Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the NYSE Arca Equities Fees and Charges To Introduce a New Lead Market Maker Credit, 3727-3732 [2020-00918]

Download as PDF Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices ensure that the ICC Clearing Rules provide a consistent and enforceable legal basis for clearing and settling CDS contracts to which the NTCE Supplement applies in light of the amendments made by the NTCE Supplement. Therefore, the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(d)(1). IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A(b)(3)(F) of the Act 32 and Rule 17Ad–22(d)(1) thereunder.33 It is therefore ordered pursuant to Section 19(b)(2) of the Act 34 that the proposed rule change (SR–ICC–2019– 013), be, and hereby is, approved.35 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–00915 Filed 1–21–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87978; File No. SR– NYSEArca–2020–03] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the NYSE Arca Equities Fees and Charges To Introduce a New Lead Market Maker Credit January 15, 2020. khammond on DSKJM1Z7X2PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 2, 2020, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to 32 15 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(d)(1). 34 15 U.S.C. 78s(b)(2). 35 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 36 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 33 17 VerDate Sep<11>2014 16:42 Jan 21, 2020 Jkt 250001 solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the NYSE Arca Equities Fees and Charges (‘‘Fee Schedule’’) to (1) introduce a new Lead Market Maker (‘‘LMM’’) credit, (2) introduce a new LMM rebate, and (3) replace the rebate applicable to ETP Holders and Market Makers with a monthly rebate payable on a persecurity basis that is tied to quoting requirements in NYSE Arca-listed securities. The Exchange proposes to implement the fee changes effective January 2, 2020. 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 Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Fee Schedule to (1) introduce a new LMM 3 credit, (2) introduce a new LMM rebate, and (3) replace the rebate applicable to ETP Holders 4 with a monthly rebate payable on a persecurity basis that is tied to quoting requirements in NYSE Arca-listed securities. The proposed changes respond to the current competitive environment where order flow providers have a choice of where to direct liquidity-providing orders by offering further incentives for ETP Holders and LMMs to send 3 The term ‘‘Lead Market Maker’’ is defined in Rule 1.1(w) to mean a registered Market Maker that is the exclusive Designated Market Maker in listings for which the Exchange is the primary market. 4 All references to ETP Holders in connection with this proposed fee change include Market Makers. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 3727 additional displayed liquidity to the Exchange. The Exchange proposes to implement the fee changes effective January 2, 2020. Background The Commission has repeatedly expressed its preference for competition over regulatory intervention in determining prices, products, and services in the securities markets. In Regulation NMS, the Commission highlighted the importance of market forces in determining prices and SRO revenues and, also, recognized that current regulation of the market system ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 5 As the Commission itself recognized, the market for trading services in NMS stocks has become ‘‘more fragmented and competitive.’’ 6 Indeed, equity trading is currently dispersed across 13 exchanges,7 31 alternative trading systems,8 and numerous broker-dealer internalizers and wholesalers, all competing for order flow. Based on publicly-available information for November 2019, no single exchange has more than 18% market share (whether including or excluding auction volume).9 Therefore, no exchange possesses significant pricing power in the execution of equity order flow. More specifically, in November 2019, the Exchange had 7.6% market share of executed volume of equity trades (excluding auction volume).10 The Exchange believes that the evershifting market share among the exchanges from month to month demonstrates that market participants can move order flow, or discontinue or reduce use of certain categories of products. While it is not possible to know a firm’s reason for shifting order flow, the Exchange believes that one such reason is because of fee changes at any of the registered exchanges or non5 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005). 6 See Securities Exchange Act Release No. 51808, 84 FR 5202, 5253 (February 20, 2019) (File No. S7– 05–18) (Final Rule). 