR 240.19b–4.
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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.
1. Purpose
[Release No. 34–66966; File No. SR–
NYSEArca–2012–37]
1 15
The Exchange proposes a pilot
program to create a Lead Market Maker
(‘‘LMM’’) Issuer Incentive Program
(‘‘Fixed Incentive Program’’) for issuers
of certain exchange-traded products
(‘‘ETPs’’) listed on the Exchange. The
text of the proposed rule change is
available at the Exchange,
www.nyse.com, the Commission’s
Public Reference Room, and the
Commission’s Web site at www.sec.gov.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
15 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes a pilot
program to create a Fixed Incentive
Program for issuers of certain ETPs
listed on the Exchange.
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 $45,000.3 ETP issuers also pay
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.
A qualified Market Maker may request
an assignment as an LMM for an ETP,
and the request is subject to approval by
the Exchange.4 For some ETPs, no
Market Maker requests an assignment as
3 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 https://
www.nyse.com/pdfs/NYSEArca_Listing_Fees.pdf.
4 See NYSE Arca Equities Rule 7.22(d).
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29419
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 are
obligated to meet certain obligations and
requirements 5 and therefore incur
greater risks than other market
participants on the Exchange. The risks
include those associated with managing
position inventory as well as those
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 the accumulation of
costs from carrying those positions as
well as positions in the underlying
securities used for hedging.6 LMMs are
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 established by Regulation
SHO,7 LMMs acting in ETPs with low
shares outstanding are often required to
maintain a long ETP position. 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. If, due to
human error such as the input of an
inaccurate underlying basket or
technological error such as a static data
5 An LMM is 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 or Offer
(‘‘NBBO’’), (ii) percent of executions better than the
NBBO, (iii) average displayed size, (iv) average
quoted spread, and (v) in the event the security is
a derivative security, the ability to transact in
underlying markets. An LMM’s minimum
performance standards are higher than those of a
Designated Market Maker and 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. References in this rule filing, including in
the proposed rule text, to an LMM’s minimum
performance standards mean those set forth in
NYSE Arca LMM Requirements.
6 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.
7 See 17 CFR 242.203–204.
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feed caused by networking or hardware
breakdowns, the LMM’s quote diverges
from the underlying assets value, the
LMMs are more likely to buy (sell) at
prices that are above (below) theoretical
fair values. Because LMMs are 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.
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 makertaker rates (‘‘Standard Rates’’).8 LMM
Rates are intended to balance the
increased risks and requirements
assumed by LMMs. Accordingly, the
value of acting as an LMM could 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
Symbol
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
25,000,000
5,100,000
2,500,000
1,100,000
750,000
500,000
100,000
10,000
1,000
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 are insufficient to outweigh the
2003
New NYSE Arca ETP Listings .........................................
Listed with LMM ...............................................................
Listed without LMM ..........................................................
2004
11
11
0
2005
34
34
0
Annual
transaction
credit/fee
(standard
rates)
Annual
transaction
credit/fee
(LMM rates)
CADV
ABC ..................................................................................................................
DEF ..................................................................................................................
GHI ...................................................................................................................
JKL ...................................................................................................................
MNO .................................................................................................................
PQR .................................................................................................................
STU ..................................................................................................................
VWX .................................................................................................................
YZ ....................................................................................................................
LMM’s volume traded. 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 CADV
than ETPs with higher CADV. 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%: 9
2006
49
49
0
133
133
0
$637,560
130,062
74,844
32,931
25,780
17,186
3,437
344
34
Annual
incremental
difference
$332,640
67,859
33,264
14,636
9,979
6,653
1,331
133
13
$304,920
62,204
41,580
18,295
15,800
10,534
2,107
211
21
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:
2007
223
218
5
2008
195
190
5
2009
124
121
3
2010
196
175
21
2011
297
271
26
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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
request being made. This behavior
signals a connection between low CADV
and low interest levels from firms
seeking to act as the LMM. Likewise, it
supports the assertion that there is less
value relative to risks of acting as the
LMM for certain ETPs.
The Exchange proposes to add new
NYSE Arca Equities Rule 8.800, which
would offer a pilot program to
incentivize Market Makers to undertake
LMM assignments in ETPs. An issuer of
an ETP that participates in the proposed
Fixed Incentive Program would
continue to pay the currently applicable
Listing and Annual Fees. Such issuer
also could elect to pay the Exchange an
Optional Incentive Fee, which would
range from $10,000 to $40,000 per
year.10
Proposed NYSE Arca Equities Rule
8.800(a) would describe the ETPs that
would be eligible for inclusion in the
8 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 Equity Trading Permit Holder (‘‘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 between $0.0035 and $0.0045 per share
depending on consolidated average daily volume
(‘‘CADV’’). Standard NYSE Arca Tape B Make Rates
(rebates paid for adding liquidity) range from
$0.0022 to $0.0033 per share. Standard NYSE Arca
Tape B Take Rates (fees charged for removing
liquidity) range from $0.0026 to $0.0030 per share.
See the Trading Fee Schedule, available at https://
usequities.nyx.com/sites/usequities.nyx.com/files/
nyse_arca_marketplace_fees__3_01_12_.pdf.
9 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 * NYSE Arca market share * LMM
participation rate * LMM make ratio. LMM take
volume equals CADV * NYSE Arca market share *
LMM participation rate * LMM take ratio.
10 The Exchange would provide notification on its
Web site regarding the ETPs participating in the
Fixed Incentive Program and the assigned LMMs.
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Proposed Fixed Incentive Program
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Fixed Incentive Program. Eligible
products would include any ETP that is
listed on the Exchange as of the
commencement of the pilot period or
that becomes listed during the pilot
period, and the listing is under NYSE
Arca Equities Rules 5.2(j)(3) (Investment
Company Units), 5.2(j)(5) (Equity Gold
Shares), 5.2(j)(6) (Equity Index-Linked
Securities, Commodity-Linked
Securities, Currency-Linked Securities,
Fixed Income Index-Linked Securities,
Futures-Linked Securities, and
Multifactor Index-Linked Securities),
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), and 8.700
(Managed Trust Securities).
Proposed NYSE Arca Equities Rule
8.800(b)(1) would describe the issuer’s
application process. An issuer that
wishes to have an ETP participate in the
Fixed 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 elect to 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
existing ETPs, that are listed on the
Exchange prior to pilot [sic], participate
in the Fixed Incentive Program. The
Exchange would communicate the
ETP(s) proposed for inclusion in the
Fixed Incentive Program on a written
solicitation that would be sent to all
qualified LMM firms 11 along with the
Optional Incentive Fee the issuer
proposes to pay the Exchange for each
ETP. The permitted range for the
Optional Incentive Fee would be set
forth in the Exchange’s Fee Schedule.
The issuer and the LMM thereafter
would agree upon the final Optional
Incentive Fee for each ETP. If more than
one qualified LMM proposed to serve as
such, the issuer would choose the LMM.
Proposed NYSE Arca Equities Rule
8.800(b)(2) would set forth eligibility
requirements for issuers’ participation
in the Fixed Incentive Program. To be
eligible to participate in the Fixed
Incentive Program, an issuer would be
11 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.
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required to be current in all payments
due to the Exchange if it had other
securities listed on the Exchange. In
addition, the issuer would be required
to be current in all payments due to the
Exchange and compliant with
continuing listing standards for the ETP
proposed for inclusion if the issuer
elected to participate in the Fixed
Incentive Program after listing such ETP
on the Exchange.
