Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change To Permit the Exchange To List and Trade Exchange Traded Products, 56864-56868 [2019-23051]
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Federal Register / Vol. 84, No. 205 / Wednesday, October 23, 2019 / Notices
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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSE–2019–53 and should
be submitted on or before November 13,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–23052 Filed 10–22–19; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–87329; File No. SR–NYSE–
2019–54]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change To
Permit the Exchange To List and Trade
Exchange Traded Products
October 17, 2019.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on October
3, 2019, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
24 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to permit the
Exchange to list and trade Exchange
Traded Products that have a component
NMS Stock listed on the Exchange or
that are based on, or represent an
interest in, an underlying index or
reference asset that includes an NMS
Stock listed on the Exchange. The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
1. Purpose
The Exchange proposes to permit the
Exchange to list and trade Exchange
Traded Products (‘‘ETPs’’) 4 that have a
component NMS Stock 5 listed on the
4 Rule 1.1P(k) defines ‘‘Exchange Traded
Product’’ as a security that meets the definition of
‘‘derivative securities product’’ in Rule 19b–4(e)
under the Act. ETPs include, for example, securities
listed and traded on the Exchange pursuant to the
following Exchange rules: Rule 5.2(j)(3) (Investment
Company Units); Rule 5.2(j)(5) (Equity Gold
Shares); Rule 5.2(j)(6) (Index-Linked Securities);
Rule 8.100 (Portfolio Depositary Receipts); Rule
8.200 (Trust Issued Receipts); Rule 8.201
(Commodity-Based Trust Shares); Rule 8.202–E
(Currency Trust Shares); Rule 8.203 (Commodity
Index Trust Shares); Rule 8.204 (Commodity
Futures Trust Shares); Rule 8.600 (Managed Fund
Shares); and Rule 8.700 (Managed Trust Securities).
5 NMS Stock is defined in Rule 600 of Regulation
NMS, 17 CFR 242.600(b)(48) as ‘‘any NMS security
other than an option.’’ ‘‘NMS Security’’ means any
security or class of securities for which transaction
reports are collected, processed, and made available
pursuant to an effective transaction reporting plan,
or an effective national market system plan for
reporting transactions in listed options.’’ See 17
CFR 242.600(b)(47). As the Commission has
explained, the term ‘‘NMS Security’’ refers to
‘‘exchange-listed equity securities and standardized
options, but does not include exchange-listed debt
securities, securities futures, or open-end mutual
funds, which are not currently reported pursuant to
an effective transaction reporting plan.’’ See
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Exchange or that are based on, or
represent an interest in, an underlying
index or reference asset that includes an
NMS Stock listed on the Exchange.
Background
Currently, the Exchange trades
securities, including ETPs, on its Pillar
trading platform on an unlisted trading
privileges (‘‘UTP’’) basis, subject to
Pillar Platform Rules 1P–13P.6 ETPs
traded on a UTP basis on the Exchange
are not assigned to a Designated Market
Maker (‘‘DMM’’) but are available for
Floor brokers to trade in Floor-based
crossing transactions.7
The Exchange’s rules also permit it to
list ETPs under Rules 5P and 8P.
Specifically, Rules 5P (Securities
Traded) and 8P (Trading of Certain
Exchange Traded Products) provide for
the listing of certain ETPs on the
Exchange that (1) meet the applicable
requirements set forth in those rules,
and (2) do not have any component
NMS Stock that is listed on the
Exchange or is based on, or represents
an interest in, an underlying index or
reference asset that includes an NMS
Stock listed on the Exchange. ETPs
listed under Rules 5P and 8P would be
‘‘Tape A’’ listings and would be traded
pursuant to the rules applicable to
NYSE-listed securities.
Accordingly, once an ETP is listed, it
will be assigned to a DMM pursuant to
Rule 103B and the assigned DMM will
have obligations vis-a`-vis such
securities as specified in Rule 104,
including facilitating the opening,
reopening, and closing of such
securities.8
Proposed Rule Change
The Exchange proposes to expand the
ETPs that would be eligible to list and
trade on the Exchange to include ETPs
that have a component NMS Stock or
that are based on, or represent an
interest in, an underlying index or
reference asset that includes an NMS
Question 1.1 in the ‘‘Responses to Frequently Asked
Questions Concerning Large Trader Reporting,’’
available at https://www.sec.gov/divisions/
marketreg/large-trader-faqs.htm.
6 ‘‘UTP Security’’ is defined as a security that is
listed on a national securities exchange other than
the Exchange and that trades on the Exchange
pursuant to unlisted trading privileges. See Rule
1.1.
7 See Securities Exchange Act Release No. 82945
(March 26, 2018), 83 FR 13553, 13568 (March 29,
2018) (SR–NYSE–2017–36) (approving Exchange
rules to trade securities on a UTP basis on the Pillar
trading platform).
8 See Securities Exchange Act Release No. 87056
(September 23, 2019), 84 FR 51205 (September 27,
2019) (SR–NYSE–2019–34) (order approving
amendments to Rule 104 to specify DMM
requirements for ETPs listed on the Exchange
pursuant to Rules 5P and 8P).
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Stock listed on the Exchange. To
effectuate this change, the Exchange
proposes to delete the preambles to
Rules 5P and 8P currently providing
that the Exchange will not list such
ETPs.
The proposal would permit the
Exchange to list and trade on the NYSE
Trading Floor 9 both ETPs and one or
more component NMS Stocks forming
part of the underlying ETP index or
portfolio (‘‘side-by-side trading’’ 10).
Because listed securities are assigned to
DMMs, the proposed elimination of the
current restriction could result in DMMs
being assigned ETPs that may have one
or more component NMS Stocks
forming part of the underlying ETP
index or portfolio that are also assigned
to the DMM (‘‘integrated market
making’’ 11). The Commission has
approved integrated market making and
side-by-side trading for ‘‘broad-based’’
ETPs and related options.12 The test for
whether a product is ‘‘broad-based’’,
and therefore is not readily susceptible
to manipulation, is whether the
individual components of the ETP are
sufficiently liquid and well-capitalized
and the product is not overconcentrated.13 When an ETP meets
9 The term ‘‘Trading Floor’’ is defined in Rule 6A
to mean the restricted-access physical areas
designated by the Exchange for the trading of
securities, commonly known as the ‘‘Main Room’’
and the ‘‘Buttonwood Room.’’
10 ‘‘Side-by-side trading’’ refers to the trading of
an equity security and its related derivative product
at the same physical location, though ‘‘not
necessarily by the same specialist or specialist
firm.’’ Securities Exchange Act Release No. 46213
(July 16, 2002), 67 FR 48232, 48233 (July 23, 2002)
(SR-Amex–002–21) (‘‘Release No. 46213’’) (order
approving side-by-side trading and integrated
market making of broad index-based ETFs and
related options); see also Securities Exchange Act
Release No. 45454 (February 15, 2002), 67 FR 8567,
8568 n. 7 (February 25, 2002) (SR–NYSE–2001–43)
(‘‘Release No. 45454’’) (order approving approved
person of a specialist to act as a specialist or
primary market maker with respect to an option on
a stock in which the NYSE specialist is registered
on the Exchange).