7 See Cboe U.S Equities Market Volume Summary, available at https://markets.cboe.com/us/ equities/market_share. See generally https:// www.sec.gov/fast-answers/divisionsmarketregmr exchangesshtml.html. 8 See FINRA ATS Transparency Data, available at https://otctransparency.finra.org/otctransparency/ AtsIssueData. A list of alternative trading systems registered with the Commission is available at https://www.sec.gov/foia/docs/atslist.htm. 9 See Cboe Global Markets U.S. Equities Market Volume Summary, available at https:// markets.cboe.com/us/equities/market_share/. 10 See id. E:\FR\FM\22JAN1.SGM 22JAN1 3728 Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices exchange venues to which a firm routes order flow. With respect to nonmarketable order flow that would provide displayed liquidity on an Exchange against which market makers can quote, ETP Holders and LMMs can choose from any one of the 13 currently operating registered exchanges to route such order flow. Accordingly, competitive forces constrain exchange transaction fees and credits that relate to orders that would provide displayed liquidity on an exchange. khammond on DSKJM1Z7X2PROD with NOTICES Proposed Rule Change The proposed rule change is designed to be available to all ETP Holders and LMMs on the Exchange, and is intended to provide ETP Holders and LMMs an opportunity to receive enhanced rebates by quoting and trading more on the Exchange. The Exchange currently provides incentives in the form of tiered and/or incremental credits to ETP Holders and LMMs who submit orders that provide displayed liquidity on the Exchange. The Exchange currently has multiple levels of credits for orders that provide displayed liquidity that are based on the amount of volume of such orders that participants send to the Exchange. As described in greater detail below, the Exchange proposes the following changes: • Adopt a new incremental credit of $0.00005 per share if an LMM is registered as the LMM in at least 50 but less than 75 Less Active ETP Securities; • Adopt a new monthly rebate that ranges between $100 per security and $50 per security payable to LMMs that quote and trade in NYSE Arca-listed Tape B Securities that are not actively traded; and • Adopt an ETF Incentive Program that provides a monthly rebate on a persecurity basis to ETP Holders that meet certain quoting requirements. LMM Credits The Exchange currently provides tierbased incremental credits to LMMs 11 and to ETP Holders affiliated with the LMM that provide displayed liquidity to the NYSE Arca Book in Tape B Securities. Specifically, LMMs that are registered as the LMM in Tape B Securities that have a consolidated average daily volume (‘‘CADV’’) in the previous month of less than 100,000 shares, or 0.0010% of Consolidated Tape B ADV, whichever is greater (‘‘Less Active ETP Securities’’), and the ETP Holders affiliated with such LMMs, 11 The term ‘‘Lead Market Maker’’ is defined in Rule 1.1(w) to mean a registered Market Maker that is the exclusive Designated Market Maker in listings for which the Exchange is the primary market. VerDate Sep<11>2014 16:42 Jan 21, 2020 Jkt 250001 currently receive an additional credit for orders that provide displayed liquidity to the Book in any Tape B Securities that trade on the Exchange.12 The current incremental credits and volume thresholds are as follows: • An additional credit of $0.0004 per share if an LMM is registered as the LMM in at least 300 Less Active ETP Securities • An additional credit of $0.0003 per share if an LMM is registered as the LMM in at least 200 but less than 300 Less Active ETP Securities • An additional credit of $0.0002 per share if an LMM is registered as the LMM in at least 100 but less than 200 Less Active ETP Securities • An additional credit of $0.0001 per share if an LMM is registered as the LMM in at least 75 but less than 100 Less Active ETP Securities With this proposed rule change, the Exchange proposes to adopt a new incremental credit of $0.00005 per share if a LMM is registered as the LMM in at least 50 but less than 75 Less Active ETP Securities. The purpose of the proposed rule change is to encourage LMMs and ETP Holders to enhance the market quality in Tape B securities that are listed and traded on the Exchange by offering incremental credits, which would support the quality of price discovery in Less Active ETP Securities on the Exchange and provide additional liquidity for incoming orders for the benefit of all market participants. The Exchange believes that providing increased credits to LMMs and ETP Holders that are affiliated with a LMM that add liquidity in Tape B securities to the Exchange could lead to more LMMs to register to quote and trade in Less Active ETP Securities. The Exchange believes the incremental credit for adding liquidity could also encourage competition in Tape B securities quoted and traded on the Exchange. The Exchange does not know how much order flow LMMs and ETP Holders choose to route to other exchanges or to off-exchange venues. The incremental credits in NYSE Arcalisted securities are available to all LMMs that are registered as the LMM in a security, and to ETP Holders that are affiliated with a LMM. Currently, there are 2 LMMs that meet the requirements of the proposed tier and that would qualify for the incremental credit.13 12 The Exchange defines ‘‘affiliate’’ to ‘‘mean any ETP Holder under 75% common ownership or control of that ETP Holder.’’ See Fee Schedule, NYSE Arca Marketplace: General. 13 As of November 27, 2019, there are 13 LMMs on the Exchange that could qualify for the PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 Without having a view of a LMM’s activity on other markets and offexchange venues, the Exchange has no way of knowing whether this proposed rule change would result in more LMMs sending their orders in NYSE Arcalisted securities to the Exchange to qualify for the existing credits or whether this proposed rule change would result in LMMs to send more of their orders in NYSE Arca-listed securities to the Exchange to qualify for the proposed new credits. The Exchange cannot predict with certainty how many LMMs would avail themselves of this opportunity but additional liquidityproviding orders would benefit all market participants because it would provide greater execution opportunities on the Exchange. Additionally, with this proposed rule change, the Exchange proposes to adopt a new rebate as another incentive for LMMs to actively improve market quality in the opening and closing auctions in NYSE Arca-listed securities that are not actively traded. As proposed, LMMs registered as the LMM in a NYSE Arca-listed security where the security has been listed on NYSE Arca for an entire calendar month would be eligible for a rebate payable each month provided that there has been either an opening auction or a closing auction of at least one round-lot conducted in the security each day during the billing month, and where, in the case of an opening auction, the security’s opening auction price is within 1.50% of the Auction Reference Price (as defined in Rule 7.35–E), and in the case of a closing auction, the security’s closing auction price is within 0.50% of the Auction Reference Price, for every auction in that security during the billing month. Qualifying LMMs in a security that meets the criteria described above would receive a monthly rebate, as follows: • $100 per security for each security that had a CADV in the previous month of less than 100,000 shares; • $75 per security for each security that had a CADV in the previous month between 100,000 shares and up to 175,000 shares; • $50 per security for each security that had a CADV in the previous month between 175,000 shares and up to 250,000 shares. The purpose of the proposed rule change is to incentivize LMMs to increase auction liquidity in less liquid NYSE Arca-listed securities to support price discovery in the Exchange’s opening and closing auctions for the incremental rebates for Less Active ETP Securities, all of whom are affiliated with an ETP holder. E:\FR\FM\22JAN1.SGM 22JAN1 Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices khammond on DSKJM1Z7X2PROD with NOTICES benefit of all market participants. The Exchange believes that providing monthly rebates on a per-security basis could lead to more LMMs to register in less liquid securities and encourage greater participation in the opening and closing auctions on the Exchange. The Exchange believes the proposed monthly rebate, in addition to the incremental credit for adding liquidity, could encourage competition in Tape B securities quoted and traded on the Exchange. ETF Incentive Program The Exchange proposes to replace the rebate applicable to ETP Holders with a monthly rebate payable on a persecurity basis that is tied to quoting requirements in NYSE Arca-listed securities. The Exchange believes that the proposed ETF Incentive Program (‘‘EIP Program’’) would encourage ETP Holders to maintain better market quality in NYSE Arca-listed securities, and, in particular, in lower volume securities. The Exchange currently offers an Exchange Traded Fund Liquidity Provider Program (‘‘ELP Program’’) pursuant to which the Exchange provides an incremental credit of $0.0001 per share to ETP Holders for providing displayed liquidity that result in an execution to ETP Holders that meet prescribed quoting standards in NYSE Arca-listed securities that have a CADV in the previous month of less than 250,000 shares. Under the ELP Program, for each billing month, in at least 50 qualifying securities, an ETP Holder must quote at the National Best Bid or Offer (‘‘NBBO’’) for at least an average of 15% of the time, and display at least 2,500 shares that are priced no more than 2% away from the NBBO at least 90% of the time. The Exchange proposes to eliminate the ELP Program and replace it with the EIP Program. The Exchange is now