Proposed NYSE Arca Equities Rule
8.800(c) would describe the process for
the payment of the Optional Incentive
Fee for each ETP. 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 commences
participation for an ETP in the Fixed
Incentive Program after the beginning of
a quarter. The issuer would receive a
prorated credit from the Exchange
following the end of the quarter if the
LMM did not meet its minimum
performance standards for an ETP in
any given month in such quarter. The
credit would be applied against the
issuer’s next quarterly installment of the
Optional Incentive Fee for the ETP, or
otherwise credited or refunded to the
issuer if the ETP was withdrawn from
the Fixed Incentive Program. 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
described in proposed Rule 8.800(d)
below, except that after two quarters, if
an issuer was not current in its quarterly
installments for an ETP, such ETP
would be automatically terminated from
the Fixed Incentive Program.
Proposed NYSE Arca Equities Rule
8.800(d) would describe the LMM
Payments by the Exchange. Under this
provision, the Exchange would credit an
LMM for the LMM Payment, which
would be equal to the Optional
Incentive Fee paid by the issuer, less an
Exchange administration fee set forth in
the Fee Schedule.12 An LMM that
receives an LMM Payment would not be
eligible for LMM Rates for such ETP
under the Exchange’s Fee Schedule
while participating in the Fixed
Incentive Program but would instead be
subject to Standard Rates.13
The Exchange would credit an LMM
for the LMM Payment at the end of each
quarter. If an LMM did not meet or
exceed its minimum performance
standards for the ETP for a particular
month, then the LMM Payment would
12 As noted below, the Exchange proposes that the
initial administration fee be 5%.
13 See supra note 8.
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29421
be prorated accordingly. As noted
above, the issuer in turn would receive
a prorated credit that could be used
toward the following quarterly LMM
Payment for that particular ETP or
others that they have elected to
participate in the Fixed Incentive
Program. As is the case with all
liquidity-adding credits currently
payable to NYSE Arca members, LMM
Payments would be paid directly by the
Exchange from its general revenues.
Proposed NYSE Arca Equities Rule
8.800(e) would describe the
circumstances for withdrawal from the
Fixed Incentive Program and a
reallocation process. If an ETP no longer
met continuing listing standards or is
being liquidated, it would be
automatically withdrawn from the Fixed
Incentive Program as of the ETP
suspension date. In addition, NYSE
Arca, in its discretion, could allow an
issuer to withdraw an ETP from the
Fixed Incentive Program before the end
of the pilot if the assigned LMM was
unable to meet its minimum
performance standards for any two of
the three months of a quarter or five
months during the pilot and no other
qualified ETP Holder was able to take
over the assignment.
An LMM also could withdraw from
all of its ETP assignments in the Fixed
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
minimum performance standards for
such ETP that did not affect its other
ETP assignments in the Fixed Incentive
Program. In either such event, the
LMM’s ETP(s) would be reallocated as
described below.
If an LMM, for a particular ETP, did
not meet or exceed its minimum
performance standards for any two of
the three months of a quarter or five
months during the pilot, or chose to
withdraw from the Fixed Incentive
Program, and at least one other qualified
Market Maker agreed to become the
assigned LMM under the Fixed
Incentive Program, then the ETP would
be reallocated via the written
solicitation process described above.
The issuer could select another LMM
and renegotiate the Optional Incentive
Fee. 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.
The proposed LMM Payment is
designed to encourage additional
Market Makers to pursue LMM
assignments and thereby support the
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provision of consistent liquidity in ETPs
listed on the Exchange. The Exchange
would administer all aspects of the
LMM Payments and believes that
providing a quarterly LMM Payment
would create a more equitable system of
incentives for LMMs. The Exchange
notes that the proposal would not alter
the current requirements and
obligations of LMMs under Exchange
rules or any policies and procedures
related to LMMs.14
mstockstill on DSK6TPTVN1PROD with NOTICES
Implementation of Fixed Incentive
Program
The pilot program would be offered to
issuers from the date of implementation,
which would occur no later than 90
days after the effective date of this
filing, until December 31, 2013. As
referenced above, each issuer could
select ETPs to participate in the Fixed
Incentive Program. During the course of
the pilot period, the Exchange would
assess the Fixed Incentive Program and
may 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. At the end of the pilot,
the Exchange would determine whether
to continue or discontinue the pilot or
make it permanent and submit a rule
filing as necessary. If the Exchange
determines to change the terms of the
pilot while it is ongoing, it would
submit a rule filing to the Commission.
During the pilot program, the
Exchange would provide the
Commission with certain market quality
data on a confidential basis each month.
Such data would include, for all ETPs
listed as of the date of implementation
of the pilot program and listed during
the pilot (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
has the best price with the best size,
LMM quoted spread, LMM quoted
depth, and Rule 605 statistics (onemonth delay) as agreed upon by the
Exchange and the Commission staff. In
connection with this proposal, the
Exchange would provide such data as
may be periodically requested by the
Commission.
Amendments to Listing Fee Schedule
and Trading Fee Schedule
To implement the pilot, the Exchange
also proposes to amend its Listing Fee
Schedule to provide that the Optional
Incentive Fee under NYSE Arca Rule
8.800 may range from $10,000 to
$40,000 and to amend its Trading Fee
Schedule to provide that at the end of
each quarter, the Exchange would credit
the LMM assigned to an ETP the
Optional Incentive Fee, less a 5%
Exchange administration fee, and that
an LMM that receives an LMM Payment
under NYSE Arca Rule 8.800 would be
subject to Standard Rates rather than
LMM Rates.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,15
in general, and Sections 6(b)(4) and
6(b)(5) of the Act,16 in particular.
The Exchange believes that the
proposed rule change is consistent with
Section 6(b)(4) 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 Payment. The
Exchange also believes that the
proposed fees are reasonable because
they would be used by the Exchange to
offset, in part, 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.
The Exchange believes that the
Optional Incentive Fee is reasonable,
equitably allocated, and not
unreasonably discriminatory. The fee
would be equitably allocated and not
unfairly discriminatory because it is
entirely voluntary on the issuer’s part to
join the pilot program. The amount of
the fee would be determined and paid
by the issuer within the $10,000 to
$40,000 band per ETP.
The Exchange believes that the LMM
Payment and standard transaction fees
and credits are equitable in that any
LMM could seek to participate in the
program. The Exchange further believes
that the range of credits is fair and
equitable in light of the LMM’s
obligations and minimum performance
standards and that it is reasonable for
the Exchange to retain an administration
15 15
14 See
supra note 5.
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16 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(4) and (5).
Frm 00110
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fee to recover the costs of administering
the pilot program.
The Exchange further believes that 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. In particular, the Exchange
believes that creating an incentive for an
ETP Holder to act as an LMM would
foster cooperation and coordination
with persons engaged in facilitating
securities transactions and enhance the
mechanism of a free and open market.
The assignment of an LMM, which is
held to higher minimum performance
standards as compared to other market
participants, helps to promote fair and
orderly markets in ETPs on the
Exchange.
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 Fixed Incentive Program before
making it available to all ETPs. 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 non-participating ETPs and
thereby conserve the commitment of
resources to the pilot program.
The Exchange intends to utilize its
existing surveillance procedures
applicable to derivative products to
monitor trading in the ETPs
participating in the pilot program,
which the Exchange believes are
adequate to properly monitor Exchange
trading of the participating ETPs in all
trading sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws.
