Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving Proposed Rule Change To Remove the Exchange's Quote Mitigation Plan as Provided in Commentary .03 to Exchange Rule 6.86, 36015-36019 [2015-15341]
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Federal Register / Vol. 80, No. 120 / Tuesday, June 23, 2015 / Notices
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[FR Doc. 2015–15449 Filed 6–19–15; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75191; File No. SR–
NYSEArca–2014–117]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Disapproving
Proposed Rule Change To Remove the
Exchange’s Quote Mitigation Plan as
Provided in Commentary .03 to
Exchange Rule 6.86
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June 17, 2015.
I. Introduction
On October 2, 2014, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to remove the Exchange’s quote
mitigation plan as provided by
Commentary .03 to NYSE Arca Rule
6.86. The proposed rule change was
published for comment in the Federal
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Register on October 21, 2014.3 On
December 2, 2014, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to approve or disapprove the
proposed rule change.5 On January 8,
2015, the Exchange submitted a
comment letter in further support of its
proposal.6 On January 16, 2015, the
Commission issued an Order Instituting
Proceedings to Determine Whether to
Approve or Disapprove the proposed
rule change.7 On February 27, 2015 and
June 4, 2015, the Exchange submitted
comment letters in further support of its
proposal.8 No additional comment
letters were submitted. This order
disapproves the proposed rule change.
II. Description of the Proposal
In 2007, the Exchange adopted a
quote mitigation plan in connection
with the Options Penny Pilot Program
(‘‘Penny Pilot’’).9 According to the
3 See Securities Exchange Act Release No. 73362
(October 15, 2014), 79 FR 62983 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 73720,
79 FR 72747 (December 8, 2014). The Commission
designated January 19, 2015, as the date by which
it should approve, disapprove, or institute
proceedings to determine whether to approve or
disapprove the proposed rule change.
6 See Letter from Elizabeth King, Secretary &
General Counsel, Exchange, to Kevin O’Neill,
Deputy Secretary, Commission, dated January 8,
2015 (‘‘NYSE Arca Letter 1’’) available at https://
www.sec.gov/comments/sr-nysearca-2014-117/
nysearca2014117.shtml.
7 See Securities and Exchange Release No. 74088,
80 FR 3687 (January 23, 2015) (Order Instituting
Proceedings to Determine Whether to Approve or
Disapprove a Proposal Rule Change to Remove the
Exchange’s Quote Mitigation Plan as Provided by
Commentary .03 to Exchange Rule 6.86) (‘‘OIP’’).
8 See Letters from Elizabeth King, Secretary &
General Counsel, Exchange, to Kevin O’Neill,
Deputy Secretary, Commission, dated February 27,
2015 (‘‘NYSE Arca Letter 2’’) available athttps://
www.sec.gov/comments/sr-nysearca-2014-117/
nysearca2014117-2.pdf and to Brent Fields,
Secretary, Commission, dated June 4, 2015 (‘‘NYSE
Arca Letter 3’’) available at https://www.sec.gov/
comments/sr-nysearca-2014-117/nysearca20141173.pdf.
9 See Securities and Exchange Release No. 55156
(January 23, 2007), 72 FR 4759 (February 1, 2007)
(Order Granting Approval of SR–NYSEArca–2006–
73) (‘‘Quote Mitigation Approval Order’’). In this
Order, the Commission approved a proposed rule
change to amend the NYSE Arca rules to (i) permit
thirteen options classes to be quoted in pennies on
a pilot basis and (ii) adopt a quote mitigation plan.
In approving the Penny Pilot, the Commission
analyzed data provided by the options exchanges to
assess the potential impact the Penny Pilot would
have on, among other things, the increase in
quotation message traffic. According to the
Exchange, the quote mitigation plan was designed
to mitigate the volume of data processed and
disseminated by OPRA. See Securities and
Exchange Release No. 55590 (October 12, 2006), 72
FR 4759 (October 18, 2006) (Notice of SR–
NYSEArca-2006–73). In approving the Exchange’s
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36015
Exchange, the quote mitigation plan was
designed to reduce the number of
quotation messages sent by the
Exchange to the Options Price Reporting
Authority (‘‘OPRA’’) by only submitting
quote messages for ‘‘active’’ series.10
The Exchange defines active series
under the quote mitigation plan in
Commentary .03 to Exchange Rule 6.86
as: (i) Series that have traded on any
options exchange in the previous 14
calendar days; or (ii) series that are
solely listed on the Exchange; or (iii)
series that have been trading ten days or
less; or (iv) series for which the
Exchange has received an order.11 In
addition, under the Exchange’s quote
mitigation plan, the Exchange may
define a series as active on an intraday
basis if: (i) The series trades at any
options exchange; (ii) the Exchange
receives an order in the series; or (iii)
the Exchange receives a request for
quote from a customer in that series.12
The Exchange proposes to remove its
quote mitigation plan from its rules by
deleting Commentary .03 to Exchange
Rule 6.86.13 The Exchange states that its
quote mitigation plan is no longer
necessary primarily for three reasons.
First, the Exchange states that its
incorporation of select provisions of the
Options Listing Procedures Plan
(‘‘OLPP’’) 14 in Exchange Rule 6.4A
serves to reduce the potential for excess
quoting because the OLPP limits the
number of options series eligible to be
listed, which, according to the
Exchange, reduces the number of
options series a market maker would be
obligated to quote.15 Second, the
quote mitigation plan the Commission stated that
‘‘because the Commission expects that the Penny
Pilot Program will increase quote message traffic,
the Commission is also approving the Exchange’s
proposal to reduce the number of quotations it
disseminates.’’ See Quote Mitigation Approval
Order at 4760.
10 See Notice, supra note 3, at 62983.
11 See Exchange Rule 6.86, Commentary .03, and
Notice, supra note 3, at 62983.
12 See id.
13 See Notice, supra note 3, at 62984. In addition,
the Exchange proposes to amend paragraphs (b)(1)
and (b)(2) of Exchange Rule 6.86 to delete
references to the ‘‘Quote Mitigation Plan,’’ which
refer to the quote mitigation plan set forth in
Commentary .03 to Exchange Rule 6.86. See id.
14 See Amendment to Plan for the Purpose of
Developing and Implementing Procedures Designed
to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to
Section 11A(a)(3)(B) of the Securities Exchange Act
available at https://www.theocc.com/clearing/
industry-services/olpp.jsp (providing for the most
current OLPP). See also Securities and Exchange
Release No. 44521 (July 6, 2001), 66 FR 36809 (July
13, 2001) (order approving the OLPP).
15 See Notice, supra note 3, at 62983. See also
Securities and Exchange Release No. 61977 (April
23, 2010), 75 FR 22884 (April 30, 2010) (SR–
NYSEArca–2010–30) (in which the Exchange
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Exchange states its view that Exchange
Rule 6.37B Commentary .01, which
removes certain options series from
market makers’ continuous quoting
obligations, reduces the number of
quote messages that the Exchange sends
to OPRA.16 The Exchange states that
reliance on the OLPP, via Exchange
Rule 6.4A, and the refined market maker
quoting obligations, pursuant to
Commentary .01 to Exchange Rule
6.37B, is sufficient as a quote mitigation
plan.17 Third, the Exchange states that
both the Exchange’s systems capacity
and OPRA’s systems capacity are more
than sufficient to accommodate any
additional increase in quote message
traffic that might be sent to OPRA as a
result of the deletion of the quote
mitigation plan.18 The Exchange
represents that it continually assesses its
capacity needs and ensures that the
capacity that it requests from OPRA is
sufficient and compliant with the
requirements established in the OPRA
Capacity Guidelines.19
The Exchange further represents that
it has in place certain measures that act
as additional safeguards against
excessive quoting.20 According to the
Exchange, these safeguards include
monitoring and alerting market makers
disseminating an unusual number of
quotes, a business plan designed to
ensure that new listings are actively
traded,21 and a ratio threshold fee
designed to encourage the efficient use
of orders.22
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III. Summary of Comment Letters
NYSE Arca submitted three comment
letters in which it: (1) Supports its
position that Rule 6.4A of the OLPP
adopted select provisions of the OLPP into
Exchange Rule 6.4A).