proposing to adopt an incentive program that would provide ETP Holders with a monthly rebate for each NYSE Arca-listed security that has been listed on the Exchange for an entire calendar month and that had a CADV in the previous month of less than 10,000 shares (‘‘EIP Security’’). To qualify for the proposed rebate, an EIP Security must have a time-weighted quoting size at the NBBO. Specifically, for each billing month, ETP Holders must quote at the NBBO with average time-weighted minimum bid and minimum offer of at least 300 on each side (‘‘Share Size’’). An ETP Holder with the largest Share Size in an EIP Security would receive a rebate of $60 per security that meets the Share Size requirements for the billing VerDate Sep<11>2014 16:42 Jan 21, 2020 Jkt 250001 month. An ETP Holder with the second largest Share Size in an EIP Security would receive a rebate of $40 per security. No registration is required to participate in the program. For example, assume a NYSE Arcalisted security had a CADV in the previous month of 5,000 shares, and is listed on the Exchange for every day of a billing month. Further, assume the following: • ETP Holder 1 has a time-weighted bid size of 800 shares and a timeweighted offer size of 600 shares, for an average Share Size of 700 shares. • The LMM registered as the LMM in the security has a time-weighted bid size of 400 shares and a time-weighted offer size of 800 shares, for an average Share Size of 600 shares. • ETP Holder 2 has a time-weighted bid size of 2,000 shares and a timeweighted offer size of 200 shares, for an average Share Size of 1,100 shares. In the example above, ETP Holder 1 would qualify for the $60 rebate with an average Share Size of 700 shares, and the LMM would qualify for the $40 rebate with an average Share Size of 600 shares. While ETP Holder 2 has the largest average Share Size with 1,100 shares, ETP Holder 2 had a timeweighted offer size of 200 shares, which is less than the 300 share requirement, and therefore ETP Holder 2 would not qualify for the rebate. The Exchange will calculate the Share Size for each ETP Holder, on a daily basis, up to and including the last trading day of a calendar month to determine at the end of each month whether an ETP Holder is meeting the requirements of the EIP Program. The purpose of the proposed rule change is to provide superior market quality and price discovery for NYSE Arca-listed securities, specifically securities that are less active, through a quoting size requirement that would also promote liquidity in the opening and closing auction in such securities. The proposed program is intended to provide a more meaningful incentive to ETP Holders to provide liquidity in less active securities. The proposed EIP Program would allow the Exchange to provide financial incentives to ETP Holders as long as they meet certain prescribed quoting criteria. The Exchange believes this type of an incentive, which provides a rebate on a per-security basis rather on a pertransaction basis, would encourage ETP Holders to provide meaningful quotes in the less active securities that are the focus of the proposed EIP Program. Additionally, for newly listed and low volume ETP securities, the cost to a firm for making a market, such as holding PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 3729 inventory in the security, is often not fully offset by the revenue through rebates provided by the Exchange. In some cases, ETP Holders may even operate at a loss in new and low volume ETFs. The Exchange believes the proposed EIP Program, which would compensate ETP Holders on a persecurity basis as long as they meet the prescribed quoting requirement, is a more deterministic program from an ETP Holder’s perspective. The ETP Holder would decide how many, if any, low volume securities in which it wants to provide tight and deep markets. The more securities it provides heightened quoting in, the more the ETP Holder could collect in the form of the proposed per-security rebate. The proposed changes are not otherwise intended to address any other issues, and the Exchange is not aware of any significant problems that market participants would have in complying with the proposed changes. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,14 in general, and furthers the objectives of Sections 6(b)(4) and (5) of the Act,15 in particular, because it provides for the equitable allocation of reasonable dues, fees, and other charges among its members, issuers and other persons using its facilities and does not unfairly discriminate between customers, issuers, brokers or dealers. The Proposed Fee Change Is Reasonable As discussed above, the Exchange operates in a highly fragmented and competitive market. The Commission has repeatedly expressed its preference for competition over regulatory intervention in determining prices, products, and services in the securities markets. Specifically, in Regulation NMS, the Commission highlighted the importance of market forces in determining prices and SRO revenues and, also, recognized that current regulation of the market system ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 16 As the Commission itself recognized, the market for trading services in NMS stocks has become ‘‘more fragmented 14 15 U.S.C. 78f(b). U.S.C. 78f(b)(4) and (5). 