11 ‘‘Integrated market making’’ refers to the
practice of the same person or firm making markets
in an equity security and its related option. See
Release No. 45454, 67 FR at 8568 n. 7.
12 See Release No. 46213, 67 FR at 48232
(approving side-by-side trading and integrated
market making for certain Exchange Traded Funds
(‘‘ETF’’) and Trust Issued Receipts (‘‘TIR’’) and
related options); see also Securities Exchange Act
Release No. 62479 (July 9, 2010), 75 FR 41264 (July
15, 2010) (SR–Amex–2010–31) (‘‘Release No.
62479’’) (order approving side-by-side trading and
integrated market making in the QQQ ETF and
certain of its component securities where the QQQs
met the composition and concentration measures to
be classified as a broad-based ETF).
13 See Release No. 62479, id., 75 FR at 41272. The
Commission has expressed its belief ‘‘that, when
the securities underlying an ETF consist of a
number of liquid and well-capitalized stocks, the
likelihood that a market participant will be able to
manipulate the price of the ETF is reduced.’’ See
id. See generally Securities Exchange Act Release
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both criteria, and therefore can be
considered ‘‘broad-based,’’ the
Commission has explicitly permitted
integrated market making and side-byside trading in both the ETP and related
options, with no requirement for
information barriers or physical or
organizational separation.14
In making a determination of whether
an ETP is broad-based, the Commission
has relied on an exchange’s listing
standards. For instance, in permitting
integrated market making and side-byside trading for two types of ETPs and
their related options, the Commission
looked to the American Stock Exchange
LLC’s listing standards that, as
described below, are very similar to the
Exchange’s current listing standards.
Specifically, the Commission
observed that the ETPs at issue, an ETF
and a TIR, were securities based on
‘‘groups of stocks’’ whose prices were
based on the prices of their component
securities. As such, the Commission was
of the view that a market participant’s
ability to manipulate the price of ETPs
or the related options would be
‘‘limited.’’ 15 Moreover, the Commission
noted that the listing standards required
(1) each product to have a minimum of
13 securities in the underlying portfolio,
(2) that the most heavily weighted
component securities could not exceed
25% of the weight of the portfolio, and
(3) that the five most heavily weighted
component securities could not exceed
65% of the weight of the portfolio. As
the Commission concluded,
[b]y limiting the proposal to broad-based
ETFs and TIRs, concerns regarding
informational advantages about individual
securities are lessened.16
Finally, the Commission noted that
the capitalization and liquidity
requirements imposed by the listing
standards—for example, the component
securities that in the aggregate account
Nos. 56633 (October 9, 2007), 72 FR 58696 (October
16, 2007) (SR–ISE–2007–60) (order approving
generic listing standards for ETFs based on both
U.S. and international indices, noting they are
‘‘sufficiently broad-based in scope to minimize
potential manipulation.’’); 55621 (April 12, 2007),
72 FR 19571 (April 18, 2007) (SR–NYSEArca–2006–
86) (same); 54739 (November 9, 2006), 71 FR 66993
(November 17, 2006) (SR–Amex–2006–78) (same);
57365 (February 21, 2008), 73 FR 10839 (February
28, 2008) (SR–CBOE–2007–109) (order approving
generic listing standards for ETFs based on
international indices, noting they are ‘‘sufficiently
broad-based in scope to minimize potential
manipulation.’’); 56049 (July 11, 2007), 72 FR 39121
(July 17, 2007) (SR–Phlx–2007–20) (same); 55113
(January 17, 2007), 72 FR 3179 (January 24, 2007)
(SR–NYSE–2006–101) (same); and 55269 (February
9, 2007), 72 FR 7490 (February 15, 2007) (SR–
Nasdaq–2006–50) (same).
14 See note 12, supra.
15 Release No. 46213, 67 FR at 48235.
16 Id.
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56865
for at least 90% of the weight of the
portfolio must have a minimum market
value of at least $75 million and the
component securities representing 90%
of the weight of the portfolio each must
have a minimum trading volume during
each of the last six month of at least
250,000 shares—‘‘should reduce the
likelihood that any market participant
has an unfair information advantage
about the ETF, TIR, its related options,
or its component securities, or that a
market participant would not be able to
manipulate the prices of the ETFs, TIRs,
or their related options.’’ 17 The
Exchange believes that the same
conclusions are warranted here for all
ETPs with underlying NMS Stock
components listed under the Exchange’s
generic listing standards.
The Exchange notes that the
relationship between an ETP and its
underlying listed NMS Stock
component or components is
fundamentally different than that
between an ETP and its related option.
In the latter case, a small move in the
price of the listed security can trigger a
large move in the price of the related
option, increasing the incentive for a
market maker or specialist to
manipulate the security or coordinate
trading with the options market maker
or specialist. Here, there is no similar
outsized correlation between a move in
the price of a listed ETP and one or
more of its underlying NMS Stock
components. Indeed, as discussed
below, the potential for manipulation or
coordinated trading is significantly
attenuated for listed ETPs and their
underlying NMS Stock components
because the Exchange’s generic listed
standards are designed to ensure that
the Exchange will only list ETPs that are
‘‘broad-based’’—that is, the ETP’s
underlying component securities must
be sufficiently liquid and wellcapitalized, and the ETP must not be
unduly concentrated.
As set forth in Supplementary
Material .01 of Rule 5.2(j)(3), the index
components for investment company
units (‘‘Units’’) consisting solely of US
Component Stocks 18 or US Component
Stocks and cash must meet the
following criteria initially and on a
continuing basis:
• Component stocks (excluding Units
and securities defined in Section 2 of
Rule 8P) that in the aggregate account
17 Id.
18 The term ‘‘US Component Stock’’ means an
equity security that is registered under Sections
12(b) or 12(g) of the Securities Exchange Act of
1934 or an American Depositary Receipt, the
underlying equity security of which is registered
under Sections 12(b) or 12(g) of the Securities
Exchange Act of 1934. See Rule 5.2(j)(3).
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for at least 90% of the equity weight of
the portfolio (excluding Units and
securities defined in Section 2 of Rule
8P) each must have a minimum market
value of at least $75 million; 19
• Component stocks (excluding Units
and securities defined in Section 2 of
Rule 8P) that in the aggregate account
for at least 70% of the equity weight of
the portfolio (excluding Units and
securities defined in Section 2 of Rule
8P) each must have a minimum monthly
trading volume of 250,000 shares, or
minimum notional volume traded per
month of $25,000,000, averaged over the
last six months; 20
• The most heavily weighted
component stock (excluding Units and
securities defined in Section 2 of Rule
8P) cannot exceed 30% of the equity
weight of the portfolio, and, to the
extent applicable, the five most heavily
weighted component stocks (excluding
Units and securities defined in Section
2 of Rule 8P) cannot exceed 65% of the
equity weight of the portfolio; 21
• Where the equity portion of the
portfolio does not include Non-US
Component Stocks,22 the equity portion
of the portfolio must include a
minimum of 13 component stocks; 23
and
• All securities in the index or
portfolio will be US Component Stocks
listed on a listed on a national securities
exchange and be NMS Stocks as defined
in Rule 6000 of Regulation NMS.24
The listing standards for Units based
on an index of both US Component
Stocks and Non-US Component
Stocks; 25 Equity-Index Linked
securities (commonly referred to as
Exchange Traded Notes or ‘‘ETNs’’); 26
Portfolio Depositary Receipts under
Rule 8.100 with underlying component
19 See
Rule 5.2(j)(3), Supp. Material .01(a)(A)(1).
id. at (a)(A)(2).