16 Commentary .01 to Exchange Rule 6.37B
provides that Exchange market makers continuous
quoting obligations do not apply ‘‘to adjusted
option series, and series with a time to expiration
of nine months or greater, for options on equities
and Exchange Traded Fund Shares, and series with
a time to expiration of twelve months or greater for
Index options.’’ See also Notice, supra note 3, at
62984.
17 See Notice, supra note 3, at 62984. The
Exchange states its view that limiting the number
of options series listed on the Exchange is
preferable to suppressing the quotes of inactive
options series, as required under current Exchange
Rule 6.86, because all quotes sent by Exchange
market makers are actionable even if not displayed.
See id.
18 See Notice, supra note 3, at 62984.
19 See id.
20 See id.
21 See id. (citing to NYSE Arca Options Listing
Policy Statement, available at, https://
www.nyse.com/pdfs/
TraderNoticeArcaLOPSChanges092713.pdf).
22 See id. (citing to NYSE Arca Options Fee
Schedule, available at, https://www.theice.com/
publicdocs/nyse/markets/arca-options/NYSE_
Arca_Options_Fee_Schedule.pdf).
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together with the current exceptions
from a market maker’s continuous
quoting obligations for certain options
series would be sufficient as a quote
mitigation plan; 23 (2) provides
additional information to support its
argument that relying on the OLPP
requirements in Rule 6.4A would suffice
as a quote mitigation plan; and (3)
supports its argument that the Exchange
and OPRA have sufficient capacity to
accommodate an increase in quote
message traffic resulting from
elimination of the Exchange’s quote
mitigation plan.24
The Exchange states that at least one
other options exchange primarily relies
on the OLPP requirements in Rule 6.4A
as a quote mitigation plan.25 The
Exchange explains that the OLPP Rule
6.4A puts a restriction on the range of
permissible strike prices based on the
price of the underlying security.26 The
Exchange states its view that reliance on
the OLPP requirements is consistent
with the Act and would sufficiently
limit the number of options series listed
on the Exchange.27
Next, the Exchange argues that
eliminating its quote mitigation plan is
consistent with the Act because refined
market maker quoting obligations
currently in place on the Exchange,
which exempt certain options series
from market makers’ continuous quoting
obligations, reduce the universe of
series in which a market maker is
required to quote.28 The Exchange notes
that these refined obligations were
adopted following implementation of its
quote mitigation plan,29 and believes
that as a result, market makers do not
23 See NYSE Arca Letter 1, supra note 6, at 1. See
also NYSE Arca Letter 2, supra note 8, at 1–2. The
Exchange also supplies an actual illustration of how
the Rule results in quote mitigation. Id. at 2.
24 See NYSE Arca Letter 1, supra note 6.
25 See NYSE Arca Letter 1, supra note 6, at 1–2.
The comment letter further notes that the Miami
International Securities Exchange, LLC (‘‘MIAX’’)
stated in a response to comments on a proposed
rule change relating to increasing the number of
options series associated with Short Term Options
Series that it was not using a quote mitigation
strategy, but instead employs a listing policy that
mitigates the number of classes and series listed on
its exchange by not listing illiquid options classes
and products that are not already trading on another
market. (See NYSE Arca Letter 1, supra note 6, at
2 (citing Letter to Elizabeth Murphy, Secretary, U.S.
Securities Exchange Commission, from Brian
O’Neill, VP and Senior Counsel, MIAX, dated June
2, 2013, available at https://www.sec.gov/comments/
sr-miax-2013-23/miax201323-2.pdf.)). NYSE Arca
notes that it has a similar policy designed to help
ensure that the Exchange does not list options that
generate quote volume without providing the
benefit of trading volume. See NYSEArca Letter 1,
supra note 6, at 2 and 4.
26 See NYSE Arca Letter 2, supra note 8, at 1–2.
27 See NYSE Arca Letter 1, supra note 6, at 1.
28 See NYSE Arca Letter 1, supra note 6, at 1.
29 See id.
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need to quote in approximately 5,000
options series, thereby decreasing quote
message traffic.30
The Exchange argues that it has
sufficient capacity to handle quoting in
all options series, including quotes in
those series that are inactive and not
currently disseminated pursuant to the
Exchange’s quote mitigation plan.31 In
support of this statement, the Exchange
explains that although quotes in
inactive series do not generate quote
traffic from NYSE Arca, the Exchange
must nonetheless receive and process
quotes in such series, and perform
additional processing to suppress quotes
in these series to comply with their
quote mitigation plan.32 The Exchange
states that because it is already
processing the quotes it suppresses, it is
‘‘confident that its own systems capacity
is more than sufficient to accommodate
any increase in the traffic that might be
sent to OPRA.’’ 33 The Exchange notes
that in its requests for capacity
submitted to the Independent Systems
Capacity Advisory (‘‘ISCA’’) (which
OPRA uses to ensure overall aggregate
capacity), NYSE Arca assumes that (1)
options series that are inactive at that
time could become active in the future,
thereby increasing overall message
traffic sent to OPRA, and (2) that all
options series that it lists, including
those without continuous quoting
obligations for market makers, will
generate message traffic to OPRA.34 The
Exchange further states its belief that
OPRA also would be able to
accommodate any increase in quote
message traffic resulting from NYSE
Arca no longer suppressing quotes in
inactive series.35
The Exchange further argues that
eliminating its quote mitigation plan is
consistent with the Act because the
Exchange actively monitors market
maker quoting activity and alerts market
makers to heightened levels of quoting
activity, which could result from
systems issues or an incorrectly set
parameter that generates erroneous
quotes.36 The Exchange notes that NYSE
Arca’s requests for capacity to the ISCA
are adjusted to account for ‘‘some level’’
of erroneous quoting.37
The Exchange also states that the
landscape regarding quote message
traffic and capacity has changed since
the adoption of the Penny Pilot.38 NYSE
30 Id.
31 See
NYSE Arca Letter 1, supra note 6, at 2.
NYSE Arca Letter 1, supra note 6, at 2.
33 See NYSE Arca Letter 1, supra note 6, at 2–3.
34 Id.
35 See NYSE Arca Letter 1, supra note 6, at 2.
36 See NYSE Arca Letter 1, supra note 6, at 3–4.
37 Id. at 4.
38 See NYSE Arca Letter 3, supra note 8, at 2.
32 See
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Arca represents that in January 2007,
15% of quotes received by the Exchange
were not sent to OPRA, compared to
5.8% as of April 2015.39 The Exchange
also states that at the time the Penny
Pilot was adopted, OPRA’s total
capacity was set to 359,000 messages
per seconds (‘‘mps’’), and that by July
2015, OPRA’s peak capacity is
anticipated to be 42,100,000 mps.40 In
addition, the Exchange states, based on
peak message traffic figures on the
Exchange for one day in May 2015,41
that if the quotes the Exchange
suppressed on that day had been sent to
OPRA, industry quotes published by
OPRA would have increased by no more
than 1%, and that this would use less
than .05% of total OPRA capacity.42
IV. Discussion
Under Section 19(b)(2)(C) of the Act,
the Commission shall approve a
proposed rule change of a selfregulatory organization if the
Commission finds that such proposed
rule change is consistent with the
requirements of the Act, and the rules
and regulations thereunder that are
applicable to such organization.43 The
Commission shall disapprove a
proposed rule change if it does not make
such a finding.44 Rule 700(b)(3) of the
Commission’s Rules of Practice states
that the ‘‘burden to demonstrate that a
proposed rule change is consistent with
the [Act] . . . is on the self-regulatory
organization that proposed the rule
change’’ and that a ‘‘mere assertion that
the proposed rule change is consistent
with those requirements . . . is not
sufficient.’’ 45
After careful consideration, the
Commission cannot find that the
39 Id.
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40 Id.
41 Id. The Exchange represents that as of Friday
May 29, 2015, peak message traffic for the Exchange
was 1,707,820 mps, measured over a 100
millisecond period. Based on this, the Exchange
believes that if the highest percentage of quotes
suppressed by the Exchange during this period
(8.3%) had been published at the same rate as
quotes the Exchange had not suppressed during this
time, the mps rate would instead be 1,849,569. Id.
42 Id.
43 15 U.S.C. 78s(b)(2)(C)(i).