16 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005). 15 15 E:\FR\FM\22JAN1.SGM 22JAN1 3730 Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices khammond on DSKJM1Z7X2PROD with NOTICES and competitive.’’ 17 Indeed, equity trading is currently dispersed across 13 exchanges,18 31 alternative trading systems,19 and numerous broker-dealer internalizers and wholesalers, all competing for order flow. As noted above, no exchange possesses significant pricing power in the execution of equity order flow. The Exchange believes that the evershifting market share among the exchanges from month to month demonstrates that market participants can shift order flow, or discontinue to reduce use of certain categories of products, in response to fee changes. With respect to non-marketable order which provide liquidity on an Exchange, ETP Holders can choose from any one of the 13 currently operating registered exchanges to route such order flow. Accordingly, competitive forces reasonably constrain exchange transaction fees that relate to orders that would provide displayed liquidity on an exchange. Stated otherwise, changes to exchange transaction fees can have a direct effect on the ability of an exchange to compete for order flow. Given this competitive environment, the proposal represents a reasonable attempt to attract additional order flow to the Exchange. The Exchange believes the proposed rule change to introduce a new $0.00005 per share incremental credit is reasonable because it is intended to encourage LMMs to promote price discovery and market quality in Less Active ETP Securities for the benefit of all market participants. The Exchange believes the proposed rule change is reasonable and appropriate in that the credits are based on the amount of business transacted on the Exchange. The Exchange notes that the proposed incremental credit is similar to market quality incentive programs already in place on other markets, such as the Qualified Market Maker incentive on the Nasdaq Stock Market LLC (‘‘Nasdaq’’), which requires a member on that exchange to provide meaningful and consistent support to market quality and price discovery by quoting at the National Best Bid and Offer in a large number of securities. In return, Nasdaq provides such member with an 17 See Securities Exchange Act Release No. 51808, 84 FR 5202, 5253 (February 20, 2019) (File No. S7– 05–18) (Final rule). 18 See Cboe Global Markets, U.S Equities Market Volume Summary, available at https:// markets.cboe.com/us/equities/market_share/. 19 See FINRA ATS Transparency Data, available at https://otctransparency.finra.org/ otctransparency/AtsIssueData. A list of alternative trading systems registered with the Commission is available at https://www.sec.gov/foia/docs/ atslist.htm. VerDate Sep<11>2014 16:42 Jan 21, 2020 Jkt 250001 incremental rebate.20 Nasdaq PHLX LLC (‘‘PHLX’’) also provides enhanced credits to Market Makers on certain volumes based on an affiliate’s activity. Specifically, PHLX offers a tiered Customer Rebate Program that qualifies either a Specialist or Market Maker or its affiliate under Common Ownership 21 to an additional rebate provided the Specialist or Market Maker has reached the Monthly Market Maker Cap.22 The Exchange believes that providing increased credits to ETP Holders and Market Makers that are affiliated with a LMM that add liquidity in Tape B securities to the Exchange is reasonable because the Exchange believes that by providing increased rebates to affiliated ETP Holders and Market Makers of a LMM, more LMMs will register to quote and trade in Less Active ETP Securities. The Exchange believes the proposed incremental credit for adding liquidity is also reasonable because it will encourage liquidity and competition in Tape B securities quoted and traded on the Exchange. Moreover, the Exchange believes that the proposed fee change will incentivize LMMs to register as an LMM in Less Active ETP Securities and thus, add more liquidity in Tape B securities to the benefit of all market participants. Submission of additional liquidity to the Exchange would promote price discovery and transparency and enhance order execution opportunities for LMMs from the substantial amounts of liquidity present on the Exchange. All participants, including LMMs, would benefit from the greater amounts of liquidity that will be present on the Exchange, which would provide greater execution opportunities. The Exchange believes that proposal to