21 See id. at (a)(A)(3).
22 The term ‘‘Non-US Component Stock’’ means
an equity security that is not registered under
Sections 12(b) or 12(g) of the Securities Exchange
Act of 1934 and that is issued by an entity that (a)
is not organized, domiciled or incorporated in the
United States, and (b) is an operating company
(including Real Estate Investment Trusts (REITS)
and income trusts, but excluding investment trusts,
unit trusts, mutual funds, and derivatives). See Rule
5.2(j)(3).
23 See id. at (a)(A)(4). There is no minimum
number of component stocks if (a) one or more
series of Units or Portfolio Depositary Receipts (as
defined in Section 2 of Rule 8P) constitute, at least
in part, components underlying a series of Managed
Fund Shares, or (b) one or more series of such ETPs
account for 100% of the US Component Stocks
portion of the weight of the index or portfolio. See
id.
24 See id. at (a)(A)(5).
25 See Rule 5.2(j)(3), Supp. Material .01(a)(B)(1)–
(5). The index or portfolio must include a minimum
of 20 component stocks.
26 See Rule 5.2(j)(6)(B)(I).
20 See
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stocks consisting of an index or
portfolio of US Component Stocks; 27
and actively managed funds under Rule
8.600 28 are all broadly similar. The
Exchange could not list an ETP that
does not meet these generic listing
requirements without a proposed rule
change being filed with the
Commission.
By virtue of the numerous restrictions
in the Exchange’s generic listing
standards relating to market cap, trading
volume, and diversity requirements,
among others, that the underlying
components must meet to list on the
Exchange, the generic listing standards
are, among other things,
intended to reduce the potential for
manipulation by assuring that the ETP is
sufficiently broad-based, and that the
components of an index or portfolio
underlying an ETP are adequately
capitalized, sufficiently liquid, and that no
one stock dominates the index.29
The Exchange believes that listed
ETPs meeting these composition and
concentration measures would be
sufficiently broad-based to allow
integrated market making and side-byside trading in both the ETP and the
component NMS securities with no
requirement for information barriers or
physical or organizational separation.
As noted, equity-based ETPs that do
not meet the applicable generic listing
standards would require a rule filing
with the Commission prior to
commencement of Exchange listing or
trading. The rule filing would set forth
the initial and continued listing
requirements in order for such a product
to be listed and traded on the Exchange.
In order for a rule proposal to be
consistent with the Act, it must, among
other things, further the objectives of
Section 6(b)(5) of the Act 30 in that it is
designed to prevent fraudulent and
manipulative acts and practices. The
Exchange believes that equity-based
ETPs whose underlying component
composition varies greatly from the
generic listing standards, i.e., an ETP
whose components are insufficiently
liquid or well-capitalized or unduly
concentrated, would be unlikely to meet
this requirement.31 Accordingly, the
27 See
Rule 8.100.
Rule 8.600.
29 See Securities Exchange Act Release No. 80189
(March 9, 2017), 82 FR 13889, 13892 (March 15,
2017) (SR–NYSEArca–2017–01) (order approving
amendment of NYSE Arca, Inc. (‘‘NYSE Arca’’) Rule
5 and 8 Series to add specific continued listing
standards for ETPs and to specify the delisting
procedures for these products). See generally id. n.
28 & authorities cited therein.
30 15 U.S.C. 78f(b)(5).
31 For examples of equity-based ETPs that did not
meet the generic listing standards on the Exchange’s
affiliate NYSE Arca and for which a rule filing was
28 See
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Exchange believes that ETPs listed and
traded via the rule filing process would
also be sufficiently broad-based in order
to minimize potential manipulation,
thus justifying integrated market making
and side-by-side trading in both the ETP
and the component NMS securities.
While the ‘‘broad-based’’ nature of
listed ETPs under either the generic
listing standards or via a rule filing
makes manipulation less likely, the
Exchange also believes that the potential
for manipulation of listed ETPs is
minimal because ETP pricing is based
on an ‘‘arbitrage function’’ performed by
market participants that affects the
supply of and demand for ETP shares
and, thus, ETP prices. This ‘‘arbitrage
function’’ is effectuated by creating new
ETP shares and redeeming existing ETP
shares based on investor demand; thus,
ETP supply is open-ended. As the
Commission has acknowledged, the
arbitrage function helps to keep an
ETP’s price in line with the value of its
underlying portfolio, i.e., it minimizes
deviation from NAV.32 Generally, the
higher the liquidity and trading volume
required, see, e.g., Securities Exchange Act Release
No. 56987 (December 18, 2007), 72 FR 73397
(December 27, 2007) (SR–NYSEArca–2007–119)
(proposal to list and trade the BearLinxSM Alerian
master limited partnership (‘‘MLP’’) Select Index
ETNs linked to the performance of the Alerian MLP
Select Index); Securities Exchange Act Release No.
58437 (August 28, 2008), 73 FR 51684 (September
4, 2008) (SR–NYSEArca–2008–77) (proposal to list
and trade shares of the Barclays Middle East
Equities (MSCI GCC) Non Exchange Traded Notes
Due 2038, which are linked to the MSCI Gulf
Cooperation Council (GCC) Countries ex-Saudi
Arabia Net Total Return Index, and index
comprised of all of the equity securities included
in the five individual Middle Eastern country
indices); Securities Exchange Act Release No. 57320
(February 13, 2008), 73 FR 9395 (February 20, 2008)
(SR–NYSEArca–2008–15) (proposal to continue to
list a and trade the iShares MSCI Mexico Index
Fund that corresponds to the price and yield
performance of publicly traded securities in the
aggregate in the Mexican market as represented by
the MSCI Mexico Investable Market Index);
Securities Exchange Act Release No. 60137 (June
18, 2009), 74 FR 30340 (June 25, 2009) (SR–
NYSEArca–2009–54) (proposal to list and trade the
iShares MSCI All Peru Capped Index Fund that
corresponds to the MSCI All Peru Capped Index,
which measures the performance of the ‘‘Broad
Peru Equity Universe’’ which includes Peruvian
equity securities classified in Peru according to the
MSCI Global Investable Market Indices
Methodology and securities of companies
headquartered in Peru and that have the majority
of their operations based in Peru).