Finally, the Exchange believes that
the pilot program would not be
inconsistent with Financial Industry
Regulatory Authority (‘‘FINRA’’) Rule
5250, which prohibits payment for
market making. The Exchange believes
that FINRA Rule 5250 is designed to
address issues associated with securities
of operating companies, and such issues
are not present with ETPs, which have
derivative pricing, creation and/or
redemption features, or upsizing that
would preclude the type of
manipulation that FINRA Rule 5250 is
designed to prevent. Moreover, the
Exchange believes that the structure of
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its proposal is unique and has
appropriate safeguards. For example,
the proposal includes the interposition
of the Exchange between the issuers and
LMMs, the payment of fees from the
general revenues of the Exchange, and
the existing obligations and minimum
performance standards that are
monitored by the Exchange under NYSE
Arca Equities Rules 7.23 and 7.24,
respectively. For these reasons, the
Exchange does not believe that its
proposal would be inconsistent with
FINRA Rule 5250.17
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
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 Exchange 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.
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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 requests comment, in
particular, on the following aspects of
the proposed rule change:
1. The Exchange asserts that LMMs in
ETPs incur higher inventory, quoting,
and other risks than other market
participants on the Exchange and that
17 Notwithstanding the Exchange’s views, and
based upon discussions with FINRA, subsequent to
the Exchange’s filing of this proposal FINRA will
file an immediately effective rule change indicating
that participation by LMMs and issuers in the Fixed
Incentive Program would not be prohibited by
FINRA Rule 5250.
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there is less value relative to risk of
acting as an LMM for ETPs that exhibit
low CADV. Do commenters agree that
low interest levels by LMMs in ETPs
that have low CADV is a result of such
value/risk discrepancy? Why or why
not? What other factors could contribute
to a lack of interest by LMMs in such
ETPs? What other factors could explain
the apparent increasing proportion of
new ETPs that are listed on the
Exchange without a designated LMM?
2. The Exchange asserts that
providing a quarterly LMM Payment to
LMMs assigned to ETPs in the Fixed
Incentive Program will create a more
equitable system of incentives for
LMMs. Do commenters believe that the
Fixed Incentive Program will
incentivize more LMMs to take
assignments in ETPs. If so, how? If not,
why not?
3. Given the inherent arbitrage link
between trading ETPs and their
underlying holdings, would a lack of
liquidity in an ETP impact the ability of
LMMs to quote relatively narrow bids
and offers? What, if anything, does a
lack of liquidity in an ETP indicate
about the ability of an LMM or other
market maker to make effective use of
arbitrage and the creation/redemption
mechanisms often associated with
ETPs? How, if at all, would a marketmaking incentive program affect any
intraday premium (discount) of the
traded price of an ETP above (below) its
intraday indicative value?
4. The Exchange states that the Fixed
Incentive Program is designed to
encourage additional Market Makers to
pursue LMM assignments and thereby
support the provision of consistent
liquidity in ETPs listed on the
Exchange. The Commission seeks
specific commentary on any potential
impact of the proposed rules on the
market quality of ETPs. Do commenters
agree with the Exchange that the Fixed
Incentive Program would support the
provision of consistent liquidity in ETPs
listed on the Exchange? If so, please
explain. If not, why not?
5. If two ETPs share similar market
quality characteristics (quoted spread,
size, volume, etc.) but one is supported
by the Fixed Incentive Program and the
other is not, what, if anything, does that
suggest about the fundamental market
qualities of the two ETPs? Would
investors understand, and should they
be concerned about, the differences
underlying the seemingly similar market
qualities of the two ETPs? Are there
other aspects of this type of incentivized
market quality that should concern
investors? Are such apparent
improvements in market quality
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
29423
consistent with the Act and investor
protection? Why or why not?
6. Under the proposal, LMMs for ETPs
in the Fixed Incentive Program would
continue to be subject to the current
LMM performance standards and would
not be subject to higher performance
standards. Do commenters believe this
is appropriate? Why or why not? Should
LMMs for ETPs in the Fixed Incentive
Program be subject to higher standards
because of the LMM Payments that
LMMs could be entitled to receive? Why
or why not?
7. FINRA Rule 5250 prohibits FINRA
members from directly or indirectly
accepting payment from an issuer of a
security for acting as a market maker.
The Exchange asserts that FINRA Rule
5250 is designed to address issues
associated with securities of operating
companies, and such issues are not
present with ETPs, because they have
derivative pricing, creation and/or
redemption features, or upsizing that
would preclude the type of
manipulation that FINRA Rule 5250 is
designed to prevent. Do commenters
agree with this assertion? If so, why? If
not, why not?
8. The Exchange notes in its filing that
it expects FINRA to file a proposed rule
change to amend its Rule 5250 to
indicate that participation by LMMs and
issuers in the Fixed Incentive Program
would not be prohibited by FINRA Rule
5250. FINRA Rule 5250 (previously
NASD Rule 2460) was implemented, in
part, to address concerns about issuers
paying market makers to improperly
influence the price of an issuer’s
stock.18 Do commenters believe the
Fixed Incentive Program would raise the
types of concerns that FINRA Rule 5250
18 See Securities Exchange Act Release No. 38812
(July 3, 1997), 62 FR 37105 (July 10, 1997) (SR–
NASD–97–29) (‘‘Specifically, the Commission finds
that the rule preserves the integrity of the
marketplace by ensuring that quotations accurately
reflect a broker-dealer’s interest in buying or selling
a security. The decision by a firm to make a market
in a given security and the question of price
generally are dependent on a number of factors,
including, among others, supply and demand, the
firm’s expectations toward the market, its current
inventory position, and exposure to risk and
competition. This decision should not be
influenced by payments to the member from issuers
or promoters. Public investors expect brokerdealers’ quotations to be based on the factors
described above. If payments to broker-dealers by
promoters and issuers were permitted, investors
would not be able to ascertain which quotations in
the marketplace are based on actual interest and
which quotations are supported by issuers or
promoters. This structure would harm investor
confidence in the overall integrity of the
marketplace. The Commission finds that the
proposed rule supports a longstanding policy and
position of the NASD and establishes a clear
standard of fair practice for member firms.’’)
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mstockstill on DSK6TPTVN1PROD with NOTICES
was designed to address? Why or why
not?
9. The Exchange asserts that the
structure of its proposal is unique and
has appropriate safeguards to dispel the
concerns that FINRA Rule 5250 was
designed to address. For example, the
Exchange notes that the proposal
includes the interposition of the
Exchange between the issuers and
LMMs, the payment of fees from the
general revenues of the Exchange, and
the existing obligations and minimum
performance standards that are
monitored by the Exchange under NYSE
Arca Equities Rules 7.23 and 7.24,
respectively. Do commenters agree that
the Exchange’s proposal adequately
addresses the policies and concerns
behind FINRA Rule 5250? Why or why
not? What are commenters’ views on
whether, and if so, how, the Fixed
Incentive Program would be consistent
with the rationale behind FINRA Rule
5250?
10. Could there be conflicts of interest
between an issuer of an ETP in the
Fixed Incentive Program and the LMM
assigned to such ETP? If so, what are
those conflicts of interest? 19 Please
explain whether the Exchange’s
proposal adequately addresses such
potential conflicts, and if so, how, and
if not, why not.
11. Are the proposed criteria for
participation by potential ETP issuers
and/or LMMs in the Fixed Incentive
Program sufficiently clear, precise, and
objective to address concerns about
potential conflicts of interest between
issuers and market makers? Why or why
not? Should such participation
standards be more objective to ensure
that there is a level playing field in
determining who the issuers and market
makers are for a particular ETP in the
Fixed Incentive Program? Would more
clear and objective standards help to
address conflicts of interest that may be
present between issuers and market
makers, if any? Under the proposed
Fixed Incentive Program, if more than
one qualified LMM proposes to serve as
such, the issuer would choose the LMM.