adopt market quality based incentives under the proposed EIP Program is a reasonable means to incentivize liquidity provision in ETPs listed on the Exchange. The marketplace for listings is extremely competitive and the Exchange is not the only venue for listing ETPs. Competition in ETPs is further exacerbated by the fact that listings can and do transfer from one listing market to another. The proposed EIP Program is intended to help the Exchange compete as an ETP listing venue. Further, the Exchange notes that the proposed incentives are not transaction fees, nor are they fees paid by participants to access the Exchange. Rather, the proposed rebates are based on achieving certain objective market quality metrics. The Exchange believes providing monthly rebates for the two largest Share Sizes in less active securities will allow ETP Holders to anticipate their revenue as participants of the EIP Program and will incentivize ETP Holders to participate in the EIP Program. Given the proposed EIP Program is a new program, the Exchange cannot be certain that ETP Holders will choose to actively compete for this incentive. For ETP Holders that do choose to actively participate by increasing their quoting at the NBBO with a time-weighted minimum bid and minimum offer of at least 300 shares on each side of their quote, the Exchange generally expects ETP Holders would receive payments comparable to what they currently receive under the ELP Program, with the potential for additional upside when they meet the quoting requirement in a greater number of less active securities. The Exchange believes that eliminating the existing ELP Program is reasonable because the Exchange is not required to maintain the program and the Exchange is proposing to implement the new EIP Program in its place, as described above. The Exchange notes that only 2 ETP Holders qualified for the ELP Program in November 2019. On the backdrop of the competitive environment in which the Exchange currently operates, the proposed rule change is a reasonable attempt to increase liquidity on the Exchange and improve the Exchange’s market share relative to its competitors. 20 See Equity 7 Pricing Schedule, Section 114. Market Quality Incentive Programs, at https:// nasdaq.cchwallstreet.com/NASDAQTools/Platform Viewer.asp?selectednode=chp%5F1%5F1%5F2 %5F3&manual=%2Fnasdaq%2Fmain%2Fnasdaq %2Dllcrules%2F. 21 The term ‘‘Common Ownership’’ is defined as meaning ‘‘members or member organizations under 75% common ownership or control.’’ See PHLX fee schedule, at https://www.nasdaqtrader.com/Micro. aspx?id=phlxpricing. 22 See Options 7 Pricing Schedule, Section I, B. Customer Rebate Program, at https://nasdaqphlx. cchwallstreet.com/NASDAQPHLXTools/Platform Viewer.asp?selectednode=chp%5F1%5F1%5F2& manual=%2Fnasdaqomxphlx%2Fphlx%2Fphlx %2Dllcrules%2F. See also Securities Exchange Act Release No. 70969 (December 3, 2013), 78 FR 73906 (December 9, 2013) (SR–Phlx–2013–114). The Proposed Fee Change Is an Equitable Allocation of Fees and Credits The Exchange believes the proposed rule change to amend the LMM credits are equitable because they provide discounts that are reasonably related to the value to the Exchange’s market quality associated with higher volumes. The Exchange further believes that the proposed incremental rebate is equitable because it is consistent with the market quality and competitive benefits associated with the fee program and because the magnitude of the additional rebate is not unreasonably high in PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 E:\FR\FM\22JAN1.SGM 22JAN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices comparison to the rebate paid with respect to other displayed liquidityproviding orders. The Exchange believes that it is equitable to offer increased rebates to LMMs as LMMs are subject to additional requirements and obligations (such as quoting requirements) that other market participants are not. When PHLX adopted its proposal to provide enhanced credits, it noted its belief that the additional rebate it provides was equitable, and not unfairly discriminatory because, among other things, PHLX Specialists and Market Makers ‘‘have burdensome quoting obligations,’’ to the market that other market participants do not, and ‘‘also serve an important role on the Exchange with regard to order interaction and they provide liquidity in the marketplace.’’ 23 PHLX further noted that the ‘‘proposed differentiation as between Specialists and Market Makers as compared to other market participants recognizes the differing contributions made to the trading environment on the Exchange by these market participants.’’ The Exchange also believes that allowing ETP Holders to receive enhanced credits based on activities of their affiliates is equitable and not unfairly discriminatory because the Exchange believes that ETP Holders affiliated with LMMs may qualify to earn enhanced credits in recognition of their shared economic interest, which includes the heightened obligations imposed on LMMs. ETP Holders unaffiliated with LMMs do not share the same type of economic interests. Further, ETP Holders not affiliated with a LMM have an opportunity to establish such affiliation by several means, including but not limited to, a business combination or the establishment of their own market making operation, which each unaffiliated firm has the potential to establish. The Exchange believes that the proposed EIP Program represents an equitable allocation of payments because ETP Holders would be required to meet prescribed quoting requirements in order to qualify for the payments, as described above. Where an ETP Holder does not achieve the largest Share Size in an EIP Security or second largest Share Size in an EIP Security, it will not receive the payments. Further, all ETP Holders on the Exchange are eligible to participate in the program and could do so by simply meeting the quoting requirement. The Exchange has designed the EIP Program to be sustainable over the long-term and 23 See Securities Exchange Act Release No. 70969 (December 3, 2013), 78 FR 73906 (December 9, 2013) (SR–Phlx–2013–114). VerDate Sep<11>2014 16:42 Jan 21, 2020 Jkt 250001 generally expects that payments made to ETP Holders under the program will be comparable to payments the Exchange currently makes under the ELP Program. As such, the Exchange believes that the proposal represents an equitable allocation of payments. The Exchange believes that eliminating the existing ELP Program is equitable because the Exchange is not required to maintain the program and the Exchange is eliminating the program for all ETP Holders. The Proposed Fee Change Is Not Unfairly Discriminatory The Exchange believes that the proposed rule change is not unfairly discriminatory. In the prevailing competitive environment, LMMs and ETP Holders are free to disfavor the Exchange’s pricing if they believe that alternatives offer them better value. The Exchange believes it is not unfairly discriminatory to adopt an additional incremental credit applicable to a LMM, and ETP Holders affiliated with such LMM, for orders that provide displayed liquidity in NYSE Arca-listed securities for which they are registered as the LMM, as the proposed credits would be provided on an equal basis to all such participants. Further, the Exchange believes the proposed additional incremental credit would incentivize LMMs that meet the current tiered requirements to send more orders to the Exchange to qualify for higher credits. The Exchange also believes that the proposed change is not unfairly discriminatory because it is reasonably related to the value to the Exchange’s market quality associated with higher volume. The proposal to introduce an additional LMM credit neither targets nor will it have a disparate impact on any particular category of market participant. The proposal does not permit unfair discrimination because the proposed threshold would be applied to all similarly situated LMMs, who would all be eligible for the same credit on an equal basis. Accordingly, no LMM already operating on the Exchange would be disadvantaged by this allocation of fees. The Exchange believes that the proposed EIP Program is not unfairly discriminatory because ETP Holders would be required to meet prescribed quoting requirements in order to qualify for the payments, as described above. Where an ETP Holder does not achieve the largest Share Size in an EIP Security or second largest Share Size in an EIP Security, it will not receive the payments. Further, all ETP Holders on the Exchange are eligible to participate PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 3731 in the program and could do so by simply meeting the quoting requirement. The Exchange has designed the EIP Program to be sustainable over the long-term and generally expects that payments made to ETP Holders under the program will be comparable to payments the Exchange currently makes under the ELP Program. As such, the Exchange believes that the proposal is not unfairly discriminatory. The Exchange believes that eliminating the existing ELP Program is not unfairly discriminatory because the Exchange is not required to maintain the program and the Exchange is eliminating the program for all ETP Holders. Finally, the submission of orders to the Exchange is optional for ETP Holders in that they could choose whether to submit orders to the Exchange and, if they do, the extent of its activity in this regard. The Exchange believes that it is subject to significant competitive forces, as described below in the Exchange’s statement regarding the burden on competition. For 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,24 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. Instead, as discussed above, the Exchange believes that the proposed changes would encourage the submission of additional liquidity to a public exchange, thereby promoting market depth, price discovery and transparency and enhancing order execution opportunities for ETP Holders. As a result, the Exchange believes that the proposed change furthers the Commission’s goal in adopting Regulation NMS of fostering integrated competition among orders, which promotes ‘‘more efficient pricing of individual stocks for all types of orders, large and small.’’ 