32 See Securities Exchange Act Release No. 75165,
80 FR 34729, 34733 (June 17, 2015) (S7–11–15)
(arbitrage ‘‘generally helps to prevent the market
price of ETP Securities from diverging significantly
from the value of the ETP’s underlying or reference
assets’’). See also generally id., 80 FR at 34739 (‘‘In
the Commission’s experience, the deviation
between the daily closing price of ETP Securities
and their NAV, averaged across broad categories of
ETP investment strategies and over time periods of
several months, has been relatively small[,]’’
although it had been ‘‘somewhat higher’’ in the case
of ETPs based on international indices.).
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of an ETP, the more likely the ETP’s
price will not deviate from the value of
its underlying portfolio. Market makers
registered in ETPs play a key role in this
arbitrage function and DMMs, along
with other market participants, would
perform this role for ETPs listed on the
Exchange. In short, the Exchange
believes that the arbitrage mechanism is
an effective and efficient means of
ensuring that intraday pricing in ETPs
closely tracks the value of the
underlying portfolio or reference
assets.33
The Exchange believes that the price
regulating function played by the
arbitrage mechanism renders attempts to
influence or manipulate the price of an
ETP more difficult and more susceptible
to immediate detection and correction.
The fact that an ETP and one or more
of its underlying components are traded
in the same physical space on the
Exchange or by the same DMM on the
Exchange does not alter this dynamic in
the slightest, nor does it make price
manipulation more likely. Rather, the
Exchange believes the arbitrage
mechanism would make price
manipulation more difficult and, thus,
less likely. Attempts by Floor-based
market participants to influence the
price of an ETP by, for instance,
manipulating or [sic] one or more of
component securities would be reflected
in the deviation of the price from the
NAV just as similar attempts today by
upstairs traders would be reflected in
the deviation of the price from the NAV.
Moreover, a broad-based ETP would, as
shown above, be even less susceptible to
price manipulation. The Exchange thus
believes that the type of broad-based
equity ETPs eligible for listing under the
generic listing standards, coupled with
the arbitrage mechanism, sufficiently
minimize the potential for manipulation
of ETPs listed and traded on the Trading
Floor.
With respect to integrated market
making, the Commission has approved
changes to Rule 98 that permit a DMM
unit to engage in integrated market
making with off-Floor market making
units in related products.34 Rule 98(c)(6)
prohibits DMM units from operating as
a specialist or market maker on the
Exchange in related products, unless
specifically permitted in Exchange
rules. Rule 98(b)(7) defines ‘‘related
products’’ as ‘‘any derivative instrument
33 See Securities Exchange Act Release No. 87056,
supra note 8.
34 See Securities Exchange Act Release No. 58328
(August 7, 2008), 73 FR 48260 (August 18, 2008)
(SR–NYSE–2008–45) (order approving amendments
to Rule 98 that permit specialist firms to integrate
with off-Floor trading desks that trade in ‘‘related
products,’’ as that term is defined in Rule 98).
VerDate Sep<11>2014
18:10 Oct 22, 2019
Jkt 250001
that is related to a DMM security.’’ 35
Accordingly, consistent with the
proposal, the Exchange proposes to
amend Rule 98(b)(7) to specifically
exclude ETPs from the definition of
‘‘related products.’’ As discussed above,
the Exchange believes that ETPs are
different from other types of related
products such as single-stock options or
futures and that, given the broad-based
nature of listed ETPs, integrated market
making and side-by-side trading in both
the ETP and underlying NMS stock
components is appropriate with no
requirement for information barriers or
physical or organizational separation.
Finally, trading on the Exchange is
subject to a comprehensive regulatory
program that includes a suite of
surveillances and routine examinations
that review trading by DMMs and other
market participants on the Exchange’s
trading Floor. Market participants on
the trading Floor, including DMMs, are
also required to implement policies and
procedures reasonably designed to
detect and deter inappropriate conduct
and prevent the misuse of material, nonpublic information or disclosure of
Floor-based non-public order
information.36
For all of the reasons stated above, the
proposal is therefore consistent with the
requirements of the Act.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act,37 in general, and furthers the
objectives of Sections 6(b)(5) of the
Act,38 in particular, because it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to, and perfect the
mechanisms of, a free and open market
and a national market system and, in
general, to protect investors and the
public interest and because it is not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
In particular, the Exchange believes
that listing and trading ETPs that have
35 Under Rule 98(b)(7), derivative instruments
include options, warrants, hybrid securities, singlestock futures, security-based swap agreement, a
forward contract, or ‘‘any other instrument that is
exercisable into or whose price is based upon or
derived from a security traded at the Exchange.’’
36 See, e.g., Rule 98(c)(3) (setting forth restrictions
on trading for member organizations operating a
DMM unit).
37 15 U.S.C. 78f(b).
38 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
56867
a component NMS Stock or are based
on, or represent an interest in, an
underlying index or reference asset that
includes an NMS stock listed on the
Exchange would remove impediments
to and perfect the mechanism of a free
and open market and a national market
system by facilitating the listing and
trading a broader range of ETPs
consistent with the Exchange’s current
structure to trade listed securities. The
Exchange believes that removal of the
current exclusion of listed ETPs with
NMS Stock components and the
exclusion of ETPs from the definition of
related products would not be
inconsistent with the public interest and
the protection of investors because
listed ETPs that include equity
securities as components are subject to
listing requirements—whether the
generic listing standards or those
approved by individual rule filing—that
are designed to ensure that underlying
indices or portfolios are sufficiently
broad-based and well-diversified to
protect against manipulation. Moreover,
the Exchange believes that potential
manipulation of listed ETPs is also
minimal because of ETPs reliance on an
‘‘arbitrage function’’ performed by
market participants that influences the
supply and demand of shares and, thus,
trading prices relative to NAV. The
Exchange believes that these safeguards
would continue to serve to prevent
fraudulent and manipulative acts and
practices, as well as to protect investors
and the public interest from concerns
that may be associated with integrated
market making and any possible misuse
of non-public information.
For the foregoing 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,39 the Exchange believes that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposed
change would promote competition by
facilitating the listing and trading of a
broader range of ETPs on the Exchange.
The Exchange believes that the
proposed rule change would facilitate
the trading of Exchange-listed ETPs by
DMMs on Pillar, which would enable
the Exchange to further compete with
unaffiliated exchange competitors that
also list and trade ETPs. The proposed
rule changes would also provide issuers
with greater choice in potential listing
39 15
E:\FR\FM\23OCN1.SGM
U.S.C. 78f(b)(8).
23OCN1
56868
Federal Register / Vol. 84, No. 205 / Wednesday, October 23, 2019 / Notices
venues for their ETP products to include
an exchange model that includes a
DMM assigned to their security and
related benefits to an issuer as a result
of the Exchange’s high-touch trading
model.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or such longer period up to 90
days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
A. By order approve or disapprove the
proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
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–
NYSE–2019–54 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2019–54. 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 website (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
VerDate Sep<11>2014
18:10 Oct 22, 2019
Jkt 250001
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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSE–2019–54 and should
be submitted on or before November 13,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–23051 Filed 10–22–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87328; File No. SR–
NASDAQ–2019–059]
2019.3 The Commission has not
received any comment letters on the
proposed rule change.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is October 19,
2019. The Commission is extending this
45-day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,5
designates December 3, 2019, as the date
by which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR-Nasdaq-2019–059).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–23050 Filed 10–22–19; 8:45 am]
BILLING CODE 8011–01–P
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Designation of a Longer Period for
Commission Action on a Proposed
Rule Change To Adopt Requirements
for the Nasdaq Capital and Global
Markets Applicable to Direct Listings
October 17, 2019.