19 The Commission’s order approving NASD Rule
2460 discussed conflicts of interest that may exist
between issuers and market makers. See id. at
37106 (‘‘It has been a longstanding policy and
position of the NASD that a broker-dealer is
prohibited from receiving compensation or other
payments from an issuer for quoting, making a
market in an issuer’s securities or for covering the
member’s out-of-pocket expenses for making a
market, or for submitting an application to make a
market in an issuer’s securities. As stated in Notice
to Members 75–16 (February 20, 1975), such
payments may be viewed as a conflict of interest
since they may influence the member’s decision as
to whether to quote or make a market in a security
and, thereafter, the prices that the member would
quote.’’)
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What are commenters’ views on
allowing the issuer that has chosen to
participate in the Fixed Incentive
Program to choose the LMM? Should
the Exchange establish objective
standards and be responsible for
choosing the designated LMM for a
particular issuer and ETP in the Fixed
Incentive Program? Would allowing an
issuer that has chosen to participate in
the Fixed Incentive Program to choose
its LMM for the particular ETP be
consistent or inconsistent with the
policies and concerns behind FINRA
Rule 5250?
12. Is it appropriate and consistent
with the Act to allow issuers to choose
to enter into the Fixed Incentive
Program and pay the Optional Incentive
Fee? Why or why not? Would it be more
or less appropriate to require all, or a
fixed subset of, ETP issuers to enter the
Fixed Incentive Program and pay the
Optional Incentive Fee? What would be
the impact on market maker incentives
of allowing issuers to choose to enter
into the Fixed Incentive Program and
pay the Optional Incentive Fee?
13. Is it appropriate and consistent
with the Act to allow issuers and LMMs
to negotiate the Optional Incentive Fee?
Why or why not? Does allowing issuers
to negotiate such fees directly with
LMMs raise concerns regarding investor
confidence, market integrity, and
member standards, similar to those
discussed in connection with FINRA
Rule 5250? 20 If so, what are those
concerns? Should the Optional
Incentive Fee agreed upon between the
issuer and the LMM for a particular ETP
be publicly disclosed? Why or why not?
14. With respect to an ETP, should the
entity paying the Optional Incentive Fee
be the sponsor or the fund? What
impact, if any, would it have on fund
investors if the fund pays the Optional
Incentive Fee as opposed to the
sponsor? Are the proposed rules
sufficiently clear as to which entity will
be paying the Optional Incentive Fee?
15. Section 11(d)(1) of the Act
generally prohibits a firm that is both a
broker and a dealer in securities from
extending or maintaining any credit on
any new issue security if the brokerdealer participated in the distribution of
the new issue security within the
preceding 30 days. The Commission has
granted relief to authorized participants
from these restrictions if, among other
things, neither the broker-dealer
authorized participant, nor any natural
person associated with such brokerdealer authorized participant, directly
or indirectly, receives from the fund
complex any payment, compensation, or
20 See
PO 00000
supra note 18.
Frm 00112
Fmt 4703
Sfmt 4703
other economic incentive to promote or
sell the shares of the fund to persons
outside the fund complex, other than
non-cash compensation permitted under
NASD Rule 2380. Should authorized
participants participating in the creation
and redemption of shares of ETPs that
are also LMMs in those same ETPs be
eligible to receive LMM Payments?
Would the LMM Payments give these
authorized participants economic
incentives to promote or sell shares of
the ETP? Should such payments be
viewed by the Commission as coming
directly or indirectly from the fund
complex of the ETP? Should LMM
Payments disqualify broker-dealer
authorized participants from relying on
the Commission’s exemption from
Section 11(d)(1) of the Act?
16. Could the Fixed Incentive
Program have an impact (either positive
or negative) on incentives for market
making in other ETPs listed and traded
on the Exchange that are not eligible for
and/or do not participate in the Fixed
Incentive Program, either because the
Exchange has limited the number of
ETPs that an issuer may have in the
program, the issuer does not qualify for
the program, or the issuer’s application
for participation is otherwise denied? If
so, what type of impact, and why? If
not, why not? Please explain.
17. The Exchange’s stated rationale
for the Fixed Incentive Program is that
market makers need additional
incentives to take on LMM assignments
in ETPs with low CADV. However, the
Fixed Incentive Program does not limit
which ETPs can be included within the
program based on trading volume, and
does not provide for the removal or
withdrawal of an ETP from the program
if such ETP reaches a certain CADV
level. Would it be more appropriate for
an ETP to be removed from the Program
once it reaches a certain liquidity level
or volume threshold? Why or why not?
If so, what would be an appropriate
threshold? Would it be more
appropriate to limit inclusion in the
program to newly listed or low volume
ETPs? Why or why not?
18. Could the Fixed Incentive
Program have unintended consequences
on fair and orderly markets in an ETP
when such security leaves the program?
If so, what could these consequences
be? If not, why not? Please explain.
19. The Exchange has proposed to
implement the Fixed Incentive Program
on a pilot basis beginning no later than
90 days after the effective date of this
filing, until December 31, 2013. Is this
a reasonable amount of time to assess
the impact of the proposed rules? If not,
why not? Please explain.
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20. What additional data, if any,
should be provided by the Exchange to
help assess during the pilot period
whether the Fixed Incentive Program is
achieving its stated goals? For example,
if the Exchange required ETPs to be
listed and traded outside the Fixed
Incentive Program for a period of time
before being eligible for the program,
could such a requirement provide useful
‘‘before and after’’ data for ETPs to
permit the Exchange and the
Commission to more accurately assess
the market quality of the securities
before participating in the program and
the market quality of the same securities
while participating in the program? If
so, how? If not, please explain.
21. The Exchange represents that it
will provide certain public disclosures
relating to the Fixed Incentive Program
(i.e., notification on its Web site
regarding the ETPs participating in the
Fixed Incentive Program and the
assigned LMMs). Do commenters
believe that these disclosures would
provide sufficient information to
investors? If not, why not? Do
commenters believe the program is
sufficiently transparent? Why or why
not? Is there any other information that
the Exchange should provide on its Web
site regarding the Fixed Incentive
Program and participating ETPs, issuers,
and LMMs? For example, should the
Exchange be required to publish on its
Web site any notices from an issuer or
LMM to withdraw from the program, or
notices that an issuer or LMM has been
removed from the program? Should the
Exchange be required to publish on its
Web site the performance standards to
which LMMs in the program are
subject? What advantages or
disadvantages would such disclosures
provide? Please explain.
22. Would it be helpful to investors to
have public notice of an issuer’s
participation in the Fixed Incentive
Program through means other than on
the Exchange’s Web site, such as in the
issuer’s periodic reports to the
Commission, on the issuer’s Web site, or
through a ticker symbol identifier on the
consolidated tape? Why or why not?
23. What are commenters’ views on
whether the proposed disclosures are
sufficient to enable all investors, even
less sophisticated investors, to
understand the potential impact of the
proposed Fixed Incentive Program on an
ETP, including that an issuer’s
participation in the program is
voluntary and subject to withdrawal?
24. Should the Exchange be required
to publicly (and anonymously) disclose
statistics on the performance of LMMs?