44 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR
201.700(b)(3) and note 45 infra, and accompanying
text.
45 17 CFR 201.700(b)(3). The description of a
proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently
detailed and specific to support an affirmative
Commission finding. See id. Any failure of a selfregulatory organization to provide the information
solicited by Form 19b–4 may result in the
Commission not having a sufficient basis to make
an affirmative finding that a proposed rule change
is consistent with the Act and the rules and
regulations issued thereunder that are applicable to
the self-regulatory organization. Id.
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proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.46 In particular, the
Commission cannot find that the
proposed rule change is consistent with
Section 6(b)(5) of the Act,47 which
requires that the rules of a national
securities exchange be designed, among
other things, to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and to protect investors and the
public interest.
In conjunction with the adoption of
the Penny Pilot in 2007 that permitted
the options exchanges to quote certain
options series in one and five cent
increments, and in response to a letter
sent by the then Chairman of the
Commission,48 the options exchanges,
including NYSE Arca, adopted quote
mitigation plans.49 The Commission
emphasized the importance of options
exchanges’ quote mitigation strategies in
connection with the Penny Pilot in its
orders approving an expansion of the
Penny Pilot in 2007. In those orders, the
Commission noted that options
exchanges participating in the Penny
Pilot would continue to use quote
mitigation strategies.50 Likewise, when
the Commission approved NYSE Arca’s
proposal to again expand the Penny
Pilot in 2009, the Commission reiterated
that the Exchange would retain and
46 In disapproving the proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
47 15 U.S.C. 78f(b)(5).
48 In a letter sent to the options exchanges on June
7, 2006, encouraging the implementation of a penny
pilot program, then Chairman Cox noted that
quoting options in pennies would increase quote
message traffic, which the systems of exchanges,
market data vendors, and securities firms must be
able to manage, and for that reason, quoting options
in pennies would begin in a small number of
options. To assist in managing the anticipated
increase in quote traffic, Chairman Cox asked that
options exchanges include a workable quote
mitigation strategy in any proposal to allow quoting
in pennies. See Commission Press Release 2006–91,
‘‘SEC Chairman Cox Urges Options Exchanges to
Start Limited Penny Quoting,’’ June 7, 2006.
49 See Quote Mitigation Approval Order, supra
note 9.
50 See Securities Exchange Act Release No. 56568,
72 FR 56422 (October 3, 2007) (SR–NYSEArca–
2007–88); 56567 (September 27, 2007), 72 FR 56307
(October 3, 2007) (Amex–2007–96); 56565
(September 27, 2007), 72 FR 56403 (October 3,
2007) (CBOE–2007–98); 56564 (September 27,
2007), 72 FR 56412 (October 3, 2007) (ISE–2007–
74); 56563 (September 27, 2007), 72 FR 56429
(October 3, 2007) (Phlx–2007–62); and 56566
(September 27, 2007), 72 FR 56400 (October 3,
2007) (BSE–2007–40).
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continue to employ its quote mitigation
strategy.51
When considering whether the
Exchange’s quote mitigation plan was
consistent with the Act, the Commission
relied upon supporting data and
analysis provided by the Exchange.52 In
its proposal to provide for a quote
mitigation plan, NYSE Arca represented
that the quote mitigation plan was
intended to reduce the number of
quotations generated by the Exchange
for all option issues traded at NYSE
Arca, not just options on issues
included in the Penny Pilot, and that
the Exchange anticipated the quote
mitigation plan would reduce quote
message traffic by 20–30%.53 In
approving NYSE Arca’s proposal in
February 2007, the Commission stated
that because it expected that the Penny
Pilot would increase quote message
traffic, the Commission also approved
the Exchange’s proposal to reduce the
number of quotations it disseminates.54
In 2007 and 2009, the Commission
approved rule changes submitted by
NYSE Arca expanding the number of
classes eligible to participate in the
Penny Pilot.55 In so approving, the
Commission reviewed data provided by
the options exchanges, including data
relating to OPRA’s capacity to process
the increase in quotes resulting from the
expansion of the Penny Pilot and the
effectiveness of its quote mitigation
plan.56 In approving each of these
expansions, the Commission noted that
51 See Securities Exchange Act Release No. 60711,
74 FR 49419 (September 28, 2009) (SR–NYSEArca–
2009–44). See also Securities Exchange Act Nos.
60373 (October 23, 2009), 74 FR 56675 (November
2, 2009) (Phlx–2009–91); 60864 (October 22, 2009),
74 FR 55876 (October 29, 2009) (CBOE–2009–076);
60865 (October 22, 2009), 74 FR 55880 ((ISE–2009–
82); 60886 (October 27, 2009), 74 56897 (November
3, 2009); 60874 (October 23, 2009), 74 FR 56682
(November 2, 2009) (NASDAQ–2009–091); and
61106 (December 3, 2009), 74 FR 65193 (December
9, 2009) (NYSEAmex–2009–74).
52 See Quote Mitigation Approval Order, supra
note 9.
53 See Quote Mitigation Approval Order, supra
note 9, at 4760.
54 See Quote Mitigation Approval Order, supra
note 9, at 4760.
55 The Commission approved thirteen classes to
participate in the Penny Pilot on January 23, 2007.
See Quote Mitigation Approval Order, supra note
9. On September 27, 2007, the Commission
approved an expansion of Penny Pilot, which raised
the number of participating classes to 63. See
Securities Exchange Act Release No. 56568, 72 FR
56422 (October 3, 2007) (SR–NYSEArca–2007–88)
(‘‘Order Approving Expansion 1’’). On September
23, 2009, the Commission approved another
expansion, raising the number of participating
classes to 363. See Securities Exchange Act Release
No. 60711, 74 FR 49419 (September 28, 2009) (SR–
NYSEArca–2009–44) (‘‘Order Approving Extension
2’’).
56 See Order Approving Expansion 1 and Order
Approving Expansion 2, supra note 55 at 56423–24
and 49422–23, respectively.
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it relied, in part, on the Exchange’s
representation that it would continue to
use its quote mitigation plan to suppress
certain quotation traffic that would
otherwise be sent to OPRA.57 The
Commission also relied on data
provided by the options exchanges to
support representations that capacity
was not a concern, and that the quote
mitigation plans in place were
successful.58 For example, NYSE Arca,
provided the Commission with data
supporting its claim that the Exchange’s
quote mitigation plan mitigated 12.1
million quotes a day or 13 percent of
NYSE Arca’s daily quote traffic sent to
OPRA.59 In another report, NYSE Arca
provided data on OPRA’s then-current
capacity, future capacity, and peaks in
message traffic sent to OPRA to support
its argument that quote traffic increases
were manageable.60
As noted above, the Exchange
believes that its quote mitigation plan is
no longer necessary because: (1) the
Exchange has incorporated select
provisions of the OLPP in Exchange
Rule 6.4A, which the Exchange believes
limits the number of series eligible to be
traded; (2) current Exchange Rule 6.37B
Commentary .01 removes certain
options series from market makers’
continuous quoting obligations, which
the Exchange believes reduces the
number of quote messages that the
Exchange sends to OPRA; and (3) both
the system capacity at the Exchange and
at OPRA are more than sufficient to
accommodate any additional increase in
quote message traffic that might be
disseminated if NYSE Arca’s quote
mitigation plan is eliminated. However,
the Exchange has not provided the
Commission with sufficient data
regarding potential changes in quote
message traffic if the Commission
approves its proposal.
For example, the Exchange does not
provide sufficient data about the
number of quote messages that its quote
mitigation plan currently suppresses
relative to capacity at OPRA.
Specifically, the Exchange provided
data from May 29, 2015 that purports to
show that if all quote messages
suppressed by the Exchange were
instead sent to OPRA, industry quotes
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57 Id.
58 Id. For example, in Order Approving Expansion
2, the Commission noted that on June 2, 2009, the
sustained message traffic peak of 852,350 messages
per second reported by OPRA is still well below the
OPRA’s current message per second capacity limit
of 2,050,000. See Order Approving Expansion 2,
supra note 55 at 49422.
59 See Understanding Economic and Capacity
Impacts of the Penny Pilot, NYSE ARCA Options,
May 31, 2007.
