Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Proposes To Amend the Definition of Retail Order in the NYSE Arca Equities Schedule of Fees and Charges for Exchange Services and the Attestation Requirements for ETP Holders That Submit Retail Orders, 61433-61436 [2013-24249]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 192 (Thursday, October 3, 2013)]
[Notices]
[Pages 61433-61436]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24249]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70565; File No. SR-NYSEARCA-2013-98]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Proposes To Amend 
the Definition of Retail Order in the NYSE Arca Equities Schedule of 
Fees and Charges for Exchange Services and the Attestation Requirements 
for ETP Holders That Submit Retail Orders

September 30, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on September 20, 2013, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend (1) the definition of ``Retail 
Order'' in the NYSE Arca Equities Schedule of Fees and Charges for 
Exchange Services (``Fee Schedule'') and (2) the attestation 
requirements for ETP Holders that submit Retail Orders. The text of the 
proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend (1) the definition of ``Retail 
Order'' in the Fee Schedule and (2) the attestation requirements for 
ETP Holders that submit Retail Orders. The Exchange proposes to 
implement the changes effective October 1, 2013.
Background
    The Fee Schedule provides certain transaction credits for Retail 
Orders under two tiers, the Retail Order Tier \4\ and the Retail Cross-
Asset Tier.\5\ The term ``Retail Order'' is defined in the Fee Schedule 
as an agency order that originates from a natural person and is 
submitted to the Exchange by an ETP Holder, provided that no change is 
made to the terms of the order with respect to price or side of market 
and the order does not originate from a trading algorithm or any other 
computerized methodology.
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    \4\ Under this tier, an ETP Holder, including a Market Maker, 
that executes an average daily volume (``ADV'') of Retail Orders 
during the month that is 0.20% or more of the U.S. consolidated ADV 
(``CADV'') receives a credit of $0.0033 per share for its Retail 
Orders that provide liquidity on the Exchange in Tape A, B and C 
securities. For all other fees and credits, Tiered or Basic Rates 
would apply based on the ETP Holder's qualifying levels.
    \5\ Under this tier, an ETP Holder, including a Market Maker, 
that (1) executes a CADV of Retail Orders during the month that is 
0.30% or more of the U.S. CADV and (2) is affiliated with an OTP 
Holder or OTP Firm that provides an ADV of electronic posted 
Customer executions in Penny Pilot issues on NYSE Arca Options 
(excluding mini options) of at least 0.50% of total Customer equity 
and ETF option ADV as reported by OCC receives a credit of $0.0034 
per share for its Retail Orders that provide liquidity on the 
Exchange in Tape A, B and C securities. For all other fees and 
credits, Tiered or Basic Rates would apply based on the ETP Holder's 
qualifying levels.
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    As part of qualifying for the Retail Order Tier, an ETP Holder is 
required to designate certain of its order entry ports at the Exchange 
as ``Retail Order Ports'' or designate orders as Retail Orders within 
the order entry message. The ETP Holder is required to attest, in a 
form and/or manner prescribed by the Exchange, that all orders 
submitted to the Exchange via such Retail Order Ports are Retail 
Orders. Additionally, an ETP Holder is required to have written 
policies and procedures reasonably designed to ensure that it will only 
designate orders as Retail Orders if all requirements of a Retail Order 
are met.\6\ The Financial Industry Regulatory Authority, Inc. 
(``FINRA''), on behalf of the Exchange, reviews an ETP Holder's 
compliance with these requirements through an exam-based review of the 
ETP Holder's internal controls.
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    \6\ Such written policies and procedures must require the ETP 
Holder to (1) exercise due diligence before entering a Retail Order 
to assure that entry as a Retail Order is in compliance with the 
requirements specified by the Exchange and (2) monitor whether 
orders entered as Retail Orders meet the applicable requirements. If 
the ETP Holder represents Retail Orders from another broker-dealer 
customer, the ETP Holder's supervisory procedures must be reasonably 
designed to ensure that the orders it receives from such broker-
dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order. The ETP Holder must (i) obtain an 
annual written representation, in a form acceptable to the Exchange, 
from each broker-dealer customer that sends it orders to be 
designated as Retail Orders that the entry of such orders as Retail 
Orders will be in compliance with the requirements specified by the 
Exchange, and (ii) monitor whether its broker-dealer customer's 
Retail Order flow continues to meet the applicable requirements.
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    The Exchange notes that the Retail Order Tier and Retail Cross-
Asset Tier are optional for ETP Holders. Accordingly, an ETP Holder 
that does