Would such disclosure provide
meaningful information to investors
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(e.g., would such disclosure provide
investors the opportunity to assess how
much perceived liquidity is being
provided by LMMs in the Fixed
Incentive Program, as opposed to
liquidity provided by market makers
and other market participants who are
not paid an LMM Payment)? If so, what
information should be disclosed and
why? If not, why not? What advantages
or disadvantages would such disclosure
provide? Please explain.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEArca–2012–37 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–2012–37. 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 (https://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 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–2012–37 and
PO 00000
Frm 00113
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29425
should be submitted on or before June
7, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–11914 Filed 5–16–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66968; File No. SR–Phlx–
2012–57]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Complex Order Fees for Removing
Liquidity in Select Symbols
May 11, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on April 30,
2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) 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. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Section I of the Exchange’s Pricing
Schedule entitled ‘‘Rebates and Fees for
Adding and Removing Liquidity in
Select Symbols.’’ The Exchange
previously filed an immediately
effective rule change, SR–Phlx–2012–
27,3 to amend certain fees and rebates in
Section I, which filing was temporarily
suspended by the Commission as of
April 30, 2012 (‘‘Suspension Order’’).4
At this time, to continue the
effectiveness of certain fees and rebates
that were contained in SR–Phlx–2012–
27, the Exchange is filing this rule
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 66551
(March 9, 2012), 77 FR 15400 (March 15, 2012) (SR–
Phlx–2012–27).
4 By order dated April 30, 2012, the Commission
suspended SR–Phlx–2012–27 and SR–Phlx–2012–
54. See Securities Exchange Release No. 66884
(April 30, 2012).
1 15
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]]>Agencies
[Federal Register Volume 77, Number 96 (Thursday, May 17, 2012)]
[Notices]
[Pages 29419-29425]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11914]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66966; File No. SR-NYSEArca-2012-37]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Proposing a Pilot Program To Create a Lead
Market Maker Issuer Incentive Program for Issuers of Certain Exchange-
Traded Products Listed on NYSE Arca, Inc.
May 11, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that, on April 27, 2012, NYSE Arca, Inc. (``Exchange''
or ``NYSE Arca'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been substantially prepared
by the Exchange. 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\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a pilot program to create a Lead Market Maker
(``LMM'') Issuer Incentive Program (``Fixed Incentive Program'') for
issuers of certain exchange-traded products (``ETPs'') listed on the
Exchange. The text of the proposed rule change is available at the
Exchange, www.nyse.com, the Commission's Public Reference Room, and the
Commission's Web site at www.sec.gov.
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
The Exchange proposes a pilot program to create a Fixed Incentive
Program for issuers of certain ETPs listed on the Exchange.
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.\3\
ETP issuers also pay 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.
---------------------------------------------------------------------------
\3\ 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
https://www.nyse.com/pdfs/NYSEArca_Listing_Fees.pdf.
---------------------------------------------------------------------------
A qualified Market Maker may request an assignment as an LMM for an
ETP, and the request is subject to approval by the Exchange.\4\ 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 are obligated to meet certain
obligations and requirements \5\ and therefore incur greater risks than
other market participants on the Exchange. The risks include those
associated with managing position inventory as well as those 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 the accumulation
of costs from carrying those positions as well as positions in the
underlying securities used for hedging.\6\ LMMs are 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 established by Regulation SHO,\7\ LMMs acting
in ETPs with low shares outstanding are often required to maintain a
long ETP position. 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. If, due to human error such as the input
of an inaccurate underlying basket or technological error such as a
static data
[[Page 29420]]
feed caused by networking or hardware breakdowns, the LMM's quote
diverges from the underlying assets value, the LMMs are more likely to
buy (sell) at prices that are above (below) theoretical fair values.
Because LMMs are 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.
---------------------------------------------------------------------------
\4\ See NYSE Arca Equities Rule 7.22(d).
\5\ An LMM is 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 or
Offer (``NBBO''), (ii) percent of executions better than the NBBO,
(iii) average displayed size, (iv) average quoted spread, and (v) in
the event the security is a derivative security, the ability to
transact in underlying markets. An LMM's minimum performance
standards are higher than those of a Designated Market Maker and 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. References
in this rule filing, including in the proposed rule text, to an
LMM's minimum performance standards mean those set forth in NYSE
Arca LMM Requirements.
\6\ 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.
\7\ See 17 CFR 242.203-204.
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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'').\8\ LMM Rates are intended to balance the
increased risks and requirements assumed by LMMs. Accordingly, the
value of acting as an LMM could 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 volume traded. 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 CADV than ETPs with higher CADV. 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%: \9\
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\8\ 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 Equity Trading Permit Holder
(``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 between $0.0035 and $0.0045 per
share depending on consolidated average daily volume (``CADV'').
Standard NYSE Arca Tape B Make Rates (rebates paid for adding
liquidity) range from $0.0022 to $0.0033 per share. Standard NYSE
Arca Tape B Take Rates (fees charged for removing liquidity) range
from $0.0026 to $0.0030 per share. See the Trading Fee Schedule,
available at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees__3_01_12_.pdf.
\9\ 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 * NYSE Arca market share * LMM
participation rate * LMM make ratio. LMM take volume equals CADV *
NYSE Arca market share * LMM participation rate * LMM take ratio.
----------------------------------------------------------------------------------------------------------------
Annual
Annual transaction Annual
Symbol CADV transaction credit/fee incremental
credit/fee (standard difference
(LMM rates) rates)
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
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 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:
----------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 2009 2010 2011
----------------------------------------------------------------------------------------------------------------
New NYSE Arca ETP Listings..... 11 34 49 133 223 195 124 196 297
Listed with LMM................ 11 34 49 133 218 190 121 175 271
Listed without LMM............. 0 0 0 0 5 5 3 21 26
----------------------------------------------------------------------------------------------------------------
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 request being made. This
behavior signals a connection between low CADV and low interest levels
from firms seeking to act as the LMM. Likewise, it supports the
assertion that there is less value relative to risks of acting as the
LMM for certain ETPs.
Proposed Fixed Incentive Program
The Exchange proposes to add new NYSE Arca Equities Rule 8.800,
which would offer a pilot program to incentivize Market Makers to
undertake LMM assignments in ETPs. An issuer of an ETP that
participates in the proposed Fixed Incentive Program would continue to
pay the currently applicable Listing and Annual Fees. Such issuer also
could elect to pay the Exchange an Optional Incentive Fee, which would
range from $10,000 to $40,000 per year.\10\
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\10\ The Exchange would provide notification on its Web site
regarding the ETPs participating in the Fixed Incentive Program and
the assigned LMMs.
---------------------------------------------------------------------------
Proposed NYSE Arca Equities Rule 8.800(a) would describe the ETPs
that would be eligible for inclusion in the
[[Page 29421]]
Fixed Incentive Program. Eligible products would include any ETP that
is listed on the Exchange as of the commencement of the pilot period or
that becomes listed during the pilot period, and the listing is under
NYSE Arca Equities Rules 5.2(j)(3) (Investment Company Units),
5.2(j)(5) (Equity Gold Shares), 5.2(j)(6) (Equity Index-Linked
Securities, Commodity-Linked Securities, Currency-Linked Securities,
Fixed Income Index-Linked Securities, Futures-Linked Securities, and
Multifactor Index-Linked Securities), 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), and 8.700 (Managed Trust
Securities).
Proposed NYSE Arca Equities Rule 8.800(b)(1) would describe the
issuer's application process. An issuer that wishes to have an ETP
participate in the Fixed 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 elect to 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 existing ETPs, that are listed on the
Exchange prior to pilot [sic], participate in the Fixed Incentive
Program. The Exchange would communicate the ETP(s) proposed for
inclusion in the Fixed Incentive Program on a written solicitation that
would be sent to all qualified LMM firms \11\ along with the Optional
Incentive Fee the issuer proposes to pay the Exchange for each ETP. The
permitted range for the Optional Incentive Fee would be set forth in
the Exchange's Fee Schedule. The issuer and the LMM thereafter would
agree upon the final Optional Incentive Fee for each ETP. If more than
one qualified LMM proposed to serve as such, the issuer would choose
the LMM.
