Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Implement a One-Year Pilot Program for Issuers of Certain Exchange-Traded Products (“ETPs”) Listed on the Exchange, 21681-21691 [2013-08444]
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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Notices
used to attract order flow. MIAX
believes, however, that evidence not
then before the court clearly
demonstrates that availability of data
attracts order flow. Due to competition
among platforms, MIAX intends to
improve its platform data offerings on a
continuing basis, and to respond
promptly to customers’ data needs.
The intensity of competition for
proprietary information is significant
and MIAX believes that this proposal
itself clearly evidences such
competition. MIAX is offering ToM in
order to keep pace with changes in the
industry and evolving customer needs.
It is entirely optional and is geared
towards attracting new Member
Applicants and customers. MIAX
competitors continue to create new
market data products and innovative
pricing in this space. MIAX expects to
see firms challenge its pricing on the
basis of MIAX’s explicit fees being
higher than the zero-priced fees from
other competitors such as BATS. In all
cases, MIAX expects firms to make
decisions on how much and what types
of data to consume on the basis of the
total cost of interacting with MIAX or
other exchanges. Of course, the explicit
data fees are only one factor in a total
platform analysis. Some competitors
have lower transactions fees and higher
data fees, and others are vice versa. The
market for this proprietary information
is highly competitive and continually
evolves as products develop and
change.
The Exchange notes that the ToM
market data and fees will compete with
similar products offered by other
markets such as NASDAQ OMX PHLX,
LLC (‘‘PHLX’’) and the International
Stock Exchange LLC (‘‘ISE’’). For
example, PHLX and ISE offer market
data products that are similar to ToM:
data feeds that show the top of the
market entitled Top of PHLX Options
(‘‘TOPO’’) and the ISE TOP Quote Feed.
TKELLEY on DSK3SPTVN1PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.14 At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
14 15
U.S.C. 78s(b)(3)(A)(ii).
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such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–MIAX–2013–14 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–MIAX–2013–14. 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 Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
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21681
information that you wish to make
available publicly. All submissions
should refer to File Number SR–MIAX–
2013–14 and should be submitted on or
before May 2, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–08488 Filed 4–10–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69335; File No. SR–
NYSEArca–2013–34]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change and Amendment No. 1
Thereto To Implement a One-Year Pilot
Program for Issuers of Certain
Exchange-Traded Products (‘‘ETPs’’)
Listed on the Exchange
April 5, 2013.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 2 and Rule 19b–4
thereunder,3 notice is hereby given that,
on March 21, 2013, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
On April 5, 2013, the Exchange
submitted Amendment No. 1 to the
proposed rule change, which replaces
and supersedes the proposed rule
change in its entirety. The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 1
thereto, from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to implement
a one-year pilot program for issuers of
certain exchange-traded products
(‘‘ETPs’’) listed on the Exchange. The
text of the proposed rule change is
available on the Exchange’s Web site at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
15 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This Amendment No. 1 to SR–
NYSEArca–2013–34 replaces and
supercedes SR–NYSEArca–2013–34 in
its entirety.4
The Exchange proposes to create a
one-year pilot program for issuers of
certain ETPs listed on the Exchange.
The pilot program would be called the
NYSE Arca ETP Incentive Program
(‘‘Incentive Program’’). As described in
more detail below, the Incentive
Program is designed to enhance the
market quality for ETPs by incentivizing
Market Makers 5 to take Lead Market
Maker (‘‘LMM’’) assignments in certain
lower volume ETPs by offering an
alternative fee structure for such LMMs
that would be funded from the
Exchange’s general revenues. The costs
of the Incentive Program would be offset
by charging participating issuers nonrefundable Optional Incentive Fees,
which would be credited to the
Exchange’s general revenues.
Participation would be entirely
voluntary on the part of both LMMs and
issuers. The Exchange proposes to add
new NYSE Arca Equities Rule 8.800 to
set forth the requirements for the
Incentive Program, including
performance standards specific to
Background
Under the current Fee Schedule for
listings, an issuer of an ETP is required
to pay a Listing Fee that ranges from
$5,000 to $45,000.6 An ETP issuer also
pays a graduated Annual Fee based on
the number of shares of the ETP that are
outstanding. The Annual Fee ranges
from $5,000 to $55,000.
A qualified Market Maker may request
an assignment as an LMM for an ETP,
and the request is subject to approval by
the Exchange.7 For some ETPs, no
Market Maker requests an assignment as
an LMM, and the ETP therefore trades
without an LMM assigned to it. The
Exchange operates under the price-time
priority model for all market
participants, so there is no distinct
transactional benefit to being assigned
as an LMM. However, LMMs must meet
certain obligations and requirements
and therefore incur greater risks than
other market participants on the
Exchange.
An LMM is currently subject to the
obligations for Market Makers that are
set forth in NYSE Arca Equities Rule
7.23 and the minimum performance
standards that are referenced in NYSE
Arca Equities Rule 7.24. Under NYSE
Arca Equities Rule 7.24, the minimum
performance standards include (i)
Percent of time at the National Best Bid
(the ‘‘NBB’’) or National Best Offer (the
‘‘NBO’’) (collectively, the ‘‘NBBO’’), (ii)
percent of executions better than the
NBBO, (iii) average displayed size, (iv)
average quoted spread, and (v) in the
event that the security is a derivative
security, the ability to transact in
underlying markets. An LMM’s
minimum performance standards are
described in an official NYSE Arca
policy, titled NYSE Arca LMM
Requirements, which may be amended
from time to time. The minimum
performance standards are measured
daily and reviewed as a monthly
average. The Exchange believes that
they are stringent and help foster
liquidity provision and stability in the
market.8
4 SR–NYSEArca–2013–34
TKELLEY on DSK3SPTVN1PROD with NOTICES
replaced and
superceded SR–NYSEArca–2012–37, which was
withdrawn by the Exchange. See Securities
Exchange Act Release Nos. 66966 (May 11, 2012),
77 FR 29419 (May 17, 2012) and 68616 (Jan. 10,
2013), 78 FR 3482 (Jan. 16, 2013) (SR–NYSEArca–
2012–37). Attached hereto is Exhibit 4, which
reflects the changes made to Exhibit 5.
5 A Market Maker is an Equity Trading Permit
Holder (‘‘ETP Holder’’) that acts as a Market Maker
pursuant to NYSE Arca Equities Rule 7. See NYSE
Arca Equities Rule 1.1(v). An ETP Holder is a sole
proprietorship, partnership, corporation, limited
liability company, or other organization in good
standing that has been issued an Equity Trading
Permit. See NYSE Arca Equities Rule 1.1(n).
LMMs participating in the Incentive
Program.
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6 The Exchange has one Schedule of Fees and
Charges for Exchange Services that is for listings
(‘‘Listing Fee Schedule’’) and another that is for
trade-related charges (‘‘Trading Fee Schedule’’). To
differentiate them, the Exchange proposes to change
the name of the former to ‘‘SCHEDULE OF FEES
AND CHARGES FOR EXCHANGE LISTING
SERVICES.’’ ETPs are generally classified as either
Derivative Securities Products or Structured
Products for purposes of the Listing Fee Schedule.
See Listing Fee Schedule, available at https://
www.nyse.com/pdfs/NYSEArca_Listing_Fees.pdf.
7 See NYSE Arca Equities Rule 7.22(d).
8 References in this rule filing to an LMM’s
minimum performance standards outside of the
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The risks for LMMs that exceed those
of other market participants include
risks associated with managing position
inventory as well as risks associated
with maintaining quotes. Inventory risks
may be higher for certain ETPs with low
volume and low shares outstanding
because there are fewer opportunities to
turn over positions in such ETPs and
there is an accumulation of costs from
carrying those positions as well as
positions in the underlying securities
used for hedging.9 LMMs are currently
required to continuously quote on both
sides of the market; therefore, they must
be willing to buy as well as sell by
posting displayed and firm quotes on
the Exchange. When there is a low
volume of shares outstanding, there is
often less supply for securities lending
purposes. In order to meet settlement
requirements, LMMs acting in ETPs
with low shares outstanding are often
required to maintain long ETP positions.
Quoting risks exist due to the
complexity of pricing ETPs and the
potential for human and/or
technological errors. ETPs are openended and derivatively priced securities
that typically track returns of
underlying assets. LMMs’ quotes can
diverge from the underlying assets’
values, and in such cases, the LMMs are
more likely to buy (sell) at prices that
are above (below) theoretical fair values.
Because LMMs are currently required to
continuously quote on both sides of the
market and maintain certain minimum
performance standards, they are more
likely to face these types of risks
because other market participants have
more freedom to withdraw quotes upon
experiencing difficulties or unusual
market conditions.
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’’).10 LMM
Incentive Program mean those set forth in NYSE
Arca LMM Requirements. The proposed standards
for LMMs in the Incentive Program are referred to
as the ‘‘proposed Incentive Program LMM
performance standards.’’
9 Costs of carrying ETP inventories include the
expense ratio, which includes the management fee,
financing costs or the cost of capital, and the
opportunity cost of allocating capital. At times, it
may also include stock loan costs for maintaining
a hedge in hard-to-borrow securities.
10 The Exchange generally employs a maker-taker
transactional fee structure, whereby an ETP Holder
that removes liquidity is charged a fee (‘‘Take
Rate’’), and an ETP Holder that provides liquidity
receives a credit (‘‘Make Rate’’). The Take Rate for
LMMs is currently $0.0025 per share. The Make
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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Notices
Rates are intended to balance the
increased risks and requirements
assumed by LMMs. Accordingly, the
value of acting as an LMM can be
measured by the incremental difference
in the transaction credits or fees under
the LMM Rates as compared to the
Standard Rates. However, the absolute
incremental difference depends on the
LMM’s trading volume. Trading volume
for different ETPs can vary significantly
and result in a corresponding variance
in LMM trading volume. The benefit of
acting as an LMM can therefore vary
significantly depending upon the ETP to
which the LMM is assigned. There are
fewer financial benefits for LMM
assignments in ETPs with lower CADVs
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
Annual
transaction
credit/fee
(standard
rates)
Annual
transaction
credit/fee
(LMM rates)
CADV
ABC ..................................................................................................................
DEF ..................................................................................................................
GHI ...................................................................................................................
JKL ...................................................................................................................
MNO .................................................................................................................
PQR .................................................................................................................
STU ..................................................................................................................
VWX .................................................................................................................
YZ ....................................................................................................................
than ETPs with higher CADVs. The
table below provides hypothetical
examples based on assumptions that
NYSE Arca market share equals 22%,
LMM participation rate equals 20%,
LMM make ratio equals 80%, and LMM
take ratio equals 20%: 11
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 in low-volume ETPs are
$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
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
TKELLEY on DSK3SPTVN1PROD with NOTICES
New NYSE Arca ETP Listings .........................
Listed with LMM ...............................................
Listed without LMM ..........................................
2004
2005
2006
2007
2008
2009
2010
2011
2012
11
11
0
34
34
0
49
49
0
133
133
0
223
218
5
195
190
5
124
121
3
196
175
21
297
271
26
147
135
12
The Exchange is concerned that this
trend will continue or worsen if there is
no mechanism to appropriately
remunerate capable Market Makers to
take on the obligations and
accountability that are part and parcel of
the LMM assignment. The Exchange
also is concerned that this would not be
limited to future listings and that
existing listings could also be subject to
LMM withdrawals. Indeed, since
January 2008, nearly 100% of all LMM
withdrawal requests for ETPs already
listed and trading were made for
securities that exhibited low CADV in
the period prior to the withdrawal
requests being made. This behavior
further signals a connection between
low CADV and low interest levels from
firms seeking to act as LMMs. Likewise,
it supports the assertion that there is
less value relative to the risks of acting
as the LMM for certain ETPs.
The Exchange believes that there is
ample evidence, along with logical
inference, to support the assertion that
the presence of an obligated and
accountable liquidity provider leads to
superior market quality and thus
benefits long-term investors. When there
is an LMM assigned to a security listed
on NYSE Arca, long-term investors
trading on the Exchange in the
secondary market likely experience
enhanced market quality compared to
similar securities for which there are no
LMMs assigned. For instance, in the
fourth quarter of 2012, there were 609
ETPs listed on NYSE Arca that traded
less than 10,000 shares CADV. Of those
ETPs, 567 had LMMs while 42 did not.
The average spread for the ETPs with
LMMs was 0.79% and the average quote
size was 3,014 shares. The average
spread for the ETPs without LMMs was
11.52% and the average quote size was
1,655 shares. During the same time
period, there were 410 ETPs listed on
NYSE Arca that traded between 10,000
shares and 100,000 shares CADV. Of
those ETPs, 396 had LMMs while 14 did
not. The average spread for the ETPs
with LMMs was 0.23% and the average
quote size was 6,643 shares. The average
spread for ETPs without LMMs was
0.36% and the average quote size was
2,613 shares. Exhibits 1 and 2 illustrate
that these observations were consistent
over longer time periods and that there
has been a greater variance in market
quality for ETPs without LMMs.12
Rate for LMMs is currently generally between
$0.0035 and $0.0045 per share depending on
consolidated average daily volume (‘‘CADV’’). See
Trading Fee Schedule, available at https://
usequities.nyx.com/sites/usequities.nyx.com/files/
nyse_arca_marketplace_fees__4_4__13_copy.pdf.