[[Page 61434]]

not opt to identify qualified orders as Retail Orders is not required 
to (1) designate any of its ports as Retail Order Ports or orders as 
Retail Orders, (2) make an attestation to the Exchange, or (3) maintain 
required policies and procedures.
Proposed Change
    The Exchange proposes two changes to the current requirements. 
First, the Exchange proposes to include in the definition of Retail 
Order any riskless principal order that meets the criteria of FINRA 
Rule 5320.03. Under FINRA Rule 5320.03, a riskless principal order is a 
proprietary order for the purposes of facilitating the execution, on a 
riskless principal basis, of an order from a customer (whether its own 
customer or the customer of another broker-dealer) (the ``facilitated 
order''), provided that the member (1) submits a report, 
contemporaneously with the execution of the facilitated order, 
identifying the trade as riskless principal to FINRA (or another self-
regulatory organization if not required under FINRA rules); and (2) has 
written policies and procedures to ensure that riskless principal 
transactions for which the member is relying on this exception comply 
with applicable FINRA rules. At a minimum these policies and procedures 
must require that the customer order was received prior to the 
offsetting principal transaction, and that the offsetting principal 
transaction is at the same price as the customer order exclusive of any 
markup or markdown, commission equivalent or other fee, and is 
allocated to a riskless principal or customer account in a consistent 
manner and within 60 seconds of execution. Members must have 
supervisory systems in place that produce records that enable the 
member and FINRA to reconstruct accurately, readily, and in a time-
sequenced manner all facilitated orders for which the member relies on 
this exception. The Exchange proposes that the obligations that apply 
to FINRA members with respect to FINRA under this rule would apply to 
ETP Holders with respect to the Exchange for purposes of qualifying for 
the tiers. The Exchange notes that its affiliates, New York Stock 
Exchange LLC (``NYSE'') and NYSE MKT LLC (``NYSE MKT''), as well as The 
NASDAQ Stock Market (``NASDAQ'') include such riskless principal orders 
in their definitions of Retail Order for their retail liquidity 
programs.\7\
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    \7\ See NYSE Rule 107C(a)(3), NYSE MKT Rule 107C(a)(3)--
Equities, and NASDAQ Rule 4780(a)(3)[sic].
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    Second, the Exchange proposes to change the required attestation so 
that the ETP Holder must attest that substantially all, rather than 
all, orders submitted to the Exchange via such Retail Order Ports are 
Retail Orders. This is the same standard that NYSE, NYSE MKT, and 
NASDAQ apply with respect to their retail liquidity programs.\8\ The 
Exchange believes that the categorical nature of the current 
attestation language may be preventing certain ETP Holders from 
qualifying for the Retail Order Tier and Retail Cross-Asset Tier. In 
particular, the Exchange understands that some ETP Holders represent 
both ``Retail Orders,'' as proposed to be defined in the Fee Schedule, 
as well as other agency flow that may not meet the strict definition of 
``Retail Order.'' The Exchange further understands that limitations in 
order management systems and routing networks used by such ETP Holders 
may make it infeasible for them to isolate 100% of Retail Orders from 
other agency, non-Retail Order flow that they would direct to the 
Exchange. Unable to make the categorical attestation required by the 
Exchange, some ETP Holders may not attempt to qualify for the Retail 
Order Tier and Retail Cross-Asset Tier, notwithstanding that they have 
substantial order flow from Retail Orders.
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    \8\ See NYSE Rule 107C(b)(2)(C), NYSE MKT Rule 107C(b)(2)(C)--
Equities, and NASDAQ Rule 4780(b)(2)(C).
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    For example, some ETP Holders have explained that their order flow 
is routed in aggregate for retail execution purposes and that a de 
minimis amount of such flow may have been generated electronically, 
thus not meeting the strict Retail Order definition. These ETP Holders 
have chosen not to direct any of their shares of retail order flow to 
the Exchange because the cost of complying with the current ``any 
order'' standard, such as implementing any necessary systems changes, 
is too high. These ETP Holders have indicated their willingness to 
comply with the proposed ``substantially all'' standard, as well as 
their ability to implement the proposed standard on their systems with 
confidence.
    Accordingly, the Exchange is proposing a de minimis relaxation of 
the attestation requirement in order to accommodate these system 
limitations. Specifically, an ETP Holder would be permitted to send de 
minimis quantities of agency orders to the Exchange as Retail Orders 
that cannot be explicitly attested to under the existing definition in 
the Fee Schedule. The Exchange will issue a Trader Notice to make clear 
that the ``substantially all'' language is meant to permit the presence 
of only isolated and de minimis quantities of agency orders that do not 
qualify as Retail Orders and cannot be segregated from Retail Orders 
due to systems limitations. In this regard, an ETP Holder would need to 
retain, in its books and records, adequate substantiation that 
substantially all orders sent to the Exchange as Retail Orders met the 
strict definition and that those orders not meeting the strict 
definition are agency orders that cannot be segregated from Retail 
Orders due to system limitations, and are de minimis in terms of the 
overall number of Retail Orders sent to the Exchange.
    The Exchange notes that it may disqualify an ETP Holder from 
qualifying for the Retail Order Tier or Retail Cross-Asset Tier if the 
Exchange determines, in its sole discretion, that the ETP Holder has 
failed to abide by applicable requirements. Tiered or Basic Rates would 
apply based on the ETP Holder's qualifying levels for an ETP Holder 
that is disqualified from qualifying for the Retail Order Tier or 
Retail Cross-Asset Tier.
    The Exchange also proposes a technical correction to remove a 
duplicative definition of Retail Order. Consistent with its conventions 
in the rest of the Fee Schedule, the term needs to be defined only 
once. The Exchange also proposes to correct a typographical error in 
the Retail Order Cross-Asset Tier.
    The Exchange is not proposing to change the level of credits 
available under the Retail Order Tier or the Retail Cross-Asset Tier. 
The proposed change is not otherwise intended to address any other 
issues, and the Exchange is not aware of any problems that ETP Holders 
would have in complying with the proposed change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act,\10\ in particular, because it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among its members, issuers and other persons using its 
facilities and does not unfairly discriminate between customers, 
issuers, brokers or dealers. The Exchange also believes that the 
proposed rule change furthers the objectives of Section 6(b)(5) of the 
Act,\11\ which requires, among other things, that