---------------------------------------------------------------------------
\11\ 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.
---------------------------------------------------------------------------
Proposed NYSE Arca Equities Rule 8.800(b)(2) would set forth
eligibility requirements for issuers' participation in the Fixed
Incentive Program. To be eligible to participate in the Fixed Incentive
Program, an issuer would be required to be current in all payments due
to the Exchange if it had other securities listed on the Exchange. In
addition, the issuer would be required to be current in all payments
due to the Exchange and compliant with continuing listing standards for
the ETP proposed for inclusion if the issuer elected to participate in
the Fixed Incentive Program after listing such ETP on the Exchange.
Proposed NYSE Arca Equities Rule 8.800(c) would describe the
process for the payment of the Optional Incentive Fee for each ETP. 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 commences participation for an
ETP in the Fixed Incentive Program after the beginning of a quarter.
The issuer would receive a prorated credit from the Exchange following
the end of the quarter if the LMM did not meet its minimum performance
standards for an ETP in any given month in such quarter. The credit
would be applied against the issuer's next quarterly installment of the
Optional Incentive Fee for the ETP, or otherwise credited or refunded
to the issuer if the ETP was withdrawn from the Fixed Incentive
Program. 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 described in proposed Rule 8.800(d)
below, except that after two quarters, if an issuer was not current in
its quarterly installments for an ETP, such ETP would be automatically
terminated from the Fixed Incentive Program.
Proposed NYSE Arca Equities Rule 8.800(d) would describe the LMM
Payments by the Exchange. Under this provision, the Exchange would
credit an LMM for the LMM Payment, which would be equal to the Optional
Incentive Fee paid by the issuer, less an Exchange administration fee
set forth in the Fee Schedule.\12\ An LMM that receives an LMM Payment
would not be eligible for LMM Rates for such ETP under the Exchange's
Fee Schedule while participating in the Fixed Incentive Program but
would instead be subject to Standard Rates.\13\
---------------------------------------------------------------------------
\12\ As noted below, the Exchange proposes that the initial
administration fee be 5%.
\13\ See supra note 8.
---------------------------------------------------------------------------
The Exchange would credit an LMM for the LMM Payment at the end of
each quarter. If an LMM did not meet or exceed its minimum performance
standards for the ETP for a particular month, then the LMM Payment
would be prorated accordingly. As noted above, the issuer in turn would
receive a prorated credit that could be used toward the following
quarterly LMM Payment for that particular ETP or others that they have
elected to participate in the Fixed Incentive Program. As is the case
with all liquidity-adding credits currently payable to NYSE Arca
members, LMM Payments would be paid directly by the Exchange from its
general revenues.
Proposed NYSE Arca Equities Rule 8.800(e) would describe the
circumstances for withdrawal from the Fixed Incentive Program and a
reallocation process. If an ETP no longer met continuing listing
standards or is being liquidated, it would be automatically withdrawn
from the Fixed Incentive Program as of the ETP suspension date. In
addition, NYSE Arca, in its discretion, could allow an issuer to
withdraw an ETP from the Fixed Incentive Program before the end of the
pilot if the assigned LMM was unable to meet its minimum performance
standards for any two of the three months of a quarter or five months
during the pilot and no other qualified ETP Holder was able to take
over the assignment.
An LMM also could withdraw from all of its ETP assignments in the
Fixed 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 minimum
performance standards for such ETP that did not affect its other ETP
assignments in the Fixed Incentive Program. In either such event, the
LMM's ETP(s) would be reallocated as described below.
If an LMM, for a particular ETP, did not meet or exceed its minimum
performance standards for any two of the three months of a quarter or
five months during the pilot, or chose to withdraw from the Fixed
Incentive Program, and at least one other qualified Market Maker agreed
to become the assigned LMM under the Fixed Incentive Program, then the
ETP would be reallocated via the written solicitation process described
above. The issuer could select another LMM and renegotiate the Optional
Incentive Fee. 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.
The proposed LMM Payment is designed to encourage additional Market
Makers to pursue LMM assignments and thereby support the
[[Page 29422]]
provision of consistent liquidity in ETPs listed on the Exchange. The
Exchange would administer all aspects of the LMM Payments and believes
that providing a quarterly LMM Payment would create a more equitable
system of incentives for LMMs. The Exchange notes that the proposal
would not alter the current requirements and obligations of LMMs under
Exchange rules or any policies and procedures related to LMMs.\14\
---------------------------------------------------------------------------
\14\ See supra note 5.
---------------------------------------------------------------------------
Implementation of Fixed Incentive Program
The pilot program would be offered to issuers from the date of
implementation, which would occur no later than 90 days after the
effective date of this filing, until December 31, 2013. As referenced
above, each issuer could select ETPs to participate in the Fixed
Incentive Program. During the course of the pilot period, the Exchange
would assess the Fixed Incentive Program and may 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. At the end of the pilot, the Exchange would determine
whether to continue or discontinue the pilot or make it permanent and
submit a rule filing as necessary. If the Exchange determines to change
the terms of the pilot while it is ongoing, it would submit a rule
filing to the Commission.
During the pilot program, the Exchange would provide the Commission
with certain market quality data on a confidential basis each month.
Such data would include, for all ETPs listed as of the date of
implementation of the pilot program and listed during the pilot (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 has 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
such data as may be periodically requested by the Commission.
Amendments to Listing Fee Schedule and Trading Fee Schedule
To implement the pilot, the Exchange also proposes to amend its
Listing Fee Schedule to provide that the Optional Incentive Fee under
NYSE Arca Rule 8.800 may range from $10,000 to $40,000 and to amend its
Trading Fee Schedule to provide that at the end of each quarter, the
Exchange would credit the LMM assigned to an ETP the Optional Incentive
Fee, less a 5% Exchange administration fee, and that an LMM that
receives an LMM Payment under NYSE Arca Rule 8.800 would be subject to
Standard Rates rather than LMM Rates.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\15\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\16\ in particular.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(4) 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 Payment. The
Exchange also believes that the proposed fees are reasonable because
they would be used by the Exchange to offset, in part, 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.
The Exchange believes that the Optional Incentive Fee is
reasonable, equitably allocated, and not unreasonably discriminatory.
The fee would be equitably allocated and not unfairly discriminatory
because it is entirely voluntary on the issuer's part to join the pilot
program. The amount of the fee would be determined and paid by the
issuer within the $10,000 to $40,000 band per ETP.
The Exchange believes that the LMM Payment and standard transaction
fees and credits are equitable in that any LMM could seek to
participate in the program. The Exchange further believes that the
range of credits is fair and equitable in light of the LMM's
obligations and minimum performance standards and that it is reasonable
for the Exchange to retain an administration fee to recover the costs
of administering the pilot program.
The Exchange further believes that 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. In particular, the
Exchange believes that creating an incentive for an ETP Holder to act
as an LMM would foster cooperation and coordination with persons
engaged in facilitating securities transactions and enhance the
mechanism of a free and open market. The assignment of an LMM, which is
held to higher minimum performance standards as compared to other
market participants, helps to promote fair and orderly markets in ETPs
on the Exchange.
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 Fixed Incentive
Program before making it available to all ETPs. 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 non-participating ETPs and thereby
conserve the commitment of resources to the pilot program.
The Exchange intends to utilize its existing surveillance
procedures applicable to derivative products to monitor trading in the
ETPs participating in the pilot program, which the Exchange believes
are adequate to properly monitor Exchange trading of the participating
ETPs in all trading sessions and to deter and detect violations of
Exchange rules and applicable federal securities laws.