11 Market share is the percentage of CADV traded
on NYSE Arca. Participation rate is the percentage
of NYSE Arca volume traded by the LMM. Make
ratio is the percentage of LMM volume that
provides liquidity. Take ratio is the percentage of
LMM volume that takes liquidity. The formula for
calculating the transaction credit is as follows:
(LMM make volume * Make Rate) + (LMM take
volume * Take Rate). LMM make volume equals
CADV * Arca market share * LMM participation
rate * LMM make ratio. LMM take volume equals
CADV * Arca market share * LMM participation
rate * LMM take ratio.
12 All open-ended ETPs trading over 100,000
CADV have LMMs except SPY, which has
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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Notices
For ETPs <10,000 Shares CADV:
Market Quality
14.00%
3,500
12.00%
10.00%
8.00%
2,000
6.00%
1,500
1,000
2.00%
500
0.00%
0
01
02
03
04
Ql
Q2
03
04
2011
2011
2011
2011
2012
2012
2012
2012
TKELLEY on DSK3SPTVN1PROD with NOTICES
_lMM Size _
significant liquidity without the need for an LMM,
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Non lMM Size -lMM Spreads -
Non lMM Spreads
and UBS E–TRACS Alerian MLP Infrastructure ETN
(symbol: MLPI).
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..
!II
III
12In
2,500
4.00%
...
"g
3,000
Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Notices
21685
For ETPs between 10,000 and 100,000
Shares CADV:
To address these issues, the Exchange
proposes to establish the Incentive
Program as a one-year pilot to enhance
the market quality for ETPs by
incentivizing Market Makers to take
LMM assignments in certain lower
volume ETPs by offering an alternative
fee structure for such LMMs funded
from the Exchange’s general revenues.
Incentive Program costs would be offset
by charging participating issuers nonrefundable Optional Incentive Fees,
which would be credited to the
Exchange’s general revenues.
Participation would be entirely
voluntary on the part of both LMMs and
issuers. The Exchange proposes to add
new NYSE Arca Equities Rule 8.800,
which would set forth Incentive
Program requirements, including
performance standards specific to
LMMs participating in the Incentive
Program, as described in more detail
below.
TKELLEY on DSK3SPTVN1PROD with NOTICES
Proposed Rule
Proposed NYSE Arca Equities Rule
8.800(a) would describe the ETPs that
would be eligible to participate in the
Incentive Program. An ETP would be
eligible to participate in the Incentive
Program if:
(1) It is listed on the Exchange as of
the commencement of the pilot period
or becomes listed during the pilot
period;
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(2) the listing is under NYSE Arca
Equities Rules 5.2(j)(3) (Investment
Company Units), 5.2(j)(5) (Equity Gold
Shares), 8.100 (Portfolio Depositary
Receipts), 8.200 (Trust Issued Receipts),
8.201 (Commodity-Based Trust Shares),
8.202 (Currency Trust Shares), 8.203
(Commodity Index Trust Shares), 8.204
(Commodity Futures Trust Shares),
8.300 (Partnership Units), 8.600
(Managed Fund Shares), or 8.700
(Managed Trust Securities);
(3) with respect to an ETP that listed
on the Exchange before the
commencement of the Incentive
Program, the ETP has a CADV of one
million shares or less for at least the
preceding three months and the issuer
of such ETP has not suspended the
issuance or redemption of new shares; 13
and
(4) it is compliant with continuing
listing standards, if the ETP was added
to the Incentive Program after listing on
the Exchange.
Proposed NYSE Arca Equities Rule
8.800(b) would describe the issuer
application and LMM assignment
process. Specifically, under proposed
NYSE Arca Equities Rule 8.800(b)(1), an
issuer that wished to have an ETP
participate in the Incentive Program and
pay the Exchange an Optional Incentive
13 The Exchange maintains a list of ETPs that
have suspended the issuance of new shares, which
is available at https://etp.nyx.com/en/tradinginformation/us/funds-closed-creation.
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Fee would be required to submit a
written application in a form prescribed
by the Exchange for each ETP. The
issuer could apply to have its ETP
participate at the time of listing or
thereafter at the beginning of each
quarter during the pilot period. An
issuer could not have more than five
ETPs that were listed on the Exchange
prior to the pilot period participate in
the Incentive Program.14 However, there
would not be a limitation on the number
of an issuer’s ETPs listed during the
pilot period that could participate.
Proposed NYSE Arca Equities Rule
8.800(b)(2) would set forth eligibility
requirements for issuers. Specifically, in
order for its ETP to be eligible to
participate in the Incentive Program, an
issuer must be current in all payments
due to the Exchange.
Proposed NYSE Arca Equities Rule
8.800(b)(3) would provide that the
Exchange would communicate the
ETP(s) proposed for inclusion in the
Incentive Program on a written
solicitation that would be sent to all
qualified LMMs 15 along with the
14 In light of this limitation, the Exchange does
not believe that there would be any improper
incentive for an LMM to pressure an issuer to place
currently listed ETPs in the Incentive Program.
15 The written solicitation would be included in
the Green Sheet, which is the common term for an
email communication sent by NYSE Arca staff
members to all qualified LMMs prior to an LMM
selection. The Green Sheet includes, among other
things, the name, symbol and description of the
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TKELLEY on DSK3SPTVN1PROD with NOTICES
Optional Incentive Fee the issuer would
pay the Exchange for each ETP. The
issuer would determine the amount of
the Optional Incentive Fee for each ETP
within a permitted range that would be
set forth in the Exchange’s Listing Fee
Schedule. In this regard, the Exchange
proposes to amend its Listing Fee
Schedule to provide that the Optional
Incentive Fee under NYSE Arca Rule
8.800 may initially range from $10,000
to $40,000, as determined by the issuer
of an ETP.16 The Optional Incentive Fee
would be paid by the issuer to the
Exchange in quarterly installments for
each participating ETP at the beginning
of each quarter and prorated if the issuer
commenced participation for an ETP in
the Incentive Program after the
beginning of a quarter. If the LMM did
not meet its proposed Incentive Program
LMM performance standards for an ETP
in any given month in such quarter, the
issuer would not receive any refund or
credit from the Exchange following the
end of the quarter.17 If the ETP had a
sponsor, the sponsor could pay the
Optional Incentive Fee to the
Exchange.18
Proposed NYSE Arca Equities Rule
8.800(b)(4) would provide that after the
Exchange provided the written
solicitation to LMMs, no individual
associated with an LMM could contact
such issuer or the Exchange staff about
that ETP until the assignment of the
LMM is made, except as otherwise
permitted in the rules.
Proposed NYSE Arca Equities Rule
8.800(b)(5) would describe the
assignment of an LMM if more than one
qualified LMM proposed to serve as
such for a particular ETP.19 If more than
one qualified LMM proposed to serve as
such for a particular ETP, Exchange staff
would select the LMM. Each LMM
ETP(s) as well as the name of the issuer and a link
to the ETP prospectus. A qualified LMM must
complete the application for a specific ETP or group
of ETPs.
16 Optional Incentive Fees would be credited to
the Exchange’s general revenues. The issuer would
still be required to pay applicable Listing Fees and
Annual Fees.
17 However, as described below, if an issuer did
not pay its quarterly installments to the Exchange
on time and the ETP continued to be listed, the
Exchange would continue to credit the LMM as
long as the LMM met its performance standards.
18 The term ‘‘sponsor’’ means the registered
investment adviser that provides investment
management services to an ETP or any of such
investment adviser’s parents or subsidiaries.
19 As is the case with all securities traded on the
Exchange, only one LMM would be assigned per
ETP participating in the Incentive Program. The
Exchange’s market structure has long included a
single LMM structure and the Exchange does not
propose to change this for the Incentive Program.
Indeed, the Exchange believes that its proposed
payment (the range of which was established after
significant analysis) might not be sufficient if it had
to be divided among multiple Market Makers.
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could provide material to the Exchange
staff, which could include a corporate
overview of the LMM and the trading
experience of its personnel. Exchange
staff would meet with representatives of
each LMM if requested by the LMM. No
more than three representatives of each
LMM could participate in the meeting,
each of whom must be employees of the
LMM, and one of whom must be the
individual trader of the LMM who is
proposed to trade the ETP. If the LMM
were unavailable to appear in person, a
telephone interview with that LMM
would be acceptable. Meetings would
normally be held at the Exchange,
unless the Exchange agreed that they
may be held elsewhere. The issuer of
the ETP could choose to submit a letter
to the Exchange staff indicating its
preference and supporting justification
for a particular LMM, and the Exchange
staff could consider such letter in
performing its duty to select an LMM,
but such letter would not be
determinative of the particular LMM
selected by the Exchange. Within two
business days after the final LMM
interview, the Exchange staff, in its sole
discretion, would select an LMM and
notify the LMM and the issuer.20
Proposed NYSE Arca Equities Rules
8.800(b)(6) and (7) would describe
required public notices relating to the
Incentive Program. Under proposed
NYSE Arca Equities Rule 8.800(b)(6),
the Exchange would provide
notification on a dedicated page on its
Web site regarding (i) The ETPs
participating in the Incentive Program,
(ii) the date a particular ETP began
participating in the Incentive Program,
(iii) the date a particular ETP ceased
participating in the Incentive Program,
(iv) the LMM assigned to each ETP
participating in the Incentive Program,
and (v) the amount of the Optional
Incentive Fee for each ETP. This page
would also include a fair and balanced
description of the Incentive Program,
including (i) A description of the
Incentive Program’s operation as a pilot,
including the effective date thereof, (ii)
the potential benefits that may be
realized by an ETP’s participation in the
Incentive Program, (iii) the potential
risks that may be attendant with an
ETP’s participation in the Incentive
Program, (iv) the potential impact
resulting from an ETP’s entry into and
exit from the Incentive Program, and (v)
how interested parties can request
additional information regarding the
20 Proposed NYSE Arca Equities Rule 8.800(b)(5)
is modeled in part on New York Stock Exchange
(‘‘NYSE’’) Rule 103B(III)(B)(1), which governs
Designated Market Maker unit assignments for
equities listed on the NYSE.
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Incentive Program and/or the ETPs
participating therein.
Under proposed NYSE Arca Equities
Rule 8.800(b)(7), an issuer of an ETP
that is approved to participate in the
Incentive Program would be required to
issue a press release to the public when
an ETP commences or ceases
participation in the Incentive Program.
The press release would be in a form
and manner prescribed by the Exchange,
and if practicable, would be issued at
least two days before the ETP
commences or ceases participation in
the Incentive Program.21 For example,
there could be instances in which it
would not be known two days in
advance that an ETP would be ceasing
participation in the Incentive Program,
in which case the Exchange would
request that the issuer distribute the
press release as soon as possible under
the particular circumstances. The issuer
also would be required to dedicate
space on its Web site, or, if it does not
have a Web site, on the Web site of the
adviser or sponsor of the ETP, that (i)
included any such press releases and (ii)
provided a hyperlink to the dedicated
page on the Exchange’s Web site that
describes the Incentive Program.22
Proposed NYSE Arca Equities Rule
8.800(c) would describe the proposed
Incentive Program LMM performance
standards that would apply to an LMM
for each Incentive Program security it is
assigned.23 Under proposed NYSE Arca
Equities Rule 8.800(c)(1), an LMM in the
Incentive Program would remain
obligated to satisfy the general
requirements of NYSE Arca Rule 7.23.
Under proposed NYSE Arca Equities
Rule 8.800(c)(2), an LMM would be
subject to a ‘‘market wide’’ requirement.
Specifically, an LMM would be required
to maintain quotes or orders at the
NBBO or better (the ‘‘Inside’’) during the
month during Core Trading Hours in
accordance with certain maximum
width and minimum depth thresholds,
which would be provided in
21 The issuer’s press release would be required to
include language describing, for example, that
while the impact of participation in or exit from the
Incentive Program, which is optional, cannot be
fully understood until objective observations can be
made in the context of the Incentive Program,
potential impacts on the market quality of the
issuer’s ETP may result, including with respect to
the average spread and average quoted size for the
ETP.
22 These disclosure requirements would be in
addition to, and would not supersede, the
prospectus disclosure requirements under the
Securities Act of 1933 or the Investment Company
Act of 1940.
23 The Exchange would specify in proposed
Commentary .01 to Rule 8.800 that only displayed
quotes and orders would be considered for
purposes of the LMM performance standards of
proposed Rule 8.800(c).
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TKELLEY on DSK3SPTVN1PROD with NOTICES
Commentary .01 to Rule 8.800.24
However, this requirement would not
apply to an LMM if the thresholds
provided in Commentary .01 were
otherwise met by quotes or orders of
other market participants on the
Exchange or across all other markets
trading the security.
Under proposed NYSE Arca Equities
Rule 8.800(c)(3), an LMM would also be
subject to an NYSE Arca-specific
requirement, which could be satisfied in
one of two ways. First, an LMM could
choose to satisfy the ‘‘Time-at-the-Inside
Requirement’’ under proposed NYSE
Arca Equities Rule 8.800(c)(3)(A),
pursuant to which an LMM would be
required to maintain quotes or orders on
NYSE Arca at the NBBO or better at
least 15% of the time when quotes may
be entered during Core Trading Hours
each trading day, as averaged over the
course of a month.25 Alternatively, an
LMM could choose to satisfy the ‘‘SizeSetting NBBO Requirement’’ under
proposed NYSE Arca Equities Rule
8.800(c)(3)(B), pursuant to which an
LMM would be required to maintain
‘‘Size-Setting’’ quotes or orders on
NYSE Arca, as compared to trading
interest on other markets, at the NBBO
or better at least 25% of the time when
quotes may be entered during Core
Trading Hours each trading day, as
averaged over the course of a month.26
However, this requirement would not
apply to an LMM if this threshold is
otherwise met by quotes or orders of
other market participants on NYSE
Arca.