60 See The Options Penny Pilot, NYSE ARCA,
received August 18, 2009.
VerDate Sep<11>2014
18:39 Jun 22, 2015
Jkt 235001
published by OPRA would increase by
no more than 1%. The Exchange asserts
that this increase would use less than
.05% of total OPRA capacity across all
option exchanges. Importantly,
however, the Exchange does not provide
data that shows the excess capacity
between peak quote message traffic sent
from all options exchanges and OPRA’s
Peak Capacity for the May 29, 2015
sample. If peak quote message traffic
sent to OPRA by all the options
exchanges was at or approached OPRA’s
Peak Capacity, then potentially even a
small increase in quote message traffic
from one exchange could result in
OPRA’s capacity being exceeded.
In addition, the Exchange does not
provide data or analysis demonstrating
the potential impact the Exchange’s
proposal would have on market
participants who consume the OPRA
and/or the Exchange’s quotation
message feeds.61 Nor does the Exchange
quantify the number or percentage of
quote messages that have been and
would continue to be suppressed as a
result of the implementation of
Exchange Rule 6.4A 62 or current
Exchange Rule 6.37B Commentary .01.63
61 See Order Approving Expansion 2, supra note
55 at 49421 (The Commission noted that several
commenters expressed concerns that increased
quotation message traffic imposes costs on
exchanges and other market participants to process
and store the additional quotations and they
questioned the ability of market systems to
effectively handle the increased quote message
traffic that would likely result from the expansion
of the Penny Pilot to 363 classes. In approving the
expansion, the Commission noted that NYSE Arca
‘‘had adopted and [would] continue to utilize quote
mitigate strategies that should continue to mitigate
the expected increase in quotation traffic.’’) Id. at
49422–23.
62 In 2009, the OLPP Participants, including
NYSE Arca, represented that the new strategy they
were proposing as Amendment No. 3 to the OLPP
(which was subsequently codified as Rule 6.4A on
the Exchange’s rulebook) would be ‘‘an additional
strategy’’ to be used to address overall capacity
concerns in the industry. See Securities Exchange
Act Release No. 60365 (July 22, 2009), 74 FR 37266
(July 28, 2009) (Notice of Filing of Amendment No.
3 to the OLPP proposing uniform standards to the
range of options series exercise prices available for
trading). Although it was anticipated that the
exercise price limitation bands set forth in
Amendment No. 3 would also have the attendant
benefit of further reducing increases in quote
message traffic, nothing in the language in the
exchanges’ OLPP filings suggest that the
methodology set forth in Amendment No. 3 (to limit
the number of options series available for trading)
was intended to replace the options exchanges’
quote mitigation strategies, nor does the language in
those filings suggest that it was contemplated at the
time that the options exchanges would eliminate
their existing exchange-specific quote mitigation
strategies.
63 While NYSE Arca stated in its proposed rule
change to adopt Exchange Rule 6.37B Commentary
.01 that the burden of continuous quoting in
adjusted series is counter to efforts to mitigate the
number of quotes collected and disseminated, and
that the proposal would further the goal of quote
mitigation, this was not a basis given for the
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
The Commission notes that the
Exchange’s comment letter stated its
belief that as a result of refined quoting
obligations, market makers do not need
to quote in approximately 5,000 options
series, and that this has resulted in a
decrease in message traffic,64 however,
the Exchange did not provide data to
quantify the decrease in message traffic
for the Commission to consider. Absent
sufficient information and data of this
type, the Commission is not able to
adequately evaluate the Exchange’s
assertion that ‘‘reliance on the OLPP, via
Rule 6.4A, together with the refined
market maker obligation, pursuant to
Commentary .01 to Rule 6.37B, is
sufficient as a quote mitigation strategy
and obviates the need for Rule 6.86.’’ 65
Other information or data may also be
helpful for the Commission’s
consideration of the proposed rule
change. Without sufficient supporting
data and analysis, the Commission is
not able to adequately assess the impact
of NYSE Arca’s proposed rule change to
eliminate its quote mitigation plan and
make a determination that the proposed
rule change is consistent with the Act.
Given the limitations in the data
provided by NYSE Arca, as described
above, the Commission cannot find a
sufficient basis to conclude that the
proposal is consistent with the Act. The
Commission notes, however, that the
Penny Pilots for each of the options
exchanges are anticipated to be
extended for an additional year, until
June 30, 2016. In connection with any
future requests to extend the Penny
Pilots after that date, the Commission
intends to require each exchange to
submit detailed information to allow for
permanent approval or disapproval by
the Commission. Such proposals
should, among other things, provide
detailed data and analysis to support the
efficacy, or any proposed modification
or elimination, of any exchanges’ quote
mitigation plan.66
For the foregoing reasons, the
Commission does not believe that NYSE
proposed rule change, and the Exchange did not
provide any data on what the impact of the
proposal on quote volume would be. See Securities
Exchange Act Release No. 65210 (August 26, 2011),
76 FR 54516 (September 1, 2011) (SR–NYSEArca–
2011–59). Additionally, the Commission did not
consider the potential impact of the proposal on
quote mitigation as a basis for approving the
elimination of continuous quoting obligation in
certain series. See Securities Exchange Act Release
No. 65573 (October 14, 2011), 76 FR 65305 (October
20, 2011) (SR–NYSEArca–2011–59).
64 See NYSE Arca Letter 1, supra note 6, at 3.
65 See Notice, supra note 3, at 62984.
66 In reviewing the quote mitigation plans in this
manner, the Commission would be able to consider
the market-wide impact of any proposed
modification to or elimination of an exchange’s
quote mitigation practices.
E:\FR\FM\23JNN1.SGM
23JNN1
Federal Register / Vol. 80, No. 120 / Tuesday, June 23, 2015 / Notices
Arca has met its burden to demonstrate
that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder, including that the rules of
an exchange be designed to promote just
and equitable principles of trade, 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.67
IV. Conclusion
For the reasons set forth above, the
Commission does not believe that NYSE
Arca has met its burden to demonstrate
that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange, and in particular,
Section 6(b)(5) of the Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSEArca–
2014–117) be, and hereby is,
disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.68
Brent J. Fields,
Secretary.
[FR Doc. 2015–15341 Filed 6–22–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
31679; 812–14358]
Academy Funds Trust and Innovator
Management LLC; Notice of
Application
Applicants’ Representations
June 17, 2015.
Notice of an application under
section 6(c) of the Investment Company
Act of 1940 (the ‘‘Act’’) for an
exemption from section 15(a) of the Act
and rule 18f–2 under the Act.
ACTION:
Applicants
request an order that would permit them
to enter into and materially amend
subadvisory agreements without
shareholder approval.
APPLICANTS: Academy Funds Trust (the
‘‘Trust’’) and Innovator Management
LLC (‘‘Innovator’’ or the ‘‘Adviser’’).
FILING DATES: The application was filed
on September 12, 2014 and amended on
January 28, 2015, May 12, 2015 and
June 3, 2015.
mstockstill on DSK4VPTVN1PROD with NOTICES
SUMMARY OF APPLICATION:
67 15
68 17
U.S.C. 78f(b)(5).
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
18:39 Jun 22, 2015
Jkt 235001
An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on July 8, 2015, and should
be accompanied by proof of service on
the applicants, in the form of an
affidavit or, for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
Act, hearing requests should state the
nature of the writer’s interest, any facts
bearing upon the desirability of a
hearing on the matter, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
Applicants: 123 South Broad Street,
Suite 1630, Philadelphia, PA 19109.