On August 15, 2019, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ 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
adopt additional listing requirements for
direct listings on the Nasdaq Capital and
Global Markets. The proposed rule
change was published for comment in
the Federal Register on September 4,
40 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87336; File No. SR–
CboeBZX–2019–088]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Extend the
Pilot Related to the Market-Wide
Circuit Breaker in Rule 11.18
October 17, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
3 See Securities Exchange Act Release No. 86792
(August 28, 2019), 84 FR 46580 (September 4,
2019).
4 15 U.S.C. 78s(b)(2).
5 Id.
6 17 CFR 200.30–3(a)(31).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
E:\FR\FM\23OCN1.SGM
23OCN1
]]>Agencies
[Federal Register Volume 84, Number 205 (Wednesday, October 23, 2019)]
[Notices]
[Pages 56864-56868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23051]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87329; File No. SR-NYSE-2019-54]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change To Permit the Exchange To List
and Trade Exchange Traded Products
October 17, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 3, 2019, New York Stock Exchange LLC (``NYSE''
or the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to permit the Exchange to list and trade
Exchange Traded Products that have a component NMS Stock listed on the
Exchange or that are based on, or represent an interest in, an
underlying index or reference asset that includes an NMS Stock listed
on the Exchange. The proposed rule change is available on the
Exchange's website 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 permit the Exchange to list and trade
Exchange Traded Products (``ETPs'') \4\ that have a component NMS Stock
\5\ listed on the Exchange or that are based on, or represent an
interest in, an underlying index or reference asset that includes an
NMS Stock listed on the Exchange.
---------------------------------------------------------------------------
\4\ Rule 1.1P(k) defines ``Exchange Traded Product'' as a
security that meets the definition of ``derivative securities
product'' in Rule 19b-4(e) under the Act. ETPs include, for example,
securities listed and traded on the Exchange pursuant to the
following Exchange rules: Rule 5.2(j)(3) (Investment Company Units);
Rule 5.2(j)(5) (Equity Gold Shares); Rule 5.2(j)(6) (Index-Linked
Securities); Rule 8.100 (Portfolio Depositary Receipts); Rule 8.200
(Trust Issued Receipts); Rule 8.201 (Commodity-Based Trust Shares);
Rule 8.202-E (Currency Trust Shares); Rule 8.203 (Commodity Index
Trust Shares); Rule 8.204 (Commodity Futures Trust Shares); Rule
8.600 (Managed Fund Shares); and Rule 8.700 (Managed Trust
Securities).
\5\ NMS Stock is defined in Rule 600 of Regulation NMS, 17 CFR
242.600(b)(48) as ``any NMS security other than an option.'' ``NMS
Security'' means any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.'' See 17 CFR 242.600(b)(47). As the Commission has
explained, the term ``NMS Security'' refers to ``exchange-listed
equity securities and standardized options, but does not include
exchange-listed debt securities, securities futures, or open-end
mutual funds, which are not currently reported pursuant to an
effective transaction reporting plan.'' See Question 1.1 in the
``Responses to Frequently Asked Questions Concerning Large Trader
Reporting,'' available at https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm.
---------------------------------------------------------------------------
Background
Currently, the Exchange trades securities, including ETPs, on its
Pillar trading platform on an unlisted trading privileges (``UTP'')
basis, subject to Pillar Platform Rules 1P-13P.\6\ ETPs traded on a UTP
basis on the Exchange are not assigned to a Designated Market Maker
(``DMM'') but are available for Floor brokers to trade in Floor-based
crossing transactions.\7\
---------------------------------------------------------------------------
\6\ ``UTP Security'' is defined as a security that is listed on
a national securities exchange other than the Exchange and that
trades on the Exchange pursuant to unlisted trading privileges. See
Rule 1.1.
\7\ See Securities Exchange Act Release No. 82945 (March 26,
2018), 83 FR 13553, 13568 (March 29, 2018) (SR-NYSE-2017-36)
(approving Exchange rules to trade securities on a UTP basis on the
Pillar trading platform).
---------------------------------------------------------------------------
The Exchange's rules also permit it to list ETPs under Rules 5P and
8P. Specifically, Rules 5P (Securities Traded) and 8P (Trading of
Certain Exchange Traded Products) provide for the listing of certain
ETPs on the Exchange that (1) meet the applicable requirements set
forth in those rules, and (2) do not have any component NMS Stock that
is listed on the Exchange or is based on, or represents an interest in,
an underlying index or reference asset that includes an NMS Stock
listed on the Exchange. ETPs listed under Rules 5P and 8P would be
``Tape A'' listings and would be traded pursuant to the rules
applicable to NYSE-listed securities.
Accordingly, once an ETP is listed, it will be assigned to a DMM
pursuant to Rule 103B and the assigned DMM will have obligations vis-
[agrave]-vis such securities as specified in Rule 104, including
facilitating the opening, reopening, and closing of such securities.\8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 87056 (September 23,
2019), 84 FR 51205 (September 27, 2019) (SR-NYSE-2019-34) (order
approving amendments to Rule 104 to specify DMM requirements for
ETPs listed on the Exchange pursuant to Rules 5P and 8P).
---------------------------------------------------------------------------
Proposed Rule Change
The Exchange proposes to expand the ETPs that would be eligible to
list and trade on the Exchange to include ETPs that have a component
NMS Stock or that are based on, or represent an interest in, an
underlying index or reference asset that includes an NMS
[[Page 56865]]
Stock listed on the Exchange. To effectuate this change, the Exchange
proposes to delete the preambles to Rules 5P and 8P currently providing
that the Exchange will not list such ETPs.
The proposal would permit the Exchange to list and trade on the
NYSE Trading Floor \9\ both ETPs and one or more component NMS Stocks
forming part of the underlying ETP index or portfolio (``side-by-side
trading'' \10\). Because listed securities are assigned to DMMs, the
proposed elimination of the current restriction could result in DMMs
being assigned ETPs that may have one or more component NMS Stocks
forming part of the underlying ETP index or portfolio that are also
assigned to the DMM (``integrated market making'' \11\). The Commission
has approved integrated market making and side-by-side trading for
``broad-based'' ETPs and related options.\12\ The test for whether a
product is ``broad-based'', and therefore is not readily susceptible to
manipulation, is whether the individual components of the ETP are
sufficiently liquid and well-capitalized and the product is not over-
concentrated.\13\ When an ETP meets both criteria, and therefore can be
considered ``broad-based,'' the Commission has explicitly permitted
integrated market making and side-by-side trading in both the ETP and
related options, with no requirement for information barriers or
physical or organizational separation.\14\
---------------------------------------------------------------------------
\9\ The term ``Trading Floor'' is defined in Rule 6A to mean the
restricted-access physical areas designated by the Exchange for the
trading of securities, commonly known as the ``Main Room'' and the
``Buttonwood Room.''