Finally, under proposed NYSE Arca
Equities Rule 8.800(c)(4), for at least
90% of the time when quotes may be
24 The Exchange would specify in proposed
Commentary .01 to Rule 8.800 that (i) the spread
thresholds would be calculated as the timeweighted average throughout the trading day and
then averaged, by day, across the month and (ii) the
depth thresholds would be calculated as the average
of (a) the average time-weighted bid depth and (b)
the average time-weighted ask depth.
25 The Exchange would specify in proposed
Commentary .01 to Rule 8.800 that the Time-at-theInside Requirement would be calculated as the
average of (a) the percentage of time the LMM has
a bid on NYSE Arca at the NBB and (b) the
percentage of time the LMM has an offer on NYSE
Arca at the NBO.
26 The Exchange would specify in proposed
Commentary .01 to Rule 8.800 that the Size-Setting
NBBO Requirement would be calculated throughout
the trading day and then averaged, by day, across
the month. Quotes and orders of all market
participants across all markets trading the security
would be considered when calculating the SizeSetting NBBO Requirement. A quote or order would
be considered ‘‘Size-Setting’’ if it is at the NBB or
NBO. If multiple quotes or orders exist at the same
price, the quote or order with the largest size would
be considered ‘‘Size-Setting.’’ If multiple quotes or
orders exist at the same price and the same size, the
quote or order with the earliest entry time would
be considered ‘‘Size-Setting.’’
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entered during Core Trading Hours each
trading day, as averaged over the course
of a month, an LMM would be required
to maintain (A) at least 2,500 shares of
attributable, displayed posted buy
liquidity on the Exchange that is priced
no more than 2% away from the NBB
for the particular ETP; and (B) at least
2,500 shares of attributable, displayed
posted offer liquidity on the Exchange
that is priced no more than 2% away
from the NBO for the particular ETP.
Proposed NYSE Arca Equities Rule
8.800(d) would describe the payment to
an LMM by the Exchange (‘‘LMM
Payment’’). Under this provision, the
Exchange would credit an LMM for the
LMM Payment, which would be
determined by the Exchange and set
forth in the Trading Fee Schedule. An
LMM participating in the Incentive
Program would not be entitled to an
LMM Payment unless and until it meets
or exceeds the proposed Incentive
Program LMM performance standards
for an assigned ETP, as determined by
the Exchange. In this regard, the
Exchange proposes to amend its Trading
Fee Schedule to provide that at the end
of each quarter the Exchange would
credit an LMM an ‘‘LMM Payment’’ for
each month during such quarter that the
LMM meets or exceeds its proposed
Incentive Program LMM performance
standards for an assigned ETP. If an
LMM does not meet or exceed its
proposed Incentive Program LMM
performance standards for an assigned
ETP for a particular month, or the ETP
is withdrawn from the Incentive
Program pursuant to paragraph (e) of
NYSE Arca Equities Rule 8.800, then the
LMM Payment would be zero for such
month. The amount of the LMM
Payment for a particular month would
not exceed 1⁄3 of the quarterly Optional
Incentive Fee, less an Exchange
administration fee of 5%, and such
LMM would be subject to Standard
Rates during that quarter instead of
LMM Rates. As is the case with all
liquidity-adding credits currently
payable to NYSE Arca ETP Holders,
LMM Payments would be paid by the
Exchange from its general revenues. The
Trading Fee Schedule would also reflect
that if an issuer did not pay its quarterly
installments to the Exchange on time
and the ETP continued to be listed, the
Exchange would continue to credit the
LMM if the LMM met its proposed
Incentive Program LMM performance
standards.
Proposed NYSE Arca Equities Rule
8.800(e) would describe the
circumstances for withdrawal from the
Incentive Program. First, if an ETP no
longer met continuing listing standards,
suspended the creation and/or
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21687
redemption of shares, or liquidated, it
would be automatically withdrawn from
the Incentive Program as of the ETP
suspension date.
Second, NYSE Arca, in its discretion,
could allow an issuer to withdraw an
ETP from the Incentive Program before
the end of the pilot period if the
assigned LMM was unable to meet its
proposed Incentive Program LMM
performance standards for any two of
the three months of a quarter or for five
months during the pilot period and no
other qualified ETP Holder was able to
take over the assignment.
Third, an LMM also could withdraw
from all of its ETP assignments in the
Incentive Program. Alternatively, NYSE
Arca, in its discretion, could allow an
LMM to withdraw from a particular ETP
before the end of the pilot period if the
Exchange determined that there were
extraneous circumstances that
prevented the LMM from meeting its
proposed Incentive Program LMM
performance standards for such ETP
that did not affect its other ETP
assignments in the Incentive Program.
In either such event, the LMM’s ETP(s)
would be reallocated as described
below.
Fourth, if an ETP maintained a CADV
of one million shares or more for three
consecutive months, it would be
automatically withdrawn from the
Incentive Program within one month
thereafter. If after such automatic
withdrawal the ETP failed to maintain
a CADV of one million shares or more
for three consecutive months, the issuer
of the ETP could reapply for the
Incentive Program one month thereafter.
The Exchange believes that setting a
one-million-share threshold would
focus Incentive Program resources on
particularly low volume ETPs and
provide an objective measurement for
evaluating the effectiveness of the
Incentive Program.
Fifth, if the issuer was not current in
all payments due to the Exchange for
two consecutive quarters, its ETP would
be automatically terminated from the
Incentive Program.
Finally, proposed NYSE Arca Equities
Rule 8.800(f) would describe the LMM
reallocation process. If the LMM for a
particular ETP did not meet or exceed
its proposed Incentive Program LMM
performance standards for any two of
the three months of a quarter or for five
months during the pilot period, or chose
to withdraw from the Incentive
Program, and at least one other qualified
Market Maker had agreed to become the
assigned LMM under the Incentive
Program, then the ETP would be
reallocated. If more than one qualified
LMM proposed to serve as such, another
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LMM would be selected in accordance
with the written solicitation and
assignment processes described above.
The reallocation process would be
completed no sooner than the end of the
current quarter and no later than the
end of the following quarter.
TKELLEY on DSK3SPTVN1PROD with NOTICES
Implementation of Incentive Program
The Incentive Program would be
offered to issuers from the date of
implementation, which would occur no
later than 90 days after Securities and
Exchange Commission (‘‘Commission’’)
approval of this filing, until one
calendar year after implementation. As
described above, each issuer could
select ETPs to participate in the
Incentive Program. During the pilot
period, the Exchange would assess the
Incentive Program and could expand the
criteria for ETPs that are eligible to
participate, for example, to permit
issuers to include more than five ETPs
that were listed on the Exchange before
the pilot period commenced. At the end
of the pilot period, the Exchange would
determine whether to continue or
discontinue the Incentive Program or
make it permanent and submit a rule
filing as necessary. If the Exchange
determined to change the terms of the
Incentive Program while it was ongoing,
it would submit a rule filing to the
Commission.
During the Incentive Program, the
Exchange would provide the
Commission with certain market quality
reports each month, which would also
be posted on the Exchange’s Web site.
Such reports would include the
Exchange’s analysis regarding the
Incentive Program and whether it is
achieving its goals, as well as market
quality data such as, for all ETPs listed
as of the date of implementation of the
Incentive Program and listed during the
pilot period (for comparative purposes),
volume (CADV and NYSE Arca ADV),
NBBO bid/ask spread differentials,
LMM participation rates, NYSE Arca
market share, LMM time spent at the
inside, LMM time spent within $0.03 of
the inside, percent of time NYSE Arca
had the best price with the best size,
LMM quoted spread, LMM quoted
depth, and Rule 605 statistics (onemonth delay) as agreed upon by the
Exchange and the Commission staff. In
connection with this proposal, the
Exchange would provide other data and
information related to the Incentive
Program as may be periodically
requested by the Commission. In
addition, and as described further
below, issuers could utilize ArcaVision
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to analyze and replicate data on their
own.27
Benefits of the Incentive Program
The proposed LMM Payment is
designed to encourage additional
Market Makers to pursue LMM
assignments and thereby support the
provision of consistent liquidity in
lower-volume ETPs listed on the
Exchange. The Exchange believes that
providing a quarterly LMM Payment
would create a more equitable system of
incentives for LMMs. The Exchange
would administer all aspects of the
LMM Payments, which, as noted above,
would be paid by the Exchange to
LMMs out of the Exchange’s general
revenues.
The Exchange believes that the
Incentive Program would increase the
supply of Market Makers seeking to take
on LMM assignments, ultimately
leading to improved market quality for
long-term investors in ETPs, which
would lead to multiple benefits. It
would help to ensure that a diversified
pool of qualified LMM candidates exists
in the present and future. It would also
help to discover a competitive balance
to set the fair Optional Incentive Fees
within the proposed range of $10,000 to
$40,000 per ETP annually, based on the
risk/reward of receiving specific LMM
assignments. Issuers would be able to
monitor the performance of LMMs as
well as registered Market Makers and
other participants that opted into the
‘‘ArcaVision Market Maker Summary’’
reporting mechanism. Thus, issuers
would be able to compare and contrast
the performance of various Market
Makers to ensure that they were
optimizing benefits vis-a-vis cost.
Consistency with FINRA Rule 5250
The Exchange believes that the
Incentive Program is designed to
mitigate risks and concerns that
Financial Industry Regulatory Authority
(‘‘FINRA’’) Rule 5250 addresses. FINRA
Rule 5250 prohibits a FINRA member or
27 NYSE Arca provides ArcaVision free of charge
to the public via the Web site
www.ArcaVision.com. ArcaVision offers a
significant amount of trading data and market
quality statistics for every Regulation NMS equity
security traded in the United States, including all
ETPs. Publicly available reports within ArcaVision,
which include relevant comparative data, are the
Symbol Summary, Symbol Analytics, Volume
Comparison and Quotation Comparison reports,
among others. In addition, users can create the
reports on a per-symbol basis over a flexible time
frame. They can also take advantage of predefined,
accurate and up-to-date symbol sets based on type
of ETP or issuer. Users can also create their own
symbol lists. ArcaVision also allows an ETP issuer
to see additional information specific to its LMM
and other Market Makers in each ETP via the
‘‘ArcaVision Market Maker Summary’’ reporting
mechanism.
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Sfmt 4703
a person associated with a FINRA
member from accepting any payment or
other consideration, directly or
indirectly, from an issuer of a security,
or any affiliate or promoter thereof, for
publishing a quotation, acting as market
maker in a security, or submitting an
application in connection therewith.
FINRA Rule 5250 is designed to
preserve the integrity of the marketplace
by ensuring that quotations accurately
reflect a broker-dealer’s interest in
buying or selling a security and that the
decision by a firm to make a market in
a given security and the question of
price should not be influenced by
payments to members from issuers or
promoters.28 The Exchange believes that
the Incentive Program is carefully
tailored to promote the beneficial
purpose of improved market quality,
while at the same time being designed
to mitigate the public policy risks and
concerns that FINRA Rule 5250
addresses and to not adversely affect
market integrity.
First, the derivative and open-ended
nature of many of the ETPs eligible to
participate in the Incentive Program
would allow for transparent intrinsic
intraday pricing. As such, the Exchange
does not believe that such products
would lend themselves to the type of
market manipulation that FINRA Rule
5250 was designed to prevent. The
transparent nature of many ETPs’
portfolio composition as well as their
accessibility and the elasticity of shares
outstanding contribute to an arbitrage
process that will lead to executions of
orders of many ETPs priced at or near
net asset values (‘‘NAVs’’). The typical
unit size is 50,000 shares to 100,000
shares and each share represents
fractional ownership of the portfolio,
allowing low minimum investments to
access the exposure of a large notional
portfolio. ETP supply (i.e., shares
outstanding) can be increased or
decreased through the creation and
redemption process. Clearing firms that
are authorized participants will have the
opportunity to deliver, or take delivery
of, unit-sized amounts of the underlying
securities. Proprietary traders engaging
in arbitrage are able to calculate an
estimated intraday NAV. Such traders
understand what the intrinsic per-share
price is, hedge themselves using the
underlying securities or correlated
equivalents, and manage their positions
by either creating or redeeming units. If
and when the quote is priced beyond
28 See Securities Exchange Act Release No. 60066
(June 8, 2009), 74 FR 28308 (June 15, 2009) (SR–
FINRA–2009–36). See also Securities Exchange Act
Release No. 38812 (July 3, 1997), 62 FR 37105 (July
10, 1997) (SR–NASD–97–29) (order approving
NASD Rule 2460, predecessor to FINRA Rule 5250).
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the intrinsic value of an ETP, an
arbitrage opportunity can arise, and
market participants will arbitrage such
spread until price equilibrium is
restored.
Second, the Incentive Program would
have numerous structural safeguards
that were designed to prevent any
adverse effect on market integrity. First,
the Incentive Program would be
administered by the staff of the
Exchange, which is a self-regulatory
organization,29 and which would be
interposed between LMMs and issuers.