FOR FURTHER INFORMATION CONTACT:
Bruce R. MacNeil, Senior Counsel, at
(202) 551–6817, or James M. Curtis,
Branch Chief, at (202) 551–6712
(Division of Investment Management,
Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
HEARING OR NOTIFICATION OF HEARING:
1. The Trust is organized as a
Delaware statutory trust and is
registered as an open-end management
investment company with multiple
series. Each series of the Trust has its
own investment objective, policies and
restrictions, and each is managed by the
Adviser and may be managed by various
subadvisers.1
1 Applicants also request relief with respect to
any existing or future series of the Trust and any
other existing or future registered open-end
management investment company or series thereof
that: (a) Is advised by Innovator or its successors,
including any entity controlling, controlled by or
under common control with Innovator or its
successors (included in the term ‘‘Adviser’’); (b)
uses the manager-of-managers structure (‘‘Manager
of Managers Structure’’) described in the
application; and (c) complies with the terms and
conditions of the application (each a ‘‘Fund’’ and
together, the ‘‘Funds’’). The only existing
investment company that currently intends to rely
on the requested order, the Trust, is named as an
applicant. For purposes of the requested order,
‘‘successor’’ is limited to an entity that results from
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
36019
2. Innovator is a Delaware limited
partnership registered as an investment
adviser under the Investment Advisers
Act of 1940 (‘‘Advisers Act’’). Innovator
provides investment management
services to the Funds under an
investment advisory agreement with the
Trust (the ‘‘Advisory Agreement’’).2 The
terms of the Advisory Agreement
comply or will comply with section
15(a) of the Act. Each Advisory
Agreement was or will be approved by
the board of trustees of the relevant
Fund (the board of trustees of any Fund,
a ‘‘Board’’), including by a majority of
the trustees who are not ‘‘interested
persons’’ (as defined in section 2(a)(19)
of the Act) of the Trust or Adviser (the
‘‘Independent Trustees’’), and by the
shareholders of the respective Fund in
the manner required by sections 15(a)
and (c) of the Act and rule 18f–2
thereunder.3
3. Under the terms of each Advisory
Agreement, Innovator is responsible for
the overall management of the Funds’
business affairs and selecting
investments in accordance with the
Funds’ investment objectives, policies
and restrictions. For the investment
management services that it provides to
the Funds, the Adviser receives the fee
specified in the Advisory Agreements.
In addition, pursuant to the Advisory
Agreement, Innovator may retain one or
more subadvisers (each, a ‘‘Subadviser’’)
for the purpose of managing all or a
portion of the assets of the Funds.
Pursuant to its authority under the
Advisory Agreements, the Adviser
intends to enter into subadvisory
agreements (the ‘‘Subadvisory
Agreements’’) with certain unaffiliated
Subadvisers to provide investment
advisory services to the Funds. Each
Subadvisory Agreement has been or will
be approved by the Board, including by
a majority of the Independent Trustees
in accordance with Sections 15(a) and
15(c) of the Act. In addition, the terms
of each Subadvisory Agreements
comply or will comply fully with the
requirements of Sections 15(a) and 15(c)
of the Act other than the shareholder
approval required under Section 15(a).
Each Subadviser to a Fund will be an
‘‘investment adviser,’’ as defined in
section 2(a)(20)(B) of the Act, and
registered as an investment adviser
a reorganization into another jurisdiction or a
change in the type of organization.
2 Innovator or another Adviser will enter into
substantially similar investment advisory
agreements to provide investment management
services to each future Fund (each included in the
term ‘‘Advisory Agreement’’). Each other Adviser
will also be registered as an investment adviser
under the Advisers Act.
3 Applicants are not seeking any exemptions with
respect to the Advisory Agreements.
E:\FR\FM\23JNN1.SGM
23JNN1
]]>Agencies
[Federal Register Volume 80, Number 120 (Tuesday, June 23, 2015)]
[Notices]
[Pages 36015-36019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-15341]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75191; File No. SR-NYSEArca-2014-117]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving Proposed Rule Change To Remove the Exchange's Quote
Mitigation Plan as Provided in Commentary .03 to Exchange Rule 6.86
June 17, 2015.
I. Introduction
On October 2, 2014, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
remove the Exchange's quote mitigation plan as provided by Commentary
.03 to NYSE Arca Rule 6.86. The proposed rule change was published for
comment in the Federal Register on October 21, 2014.\3\ On December 2,
2014, pursuant to Section 19(b)(2) of the Act,\4\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to approve or disapprove the proposed rule
change.\5\ On January 8, 2015, the Exchange submitted a comment letter
in further support of its proposal.\6\ On January 16, 2015, the
Commission issued an Order Instituting Proceedings to Determine Whether
to Approve or Disapprove the proposed rule change.\7\ On February 27,
2015 and June 4, 2015, the Exchange submitted comment letters in
further support of its proposal.\8\ No additional comment letters were
submitted. This order disapproves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 73362 (October 15,
2014), 79 FR 62983 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 73720, 79 FR 72747
(December 8, 2014). The Commission designated January 19, 2015, as
the date by which it should approve, disapprove, or institute
proceedings to determine whether to approve or disapprove the
proposed rule change.
\6\ See Letter from Elizabeth King, Secretary & General Counsel,
Exchange, to Kevin O'Neill, Deputy Secretary, Commission, dated
January 8, 2015 (``NYSE Arca Letter 1'') available at https://www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117.shtml.
\7\ See Securities and Exchange Release No. 74088, 80 FR 3687
(January 23, 2015) (Order Instituting Proceedings to Determine
Whether to Approve or Disapprove a Proposal Rule Change to Remove
the Exchange's Quote Mitigation Plan as Provided by Commentary .03
to Exchange Rule 6.86) (``OIP'').
\8\ See Letters from Elizabeth King, Secretary & General
Counsel, Exchange, to Kevin O'Neill, Deputy Secretary, Commission,
dated February 27, 2015 (``NYSE Arca Letter 2'') available athttps://
www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117-2.pdf and
to Brent Fields, Secretary, Commission, dated June 4, 2015 (``NYSE
Arca Letter 3'') available at https://www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117-3.pdf.
---------------------------------------------------------------------------
II. Description of the Proposal
In 2007, the Exchange adopted a quote mitigation plan in connection
with the Options Penny Pilot Program (``Penny Pilot'').\9\ According to
the Exchange, the quote mitigation plan was designed to reduce the
number of quotation messages sent by the Exchange to the Options Price
Reporting Authority (``OPRA'') by only submitting quote messages for
``active'' series.\10\ The Exchange defines active series under the
quote mitigation plan in Commentary .03 to Exchange Rule 6.86 as: (i)
Series that have traded on any options exchange in the previous 14
calendar days; or (ii) series that are solely listed on the Exchange;
or (iii) series that have been trading ten days or less; or (iv) series
for which the Exchange has received an order.\11\ In addition, under
the Exchange's quote mitigation plan, the Exchange may define a series
as active on an intraday basis if: (i) The series trades at any options
exchange; (ii) the Exchange receives an order in the series; or (iii)
the Exchange receives a request for quote from a customer in that
series.\12\
---------------------------------------------------------------------------
\9\ See Securities and Exchange Release No. 55156 (January 23,
2007), 72 FR 4759 (February 1, 2007) (Order Granting Approval of SR-
NYSEArca-2006-73) (``Quote Mitigation Approval Order''). In this
Order, the Commission approved a proposed rule change to amend the
NYSE Arca rules to (i) permit thirteen options classes to be quoted
in pennies on a pilot basis and (ii) adopt a quote mitigation plan.
In approving the Penny Pilot, the Commission analyzed data provided
by the options exchanges to assess the potential impact the Penny
Pilot would have on, among other things, the increase in quotation
message traffic. According to the Exchange, the quote mitigation
plan was designed to mitigate the volume of data processed and
disseminated by OPRA. See Securities and Exchange Release No. 55590
(October 12, 2006), 72 FR 4759 (October 18, 2006) (Notice of SR-
NYSEArca-2006-73). In approving the Exchange's quote mitigation plan
the Commission stated that ``because the Commission expects that the
Penny Pilot Program will increase quote message traffic, the
Commission is also approving the Exchange's proposal to reduce the
number of quotations it disseminates.'' See Quote Mitigation
Approval Order at 4760.
\10\ See Notice, supra note 3, at 62983.
\11\ See Exchange Rule 6.86, Commentary .03, and Notice, supra
note 3, at 62983.
\12\ See id.