[[Page 61435]]

the rules of a national securities exchange be 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 regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed inclusion of riskless 
principal orders in the definition of Retail Order is reasonable 
because at least three other exchanges include such riskless principal 
orders in their definitions of Retail Order for their retail liquidity 
programs.\12\ The Exchange further believes that the proposed change is 
equitable and not unfairly discriminatory because the opportunity to 
submit riskless principal orders will be available to all ETP Holders.
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    \12\ See supra note 7.
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    The Exchange believes that the proposed change with respect to 
required attestations is designed to prevent fraudulent and 
manipulative acts and practices because, while it represents a 
relaxation of the attestation requirements, the change is a de minimis 
relaxation that still requires the ETP Holder to attest that 
``substantially all'' of its orders will qualify as Retail Orders. The 
slight relaxation will allow enough flexibility to accommodate system 
limitations while still ensuring that only a fractional amount of 
orders submitted to the Exchange would not qualify as Retail Orders.
    The Exchange believes that the proposed rule change promotes just 
and equitable principles of trade because it will ensure that similarly 
situated member organizations who have only slight differences in the 
capability of their systems will be able to equally benefit from tiers 
that provide credits for Retail Orders.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it will allow an ETP Holder that is 
concerned that its system limitations would not allow 100% 
certification that submitted orders are Retail Orders to still send 
order flow to the Exchange to qualify for the credits available under 
the Retail Order Tier and Retail Cross-Asset Tier.
    Finally, the Exchange believes that it is subject to significant 
competitive forces, as described below in the Exchange's statement 
regarding the burden on competition.
    For these reasons, the Exchange believes that the proposal is 
consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\13\ 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. Instead, the Exchange believes that the 
proposed change would increase the level of competition among ETP 
Holders and among exchanges for retail order flow such that retail 
investors would have the potential to receive better prices than they 
currently do. The Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive or credits to be inadequate. In such an environment, the 
Exchange must continually review, and consider adjusting, its fees and 
credits to remain competitive with other exchanges. For the reasons 
described above, the Exchange believes that the proposed rule change 
reflects this competitive environment.
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    \13\ 15 U.S.C. 78f(b)(8).
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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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \14\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \15\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \16\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2013-98 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-2013-98. 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

[[Page 61436]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEARCA-2013-98 and should be submitted on or before October 24, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24249 Filed 10-2-13; 8:45 am]
BILLING CODE 8011-01-P