Second, both LMMs and issuers would
be required to apply to participate in the
program and to meet certain standards.
The Exchange would collect the
Optional Incentive Fees from issuers
and credit them to the Exchange’s
general revenues. An LMM would be
eligible to receive an LMM Payment,
again from the Exchange’s general
revenues, only after it met the proposed
Incentive Program LMM performance
standards set and monitored by the
Exchange. Third, the Incentive Program
is rules based and subject to significant
public disclosure. Application to,
continuation in, and withdrawal from
the Incentive Program would be
governed by published Exchange rules
and policies, and there would be
extensive public notice regarding the
Incentive Program and payments
thereunder on both the Exchange’s and
the issuers’ Web sites.
In light of the pricing mechanisms of
ETPs and the structural safeguards of
the Incentive Program, the Exchange
believes that the payments under the
Incentive Program are designed to
mitigate the risks and concerns that
FINRA Rule 5250 addresses. In this
regard, the Exchange understands, based
upon discussions with FINRA, that
FINRA will file an immediately effective
rule change with the Commission
indicating that participation by LMMs
and issuers in the Incentive Program
would not violate Rule 5250.
TKELLEY on DSK3SPTVN1PROD with NOTICES
Consistency With Regulation M
Rule 102 of Regulation M prohibits an
issuer from directly or indirectly
attempting ‘‘to induce any person to bid
for or purchase, a covered security
during the applicable restricted period’’
unless an exemption is available.30 For
29 FINRA surveils trading on the Exchange,
including ETP trading, pursuant to a Regulatory
Services Agreement (‘‘RSA’’). The Exchange is
responsible for FINRA’s performance under this
RSA.
30 Rule 102 provides that ‘‘[i]n connection with a
distribution of securities effected by or on behalf of
an issuer or selling security holder, it shall be
unlawful for such person, or any affiliated
purchaser of such person, directly or indirectly, to
bid for, purchase, or attempt to induce any person
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17:37 Apr 10, 2013
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the reasons discussed below, the
Exchange believes that exemptive relief
from Rule 102 should be granted for the
Incentive Program.
First, the Exchange notes that the
Commission and its staff have
previously granted relief from Rule 102
to a number of ETPs (‘‘Existing Relief’’)
in order to permit the ordinary
operation of such ETPs.31 In granting
the Existing Relief, the Commission has
relied in part on the exclusion from the
provisions of Rule 102 provided by
paragraph (d)(4) of Rule 102 for
securities issued by an open-end
management investment company or
unit investment trust. In granting the
Existing Relief from Rule 102 to other
types of ETPs, for which the (d)(4)
exception is not available, the staff has
relied on (i) representations that the
fund in question would continuously
redeem ETP shares in basket-size
aggregations at their NAV and that there
should be little disparity between the
market price of an ETP share and the
NAV per share and (ii) a finding that
‘‘[t]he creation, redemption, and
secondary market transactions in
[shares] do not appear to result in the
abuses that * * * Rules 101 and 102 of
Regulation M * * * were designed to
prevent.’’32 The crux of the
Commission’s findings in granting the
Existing Relief rests on the premise that
the prices of ETP shares closely track
their per-share NAVs. Given that the
Incentive Program neither alters the
derivative pricing nature of ETPs nor
impacts the arbitrage opportunities
inherent therein, the conclusion on
which the Existing Relief is based
remains unaffected by the Incentive
Program. In this regard, most ETPs that
would be eligible to participate in the
Incentive Program would have
previously been granted relief from Rule
102. Moreover, and as noted above, an
ETP that suspended the creation and/or
redemption of shares, or liquidated,
would be automatically withdrawn from
the Incentive Program as of the ETP
suspension date.
Second, the Incentive Program
requires, among other things, that an
LMM make two-sided quotes and not
just bids. It is not intended to raise ETP
prices but rather to improve market
quality. In light of the derivative nature
to bid for or purchase, a covered security during the
applicable restricted period’’ unless an exception is
available. See 17 CFR 242.102.
31 See, e.g., Letter from James A. Brigagliano,
Acting Associate Director, Division of Market
Regulation, to Stuart M. Strauss, Esq., Clifford
Chance US LLP (Oct. 24, 2006) (regarding class
relief for exchange traded index funds).
32 See Rydex Specialized Products LLC, SEC NoAction Letter (June 21, 2006).
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
21689
of ETPs described above, the Exchange
does not expect that LMMs would quote
outside of the normal quoting ranges for
these products as a result of the LMM
Payment, but rather would quote within
their normal ranges as determined by
market factors. Indeed, the Incentive
Program would not create any incentive
for an LMM to quote outside such
ranges.
Finally, the staff of the Exchange,
which is a self-regulatory organization,
would be interposed between the issuer
and the LMM, administering a rulesbased program with numerous
structural safeguards described in the
previous section. Specifically, both
LMMs and issuers would be required to
apply to participate in the program and
to meet certain standards. The Exchange
would collect the Optional Incentive
Fees from issuers and credit them to the
Exchange’s general revenues. An LMM
would be eligible to receive an LMM
Payment, again from the Exchange’s
general revenues, only after it met the
proposed Incentive Program LMM
performance standards set and
monitored by the Exchange. Application
to, continuation in, and withdrawal
from the Incentive Program would be
governed by published Exchange rules
and policies, and there would be
extensive public notice regarding the
Incentive Program and payments
thereunder on both the Exchange’s and
the issuers’ Web sites. Given these
structural safeguards, the Exchange
believes that payments under the
Incentive Program are appropriate for
exemptive relief from Rule 102.
In summary, the Exchange believes
that exemptive relief from Rule 102
should be granted for the Incentive
Program because, for example, (1) The
Incentive Program would not create any
incentive for an LMM to quote outside
of the normal quoting ranges for the
ETPs included therein; (2) the Incentive
Program has numerous structural
safeguards, such as the application
process for issuers and LMMs, the
interpositioning of the Exchange
between issuers and LMMs, and
significant public disclosure
surrounding the Incentive Program,
which in general is designed to help
inform investors about the potential
impact of the Incentive Program; and (3)
the Incentive Program does not alter the
basis on which Existing Relief is based
and, furthermore, most ETPs that would
be eligible to participate in the Incentive
Program would have previously been
granted relief from Rule 102.33
33 The Exchange notes that the Commission
granted a limited exemption from Rule 102 of
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Surveillance
The Exchange believes that its
surveillance procedures would be
adequate to properly monitor the
trading of Incentive Program ETPs on
the Exchange during all trading sessions
and to detect and deter violations of
Exchange rules and applicable federal
securities laws. Trading of the ETPs
through the Exchange would be subject
to FINRA’s surveillance procedures for
derivative products including ETFs.34
The Exchange may obtain information
via the Intermarket Surveillance Group
(‘‘ISG’’) from other exchanges that are
members or affiliates of the ISG;35 and
from issuers and public and non-public
data sources such as, for example,
Bloomberg.
TKELLEY on DSK3SPTVN1PROD with NOTICES
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,36
in general, and Sections 6(b)(4) and
6(b)(5) of the Act,37 in particular. The
proposed rule change is consistent with
Section 6(b)(5) of the Act in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities,
and to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system. The Exchange believes that the
Incentive Program would enhance quote
competition, improve liquidity, support
the quality of price discovery, promote
market transparency, and increase
competition for listings and trade
executions while reducing spreads and
transaction costs. The Exchange further
believes that enhancing liquidity in
Incentive Program ETPs with all of the
structural safeguards described above
would help raise investors’ confidence
in the fairness of the market generally
Regulation M to The NASDAQ Stock Market LLC
(‘‘NASDAQ’’) for a program similar to the
Exchange’s proposed Incentive Program. See
Securities Exchange Act Release No. 69196 (March
20, 2013), 78 FR 18410 (March 26, 2013) (Order
Granting a Limited Exemption From Rule 102 of
Regulation M Concerning the NASDAQ Market
Quality Program Pilot Pursuant to Regulation M
Rule 102(e)) (the ‘‘NASDAQ Exemption’’). The
NASDAQ Exemption includes certain conditions
related to, among other things, notices to the public
and disclosures with respect to NASDAQ’s
program. The Exchange notes that if the
Commission were to provide exemptive relief from
Rule 102 of Regulation M for the Incentive Program
it may include similar conditions.
34 See supra note 29.
35 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
36 15 U.S.C. 78f(b).
37 15 U.S.C. 78f(b)(4) and (5).
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Jkt 229001
and their transactions in particular. As
such, the Incentive Program would
foster cooperation and coordination
with persons engaged in facilitating
securities transactions, enhance the
mechanism of a free and open market,
and promote fair and orderly markets in
ETPs on the Exchange.
The Exchange further believes that
designating ETPs as the products
eligible for inclusion in the Incentive
Program is reasonable because it would
incentivize Market Makers to undertake
LMM assignments in ETPs with lower
trading volume. As described earlier in
the filing, there is ample data
demonstrating that there are generally
fewer financial benefits for such ETPs as
compared to ETPs with higher CADVs
and that market quality has been
affected.
The Exchange believes that its
implementation plan and the pilot
period are reasonable in that they would
permit the Commission, the Exchange,
LMMs, and issuers to assess the impact
of the Incentive Program before making
it available to other securities. In
particular, the Exchange believes that it
is beneficial and not unfairly
discriminatory to limit the ETPs
participating so that the Exchange and
issuers could measure the experience
against nonparticipating ETPs and
thereby conserve the commitment of
resources to the Incentive Program. In
particular, by setting an objective onemillion-share CADV threshold, the
Exchange and the Commission will have
an opportunity to observe the impact, if
any, on ETPs that exceed the threshold
and ‘‘graduate’’ from the Incentive
Program and compare them to other
ETPs.
The Exchange believes that the
proposed LMM minimum performance
standards are reasonable, including
aspects thereof that can be met by
quotes or orders of other market
participants on the Exchange or across
all other markets trading the security,
because such standards would
contribute to reasonably ensuring that
there is sufficient liquidity for the ETPs
participating in the Incentive Program.
In this regard, the role of the LMM is to
reasonably ensure that sufficient
liquidity exists for investors when such
liquidity is not provided by other
market participants, whether on the
Exchange or across other markets
trading the particular security, by
submitting quotes and orders that
contribute to the quality of the width
and depth of liquidity for the ETP.
Accordingly, when the quotes or orders
of other market participants on the
Exchange or across all other markets
trading the security result in such
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
sufficient liquidity, there is not a need
for an LMM to quote according to the
proposed LMM minimum performance
standards, which are designed to
reasonably ensure that such liquidity
exists. However, when such liquidity is
not otherwise present, the proposed
LMM minimum performance standards
would reasonably ensure that such
liquidity exists and is available for
investors.
With respect to the proposed fees, the
Exchange believes that the proposed
rule change is consistent with Sections
6(b)(4) and 6(b)(5) of the Act, in that it
is designed to provide for the equitable
allocation of reasonable dues, fees, and
other charges among its members and
issuers and other persons using its
facilities and that it is not unfairly
discriminatory. The Exchange believes
that the proposed Optional Incentive
Fees for ETPs are reasonable, given the
additional costs to the Exchange of
providing the LMM Payments, which
are paid by the Exchange out of the
Exchange’s general revenues. The
Exchange also believes that the
proposed fees are reasonable because
they would be used by the Exchange to
offset the cost that the Exchange incurs
to provide listing services for ETPs.
These costs include, but are not limited
to, ETP rulemaking initiatives, listing
administration processes, issuer
services, consultative legal services
provided to ETP issuers in support of
new product development, and
administration of the proposed quarterly
LMM Payment. As such, the Exchange
believes that it is reasonable for it to
retain an administration fee to recover
the costs of administering the Incentive
Program.
The Exchange believes that the
Optional Incentive Fee is reasonable,
equitably allocated, and not
unreasonably discriminatory because it
is entirely voluntary on an issuer’s part
to join the Incentive Program. The
amount of the fee would be determined
and paid by the issuer within the
$10,000 to $40,000 band per ETP and
credited to the Exchange’s general
revenues. Only issuers that voluntarily
join the Incentive Program would be
required to pay the fees. The Exchange
believes that this is fairer than requiring
all issuers to pay higher fees to fund the
Incentive Program.
The Exchange believes that the LMM
Payment and standard transaction fees
and credits are equitable and not
unfairly discriminatory in that any
Market Maker could seek to participate
in the Incentive Program as an LMM.
Moreover, an LMM participating in the
Incentive Program would not be entitled
to an LMM Payment unless and until it
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11APN1
Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Notices
meets or exceeds the proposed Incentive
Program LMM performance standards
for an assigned ETP, as determined by
the Exchange. The Exchange further
believes that the range of credits, which
would be paid from the Exchange’s
general revenues, is fair and equitable in
light of the LMM’s obligations and
proposed Incentive Program LMM
performance standards, which would be
higher than the standards for LMMs not
participating in the Incentive Program.
Finally, for the reasons stated above,
the Exchange believes that the Incentive
Program would be designed to mitigate
risks and concerns that FINRA Rule
5250 addresses and that the
Commission should provide exemptive
relief from Rule 102 of Regulation M for
the Incentive Program.38
B. Self-Regulatory Organization’s
Statement on Burden on Competition
TKELLEY on DSK3SPTVN1PROD with NOTICES
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the Exchange believes that the
Incentive Program, which is entirely
voluntary, would encourage
competition among markets for issuers’
listings and among Market Makers for
LMM assignments. The Incentive
Program is designed to improve the
quality of market for lower-volume
ETPs, thereby incentivizing them to list
on the Exchange. The competition for
listings among the exchanges is fierce.