---------------------------------------------------------------------------
The Exchange proposes to remove its quote mitigation plan from its
rules by deleting Commentary .03 to Exchange Rule 6.86.\13\ The
Exchange states that its quote mitigation plan is no longer necessary
primarily for three reasons. First, the Exchange states that its
incorporation of select provisions of the Options Listing Procedures
Plan (``OLPP'') \14\ in Exchange Rule 6.4A serves to reduce the
potential for excess quoting because the OLPP limits the number of
options series eligible to be listed, which, according to the Exchange,
reduces the number of options series a market maker would be obligated
to quote.\15\ Second, the
[[Page 36016]]
Exchange states its view that Exchange Rule 6.37B Commentary .01, which
removes certain options series from market makers' continuous quoting
obligations, reduces the number of quote messages that the Exchange
sends to OPRA.\16\ The Exchange states that reliance on the OLPP, via
Exchange Rule 6.4A, and the refined market maker quoting obligations,
pursuant to Commentary .01 to Exchange Rule 6.37B, is sufficient as a
quote mitigation plan.\17\ Third, the Exchange states that both the
Exchange's systems capacity and OPRA's systems capacity are more than
sufficient to accommodate any additional increase in quote message
traffic that might be sent to OPRA as a result of the deletion of the
quote mitigation plan.\18\ The Exchange represents that it continually
assesses its capacity needs and ensures that the capacity that it
requests from OPRA is sufficient and compliant with the requirements
established in the OPRA Capacity Guidelines.\19\
---------------------------------------------------------------------------
\13\ See Notice, supra note 3, at 62984. In addition, the
Exchange proposes to amend paragraphs (b)(1) and (b)(2) of Exchange
Rule 6.86 to delete references to the ``Quote Mitigation Plan,''
which refer to the quote mitigation plan set forth in Commentary .03
to Exchange Rule 6.86. See id.
\14\ See Amendment to Plan for the Purpose of Developing and
Implementing Procedures Designed to Facilitate the Listing and
Trading of Standardized Options Submitted Pursuant to Section
11A(a)(3)(B) of the Securities Exchange Act available at https://www.theocc.com/clearing/industry-services/olpp.jsp (providing for
the most current OLPP). See also Securities and Exchange Release No.
44521 (July 6, 2001), 66 FR 36809 (July 13, 2001) (order approving
the OLPP).
\15\ See Notice, supra note 3, at 62983. See also Securities and
Exchange Release No. 61977 (April 23, 2010), 75 FR 22884 (April 30,
2010) (SR-NYSEArca-2010-30) (in which the Exchange adopted select
provisions of the OLPP into Exchange Rule 6.4A).
\16\ Commentary .01 to Exchange Rule 6.37B provides that
Exchange market makers continuous quoting obligations do not apply
``to adjusted option series, and series with a time to expiration of
nine months or greater, for options on equities and Exchange Traded
Fund Shares, and series with a time to expiration of twelve months
or greater for Index options.'' See also Notice, supra note 3, at
62984.
\17\ See Notice, supra note 3, at 62984. The Exchange states its
view that limiting the number of options series listed on the
Exchange is preferable to suppressing the quotes of inactive options
series, as required under current Exchange Rule 6.86, because all
quotes sent by Exchange market makers are actionable even if not
displayed. See id.
\18\ See Notice, supra note 3, at 62984.
\19\ See id.
---------------------------------------------------------------------------
The Exchange further represents that it has in place certain
measures that act as additional safeguards against excessive
quoting.\20\ According to the Exchange, these safeguards include
monitoring and alerting market makers disseminating an unusual number
of quotes, a business plan designed to ensure that new listings are
actively traded,\21\ and a ratio threshold fee designed to encourage
the efficient use of orders.\22\
---------------------------------------------------------------------------
\20\ See id.
\21\ See id. (citing to NYSE Arca Options Listing Policy
Statement, available at, https://www.nyse.com/pdfs/TraderNoticeArcaLOPSChanges092713.pdf).
\22\ See id. (citing to NYSE Arca Options Fee Schedule,
available at, https://www.theice.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf).
---------------------------------------------------------------------------
III. Summary of Comment Letters
NYSE Arca submitted three comment letters in which it: (1) Supports
its position that Rule 6.4A of the OLPP together with the current
exceptions from a market maker's continuous quoting obligations for
certain options series would be sufficient as a quote mitigation plan;
\23\ (2) provides additional information to support its argument that
relying on the OLPP requirements in Rule 6.4A would suffice as a quote
mitigation plan; and (3) supports its argument that the Exchange and
OPRA have sufficient capacity to accommodate an increase in quote
message traffic resulting from elimination of the Exchange's quote
mitigation plan.\24\
---------------------------------------------------------------------------
\23\ See NYSE Arca Letter 1, supra note 6, at 1. See also NYSE
Arca Letter 2, supra note 8, at 1-2. The Exchange also supplies an
actual illustration of how the Rule results in quote mitigation. Id.
at 2.
\24\ See NYSE Arca Letter 1, supra note 6.
---------------------------------------------------------------------------
The Exchange states that at least one other options exchange
primarily relies on the OLPP requirements in Rule 6.4A as a quote
mitigation plan.\25\ The Exchange explains that the OLPP Rule 6.4A puts
a restriction on the range of permissible strike prices based on the
price of the underlying security.\26\ The Exchange states its view that
reliance on the OLPP requirements is consistent with the Act and would
sufficiently limit the number of options series listed on the
Exchange.\27\
---------------------------------------------------------------------------
\25\ See NYSE Arca Letter 1, supra note 6, at 1-2. The comment
letter further notes that the Miami International Securities
Exchange, LLC (``MIAX'') stated in a response to comments on a
proposed rule change relating to increasing the number of options
series associated with Short Term Options Series that it was not
using a quote mitigation strategy, but instead employs a listing
policy that mitigates the number of classes and series listed on its
exchange by not listing illiquid options classes and products that
are not already trading on another market. (See NYSE Arca Letter 1,
supra note 6, at 2 (citing Letter to Elizabeth Murphy, Secretary,
U.S. Securities Exchange Commission, from Brian O'Neill, VP and
Senior Counsel, MIAX, dated June 2, 2013, available at https://www.sec.gov/comments/sr-miax-2013-23/miax201323-2.pdf.)). NYSE Arca
notes that it has a similar policy designed to help ensure that the
Exchange does not list options that generate quote volume without
providing the benefit of trading volume. See NYSEArca Letter 1,
supra note 6, at 2 and 4.
\26\ See NYSE Arca Letter 2, supra note 8, at 1-2.
\27\ See NYSE Arca Letter 1, supra note 6, at 1.
---------------------------------------------------------------------------
Next, the Exchange argues that eliminating its quote mitigation
plan is consistent with the Act because refined market maker quoting
obligations currently in place on the Exchange, which exempt certain
options series from market makers' continuous quoting obligations,
reduce the universe of series in which a market maker is required to
quote.\28\ The Exchange notes that these refined obligations were
adopted following implementation of its quote mitigation plan,\29\ and
believes that as a result, market makers do not need to quote in
approximately 5,000 options series, thereby decreasing quote message
traffic.\30\
---------------------------------------------------------------------------
\28\ See NYSE Arca Letter 1, supra note 6, at 1.
\29\ See id.
\30\ Id.
---------------------------------------------------------------------------
The Exchange argues that it has sufficient capacity to handle
quoting in all options series, including quotes in those series that
are inactive and not currently disseminated pursuant to the Exchange's
quote mitigation plan.\31\ In support of this statement, the Exchange
explains that although quotes in inactive series do not generate quote
traffic from NYSE Arca, the Exchange must nonetheless receive and
process quotes in such series, and perform additional processing to
suppress quotes in these series to comply with their quote mitigation
plan.\32\ The Exchange states that because it is already processing the
quotes it suppresses, it is ``confident that its own systems capacity
is more than sufficient to accommodate any increase in the traffic that
might be sent to OPRA.'' \33\ The Exchange notes that in its requests
for capacity submitted to the Independent Systems Capacity Advisory
(``ISCA'') (which OPRA uses to ensure overall aggregate capacity), NYSE
Arca assumes that (1) options series that are inactive at that time
could become active in the future, thereby increasing overall message
traffic sent to OPRA, and (2) that all options series that it lists,
including those without continuous quoting obligations for market
makers, will generate message traffic to OPRA.\34\ The Exchange further
states its belief that OPRA also would be able to accommodate any
increase in quote message traffic resulting from NYSE Arca no longer
suppressing quotes in inactive series.\35\
---------------------------------------------------------------------------
\31\ See NYSE Arca Letter 1, supra note 6, at 2.