\10\ ``Side-by-side trading'' refers to the trading of an equity
security and its related derivative product at the same physical
location, though ``not necessarily by the same specialist or
specialist firm.'' Securities Exchange Act Release No. 46213 (July
16, 2002), 67 FR 48232, 48233 (July 23, 2002) (SR-Amex-002-21)
(``Release No. 46213'') (order approving side-by-side trading and
integrated market making of broad index-based ETFs and related
options); see also Securities Exchange Act Release No. 45454
(February 15, 2002), 67 FR 8567, 8568 n. 7 (February 25, 2002) (SR-
NYSE-2001-43) (``Release No. 45454'') (order approving approved
person of a specialist to act as a specialist or primary market
maker with respect to an option on a stock in which the NYSE
specialist is registered on the Exchange).
\11\ ``Integrated market making'' refers to the practice of the
same person or firm making markets in an equity security and its
related option. See Release No. 45454, 67 FR at 8568 n. 7.
\12\ See Release No. 46213, 67 FR at 48232 (approving side-by-
side trading and integrated market making for certain Exchange
Traded Funds (``ETF'') and Trust Issued Receipts (``TIR'') and
related options); see also Securities Exchange Act Release No. 62479
(July 9, 2010), 75 FR 41264 (July 15, 2010) (SR-Amex-2010-31)
(``Release No. 62479'') (order approving side-by-side trading and
integrated market making in the QQQ ETF and certain of its component
securities where the QQQs met the composition and concentration
measures to be classified as a broad-based ETF).
\13\ See Release No. 62479, id., 75 FR at 41272. The Commission
has expressed its belief ``that, when the securities underlying an
ETF consist of a number of liquid and well-capitalized stocks, the
likelihood that a market participant will be able to manipulate the
price of the ETF is reduced.'' See id. See generally Securities
Exchange Act Release Nos. 56633 (October 9, 2007), 72 FR 58696
(October 16, 2007) (SR-ISE-2007-60) (order approving generic listing
standards for ETFs based on both U.S. and international indices,
noting they are ``sufficiently broad-based in scope to minimize
potential manipulation.''); 55621 (April 12, 2007), 72 FR 19571
(April 18, 2007) (SR-NYSEArca-2006-86) (same); 54739 (November 9,
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (same);
57365 (February 21, 2008), 73 FR 10839 (February 28, 2008) (SR-CBOE-
2007-109) (order approving generic listing standards for ETFs based
on international indices, noting they are ``sufficiently broad-based
in scope to minimize potential manipulation.''); 56049 (July 11,
2007), 72 FR 39121 (July 17, 2007) (SR-Phlx-2007-20) (same); 55113
(January 17, 2007), 72 FR 3179 (January 24, 2007) (SR-NYSE-2006-101)
(same); and 55269 (February 9, 2007), 72 FR 7490 (February 15, 2007)
(SR-Nasdaq-2006-50) (same).
\14\ See note 12, supra.
---------------------------------------------------------------------------
In making a determination of whether an ETP is broad-based, the
Commission has relied on an exchange's listing standards. For instance,
in permitting integrated market making and side-by-side trading for two
types of ETPs and their related options, the Commission looked to the
American Stock Exchange LLC's listing standards that, as described
below, are very similar to the Exchange's current listing standards.
Specifically, the Commission observed that the ETPs at issue, an
ETF and a TIR, were securities based on ``groups of stocks'' whose
prices were based on the prices of their component securities. As such,
the Commission was of the view that a market participant's ability to
manipulate the price of ETPs or the related options would be
``limited.'' \15\ Moreover, the Commission noted that the listing
standards required (1) each product to have a minimum of 13 securities
in the underlying portfolio, (2) that the most heavily weighted
component securities could not exceed 25% of the weight of the
portfolio, and (3) that the five most heavily weighted component
securities could not exceed 65% of the weight of the portfolio. As the
Commission concluded,
---------------------------------------------------------------------------
\15\ Release No. 46213, 67 FR at 48235.
[b]y limiting the proposal to broad-based ETFs and TIRs, concerns
regarding informational advantages about individual securities are
lessened.\16\
---------------------------------------------------------------------------
\16\ Id.
Finally, the Commission noted that the capitalization and liquidity
requirements imposed by the listing standards--for example, the
component securities that in the aggregate account for at least 90% of
the weight of the portfolio must have a minimum market value of at
least $75 million and the component securities representing 90% of the
weight of the portfolio each must have a minimum trading volume during
each of the last six month of at least 250,000 shares--``should reduce
the likelihood that any market participant has an unfair information
advantage about the ETF, TIR, its related options, or its component
securities, or that a market participant would not be able to
manipulate the prices of the ETFs, TIRs, or their related options.''
\17\ The Exchange believes that the same conclusions are warranted here
for all ETPs with underlying NMS Stock components listed under the
Exchange's generic listing standards.
---------------------------------------------------------------------------
\17\ Id.
---------------------------------------------------------------------------
The Exchange notes that the relationship between an ETP and its
underlying listed NMS Stock component or components is fundamentally
different than that between an ETP and its related option. In the
latter case, a small move in the price of the listed security can
trigger a large move in the price of the related option, increasing the
incentive for a market maker or specialist to manipulate the security
or coordinate trading with the options market maker or specialist.
Here, there is no similar outsized correlation between a move in the
price of a listed ETP and one or more of its underlying NMS Stock
components. Indeed, as discussed below, the potential for manipulation
or coordinated trading is significantly attenuated for listed ETPs and
their underlying NMS Stock components because the Exchange's generic
listed standards are designed to ensure that the Exchange will only
list ETPs that are ``broad-based''--that is, the ETP's underlying
component securities must be sufficiently liquid and well-capitalized,
and the ETP must not be unduly concentrated.
As set forth in Supplementary Material .01 of Rule 5.2(j)(3), the
index components for investment company units (``Units'') consisting
solely of US Component Stocks \18\ or US Component Stocks and cash must
meet the following criteria initially and on a continuing basis:
---------------------------------------------------------------------------
\18\ The term ``US Component Stock'' means an equity security
that is registered under Sections 12(b) or 12(g) of the Securities
Exchange Act of 1934 or an American Depositary Receipt, the
underlying equity security of which is registered under Sections
12(b) or 12(g) of the Securities Exchange Act of 1934. See Rule
5.2(j)(3).
---------------------------------------------------------------------------
Component stocks (excluding Units and securities defined
in Section 2 of Rule 8P) that in the aggregate account
[[Page 56866]]
for at least 90% of the equity weight of the portfolio (excluding Units
and securities defined in Section 2 of Rule 8P) each must have a
minimum market value of at least $75 million; \19\
---------------------------------------------------------------------------
\19\ See Rule 5.2(j)(3), Supp. Material .01(a)(A)(1).