The Exchange notes that BATS
Exchange, Inc. (‘‘BATS’’) has already
implemented a program similar to the
Exchange’s proposed Incentive
Program,39 and NASDAQ has received
approval to do so as well.40
In addition, the Exchange believes
that the Incentive Program will properly
promote competition among Market
Makers to seek assignment as the LMM
for eligible ETPs. As described in detail
above, the Exchange believes that
market quality is significantly enhanced
for ETPs with an LMM as compared to
ETPs without an LMM. The Exchange
believes that market quality would be
even further enhanced as a result of the
proposed Incentive Program LMM
performance standards that the
Exchange would impose on LMMs in
38 See
supra note 33.
Interpretation and Policy .02 of BATS Rule
11.8. See also Securities Exchange Act Release Nos.
66307 (February 2, 2012), 77 FR 6608 (February 8,
2012) (SR–BATS–2011–051) and 66427 (February
21, 2012), 77 FR 11608 (February 27, 2012) (SR–
BATS–2012–011).
40 See Securities Exchange Act Release No. 69195
(March 20, 2013), 78 FR 18393 (March 26, 2013)
(SR–NASDAQ–2012–137).
39 See
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17:37 Apr 10, 2013
Jkt 229001
the Incentive Program. The Exchange
anticipates that the increased activity of
these LMMs would attract other market
participants to the Exchange, and could
thereby lead to increased liquidity on
the Exchange in such ETPs. For these
reasons, the Exchange does not believe
that the proposed rule change would
impose any unnecessary or
inappropriate burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act. The
Commission previously received
comments on SR–NYSEArca–2012–37,
which proposed rule change was
withdrawn by the Exchange,41 and all
such comments are available on the
Commission’s Internet Web site (https://
www.sec.gov/rules/sro.shtml.
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–2013–34 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
41 See
PO 00000
supra note 4.
Frm 00102
Fmt 4703
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2013–34. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (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 principal office of the Exchange.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2013–34 and
should be submitted on or before May
2, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–08444 Filed 4–10–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69321; File No. SR–
NASDAQ–2013–062]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Penny Pilot and Non-Penny Pilot
Options
April 5, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
42 17
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21691
E:\FR\FM\11APN1.SGM
CFR 200.30–3(a)(12).
11APN1
]]>Agencies
[Federal Register Volume 78, Number 70 (Thursday, April 11, 2013)]
[Notices]
[Pages 21681-21691]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08444]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69335; File No. SR-NYSEArca-2013-34]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change and Amendment No. 1 Thereto To Implement a One-
Year Pilot Program for Issuers of Certain Exchange-Traded Products
(``ETPs'') Listed on the Exchange
April 5, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\
notice is hereby given that, on March 21, 2013, NYSE Arca, Inc.
(``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. On April 5, 2013, the Exchange submitted Amendment No. 1 to
the proposed rule change, which replaces and supersedes the proposed
rule change in its entirety. The Commission is publishing this notice
to solicit comments on the proposed rule change, as modified by
Amendment No. 1 thereto, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to implement a one-year pilot program for
issuers of certain exchange-traded products (``ETPs'') listed on the
Exchange. The text of the proposed rule change is available on the
Exchange's Web site at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
[[Page 21682]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 1 to SR-NYSEArca-2013-34 replaces and supercedes
SR-NYSEArca-2013-34 in its entirety.\4\
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\4\ SR-NYSEArca-2013-34 replaced and superceded SR-NYSEArca-
2012-37, which was withdrawn by the Exchange. See Securities
Exchange Act Release Nos. 66966 (May 11, 2012), 77 FR 29419 (May 17,
2012) and 68616 (Jan. 10, 2013), 78 FR 3482 (Jan. 16, 2013) (SR-
NYSEArca-2012-37). Attached hereto is Exhibit 4, which reflects the
changes made to Exhibit 5.
---------------------------------------------------------------------------
The Exchange proposes to create a one-year pilot program for
issuers of certain ETPs listed on the Exchange. The pilot program would
be called the NYSE Arca ETP Incentive Program (``Incentive Program'').
As described in more detail below, the Incentive Program is designed to
enhance the market quality for ETPs by incentivizing Market Makers \5\
to take Lead Market Maker (``LMM'') assignments in certain lower volume
ETPs by offering an alternative fee structure for such LMMs that would
be funded from the Exchange's general revenues. The costs of the
Incentive Program would be offset by charging participating issuers
non-refundable Optional Incentive Fees, which would be credited to the
Exchange's general revenues. Participation would be entirely voluntary
on the part of both LMMs and issuers. The Exchange proposes to add new
NYSE Arca Equities Rule 8.800 to set forth the requirements for the
Incentive Program, including performance standards specific to LMMs
participating in the Incentive Program.
---------------------------------------------------------------------------
\5\ A Market Maker is an Equity Trading Permit Holder (``ETP
Holder'') that acts as a Market Maker pursuant to NYSE Arca Equities
Rule 7. See NYSE Arca Equities Rule 1.1(v). An ETP Holder is a sole
proprietorship, partnership, corporation, limited liability company,
or other organization in good standing that has been issued an
Equity Trading Permit. See NYSE Arca Equities Rule 1.1(n).
---------------------------------------------------------------------------
Background
Under the current Fee Schedule for listings, an issuer of an ETP is
required to pay a Listing Fee that ranges from $5,000 to $45,000.\6\ An
ETP issuer also pays a graduated Annual Fee based on the number of
shares of the ETP that are outstanding. The Annual Fee ranges from
$5,000 to $55,000.
---------------------------------------------------------------------------
\6\ The Exchange has one Schedule of Fees and Charges for
Exchange Services that is for listings (``Listing Fee Schedule'')
and another that is for trade-related charges (``Trading Fee
Schedule''). To differentiate them, the Exchange proposes to change
the name of the former to ``SCHEDULE OF FEES AND CHARGES FOR
EXCHANGE LISTING SERVICES.'' ETPs are generally classified as either
Derivative Securities Products or Structured Products for purposes
of the Listing Fee Schedule. See Listing Fee Schedule, available at
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.\7\ For
some ETPs, no Market Maker requests an assignment as an LMM, and the
ETP therefore trades without an LMM assigned to it. The Exchange
operates under the price-time priority model for all market
participants, so there is no distinct transactional benefit to being
assigned as an LMM. However, LMMs must meet certain obligations and
requirements and therefore incur greater risks than other market
participants on the Exchange.
---------------------------------------------------------------------------
\7\ See NYSE Arca Equities Rule 7.22(d).
---------------------------------------------------------------------------
An LMM is currently subject to the obligations for Market Makers
that are set forth in NYSE Arca Equities Rule 7.23 and the minimum
performance standards that are referenced in NYSE Arca Equities Rule
7.24. Under NYSE Arca Equities Rule 7.24, the minimum performance
standards include (i) Percent of time at the National Best Bid (the
``NBB'') or National Best Offer (the ``NBO'') (collectively, the
``NBBO''), (ii) percent of executions better than the NBBO, (iii)
average displayed size, (iv) average quoted spread, and (v) in the
event that the security is a derivative security, the ability to
transact in underlying markets. An LMM's minimum performance standards
are described in an official NYSE Arca policy, titled NYSE Arca LMM
Requirements, which may be amended from time to time. The minimum
performance standards are measured daily and reviewed as a monthly
average. The Exchange believes that they are stringent and help foster
liquidity provision and stability in the market.\8\
---------------------------------------------------------------------------
\8\ References in this rule filing to an LMM's minimum
performance standards outside of the Incentive Program mean those
set forth in NYSE Arca LMM Requirements. The proposed standards for
LMMs in the Incentive Program are referred to as the ``proposed
Incentive Program LMM performance standards.''
---------------------------------------------------------------------------
The risks for LMMs that exceed those of other market participants
include risks associated with managing position inventory as well as
risks associated with maintaining quotes. Inventory risks may be higher
for certain ETPs with low volume and low shares outstanding because
there are fewer opportunities to turn over positions in such ETPs and
there is an accumulation of costs from carrying those positions as well
as positions in the underlying securities used for hedging.\9\ LMMs are
currently required to continuously quote on both sides of the market;
therefore, they must be willing to buy as well as sell by posting
displayed and firm quotes on the Exchange. When there is a low volume
of shares outstanding, there is often less supply for securities
lending purposes. In order to meet settlement requirements, LMMs acting
in ETPs with low shares outstanding are often required to maintain long
ETP positions. Quoting risks exist due to the complexity of pricing
ETPs and the potential for human and/or technological errors. ETPs are
open-ended and derivatively priced securities that typically track
returns of underlying assets. LMMs' quotes can diverge from the
underlying assets' values, and in such cases, the LMMs are more likely
to buy (sell) at prices that are above (below) theoretical fair values.
Because LMMs are currently required to continuously quote on both sides
of the market and maintain certain minimum performance standards, they
are more likely to face these types of risks because other market
participants have more freedom to withdraw quotes upon experiencing
difficulties or unusual market conditions.
---------------------------------------------------------------------------
\9\ Costs of carrying ETP inventories include the expense ratio,
which includes the management fee, financing costs or the cost of
capital, and the opportunity cost of allocating capital. At times,
it may also include stock loan costs for maintaining a hedge in
hard-to-borrow securities.
---------------------------------------------------------------------------
To incentivize firms to take on the LMM designation and foster
liquidity provision and stability in the market, the Exchange currently
provides LMMs with an opportunity to receive incrementally higher
transaction credits and incur incrementally lower transaction fees
(``LMM Rates'') compared to standard liquidity maker-taker rates
(``Standard Rates'').\10\ LMM
[[Page 21683]]
Rates are intended to balance the increased risks and requirements
assumed by LMMs. Accordingly, the value of acting as an LMM can be
measured by the incremental difference in the transaction credits or
fees under the LMM Rates as compared to the Standard Rates. However,
the absolute incremental difference depends on the LMM's trading
volume. Trading volume for different ETPs can vary significantly and
result in a corresponding variance in LMM trading volume. The benefit
of acting as an LMM can therefore vary significantly depending upon the
ETP to which the LMM is assigned. There are fewer financial benefits
for LMM assignments in ETPs with lower CADVs than ETPs with higher
CADVs. The table below provides hypothetical examples based on
assumptions that NYSE Arca market share equals 22%, LMM participation
rate equals 20%, LMM make ratio equals 80%, and LMM take ratio equals
20%: \11\
---------------------------------------------------------------------------
\10\ The Exchange generally employs a maker-taker transactional
fee structure, whereby an ETP Holder that removes liquidity is
charged a fee (``Take Rate''), and an ETP Holder that provides
liquidity receives a credit (``Make Rate''). The Take Rate for LMMs
is currently $0.0025 per share. The Make Rate for LMMs is currently
generally between $0.0035 and $0.0045 per share depending on
consolidated average daily volume (``CADV''). See Trading Fee
Schedule, available at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees__4_4__13_copy.pdf.
\11\ Market share is the percentage of CADV traded on NYSE Arca.
Participation rate is the percentage of NYSE Arca volume traded by
the LMM. Make ratio is the percentage of LMM volume that provides
liquidity. Take ratio is the percentage of LMM volume that takes
liquidity. The formula for calculating the transaction credit is as
follows: (LMM make volume * Make Rate) + (LMM take volume * Take
Rate). LMM make volume equals CADV * Arca market share * LMM
participation rate * LMM make ratio. LMM take volume equals CADV *
Arca market share * LMM participation rate * LMM take ratio.
----------------------------------------------------------------------------------------------------------------
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 in low-volume ETPs are insufficient to outweigh the
obligations, minimum performance standards, and other risks described
above. To illustrate how this change has transpired, the following
table highlights the increasing proportion of new NYSE Arca ETPs that
are listed without an LMM present:
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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New NYSE Arca ETP Listings.......................... 11 34 49 133 223 195 124 196 297 147
Listed with LMM..................................... 11 34 49 133 218 190 121 175 271 135
Listed without LMM.................................. 0 0 0 0 5 5 3 21 26 12
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The Exchange is concerned that this trend will continue or worsen
if there is no mechanism to appropriately remunerate capable Market
Makers to take on the obligations and accountability that are part and
parcel of the LMM assignment. The Exchange also is concerned that this
would not be limited to future listings and that existing listings
could also be subject to LMM withdrawals. Indeed, since January 2008,
nearly 100% of all LMM withdrawal requests for ETPs already listed and
trading were made for securities that exhibited low CADV in the period
prior to the withdrawal requests being made. This behavior further
signals a connection between low CADV and low interest levels from
firms seeking to act as LMMs. Likewise, it supports the assertion that
there is less value relative to the risks of acting as the LMM for
certain ETPs.