\32\ See NYSE Arca Letter 1, supra note 6, at 2.
\33\ See NYSE Arca Letter 1, supra note 6, at 2-3.
\34\ Id.
\35\ See NYSE Arca Letter 1, supra note 6, at 2.
---------------------------------------------------------------------------
The Exchange further argues that eliminating its quote mitigation
plan is consistent with the Act because the Exchange actively monitors
market maker quoting activity and alerts market makers to heightened
levels of quoting activity, which could result from systems issues or
an incorrectly set parameter that generates erroneous quotes.\36\ The
Exchange notes that NYSE Arca's requests for capacity to the ISCA are
adjusted to account for ``some level'' of erroneous quoting.\37\
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\36\ See NYSE Arca Letter 1, supra note 6, at 3-4.
\37\ Id. at 4.
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The Exchange also states that the landscape regarding quote message
traffic and capacity has changed since the adoption of the Penny
Pilot.\38\ NYSE
[[Page 36017]]
Arca represents that in January 2007, 15% of quotes received by the
Exchange were not sent to OPRA, compared to 5.8% as of April 2015.\39\
The Exchange also states that at the time the Penny Pilot was adopted,
OPRA's total capacity was set to 359,000 messages per seconds
(``mps''), and that by July 2015, OPRA's peak capacity is anticipated
to be 42,100,000 mps.\40\ In addition, the Exchange states, based on
peak message traffic figures on the Exchange for one day in May
2015,\41\ that if the quotes the Exchange suppressed on that day had
been sent to OPRA, industry quotes published by OPRA would have
increased by no more than 1%, and that this would use less than .05% of
total OPRA capacity.\42\
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\38\ See NYSE Arca Letter 3, supra note 8, at 2.
\39\ Id.
\40\ Id.
\41\ Id. The Exchange represents that as of Friday May 29, 2015,
peak message traffic for the Exchange was 1,707,820 mps, measured
over a 100 millisecond period. Based on this, the Exchange believes
that if the highest percentage of quotes suppressed by the Exchange
during this period (8.3%) had been published at the same rate as
quotes the Exchange had not suppressed during this time, the mps
rate would instead be 1,849,569. Id.
\42\ Id.
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IV. Discussion
Under Section 19(b)(2)(C) of the Act, the Commission shall approve
a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder that
are applicable to such organization.\43\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\44\ Rule 700(b)(3) of the Commission's Rules of Practice
states that the ``burden to demonstrate that a proposed rule change is
consistent with the [Act] . . . is on the self-regulatory organization
that proposed the rule change'' and that a ``mere assertion that the
proposed rule change is consistent with those requirements . . . is not
sufficient.'' \45\
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\43\ 15 U.S.C. 78s(b)(2)(C)(i).
\44\ 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR 201.700(b)(3)
and note 45 infra, and accompanying text.
\45\ 17 CFR 201.700(b)(3). The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis
of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. See id. Any failure of a self-regulatory
organization to provide the information solicited by Form 19b-4 may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with
the Act and the rules and regulations issued thereunder that are
applicable to the self-regulatory organization. Id.
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After careful consideration, the Commission cannot find that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\46\ In particular, the Commission cannot find that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\47\ which requires that the rules of a national securities
exchange be designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and to protect
investors and the public interest.
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\46\ In disapproving the proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\47\ 15 U.S.C. 78f(b)(5).
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In conjunction with the adoption of the Penny Pilot in 2007 that
permitted the options exchanges to quote certain options series in one
and five cent increments, and in response to a letter sent by the then
Chairman of the Commission,\48\ the options exchanges, including NYSE
Arca, adopted quote mitigation plans.\49\ The Commission emphasized the
importance of options exchanges' quote mitigation strategies in
connection with the Penny Pilot in its orders approving an expansion of
the Penny Pilot in 2007. In those orders, the Commission noted that
options exchanges participating in the Penny Pilot would continue to
use quote mitigation strategies.\50\ Likewise, when the Commission
approved NYSE Arca's proposal to again expand the Penny Pilot in 2009,
the Commission reiterated that the Exchange would retain and continue
to employ its quote mitigation strategy.\51\
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\48\ In a letter sent to the options exchanges on June 7, 2006,
encouraging the implementation of a penny pilot program, then
Chairman Cox noted that quoting options in pennies would increase
quote message traffic, which the systems of exchanges, market data
vendors, and securities firms must be able to manage, and for that
reason, quoting options in pennies would begin in a small number of
options. To assist in managing the anticipated increase in quote
traffic, Chairman Cox asked that options exchanges include a
workable quote mitigation strategy in any proposal to allow quoting
in pennies. See Commission Press Release 2006-91, ``SEC Chairman Cox
Urges Options Exchanges to Start Limited Penny Quoting,'' June 7,
2006.
\49\ See Quote Mitigation Approval Order, supra note 9.
\50\ See Securities Exchange Act Release No. 56568, 72 FR 56422
(October 3, 2007) (SR-NYSEArca-2007-88); 56567 (September 27, 2007),
72 FR 56307 (October 3, 2007) (Amex-2007-96); 56565 (September 27,
2007), 72 FR 56403 (October 3, 2007) (CBOE-2007-98); 56564
(September 27, 2007), 72 FR 56412 (October 3, 2007) (ISE-2007-74);
56563 (September 27, 2007), 72 FR 56429 (October 3, 2007) (Phlx-
2007-62); and 56566 (September 27, 2007), 72 FR 56400 (October 3,
2007) (BSE-2007-40).
\51\ See Securities Exchange Act Release No. 60711, 74 FR 49419
(September 28, 2009) (SR-NYSEArca-2009-44). See also Securities
Exchange Act Nos. 60373 (October 23, 2009), 74 FR 56675 (November 2,
2009) (Phlx-2009-91); 60864 (October 22, 2009), 74 FR 55876 (October
29, 2009) (CBOE-2009-076); 60865 (October 22, 2009), 74 FR 55880
((ISE-2009-82); 60886 (October 27, 2009), 74 56897 (November 3,
2009); 60874 (October 23, 2009), 74 FR 56682 (November 2, 2009)
(NASDAQ-2009-091); and 61106 (December 3, 2009), 74 FR 65193
(December 9, 2009) (NYSEAmex-2009-74).
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When considering whether the Exchange's quote mitigation plan was
consistent with the Act, the Commission relied upon supporting data and
analysis provided by the Exchange.\52\ In its proposal to provide for a
quote mitigation plan, NYSE Arca represented that the quote mitigation
plan was intended to reduce the number of quotations generated by the
Exchange for all option issues traded at NYSE Arca, not just options on
issues included in the Penny Pilot, and that the Exchange anticipated
the quote mitigation plan would reduce quote message traffic by 20-
30%.\53\ In approving NYSE Arca's proposal in February 2007, the
Commission stated that because it expected that the Penny Pilot would
increase quote message traffic, the Commission also approved the
Exchange's proposal to reduce the number of quotations it
disseminates.\54\
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\52\ See Quote Mitigation Approval Order, supra note 9.
\53\ See Quote Mitigation Approval Order, supra note 9, at 4760.
\54\ See Quote Mitigation Approval Order, supra note 9, at 4760.
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In 2007 and 2009, the Commission approved rule changes submitted by
NYSE Arca expanding the number of classes eligible to participate in
the Penny Pilot.\55\ In so approving, the Commission reviewed data
provided by the options exchanges, including data relating to OPRA's
capacity to process the increase in quotes resulting from the expansion
of the Penny Pilot and the effectiveness of its quote mitigation
plan.\56\ In approving each of these expansions, the Commission noted
that
[[Page 36018]]
it relied, in part, on the Exchange's representation that it would
continue to use its quote mitigation plan to suppress certain quotation
traffic that would otherwise be sent to OPRA.\57\ The Commission also
relied on data provided by the options exchanges to support
representations that capacity was not a concern, and that the quote
mitigation plans in place were successful.\58\ For example, NYSE Arca,
provided the Commission with data supporting its claim that the
Exchange's quote mitigation plan mitigated 12.1 million quotes a day or
13 percent of NYSE Arca's daily quote traffic sent to OPRA.\59\ In
another report, NYSE Arca provided data on OPRA's then-current
capacity, future capacity, and peaks in message traffic sent to OPRA to
support its argument that quote traffic increases were manageable.\60\
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\55\ The Commission approved thirteen classes to participate in
the Penny Pilot on January 23, 2007. See Quote Mitigation Approval
Order, supra note 9. On September 27, 2007, the Commission approved
an expansion of Penny Pilot, which raised the number of
participating classes to 63. See Securities Exchange Act Release No.