Finally, the Exchange believes that the pilot program would not be
inconsistent with Financial Industry Regulatory Authority (``FINRA'')
Rule 5250, which prohibits payment for market making. The Exchange
believes that FINRA Rule 5250 is designed to address issues associated
with securities of operating companies, and such issues are not present
with ETPs, which have derivative pricing, creation and/or redemption
features, or upsizing that would preclude the type of manipulation that
FINRA Rule 5250 is designed to prevent. Moreover, the Exchange believes
that the structure of
[[Page 29423]]
its proposal is unique and has appropriate safeguards. For example, the
proposal includes the interposition of the Exchange between the issuers
and LMMs, the payment of fees from the general revenues of the
Exchange, and the existing obligations and minimum performance
standards that are monitored by the Exchange under NYSE Arca Equities
Rules 7.23 and 7.24, respectively. For these reasons, the Exchange does
not believe that its proposal would be inconsistent with FINRA Rule
5250.\17\
---------------------------------------------------------------------------
\17\ Notwithstanding the Exchange's views, and based upon
discussions with FINRA, subsequent to the Exchange's filing of this
proposal FINRA will file an immediately effective rule change
indicating that participation by LMMs and issuers in the Fixed
Incentive Program would not be prohibited by FINRA Rule 5250.
---------------------------------------------------------------------------
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
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 Exchange 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 requests comment, in
particular, on the following aspects of the proposed rule change:
1. The Exchange asserts that LMMs in ETPs incur higher inventory,
quoting, and other risks than other market participants on the Exchange
and that there is less value relative to risk of acting as an LMM for
ETPs that exhibit low CADV. Do commenters agree that low interest
levels by LMMs in ETPs that have low CADV is a result of such value/
risk discrepancy? Why or why not? What other factors could contribute
to a lack of interest by LMMs in such ETPs? What other factors could
explain the apparent increasing proportion of new ETPs that are listed
on the Exchange without a designated LMM?
2. The Exchange asserts that providing a quarterly LMM Payment to
LMMs assigned to ETPs in the Fixed Incentive Program will create a more
equitable system of incentives for LMMs. Do commenters believe that the
Fixed Incentive Program will incentivize more LMMs to take assignments
in ETPs. If so, how? If not, why not?
3. Given the inherent arbitrage link between trading ETPs and their
underlying holdings, would a lack of liquidity in an ETP impact the
ability of LMMs to quote relatively narrow bids and offers? What, if
anything, does a lack of liquidity in an ETP indicate about the ability
of an LMM or other market maker to make effective use of arbitrage and
the creation/redemption mechanisms often associated with ETPs? How, if
at all, would a market-making incentive program affect any intraday
premium (discount) of the traded price of an ETP above (below) its
intraday indicative value?
4. The Exchange states that the Fixed Incentive Program is designed
to encourage additional Market Makers to pursue LMM assignments and
thereby support the provision of consistent liquidity in ETPs listed on
the Exchange. The Commission seeks specific commentary on any potential
impact of the proposed rules on the market quality of ETPs. Do
commenters agree with the Exchange that the Fixed Incentive Program
would support the provision of consistent liquidity in ETPs listed on
the Exchange? If so, please explain. If not, why not?
5. If two ETPs share similar market quality characteristics (quoted
spread, size, volume, etc.) but one is supported by the Fixed Incentive
Program and the other is not, what, if anything, does that suggest
about the fundamental market qualities of the two ETPs? Would investors
understand, and should they be concerned about, the differences
underlying the seemingly similar market qualities of the two ETPs? Are
there other aspects of this type of incentivized market quality that
should concern investors? Are such apparent improvements in market
quality consistent with the Act and investor protection? Why or why
not?
6. Under the proposal, LMMs for ETPs in the Fixed Incentive Program
would continue to be subject to the current LMM performance standards
and would not be subject to higher performance standards. Do commenters
believe this is appropriate? Why or why not? Should LMMs for ETPs in
the Fixed Incentive Program be subject to higher standards because of
the LMM Payments that LMMs could be entitled to receive? Why or why
not?
7. FINRA Rule 5250 prohibits FINRA members from directly or
indirectly accepting payment from an issuer of a security for acting as
a market maker. The Exchange asserts that FINRA Rule 5250 is designed
to address issues associated with securities of operating companies,
and such issues are not present with ETPs, because they have derivative
pricing, creation and/or redemption features, or upsizing that would
preclude the type of manipulation that FINRA Rule 5250 is designed to
prevent. Do commenters agree with this assertion? If so, why? If not,
why not?
8. The Exchange notes in its filing that it expects FINRA to file a
proposed rule change to amend its Rule 5250 to indicate that
participation by LMMs and issuers in the Fixed Incentive Program would
not be prohibited by FINRA Rule 5250. FINRA Rule 5250 (previously NASD
Rule 2460) was implemented, in part, to address concerns about issuers
paying market makers to improperly influence the price of an issuer's
stock.\18\ Do commenters believe the Fixed Incentive Program would
raise the types of concerns that FINRA Rule 5250
[[Page 29424]]
was designed to address? Why or why not?
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\18\ See Securities Exchange Act Release No. 38812 (July 3,
1997), 62 FR 37105 (July 10, 1997) (SR-NASD-97-29) (``Specifically,
the Commission finds that the rule preserves the integrity of the
marketplace by ensuring that quotations accurately reflect a broker-
dealer's interest in buying or selling a security. The decision by a
firm to make a market in a given security and the question of price
generally are dependent on a number of factors, including, among
others, supply and demand, the firm's expectations toward the
market, its current inventory position, and exposure to risk and
competition. This decision should not be influenced by payments to
the member from issuers or promoters. Public investors expect
broker-dealers' quotations to be based on the factors described
above. If payments to broker-dealers by promoters and issuers were
permitted, investors would not be able to ascertain which quotations
in the marketplace are based on actual interest and which quotations
are supported by issuers or promoters. This structure would harm
investor confidence in the overall integrity of the marketplace. The
Commission finds that the proposed rule supports a longstanding
policy and position of the NASD and establishes a clear standard of
fair practice for member firms.'')
---------------------------------------------------------------------------
9. The Exchange asserts that the structure of its proposal is
unique and has appropriate safeguards to dispel the concerns that FINRA
Rule 5250 was designed to address. For example, the Exchange notes that
the proposal includes the interposition of the Exchange between the
issuers and LMMs, the payment of fees from the general revenues of the
Exchange, and the existing obligations and minimum performance
standards that are monitored by the Exchange under NYSE Arca Equities
Rules 7.23 and 7.24, respectively. Do commenters agree that the
Exchange's proposal adequately addresses the policies and concerns
behind FINRA Rule 5250? Why or why not? What are commenters' views on
whether, and if so, how, the Fixed Incentive Program would be
consistent with the rationale behind FINRA Rule 5250?
10. Could there be conflicts of interest between an issuer of an
ETP in the Fixed Incentive Program and the LMM assigned to such ETP? If
so, what are those conflicts of interest? \19\ Please explain whether
the Exchange's proposal adequately addresses such potential conflicts,
and if so, how, and if not, why not.
---------------------------------------------------------------------------
\19\ The Commission's order approving NASD Rule 2460 discussed
conflicts of interest that may exist between issuers and market
makers. See id. at 37106 (``It has been a longstanding policy and
position of the NASD that a broker-dealer is prohibited from
receiving compensation or other payments from an issuer for quoting,
making a market in an issuer's securities or for covering the
member's out-of-pocket expenses for making a market, or for
submitting an application to make a market in an issuer's
securities. As stated in Notice to Members 75-16 (February 20,
1975), such payments may be viewed as a conflict of interest since
they may influence the member's decision as to whether to quote or
make a market in a security and, thereafter, the prices that the
member would quote.'')