---------------------------------------------------------------------------
Component stocks (excluding Units and securities defined
in Section 2 of Rule 8P) that in the aggregate account for at least 70%
of the equity weight of the portfolio (excluding Units and securities
defined in Section 2 of Rule 8P) each must have a minimum monthly
trading volume of 250,000 shares, or minimum notional volume traded per
month of $25,000,000, averaged over the last six months; \20\
---------------------------------------------------------------------------
\20\ See id. at (a)(A)(2).
---------------------------------------------------------------------------
The most heavily weighted component stock (excluding Units
and securities defined in Section 2 of Rule 8P) cannot exceed 30% of
the equity weight of the portfolio, and, to the extent applicable, the
five most heavily weighted component stocks (excluding Units and
securities defined in Section 2 of Rule 8P) cannot exceed 65% of the
equity weight of the portfolio; \21\
---------------------------------------------------------------------------
\21\ See id. at (a)(A)(3).
---------------------------------------------------------------------------
Where the equity portion of the portfolio does not include
Non-US Component Stocks,\22\ the equity portion of the portfolio must
include a minimum of 13 component stocks; \23\ and
---------------------------------------------------------------------------
\22\ The term ``Non-US Component Stock'' means an equity
security that is not registered under Sections 12(b) or 12(g) of the
Securities Exchange Act of 1934 and that is issued by an entity that
(a) is not organized, domiciled or incorporated in the United
States, and (b) is an operating company (including Real Estate
Investment Trusts (REITS) and income trusts, but excluding
investment trusts, unit trusts, mutual funds, and derivatives). See
Rule 5.2(j)(3).
\23\ See id. at (a)(A)(4). There is no minimum number of
component stocks if (a) one or more series of Units or Portfolio
Depositary Receipts (as defined in Section 2 of Rule 8P) constitute,
at least in part, components underlying a series of Managed Fund
Shares, or (b) one or more series of such ETPs account for 100% of
the US Component Stocks portion of the weight of the index or
portfolio. See id.
---------------------------------------------------------------------------
All securities in the index or portfolio will be US
Component Stocks listed on a listed on a national securities exchange
and be NMS Stocks as defined in Rule 6000 of Regulation NMS.\24\
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\24\ See id. at (a)(A)(5).
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The listing standards for Units based on an index of both US
Component Stocks and Non-US Component Stocks; \25\ Equity-Index Linked
securities (commonly referred to as Exchange Traded Notes or ``ETNs'');
\26\ Portfolio Depositary Receipts under Rule 8.100 with underlying
component stocks consisting of an index or portfolio of US Component
Stocks; \27\ and actively managed funds under Rule 8.600 \28\ are all
broadly similar. The Exchange could not list an ETP that does not meet
these generic listing requirements without a proposed rule change being
filed with the Commission.
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\25\ See Rule 5.2(j)(3), Supp. Material .01(a)(B)(1)-(5). The
index or portfolio must include a minimum of 20 component stocks.
\26\ See Rule 5.2(j)(6)(B)(I).
\27\ See Rule 8.100.
\28\ See Rule 8.600.
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By virtue of the numerous restrictions in the Exchange's generic
listing standards relating to market cap, trading volume, and diversity
requirements, among others, that the underlying components must meet to
list on the Exchange, the generic listing standards are, among other
things,
intended to reduce the potential for manipulation by assuring that
the ETP is sufficiently broad-based, and that the components of an
index or portfolio underlying an ETP are adequately capitalized,
sufficiently liquid, and that no one stock dominates the index.\29\
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\29\ See Securities Exchange Act Release No. 80189 (March 9,
2017), 82 FR 13889, 13892 (March 15, 2017) (SR-NYSEArca-2017-01)
(order approving amendment of NYSE Arca, Inc. (``NYSE Arca'') Rule 5
and 8 Series to add specific continued listing standards for ETPs
and to specify the delisting procedures for these products). See
generally id. n. 28 & authorities cited therein.
The Exchange believes that listed ETPs meeting these composition
and concentration measures would be sufficiently broad-based to allow
integrated market making and side-by-side trading in both the ETP and
the component NMS securities with no requirement for information
barriers or physical or organizational separation.
As noted, equity-based ETPs that do not meet the applicable generic
listing standards would require a rule filing with the Commission prior
to commencement of Exchange listing or trading. The rule filing would
set forth the initial and continued listing requirements in order for
such a product to be listed and traded on the Exchange. In order for a
rule proposal to be consistent with the Act, it must, among other
things, further the objectives of Section 6(b)(5) of the Act \30\ in
that it is designed to prevent fraudulent and manipulative acts and
practices. The Exchange believes that equity-based ETPs whose
underlying component composition varies greatly from the generic
listing standards, i.e., an ETP whose components are insufficiently
liquid or well-capitalized or unduly concentrated, would be unlikely to
meet this requirement.\31\ Accordingly, the Exchange believes that ETPs
listed and traded via the rule filing process would also be
sufficiently broad-based in order to minimize potential manipulation,
thus justifying integrated market making and side-by-side trading in
both the ETP and the component NMS securities.
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\30\ 15 U.S.C. 78f(b)(5).
\31\ For examples of equity-based ETPs that did not meet the
generic listing standards on the Exchange's affiliate NYSE Arca and
for which a rule filing was required, see, e.g., Securities Exchange
Act Release No. 56987 (December 18, 2007), 72 FR 73397 (December 27,
2007) (SR-NYSEArca-2007-119) (proposal to list and trade the
BearLinxSM Alerian master limited partnership (``MLP'') Select Index
ETNs linked to the performance of the Alerian MLP Select Index);
Securities Exchange Act Release No. 58437 (August 28, 2008), 73 FR
51684 (September 4, 2008) (SR-NYSEArca-2008-77) (proposal to list
and trade shares of the Barclays Middle East Equities (MSCI GCC) Non
Exchange Traded Notes Due 2038, which are linked to the MSCI Gulf
Cooperation Council (GCC) Countries ex-Saudi Arabia Net Total Return
Index, and index comprised of all of the equity securities included
in the five individual Middle Eastern country indices); Securities
Exchange Act Release No. 57320 (February 13, 2008), 73 FR 9395
(February 20, 2008) (SR-NYSEArca-2008-15) (proposal to continue to
list a and trade the iShares MSCI Mexico Index Fund that corresponds
to the price and yield performance of publicly traded securities in
the aggregate in the Mexican market as represented by the MSCI
Mexico Investable Market Index); Securities Exchange Act Release No.
60137 (June 18, 2009), 74 FR 30340 (June 25, 2009) (SR-NYSEArca-
2009-54) (proposal to list and trade the iShares MSCI All Peru
Capped Index Fund that corresponds to the MSCI All Peru Capped
Index, which measures the performance of the ``Broad Peru Equity
Universe'' which includes Peruvian equity securities classified in
Peru according to the MSCI Global Investable Market Indices
Methodology and securities of companies headquartered in Peru and
that have the majority of their operations based in Peru).