The Exchange believes that there is ample evidence, along with
logical inference, to support the assertion that the presence of an
obligated and accountable liquidity provider leads to superior market
quality and thus benefits long-term investors. When there is an LMM
assigned to a security listed on NYSE Arca, long-term investors trading
on the Exchange in the secondary market likely experience enhanced
market quality compared to similar securities for which there are no
LMMs assigned. For instance, in the fourth quarter of 2012, there were
609 ETPs listed on NYSE Arca that traded less than 10,000 shares CADV.
Of those ETPs, 567 had LMMs while 42 did not. The average spread for
the ETPs with LMMs was 0.79% and the average quote size was 3,014
shares. The average spread for the ETPs without LMMs was 11.52% and the
average quote size was 1,655 shares. During the same time period, there
were 410 ETPs listed on NYSE Arca that traded between 10,000 shares and
100,000 shares CADV. Of those ETPs, 396 had LMMs while 14 did not. The
average spread for the ETPs with LMMs was 0.23% and the average quote
size was 6,643 shares. The average spread for ETPs without LMMs was
0.36% and the average quote size was 2,613 shares. Exhibits 1 and 2
illustrate that these observations were consistent over longer time
periods and that there has been a greater variance in market quality
for ETPs without LMMs.\12\
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\12\ All open-ended ETPs trading over 100,000 CADV have LMMs
except SPY, which has significant liquidity without the need for an
LMM, and UBS E-TRACS Alerian MLP Infrastructure ETN (symbol: MLPI).
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[[Page 21684]]
For ETPs <10,000 Shares CADV:
[GRAPHIC] [TIFF OMITTED] TN11AP13.000
[[Page 21685]]
For ETPs between 10,000 and 100,000 Shares CADV:
[GRAPHIC] [TIFF OMITTED] TN11AP13.001
Proposed Incentive Program
To address these issues, the Exchange proposes to establish the
Incentive Program as a one-year pilot to enhance the market quality for
ETPs by incentivizing Market Makers to take LMM assignments in certain
lower volume ETPs by offering an alternative fee structure for such
LMMs funded from the Exchange's general revenues. Incentive Program
costs would be offset by charging participating issuers non-refundable
Optional Incentive Fees, which would be credited to the Exchange's
general revenues. Participation would be entirely voluntary on the part
of both LMMs and issuers. The Exchange proposes to add new NYSE Arca
Equities Rule 8.800, which would set forth Incentive Program
requirements, including performance standards specific to LMMs
participating in the Incentive Program, as described in more detail
below.
Proposed Rule
Proposed NYSE Arca Equities Rule 8.800(a) would describe the ETPs
that would be eligible to participate in the Incentive Program. An ETP
would be eligible to participate in the Incentive Program if:
(1) It is listed on the Exchange as of the commencement of the
pilot period or becomes listed during the pilot period;
(2) the listing is under NYSE Arca Equities Rules 5.2(j)(3)
(Investment Company Units), 5.2(j)(5) (Equity Gold Shares), 8.100
(Portfolio Depositary Receipts), 8.200 (Trust Issued Receipts), 8.201
(Commodity-Based Trust Shares), 8.202 (Currency Trust Shares), 8.203
(Commodity Index Trust Shares), 8.204 (Commodity Futures Trust Shares),
8.300 (Partnership Units), 8.600 (Managed Fund Shares), or 8.700
(Managed Trust Securities);
(3) with respect to an ETP that listed on the Exchange before the
commencement of the Incentive Program, the ETP has a CADV of one
million shares or less for at least the preceding three months and the
issuer of such ETP has not suspended the issuance or redemption of new
shares; \13\ and
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\13\ The Exchange maintains a list of ETPs that have suspended
the issuance of new shares, which is available at https://etp.nyx.com/en/trading-information/us/funds-closed-creation.
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(4) it is compliant with continuing listing standards, if the ETP
was added to the Incentive Program after listing on the Exchange.
Proposed NYSE Arca Equities Rule 8.800(b) would describe the issuer
application and LMM assignment process. Specifically, under proposed
NYSE Arca Equities Rule 8.800(b)(1), an issuer that wished to have an
ETP participate in the Incentive Program and pay the Exchange an
Optional Incentive Fee would be required to submit a written
application in a form prescribed by the Exchange for each ETP. The
issuer could apply to have its ETP participate at the time of listing
or thereafter at the beginning of each quarter during the pilot period.
An issuer could not have more than five ETPs that were listed on the
Exchange prior to the pilot period participate in the Incentive
Program.\14\ However, there would not be a limitation on the number of
an issuer's ETPs listed during the pilot period that could participate.
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\14\ In light of this limitation, the Exchange does not believe
that there would be any improper incentive for an LMM to pressure an
issuer to place currently listed ETPs in the Incentive Program.
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Proposed NYSE Arca Equities Rule 8.800(b)(2) would set forth
eligibility requirements for issuers. Specifically, in order for its
ETP to be eligible to participate in the Incentive Program, an issuer
must be current in all payments due to the Exchange.
Proposed NYSE Arca Equities Rule 8.800(b)(3) would provide that the
Exchange would communicate the ETP(s) proposed for inclusion in the
Incentive Program on a written solicitation that would be sent to all
qualified LMMs \15\ along with the
[[Page 21686]]
Optional Incentive Fee the issuer would pay the Exchange for each ETP.
The issuer would determine the amount of the Optional Incentive Fee for
each ETP within a permitted range that would be set forth in the
Exchange's Listing Fee Schedule. In this regard, the Exchange proposes
to amend its Listing Fee Schedule to provide that the Optional
Incentive Fee under NYSE Arca Rule 8.800 may initially range from
$10,000 to $40,000, as determined by the issuer of an ETP.\16\ The
Optional Incentive Fee would be paid by the issuer to the Exchange in
quarterly installments for each participating ETP at the beginning of
each quarter and prorated if the issuer commenced participation for an
ETP in the Incentive Program after the beginning of a quarter. If the
LMM did not meet its proposed Incentive Program LMM performance
standards for an ETP in any given month in such quarter, the issuer
would not receive any refund or credit from the Exchange following the
end of the quarter.\17\ If the ETP had a sponsor, the sponsor could pay
the Optional Incentive Fee to the Exchange.\18\
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\15\ The written solicitation would be included in the Green
Sheet, which is the common term for an email communication sent by
NYSE Arca staff members to all qualified LMMs prior to an LMM
selection. The Green Sheet includes, among other things, the name,
symbol and description of the ETP(s) as well as the name of the
issuer and a link to the ETP prospectus. A qualified LMM must
complete the application for a specific ETP or group of ETPs.
\16\ Optional Incentive Fees would be credited to the Exchange's
general revenues. The issuer would still be required to pay
applicable Listing Fees and Annual Fees.
\17\ However, as described below, if an issuer did not pay its
quarterly installments to the Exchange on time and the ETP continued
to be listed, the Exchange would continue to credit the LMM as long
as the LMM met its performance standards.
\18\ The term ``sponsor'' means the registered investment
adviser that provides investment management services to an ETP or
any of such investment adviser's parents or subsidiaries.
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Proposed NYSE Arca Equities Rule 8.800(b)(4) would provide that
after the Exchange provided the written solicitation to LMMs, no
individual associated with an LMM could contact such issuer or the
Exchange staff about that ETP until the assignment of the LMM is made,
except as otherwise permitted in the rules.
Proposed NYSE Arca Equities Rule 8.800(b)(5) would describe the
assignment of an LMM if more than one qualified LMM proposed to serve
as such for a particular ETP.\19\ If more than one qualified LMM
proposed to serve as such for a particular ETP, Exchange staff would
select the LMM. Each LMM could provide material to the Exchange staff,
which could include a corporate overview of the LMM and the trading
experience of its personnel. Exchange staff would meet with
representatives of each LMM if requested by the LMM. No more than three
representatives of each LMM could participate in the meeting, each of
whom must be employees of the LMM, and one of whom must be the
individual trader of the LMM who is proposed to trade the ETP. If the
LMM were unavailable to appear in person, a telephone interview with
that LMM would be acceptable. Meetings would normally be held at the
Exchange, unless the Exchange agreed that they may be held elsewhere.
The issuer of the ETP could choose to submit a letter to the Exchange
staff indicating its preference and supporting justification for a
particular LMM, and the Exchange staff could consider such letter in
performing its duty to select an LMM, but such letter would not be
determinative of the particular LMM selected by the Exchange. Within
two business days after the final LMM interview, the Exchange staff, in
its sole discretion, would select an LMM and notify the LMM and the
issuer.\20\
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\19\ As is the case with all securities traded on the Exchange,
only one LMM would be assigned per ETP participating in the
Incentive Program. The Exchange's market structure has long included
a single LMM structure and the Exchange does not propose to change
this for the Incentive Program. Indeed, the Exchange believes that
its proposed payment (the range of which was established after
significant analysis) might not be sufficient if it had to be
divided among multiple Market Makers.
\20\ Proposed NYSE Arca Equities Rule 8.800(b)(5) is modeled in
part on New York Stock Exchange (``NYSE'') Rule 103B(III)(B)(1),
which governs Designated Market Maker unit assignments for equities
listed on the NYSE.
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Proposed NYSE Arca Equities Rules 8.800(b)(6) and (7) would
describe required public notices relating to the Incentive Program.
Under proposed NYSE Arca Equities Rule 8.800(b)(6), the Exchange would
provide notification on a dedicated page on its Web site regarding (i)
The ETPs participating in the Incentive Program, (ii) the date a
particular ETP began participating in the Incentive Program, (iii) the
date a particular ETP ceased participating in the Incentive Program,
(iv) the LMM assigned to each ETP participating in the Incentive
Program, and (v) the amount of the Optional Incentive Fee for each ETP.
This page would also include a fair and balanced description of the
Incentive Program, including (i) A description of the Incentive
Program's operation as a pilot, including the effective date thereof,
(ii) the potential benefits that may be realized by an ETP's
participation in the Incentive Program, (iii) the potential risks that
may be attendant with an ETP's participation in the Incentive Program,
(iv) the potential impact resulting from an ETP's entry into and exit
from the Incentive Program, and (v) how interested parties can request
additional information regarding the Incentive Program and/or the ETPs
participating therein.
Under proposed NYSE Arca Equities Rule 8.800(b)(7), an issuer of an
ETP that is approved to participate in the Incentive Program would be
required to issue a press release to the public when an ETP commences
or ceases participation in the Incentive Program. The press release
would be in a form and manner prescribed by the Exchange, and if
practicable, would be issued at least two days before the ETP commences
or ceases participation in the Incentive Program.\21\ For example,
there could be instances in which it would not be known two days in
advance that an ETP would be ceasing participation in the Incentive
Program, in which case the Exchange would request that the issuer
distribute the press release as soon as possible under the particular
circumstances. The issuer also would be required to dedicate space on
its Web site, or, if it does not have a Web site, on the Web site of
the adviser or sponsor of the ETP, that (i) included any such press
releases and (ii) provided a hyperlink to the dedicated page on the
Exchange's Web site that describes the Incentive Program.\22\
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\21\ The issuer's press release would be required to include
language describing, for example, that while the impact of
participation in or exit from the Incentive Program, which is
optional, cannot be fully understood until objective observations
can be made in the context of the Incentive Program, potential
impacts on the market quality of the issuer's ETP may result,
including with respect to the average spread and average quoted size
for the ETP.
\22\ These disclosure requirements would be in addition to, and
would not supersede, the prospectus disclosure requirements under
the Securities Act of 1933 or the Investment Company Act of 1940.
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Proposed NYSE Arca Equities Rule 8.800(c) would describe the
proposed Incentive Program LMM performance standards that would apply
to an LMM for each Incentive Program security it is assigned.\23\ Under
proposed NYSE Arca Equities Rule 8.800(c)(1), an LMM in the Incentive
Program would remain obligated to satisfy the general requirements of
NYSE Arca Rule 7.23.
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\23\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that only displayed quotes and orders would be considered
for purposes of the LMM performance standards of proposed Rule
8.800(c).
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Under proposed NYSE Arca Equities Rule 8.800(c)(2), an LMM would be
subject to a ``market wide'' requirement. Specifically, an LMM would be
required to maintain quotes or orders at the NBBO or better (the
``Inside'') during the month during Core Trading Hours in accordance
with certain maximum width and minimum depth thresholds, which would be
provided in
[[Page 21687]]
Commentary .01 to Rule 8.800.\24\ However, this requirement would not
apply to an LMM if the thresholds provided in Commentary .01 were
otherwise met by quotes or orders of other market participants on the
Exchange or across all other markets trading the security.
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\24\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that (i) the spread thresholds would be calculated as the
time-weighted average throughout the trading day and then averaged,
by day, across the month and (ii) the depth thresholds would be
calculated as the average of (a) the average time-weighted bid depth
and (b) the average time-weighted ask depth.
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Under proposed NYSE Arca Equities Rule 8.800(c)(3), an LMM would
also be subject to an NYSE Arca-specific requirement, which could be
satisfied in one of two ways. First, an LMM could choose to satisfy the
``Time-at-the-Inside Requirement'' under proposed NYSE Arca Equities
Rule 8.800(c)(3)(A), pursuant to which an LMM would be required to
maintain quotes or orders on NYSE Arca at the NBBO or better at least
15% of the time when quotes may be entered during Core Trading Hours
each trading day, as averaged over the course of a month.\25\
Alternatively, an LMM could choose to satisfy the ``Size-Setting NBBO
Requirement'' under proposed NYSE Arca Equities Rule 8.800(c)(3)(B),
pursuant to which an LMM would be required to maintain ``Size-Setting''
quotes or orders on NYSE Arca, as compared to trading interest on other
markets, at the NBBO or better at least 25% of the time when quotes may
be entered during Core Trading Hours each trading day, as averaged over
the course of a month.\26\ However, this requirement would not apply to
an LMM if this threshold is otherwise met by quotes or orders of other
market participants on NYSE Arca.