56568, 72 FR 56422 (October 3, 2007) (SR-NYSEArca-2007-88) (``Order
Approving Expansion 1''). On September 23, 2009, the Commission
approved another expansion, raising the number of participating
classes to 363. See Securities Exchange Act Release No. 60711, 74 FR
49419 (September 28, 2009) (SR-NYSEArca-2009-44) (``Order Approving
Extension 2'').
\56\ See Order Approving Expansion 1 and Order Approving
Expansion 2, supra note 55 at 56423-24 and 49422-23, respectively.
\57\ Id.
\58\ Id. For example, in Order Approving Expansion 2, the
Commission noted that on June 2, 2009, the sustained message traffic
peak of 852,350 messages per second reported by OPRA is still well
below the OPRA's current message per second capacity limit of
2,050,000. See Order Approving Expansion 2, supra note 55 at 49422.
\59\ See Understanding Economic and Capacity Impacts of the
Penny Pilot, NYSE ARCA Options, May 31, 2007.
\60\ See The Options Penny Pilot, NYSE ARCA, received August 18,
2009.
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As noted above, the Exchange believes that its quote mitigation
plan is no longer necessary because: (1) the Exchange has incorporated
select provisions of the OLPP in Exchange Rule 6.4A, which the Exchange
believes limits the number of series eligible to be traded; (2) current
Exchange Rule 6.37B Commentary .01 removes certain options series from
market makers' continuous quoting obligations, which the Exchange
believes reduces the number of quote messages that the Exchange sends
to OPRA; and (3) both the system capacity at the Exchange and at OPRA
are more than sufficient to accommodate any additional increase in
quote message traffic that might be disseminated if NYSE Arca's quote
mitigation plan is eliminated. However, the Exchange has not provided
the Commission with sufficient data regarding potential changes in
quote message traffic if the Commission approves its proposal.
For example, the Exchange does not provide sufficient data about
the number of quote messages that its quote mitigation plan currently
suppresses relative to capacity at OPRA. Specifically, the Exchange
provided data from May 29, 2015 that purports to show that if all quote
messages suppressed by the Exchange were instead sent to OPRA, industry
quotes published by OPRA would increase by no more than 1%. The
Exchange asserts that this increase would use less than .05% of total
OPRA capacity across all option exchanges. Importantly, however, the
Exchange does not provide data that shows the excess capacity between
peak quote message traffic sent from all options exchanges and OPRA's
Peak Capacity for the May 29, 2015 sample. If peak quote message
traffic sent to OPRA by all the options exchanges was at or approached
OPRA's Peak Capacity, then potentially even a small increase in quote
message traffic from one exchange could result in OPRA's capacity being
exceeded.
In addition, the Exchange does not provide data or analysis
demonstrating the potential impact the Exchange's proposal would have
on market participants who consume the OPRA and/or the Exchange's
quotation message feeds.\61\ Nor does the Exchange quantify the number
or percentage of quote messages that have been and would continue to be
suppressed as a result of the implementation of Exchange Rule 6.4A \62\
or current Exchange Rule 6.37B Commentary .01.\63\ The Commission notes
that the Exchange's comment letter stated its belief that as a result
of refined quoting obligations, market makers do not need to quote in
approximately 5,000 options series, and that this has resulted in a
decrease in message traffic,\64\ however, the Exchange did not provide
data to quantify the decrease in message traffic for the Commission to
consider. Absent sufficient information and data of this type, the
Commission is not able to adequately evaluate the Exchange's assertion
that ``reliance on the OLPP, via Rule 6.4A, together with the refined
market maker obligation, pursuant to Commentary .01 to Rule 6.37B, is
sufficient as a quote mitigation strategy and obviates the need for
Rule 6.86.'' \65\ Other information or data may also be helpful for the
Commission's consideration of the proposed rule change. Without
sufficient supporting data and analysis, the Commission is not able to
adequately assess the impact of NYSE Arca's proposed rule change to
eliminate its quote mitigation plan and make a determination that the
proposed rule change is consistent with the Act.
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\61\ See Order Approving Expansion 2, supra note 55 at 49421
(The Commission noted that several commenters expressed concerns
that increased quotation message traffic imposes costs on exchanges
and other market participants to process and store the additional
quotations and they questioned the ability of market systems to
effectively handle the increased quote message traffic that would
likely result from the expansion of the Penny Pilot to 363 classes.
In approving the expansion, the Commission noted that NYSE Arca
``had adopted and [would] continue to utilize quote mitigate
strategies that should continue to mitigate the expected increase in
quotation traffic.'') Id. at 49422-23.
\62\ In 2009, the OLPP Participants, including NYSE Arca,
represented that the new strategy they were proposing as Amendment
No. 3 to the OLPP (which was subsequently codified as Rule 6.4A on
the Exchange's rulebook) would be ``an additional strategy'' to be
used to address overall capacity concerns in the industry. See
Securities Exchange Act Release No. 60365 (July 22, 2009), 74 FR
37266 (July 28, 2009) (Notice of Filing of Amendment No. 3 to the
OLPP proposing uniform standards to the range of options series
exercise prices available for trading). Although it was anticipated
that the exercise price limitation bands set forth in Amendment No.
3 would also have the attendant benefit of further reducing
increases in quote message traffic, nothing in the language in the
exchanges' OLPP filings suggest that the methodology set forth in
Amendment No. 3 (to limit the number of options series available for
trading) was intended to replace the options exchanges' quote
mitigation strategies, nor does the language in those filings
suggest that it was contemplated at the time that the options
exchanges would eliminate their existing exchange-specific quote
mitigation strategies.
\63\ While NYSE Arca stated in its proposed rule change to adopt
Exchange Rule 6.37B Commentary .01 that the burden of continuous
quoting in adjusted series is counter to efforts to mitigate the
number of quotes collected and disseminated, and that the proposal
would further the goal of quote mitigation, this was not a basis
given for the proposed rule change, and the Exchange did not provide
any data on what the impact of the proposal on quote volume would
be. See Securities Exchange Act Release No. 65210 (August 26, 2011),
76 FR 54516 (September 1, 2011) (SR-NYSEArca-2011-59). Additionally,
the Commission did not consider the potential impact of the proposal
on quote mitigation as a basis for approving the elimination of
continuous quoting obligation in certain series. See Securities
Exchange Act Release No. 65573 (October 14, 2011), 76 FR 65305
(October 20, 2011) (SR-NYSEArca-2011-59).
\64\ See NYSE Arca Letter 1, supra note 6, at 3.
\65\ See Notice, supra note 3, at 62984.
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Given the limitations in the data provided by NYSE Arca, as
described above, the Commission cannot find a sufficient basis to
conclude that the proposal is consistent with the Act. The Commission
notes, however, that the Penny Pilots for each of the options exchanges
are anticipated to be extended for an additional year, until June 30,
2016. In connection with any future requests to extend the Penny Pilots
after that date, the Commission intends to require each exchange to
submit detailed information to allow for permanent approval or
disapproval by the Commission. Such proposals should, among other
things, provide detailed data and analysis to support the efficacy, or
any proposed modification or elimination, of any exchanges' quote
mitigation plan.\66\
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\66\ In reviewing the quote mitigation plans in this manner, the
Commission would be able to consider the market-wide impact of any
proposed modification to or elimination of an exchange's quote
mitigation practices.
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For the foregoing reasons, the Commission does not believe that
NYSE
[[Page 36019]]
Arca has met its burden to demonstrate that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder, including that the rules of an exchange be
designed to promote just and equitable principles of trade, 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.\67\
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\67\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
For the reasons set forth above, the Commission does not believe
that NYSE Arca has met its burden to demonstrate that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and in particular, Section 6(b)(5) of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSEArca-2014-117) be, and hereby is,
disapproved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-15341 Filed 6-22-15; 8:45 am]
BILLING CODE 8011-01-P