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11. Are the proposed criteria for participation by potential ETP
issuers and/or LMMs in the Fixed Incentive Program sufficiently clear,
precise, and objective to address concerns about potential conflicts of
interest between issuers and market makers? Why or why not? Should such
participation standards be more objective to ensure that there is a
level playing field in determining who the issuers and market makers
are for a particular ETP in the Fixed Incentive Program? Would more
clear and objective standards help to address conflicts of interest
that may be present between issuers and market makers, if any? Under
the proposed Fixed Incentive Program, if more than one qualified LMM
proposes to serve as such, the issuer would choose the LMM. What are
commenters' views on allowing the issuer that has chosen to participate
in the Fixed Incentive Program to choose the LMM? Should the Exchange
establish objective standards and be responsible for choosing the
designated LMM for a particular issuer and ETP in the Fixed Incentive
Program? Would allowing an issuer that has chosen to participate in the
Fixed Incentive Program to choose its LMM for the particular ETP be
consistent or inconsistent with the policies and concerns behind FINRA
Rule 5250?
12. Is it appropriate and consistent with the Act to allow issuers
to choose to enter into the Fixed Incentive Program and pay the
Optional Incentive Fee? Why or why not? Would it be more or less
appropriate to require all, or a fixed subset of, ETP issuers to enter
the Fixed Incentive Program and pay the Optional Incentive Fee? What
would be the impact on market maker incentives of allowing issuers to
choose to enter into the Fixed Incentive Program and pay the Optional
Incentive Fee?
13. Is it appropriate and consistent with the Act to allow issuers
and LMMs to negotiate the Optional Incentive Fee? Why or why not? Does
allowing issuers to negotiate such fees directly with LMMs raise
concerns regarding investor confidence, market integrity, and member
standards, similar to those discussed in connection with FINRA Rule
5250? \20\ If so, what are those concerns? Should the Optional
Incentive Fee agreed upon between the issuer and the LMM for a
particular ETP be publicly disclosed? Why or why not?
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\20\ See supra note 18.
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14. With respect to an ETP, should the entity paying the Optional
Incentive Fee be the sponsor or the fund? What impact, if any, would it
have on fund investors if the fund pays the Optional Incentive Fee as
opposed to the sponsor? Are the proposed rules sufficiently clear as to
which entity will be paying the Optional Incentive Fee?
15. Section 11(d)(1) of the Act generally prohibits a firm that is
both a broker and a dealer in securities from extending or maintaining
any credit on any new issue security if the broker-dealer participated
in the distribution of the new issue security within the preceding 30
days. The Commission has granted relief to authorized participants from
these restrictions if, among other things, neither the broker-dealer
authorized participant, nor any natural person associated with such
broker-dealer authorized participant, directly or indirectly, receives
from the fund complex any payment, compensation, or other economic
incentive to promote or sell the shares of the fund to persons outside
the fund complex, other than non-cash compensation permitted under NASD
Rule 2380. Should authorized participants participating in the creation
and redemption of shares of ETPs that are also LMMs in those same ETPs
be eligible to receive LMM Payments? Would the LMM Payments give these
authorized participants economic incentives to promote or sell shares
of the ETP? Should such payments be viewed by the Commission as coming
directly or indirectly from the fund complex of the ETP? Should LMM
Payments disqualify broker-dealer authorized participants from relying
on the Commission's exemption from Section 11(d)(1) of the Act?
16. Could the Fixed Incentive Program have an impact (either
positive or negative) on incentives for market making in other ETPs
listed and traded on the Exchange that are not eligible for and/or do
not participate in the Fixed Incentive Program, either because the
Exchange has limited the number of ETPs that an issuer may have in the
program, the issuer does not qualify for the program, or the issuer's
application for participation is otherwise denied? If so, what type of
impact, and why? If not, why not? Please explain.
17. The Exchange's stated rationale for the Fixed Incentive Program
is that market makers need additional incentives to take on LMM
assignments in ETPs with low CADV. However, the Fixed Incentive Program
does not limit which ETPs can be included within the program based on
trading volume, and does not provide for the removal or withdrawal of
an ETP from the program if such ETP reaches a certain CADV level. Would
it be more appropriate for an ETP to be removed from the Program once
it reaches a certain liquidity level or volume threshold? Why or why
not? If so, what would be an appropriate threshold? Would it be more
appropriate to limit inclusion in the program to newly listed or low
volume ETPs? Why or why not?
18. Could the Fixed Incentive Program have unintended consequences
on fair and orderly markets in an ETP when such security leaves the
program? If so, what could these consequences be? If not, why not?
Please explain.
19. The Exchange has proposed to implement the Fixed Incentive
Program on a pilot basis beginning no later than 90 days after the
effective date of this filing, until December 31, 2013. Is this a
reasonable amount of time to assess the impact of the proposed rules?
If not, why not? Please explain.
[[Page 29425]]
20. What additional data, if any, should be provided by the
Exchange to help assess during the pilot period whether the Fixed
Incentive Program is achieving its stated goals? For example, if the
Exchange required ETPs to be listed and traded outside the Fixed
Incentive Program for a period of time before being eligible for the
program, could such a requirement provide useful ``before and after''
data for ETPs to permit the Exchange and the Commission to more
accurately assess the market quality of the securities before
participating in the program and the market quality of the same
securities while participating in the program? If so, how? If not,
please explain.
21. The Exchange represents that it will provide certain public
disclosures relating to the Fixed Incentive Program (i.e., notification
on its Web site regarding the ETPs participating in the Fixed Incentive
Program and the assigned LMMs). Do commenters believe that these
disclosures would provide sufficient information to investors? If not,
why not? Do commenters believe the program is sufficiently transparent?
Why or why not? Is there any other information that the Exchange should
provide on its Web site regarding the Fixed Incentive Program and
participating ETPs, issuers, and LMMs? For example, should the Exchange
be required to publish on its Web site any notices from an issuer or
LMM to withdraw from the program, or notices that an issuer or LMM has
been removed from the program? Should the Exchange be required to
publish on its Web site the performance standards to which LMMs in the
program are subject? What advantages or disadvantages would such
disclosures provide? Please explain.
22. Would it be helpful to investors to have public notice of an
issuer's participation in the Fixed Incentive Program through means
other than on the Exchange's Web site, such as in the issuer's periodic
reports to the Commission, on the issuer's Web site, or through a
ticker symbol identifier on the consolidated tape? Why or why not?
23. What are commenters' views on whether the proposed disclosures
are sufficient to enable all investors, even less sophisticated
investors, to understand the potential impact of the proposed Fixed
Incentive Program on an ETP, including that an issuer's participation
in the program is voluntary and subject to withdrawal?
24. Should the Exchange be required to publicly (and anonymously)
disclose statistics on the performance of LMMs? Would such disclosure
provide meaningful information to investors (e.g., would such
disclosure provide investors the opportunity to assess how much
perceived liquidity is being provided by LMMs in the Fixed Incentive
Program, as opposed to liquidity provided by market makers and other
market participants who are not paid an LMM Payment)? If so, what
information should be disclosed and why? If not, why not? What
advantages or disadvantages would such disclosure provide? Please
explain.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2012-37 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-2012-37. 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 (https://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 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-2012-37 and should be submitted on or before
June 7, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11914 Filed 5-16-12; 8:45 am]
BILLING CODE 8011-01-P