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\25\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that the Time-at-the-Inside Requirement would be
calculated as the average of (a) the percentage of time the LMM has
a bid on NYSE Arca at the NBB and (b) the percentage of time the LMM
has an offer on NYSE Arca at the NBO.
\26\ The Exchange would specify in proposed Commentary .01 to
Rule 8.800 that the Size-Setting NBBO Requirement would be
calculated throughout the trading day and then averaged, by day,
across the month. Quotes and orders of all market participants
across all markets trading the security would be considered when
calculating the Size-Setting NBBO Requirement. A quote or order
would be considered ``Size-Setting'' if it is at the NBB or NBO. If
multiple quotes or orders exist at the same price, the quote or
order with the largest size would be considered ``Size-Setting.'' If
multiple quotes or orders exist at the same price and the same size,
the quote or order with the earliest entry time would be considered
``Size-Setting.''
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Finally, under proposed NYSE Arca Equities Rule 8.800(c)(4), for at
least 90% of the time when quotes may be entered during Core Trading
Hours each trading day, as averaged over the course of a month, an LMM
would be required to maintain (A) at least 2,500 shares of
attributable, displayed posted buy liquidity on the Exchange that is
priced no more than 2% away from the NBB for the particular ETP; and
(B) at least 2,500 shares of attributable, displayed posted offer
liquidity on the Exchange that is priced no more than 2% away from the
NBO for the particular ETP.
Proposed NYSE Arca Equities Rule 8.800(d) would describe the
payment to an LMM by the Exchange (``LMM Payment''). Under this
provision, the Exchange would credit an LMM for the LMM Payment, which
would be determined by the Exchange and set forth in the Trading Fee
Schedule. An LMM participating in the Incentive Program would not be
entitled to an LMM Payment unless and until it meets or exceeds the
proposed Incentive Program LMM performance standards for an assigned
ETP, as determined by the Exchange. In this regard, the Exchange
proposes to amend its Trading Fee Schedule to provide that at the end
of each quarter the Exchange would credit an LMM an ``LMM Payment'' for
each month during such quarter that the LMM meets or exceeds its
proposed Incentive Program LMM performance standards for an assigned
ETP. If an LMM does not meet or exceed its proposed Incentive Program
LMM performance standards for an assigned ETP for a particular month,
or the ETP is withdrawn from the Incentive Program pursuant to
paragraph (e) of NYSE Arca Equities Rule 8.800, then the LMM Payment
would be zero for such month. The amount of the LMM Payment for a
particular month would not exceed \1/3\ of the quarterly Optional
Incentive Fee, less an Exchange administration fee of 5%, and such LMM
would be subject to Standard Rates during that quarter instead of LMM
Rates. As is the case with all liquidity-adding credits currently
payable to NYSE Arca ETP Holders, LMM Payments would be paid by the
Exchange from its general revenues. The Trading Fee Schedule would also
reflect that if an issuer did not pay its quarterly installments to the
Exchange on time and the ETP continued to be listed, the Exchange would
continue to credit the LMM if the LMM met its proposed Incentive
Program LMM performance standards.
Proposed NYSE Arca Equities Rule 8.800(e) would describe the
circumstances for withdrawal from the Incentive Program. First, if an
ETP no longer met continuing listing standards, suspended the creation
and/or redemption of shares, or liquidated, it would be automatically
withdrawn from the Incentive Program as of the ETP suspension date.
Second, NYSE Arca, in its discretion, could allow an issuer to
withdraw an ETP from the Incentive Program before the end of the pilot
period if the assigned LMM was unable to meet its proposed Incentive
Program LMM performance standards for any two of the three months of a
quarter or for five months during the pilot period and no other
qualified ETP Holder was able to take over the assignment.
Third, an LMM also could withdraw from all of its ETP assignments
in the Incentive Program. Alternatively, NYSE Arca, in its discretion,
could allow an LMM to withdraw from a particular ETP before the end of
the pilot period if the Exchange determined that there were extraneous
circumstances that prevented the LMM from meeting its proposed
Incentive Program LMM performance standards for such ETP that did not
affect its other ETP assignments in the Incentive Program. In either
such event, the LMM's ETP(s) would be reallocated as described below.
Fourth, if an ETP maintained a CADV of one million shares or more
for three consecutive months, it would be automatically withdrawn from
the Incentive Program within one month thereafter. If after such
automatic withdrawal the ETP failed to maintain a CADV of one million
shares or more for three consecutive months, the issuer of the ETP
could reapply for the Incentive Program one month thereafter. The
Exchange believes that setting a one-million-share threshold would
focus Incentive Program resources on particularly low volume ETPs and
provide an objective measurement for evaluating the effectiveness of
the Incentive Program.
Fifth, if the issuer was not current in all payments due to the
Exchange for two consecutive quarters, its ETP would be automatically
terminated from the Incentive Program.
Finally, proposed NYSE Arca Equities Rule 8.800(f) would describe
the LMM reallocation process. If the LMM for a particular ETP did not
meet or exceed its proposed Incentive Program LMM performance standards
for any two of the three months of a quarter or for five months during
the pilot period, or chose to withdraw from the Incentive Program, and
at least one other qualified Market Maker had agreed to become the
assigned LMM under the Incentive Program, then the ETP would be
reallocated. If more than one qualified LMM proposed to serve as such,
another
[[Page 21688]]
LMM would be selected in accordance with the written solicitation and
assignment processes described above. The reallocation process would be
completed no sooner than the end of the current quarter and no later
than the end of the following quarter.
Implementation of Incentive Program
The Incentive Program would be offered to issuers from the date of
implementation, which would occur no later than 90 days after
Securities and Exchange Commission (``Commission'') approval of this
filing, until one calendar year after implementation. As described
above, each issuer could select ETPs to participate in the Incentive
Program. During the pilot period, the Exchange would assess the
Incentive Program and could expand the criteria for ETPs that are
eligible to participate, for example, to permit issuers to include more
than five ETPs that were listed on the Exchange before the pilot period
commenced. At the end of the pilot period, the Exchange would determine
whether to continue or discontinue the Incentive Program or make it
permanent and submit a rule filing as necessary. If the Exchange
determined to change the terms of the Incentive Program while it was
ongoing, it would submit a rule filing to the Commission.
During the Incentive Program, the Exchange would provide the
Commission with certain market quality reports each month, which would
also be posted on the Exchange's Web site. Such reports would include
the Exchange's analysis regarding the Incentive Program and whether it
is achieving its goals, as well as market quality data such as, for all
ETPs listed as of the date of implementation of the Incentive Program
and listed during the pilot period (for comparative purposes), volume
(CADV and NYSE Arca ADV), NBBO bid/ask spread differentials, LMM
participation rates, NYSE Arca market share, LMM time spent at the
inside, LMM time spent within $0.03 of the inside, percent of time NYSE
Arca had the best price with the best size, LMM quoted spread, LMM
quoted depth, and Rule 605 statistics (one-month delay) as agreed upon
by the Exchange and the Commission staff. In connection with this
proposal, the Exchange would provide other data and information related
to the Incentive Program as may be periodically requested by the
Commission. In addition, and as described further below, issuers could
utilize ArcaVision to analyze and replicate data on their own.\27\
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\27\ NYSE Arca provides ArcaVision free of charge to the public
via the Web site www.ArcaVision.com. ArcaVision offers a significant
amount of trading data and market quality statistics for every
Regulation NMS equity security traded in the United States,
including all ETPs. Publicly available reports within ArcaVision,
which include relevant comparative data, are the Symbol Summary,
Symbol Analytics, Volume Comparison and Quotation Comparison
reports, among others. In addition, users can create the reports on
a per[hyphen]symbol basis over a flexible time frame. They can also
take advantage of predefined, accurate and up[hyphen]to[hyphen]date
symbol sets based on type of ETP or issuer. Users can also create
their own symbol lists. ArcaVision also allows an ETP issuer to see
additional information specific to its LMM and other Market Makers
in each ETP via the ``ArcaVision Market Maker Summary'' reporting
mechanism.
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Benefits of the Incentive Program
The proposed LMM Payment is designed to encourage additional Market
Makers to pursue LMM assignments and thereby support the provision of
consistent liquidity in lower-volume ETPs listed on the Exchange. The
Exchange believes that providing a quarterly LMM Payment would create a
more equitable system of incentives for LMMs. The Exchange would
administer all aspects of the LMM Payments, which, as noted above,
would be paid by the Exchange to LMMs out of the Exchange's general
revenues.
The Exchange believes that the Incentive Program would increase the
supply of Market Makers seeking to take on LMM assignments, ultimately
leading to improved market quality for long[hyphen]term investors in
ETPs, which would lead to multiple benefits. It would help to ensure
that a diversified pool of qualified LMM candidates exists in the
present and future. It would also help to discover a competitive
balance to set the fair Optional Incentive Fees within the proposed
range of $10,000 to $40,000 per ETP annually, based on the risk/reward
of receiving specific LMM assignments. Issuers would be able to monitor
the performance of LMMs as well as registered Market Makers and other
participants that opted into the ``ArcaVision Market Maker Summary''
reporting mechanism. Thus, issuers would be able to compare and
contrast the performance of various Market Makers to ensure that they
were optimizing benefits vis[hyphen]a[hyphen]vis cost.
Consistency with FINRA Rule 5250
The Exchange believes that the Incentive Program is designed to
mitigate risks and concerns that Financial Industry Regulatory
Authority (``FINRA'') Rule 5250 addresses. FINRA Rule 5250 prohibits a
FINRA member or a person associated with a FINRA member from accepting
any payment or other consideration, directly or indirectly, from an
issuer of a security, or any affiliate or promoter thereof, for
publishing a quotation, acting as market maker in a security, or
submitting an application in connection therewith.
FINRA Rule 5250 is designed to preserve the integrity of the
marketplace by ensuring that quotations accurately reflect a broker-
dealer's interest in buying or selling a security and that the decision
by a firm to make a market in a given security and the question of
price should not be influenced by payments to members from issuers or
promoters.\28\ The Exchange believes that the Incentive Program is
carefully tailored to promote the beneficial purpose of improved market
quality, while at the same time being designed to mitigate the public
policy risks and concerns that FINRA Rule 5250 addresses and to not
adversely affect market integrity.
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\28\ See Securities Exchange Act Release No. 60066 (June 8,
2009), 74 FR 28308 (June 15, 2009) (SR-FINRA-2009-36). See also
Securities Exchange Act Release No. 38812 (July 3, 1997), 62 FR
37105 (July 10, 1997) (SR-NASD-97-29) (order approving NASD Rule
2460, predecessor to FINRA Rule 5250).
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First, the derivative and open-ended nature of many of the ETPs
eligible to participate in the Incentive Program would allow for
transparent intrinsic intraday pricing. As such, the Exchange does not
believe that such products would lend themselves to the type of market
manipulation that FINRA Rule 5250 was designed to prevent. The
transparent nature of many ETPs' portfolio composition as well as their
accessibility and the elasticity of shares outstanding contribute to an
arbitrage process that will lead to executions of orders of many ETPs
priced at or near net asset values (``NAVs''). The typical unit size is
50,000 shares to 100,000 shares and each share represents fractional
ownership of the portfolio, allowing low minimum investments to access
the exposure of a large notional portfolio. ETP supply (i.e., shares
outstanding) can be increased or decreased through the creation and
redemption process. Clearing firms that are authorized participants
will have the opportunity to deliver, or take delivery of, unit-sized
amounts of the underlying securities. Proprietary traders engaging in
arbitrage are able to calculate an estimated intraday NAV. Such traders
understand what the intrinsic per-share price is, hedge themselves
using the underlying securities or correlated equivalents, and manage
their positions by either creating or redeeming units. If and when the
quote is priced beyond
[[Page 21689]]
the intrinsic value of an ETP, an arbitrage opportunity can arise, and
market participants will arbitrage such spread until price equilibrium
is restored.
Second, the Incentive Program would have numerous structural
safeguards that were designed to prevent any adverse effect on market
integrity. First, the Incentive Program would be administered by the
staff of the Exchange, which is a self-regulatory organization,\29\ and
which would be interposed between LMMs and issuers. Second, both LMMs
and issuers would be required to apply to participate in the program
and to meet certain standards. The Exchange would collect the Optional
Incentive Fees from issuers and credit them to the Exchange's general
revenues. An LMM would be eligible to receive an LMM Payment, again
from the Exchange's general revenues, only after it met the proposed
Incentive Program LMM performance standards set and monitored by the
Exchange. Third, the Incentive Program is rules based and subject to
significant public disclosure. Application to, continuation in, and
withdrawal from the Incentive Program would be governed by published
Exchange rules and policies, and there would be extensive public notice
regarding the Incentive Program and payments thereunder on both the
Exchange's and the issuers' Web sites.
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\29\ FINRA surveils trading on the Exchange, including ETP
trading, pursuant to a Regulatory Services Agreement (``RSA''). The
Exchange is responsible for FINRA's performance under this RSA.