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While the ``broad-based'' nature of listed ETPs under either the
generic listing standards or via a rule filing makes manipulation less
likely, the Exchange also believes that the potential for manipulation
of listed ETPs is minimal because ETP pricing is based on an
``arbitrage function'' performed by market participants that affects
the supply of and demand for ETP shares and, thus, ETP prices. This
``arbitrage function'' is effectuated by creating new ETP shares and
redeeming existing ETP shares based on investor demand; thus, ETP
supply is open-ended. As the Commission has acknowledged, the arbitrage
function helps to keep an ETP's price in line with the value of its
underlying portfolio, i.e., it minimizes deviation from NAV.\32\
Generally, the higher the liquidity and trading volume
[[Page 56867]]
of an ETP, the more likely the ETP's price will not deviate from the
value of its underlying portfolio. Market makers registered in ETPs
play a key role in this arbitrage function and DMMs, along with other
market participants, would perform this role for ETPs listed on the
Exchange. In short, the Exchange believes that the arbitrage mechanism
is an effective and efficient means of ensuring that intraday pricing
in ETPs closely tracks the value of the underlying portfolio or
reference assets.\33\
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\32\ See Securities Exchange Act Release No. 75165, 80 FR 34729,
34733 (June 17, 2015) (S7-11-15) (arbitrage ``generally helps to
prevent the market price of ETP Securities from diverging
significantly from the value of the ETP's underlying or reference
assets''). See also generally id., 80 FR at 34739 (``In the
Commission's experience, the deviation between the daily closing
price of ETP Securities and their NAV, averaged across broad
categories of ETP investment strategies and over time periods of
several months, has been relatively small[,]'' although it had been
``somewhat higher'' in the case of ETPs based on international
indices.).
\33\ See Securities Exchange Act Release No. 87056, supra note
8.
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The Exchange believes that the price regulating function played by
the arbitrage mechanism renders attempts to influence or manipulate the
price of an ETP more difficult and more susceptible to immediate
detection and correction. The fact that an ETP and one or more of its
underlying components are traded in the same physical space on the
Exchange or by the same DMM on the Exchange does not alter this dynamic
in the slightest, nor does it make price manipulation more likely.
Rather, the Exchange believes the arbitrage mechanism would make price
manipulation more difficult and, thus, less likely. Attempts by Floor-
based market participants to influence the price of an ETP by, for
instance, manipulating or [sic] one or more of component securities
would be reflected in the deviation of the price from the NAV just as
similar attempts today by upstairs traders would be reflected in the
deviation of the price from the NAV. Moreover, a broad-based ETP would,
as shown above, be even less susceptible to price manipulation. The
Exchange thus believes that the type of broad-based equity ETPs
eligible for listing under the generic listing standards, coupled with
the arbitrage mechanism, sufficiently minimize the potential for
manipulation of ETPs listed and traded on the Trading Floor.
With respect to integrated market making, the Commission has
approved changes to Rule 98 that permit a DMM unit to engage in
integrated market making with off-Floor market making units in related
products.\34\ Rule 98(c)(6) prohibits DMM units from operating as a
specialist or market maker on the Exchange in related products, unless
specifically permitted in Exchange rules. Rule 98(b)(7) defines
``related products'' as ``any derivative instrument that is related to
a DMM security.'' \35\ Accordingly, consistent with the proposal, the
Exchange proposes to amend Rule 98(b)(7) to specifically exclude ETPs
from the definition of ``related products.'' As discussed above, the
Exchange believes that ETPs are different from other types of related
products such as single-stock options or futures and that, given the
broad-based nature of listed ETPs, integrated market making and side-
by-side trading in both the ETP and underlying NMS stock components is
appropriate with no requirement for information barriers or physical or
organizational separation.
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\34\ See Securities Exchange Act Release No. 58328 (August 7,
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45) (order
approving amendments to Rule 98 that permit specialist firms to
integrate with off-Floor trading desks that trade in ``related
products,'' as that term is defined in Rule 98).
\35\ Under Rule 98(b)(7), derivative instruments include
options, warrants, hybrid securities, single-stock futures,
security-based swap agreement, a forward contract, or ``any other
instrument that is exercisable into or whose price is based upon or
derived from a security traded at the Exchange.''
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Finally, trading on the Exchange is subject to a comprehensive
regulatory program that includes a suite of surveillances and routine
examinations that review trading by DMMs and other market participants
on the Exchange's trading Floor. Market participants on the trading
Floor, including DMMs, are also required to implement policies and
procedures reasonably designed to detect and deter inappropriate
conduct and prevent the misuse of material, non-public information or
disclosure of Floor-based non-public order information.\36\
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\36\ See, e.g., Rule 98(c)(3) (setting forth restrictions on
trading for member organizations operating a DMM unit).
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For all of the reasons stated above, the proposal is therefore
consistent with the requirements of the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\37\ in general, and furthers the objectives of
Sections 6(b)(5) of the Act,\38\ in particular, because it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to, and perfect the mechanisms of,
a free and open market and a national market system and, in general, to
protect investors and the public interest and because it is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\37\ 15 U.S.C. 78f(b).
\38\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that listing and trading ETPs
that have a component NMS Stock or are based on, or represent an
interest in, an underlying index or reference asset that includes an
NMS stock listed on the Exchange would remove impediments to and
perfect the mechanism of a free and open market and a national market
system by facilitating the listing and trading a broader range of ETPs
consistent with the Exchange's current structure to trade listed
securities. The Exchange believes that removal of the current exclusion
of listed ETPs with NMS Stock components and the exclusion of ETPs from
the definition of related products would not be inconsistent with the
public interest and the protection of investors because listed ETPs
that include equity securities as components are subject to listing
requirements--whether the generic listing standards or those approved
by individual rule filing--that are designed to ensure that underlying
indices or portfolios are sufficiently broad-based and well-diversified
to protect against manipulation. Moreover, the Exchange believes that
potential manipulation of listed ETPs is also minimal because of ETPs
reliance on an ``arbitrage function'' performed by market participants
that influences the supply and demand of shares and, thus, trading
prices relative to NAV. The Exchange believes that these safeguards
would continue to serve to prevent fraudulent and manipulative acts and
practices, as well as to protect investors and the public interest from
concerns that may be associated with integrated market making and any
possible misuse of non-public information.
For the foregoing 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,\39\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The Exchange believes that the proposed change
would promote competition by facilitating the listing and trading of a
broader range of ETPs on the Exchange. The Exchange believes that the
proposed rule change would facilitate the trading of Exchange-listed
ETPs by DMMs on Pillar, which would enable the Exchange to further
compete with unaffiliated exchange competitors that also list and trade
ETPs. The proposed rule changes would also provide issuers with greater
choice in potential listing
[[Page 56868]]
venues for their ETP products to include an exchange model that
includes a DMM assigned to their security and related benefits to an
issuer as a result of the Exchange's high-touch trading model.
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\39\ 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
Within 45 days of the date of publication of this notice in the
Federal Register or such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove the proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 [email protected]. Please include
File Number SR-NYSE-2019-54 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2019-54. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSE-2019-54 and should be submitted on
or before November 13, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23051 Filed 10-22-19; 8:45 am]
BILLING CODE 8011-01-P