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In light of the pricing mechanisms of ETPs and the structural
safeguards of the Incentive Program, the Exchange believes that the
payments under the Incentive Program are designed to mitigate the risks
and concerns that FINRA Rule 5250 addresses. In this regard, the
Exchange understands, based upon discussions with FINRA, that FINRA
will file an immediately effective rule change with the Commission
indicating that participation by LMMs and issuers in the Incentive
Program would not violate Rule 5250.
Consistency With Regulation M
Rule 102 of Regulation M prohibits an issuer from directly or
indirectly attempting ``to induce any person to bid for or purchase, a
covered security during the applicable restricted period'' unless an
exemption is available.\30\ For the reasons discussed below, the
Exchange believes that exemptive relief from Rule 102 should be granted
for the Incentive Program.
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\30\ Rule 102 provides that ``[i]n connection with a
distribution of securities effected by or on behalf of an issuer or
selling security holder, it shall be unlawful for such person, or
any affiliated purchaser of such person, directly or indirectly, to
bid for, purchase, or attempt to induce any person to bid for or
purchase, a covered security during the applicable restricted
period'' unless an exception is available. See 17 CFR 242.102.
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First, the Exchange notes that the Commission and its staff have
previously granted relief from Rule 102 to a number of ETPs (``Existing
Relief'') in order to permit the ordinary operation of such ETPs.\31\
In granting the Existing Relief, the Commission has relied in part on
the exclusion from the provisions of Rule 102 provided by paragraph
(d)(4) of Rule 102 for securities issued by an open-end management
investment company or unit investment trust. In granting the Existing
Relief from Rule 102 to other types of ETPs, for which the (d)(4)
exception is not available, the staff has relied on (i) representations
that the fund in question would continuously redeem ETP shares in
basket-size aggregations at their NAV and that there should be little
disparity between the market price of an ETP share and the NAV per
share and (ii) a finding that ``[t]he creation, redemption, and
secondary market transactions in [shares] do not appear to result in
the abuses that * * * Rules 101 and 102 of Regulation M * * * were
designed to prevent.''\32\ The crux of the Commission's findings in
granting the Existing Relief rests on the premise that the prices of
ETP shares closely track their per-share NAVs. Given that the Incentive
Program neither alters the derivative pricing nature of ETPs nor
impacts the arbitrage opportunities inherent therein, the conclusion on
which the Existing Relief is based remains unaffected by the Incentive
Program. In this regard, most ETPs that would be eligible to
participate in the Incentive Program would have previously been granted
relief from Rule 102. Moreover, and as noted above, an ETP that
suspended the creation and/or redemption of shares, or liquidated,
would be automatically withdrawn from the Incentive Program as of the
ETP suspension date.
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\31\ See, e.g., Letter from James A. Brigagliano, Acting
Associate Director, Division of Market Regulation, to Stuart M.
Strauss, Esq., Clifford Chance US LLP (Oct. 24, 2006) (regarding
class relief for exchange traded index funds).
\32\ See Rydex Specialized Products LLC, SEC No-Action Letter
(June 21, 2006).
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Second, the Incentive Program requires, among other things, that an
LMM make two-sided quotes and not just bids. It is not intended to
raise ETP prices but rather to improve market quality. In light of the
derivative nature of ETPs described above, the Exchange does not expect
that LMMs would quote outside of the normal quoting ranges for these
products as a result of the LMM Payment, but rather would quote within
their normal ranges as determined by market factors. Indeed, the
Incentive Program would not create any incentive for an LMM to quote
outside such ranges.
Finally, the staff of the Exchange, which is a self-regulatory
organization, would be interposed between the issuer and the LMM,
administering a rules-based program with numerous structural safeguards
described in the previous section. Specifically, both LMMs and issuers
would be required to apply to participate in the program and to meet
certain standards. The Exchange would collect the Optional Incentive
Fees from issuers and credit them to the Exchange's general revenues.
An LMM would be eligible to receive an LMM Payment, again from the
Exchange's general revenues, only after it met the proposed Incentive
Program LMM performance standards set and monitored by the Exchange.
Application to, continuation in, and withdrawal from the Incentive
Program would be governed by published Exchange rules and policies, and
there would be extensive public notice regarding the Incentive Program
and payments thereunder on both the Exchange's and the issuers' Web
sites. Given these structural safeguards, the Exchange believes that
payments under the Incentive Program are appropriate for exemptive
relief from Rule 102.
In summary, the Exchange believes that exemptive relief from Rule
102 should be granted for the Incentive Program because, for example,
(1) The Incentive Program would not create any incentive for an LMM to
quote outside of the normal quoting ranges for the ETPs included
therein; (2) the Incentive Program has numerous structural safeguards,
such as the application process for issuers and LMMs, the
interpositioning of the Exchange between issuers and LMMs, and
significant public disclosure surrounding the Incentive Program, which
in general is designed to help inform investors about the potential
impact of the Incentive Program; and (3) the Incentive Program does not
alter the basis on which Existing Relief is based and, furthermore,
most ETPs that would be eligible to participate in the Incentive
Program would have previously been granted relief from Rule 102.\33\
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\33\ The Exchange notes that the Commission granted a limited
exemption from Rule 102 of Regulation M to The NASDAQ Stock Market
LLC (``NASDAQ'') for a program similar to the Exchange's proposed
Incentive Program. See Securities Exchange Act Release No. 69196
(March 20, 2013), 78 FR 18410 (March 26, 2013) (Order Granting a
Limited Exemption From Rule 102 of Regulation M Concerning the
NASDAQ Market Quality Program Pilot Pursuant to Regulation M Rule
102(e)) (the ``NASDAQ Exemption''). The NASDAQ Exemption includes
certain conditions related to, among other things, notices to the
public and disclosures with respect to NASDAQ's program. The
Exchange notes that if the Commission were to provide exemptive
relief from Rule 102 of Regulation M for the Incentive Program it
may include similar conditions.
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[[Page 21690]]
Surveillance
The Exchange believes that its surveillance procedures would be
adequate to properly monitor the trading of Incentive Program ETPs on
the Exchange during all trading sessions and to detect and deter
violations of Exchange rules and applicable federal securities laws.
Trading of the ETPs through the Exchange would be subject to FINRA's
surveillance procedures for derivative products including ETFs.\34\ The
Exchange may obtain information via the Intermarket Surveillance Group
(``ISG'') from other exchanges that are members or affiliates of the
ISG;\35\ and from issuers and public and non-public data sources such
as, for example, Bloomberg.
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\34\ See supra note 29.
\35\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\36\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\37\ in particular. The
proposed rule change is consistent with Section 6(b)(5) of the Act in
that it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, and to remove impediments to and perfect
the mechanism of a free and open market and a national market system.
The Exchange believes that the Incentive Program would enhance quote
competition, improve liquidity, support the quality of price discovery,
promote market transparency, and increase competition for listings and
trade executions while reducing spreads and transaction costs. The
Exchange further believes that enhancing liquidity in Incentive Program
ETPs with all of the structural safeguards described above would help
raise investors' confidence in the fairness of the market generally and
their transactions in particular. As such, the Incentive Program would
foster cooperation and coordination with persons engaged in
facilitating securities transactions, enhance the mechanism of a free
and open market, and promote fair and orderly markets in ETPs on the
Exchange.
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\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange further believes that designating ETPs as the products
eligible for inclusion in the Incentive Program is reasonable because
it would incentivize Market Makers to undertake LMM assignments in ETPs
with lower trading volume. As described earlier in the filing, there is
ample data demonstrating that there are generally fewer financial
benefits for such ETPs as compared to ETPs with higher CADVs and that
market quality has been affected.
The Exchange believes that its implementation plan and the pilot
period are reasonable in that they would permit the Commission, the
Exchange, LMMs, and issuers to assess the impact of the Incentive
Program before making it available to other securities. In particular,
the Exchange believes that it is beneficial and not unfairly
discriminatory to limit the ETPs participating so that the Exchange and
issuers could measure the experience against nonparticipating ETPs and
thereby conserve the commitment of resources to the Incentive Program.
In particular, by setting an objective one-million-share CADV
threshold, the Exchange and the Commission will have an opportunity to
observe the impact, if any, on ETPs that exceed the threshold and
``graduate'' from the Incentive Program and compare them to other ETPs.
The Exchange believes that the proposed LMM minimum performance
standards are reasonable, including aspects thereof that can be met by
quotes or orders of other market participants on the Exchange or across
all other markets trading the security, because such standards would
contribute to reasonably ensuring that there is sufficient liquidity
for the ETPs participating in the Incentive Program. In this regard,
the role of the LMM is to reasonably ensure that sufficient liquidity
exists for investors when such liquidity is not provided by other
market participants, whether on the Exchange or across other markets
trading the particular security, by submitting quotes and orders that
contribute to the quality of the width and depth of liquidity for the
ETP. Accordingly, when the quotes or orders of other market
participants on the Exchange or across all other markets trading the
security result in such sufficient liquidity, there is not a need for
an LMM to quote according to the proposed LMM minimum performance
standards, which are designed to reasonably ensure that such liquidity
exists. However, when such liquidity is not otherwise present, the
proposed LMM minimum performance standards would reasonably ensure that
such liquidity exists and is available for investors.
With respect to the proposed fees, the Exchange believes that the
proposed rule change is consistent with Sections 6(b)(4) and 6(b)(5) of
the Act, in that it is designed to provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities and that it is not
unfairly discriminatory. The Exchange believes that the proposed
Optional Incentive Fees for ETPs are reasonable, given the additional
costs to the Exchange of providing the LMM Payments, which are paid by
the Exchange out of the Exchange's general revenues. The Exchange also
believes that the proposed fees are reasonable because they would be
used by the Exchange to offset the cost that the Exchange incurs to
provide listing services for ETPs. These costs include, but are not
limited to, ETP rulemaking initiatives, listing administration
processes, issuer services, consultative legal services provided to ETP
issuers in support of new product development, and administration of
the proposed quarterly LMM Payment. As such, the Exchange believes that
it is reasonable for it to retain an administration fee to recover the
costs of administering the Incentive Program.
The Exchange believes that the Optional Incentive Fee is
reasonable, equitably allocated, and not unreasonably discriminatory
because it is entirely voluntary on an issuer's part to join the
Incentive Program. The amount of the fee would be determined and paid
by the issuer within the $10,000 to $40,000 band per ETP and credited
to the Exchange's general revenues. Only issuers that voluntarily join
the Incentive Program would be required to pay the fees. The Exchange
believes that this is fairer than requiring all issuers to pay higher
fees to fund the Incentive Program.
The Exchange believes that the LMM Payment and standard transaction
fees and credits are equitable and not unfairly discriminatory in that
any Market Maker could seek to participate in the Incentive Program as
an LMM. Moreover, an LMM participating in the Incentive Program would
not be entitled to an LMM Payment unless and until it
[[Page 21691]]
meets or exceeds the proposed Incentive Program LMM performance
standards for an assigned ETP, as determined by the Exchange. The
Exchange further believes that the range of credits, which would be
paid from the Exchange's general revenues, is fair and equitable in
light of the LMM's obligations and proposed Incentive Program LMM
performance standards, which would be higher than the standards for
LMMs not participating in the Incentive Program.
Finally, for the reasons stated above, the Exchange believes that
the Incentive Program would be designed to mitigate risks and concerns
that FINRA Rule 5250 addresses and that the Commission should provide
exemptive relief from Rule 102 of Regulation M for the Incentive
Program.\38\
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\38\ See supra note 33.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, the
Exchange believes that the Incentive Program, which is entirely
voluntary, would encourage competition among markets for issuers'
listings and among Market Makers for LMM assignments. The Incentive
Program is designed to improve the quality of market for lower-volume
ETPs, thereby incentivizing them to list on the Exchange. The
competition for listings among the exchanges is fierce. The Exchange
notes that BATS Exchange, Inc. (``BATS'') has already implemented a
program similar to the Exchange's proposed Incentive Program,\39\ and
NASDAQ has received approval to do so as well.\40\
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\39\ See Interpretation and Policy .02 of BATS Rule 11.8. See
also Securities Exchange Act Release Nos. 66307 (February 2, 2012),
77 FR 6608 (February 8, 2012) (SR-BATS-2011-051) and 66427 (February
21, 2012), 77 FR 11608 (February 27, 2012) (SR-BATS-2012-011).
\40\ See Securities Exchange Act Release No. 69195 (March 20,
2013), 78 FR 18393 (March 26, 2013) (SR-NASDAQ-2012-137).
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In addition, the Exchange believes that the Incentive Program will
properly promote competition among Market Makers to seek assignment as
the LMM for eligible ETPs. As described in detail above, the Exchange
believes that market quality is significantly enhanced for ETPs with an
LMM as compared to ETPs without an LMM. The Exchange believes that
market quality would be even further enhanced as a result of the
proposed Incentive Program LMM performance standards that the Exchange
would impose on LMMs in the Incentive Program. The Exchange anticipates
that the increased activity of these LMMs would attract other market
participants to the Exchange, and could thereby lead to increased
liquidity on the Exchange in such ETPs. For these reasons, the Exchange
does not believe that the proposed rule change would impose any
unnecessary or inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. The Commission previously received
comments on SR-NYSEArca-2012-37, which proposed rule change was
withdrawn by the Exchange,\41\ and all such comments are available on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml.
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\41\ See supra note 4.
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Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2013-34 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2013-34. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2013-34 and should
be submitted on or before May 2, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08444 Filed 4-10-13; 8:45 am]
BILLING CODE 8011-01-P