25 Intramarket Competition. The proposed change is designed to attract additional order flow to the Exchange. The Exchange believes that the new incremental credit applicable to LMMs would continue to incentivize market participants to direct their displayed order flow to the Exchange. Greater 24 15 U.S.C. 78f(b)(8). Securities Exchange Act Release No. 51808, 70 FR 37495, 37498–99 (June 29, 2005) (S7–10–04) (Final Rule). 25 See E:\FR\FM\22JAN1.SGM 22JAN1 3732 Federal Register / Vol. 85, No. 14 / Wednesday, January 22, 2020 / Notices khammond on DSKJM1Z7X2PROD with NOTICES liquidity benefits all market participants on the Exchange by providing more trading opportunities and encourages LMMs, to send orders to the Exchange, thereby contributing to robust levels of liquidity, which benefits all market participants. The proposed new incremental credit would be applicable to all similarly-situated market participants, and, as such, the proposed change would not impose a disparate burden on competition among market participants on the Exchange. The Exchange believes the proposed EIP Program would enhance competition as it is intended to increase the Exchange’s competitiveness in NYSE Arca-listed ETPs, and all ETP Holders would be able to participate in the program uniformly. Accordingly, the Exchange does not believe that the proposed change will impair the ability of ETP Holders to maintain their competitive standing. Intermarket Competition. The Exchange operates in a highly competitive market in which market participants can readily choose to send their orders to other exchange and offexchange venues if they deem fee levels at those other venues to be more favorable. As noted above, the Exchange’s market share of intraday trading (i.e., excluding auctions) was 7.6% in November 2019. In such an environment, the Exchange must continually adjust its fees and rebates to remain competitive with other exchanges and with off-exchange venues. Because competitors are free to modify their own fees and credits in response, and because market participants may readily adjust their order routing practices, the Exchange does not believe its proposed fee change can impose any burden on intermarket competition. The Exchange believes that the proposed change could promote competition between the Exchange and other execution venues, including those that currently offer similar order types and comparable transaction pricing, by encouraging additional orders to be sent to the Exchange for execution. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change is effective upon filing pursuant to Section VerDate Sep<11>2014 16:42 Jan 21, 2020 Jkt 250001 19(b)(3)(A) 26 of the Act and subparagraph (f)(2) of Rule 19b–4 27 thereunder, because it establishes a due, fee, or other charge imposed by the Exchange. At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) 28 of the Act to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEArca–2020–03 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–NYSEArca–2020–03. 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–NYSEArca–2020–03, and should be submitted on or before February 12, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–00918 Filed 1–21–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Release No. 34–87976; File No. SR– CboeEDGX–2020–001] Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Governing the Give Up of a Clearing Member by a User on Exchange Transactions January 15, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 2, 2020, Cboe EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘‘‘EDGX’’’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 1 15 26 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). 28 15 U.S.C. 78s(b)(2)(B). 27 17 PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 E:\FR\FM\22JAN1.SGM 22JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 14 (Wednesday, January 22, 2020)]
[Notices]
[Pages 3727-3732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00918]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87978; File No. SR-NYSEArca-2020-03]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the NYSE
Arca Equities Fees and Charges To Introduce a New Lead Market Maker
Credit

January 15, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 2, 2020, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend the NYSE Arca Equities Fees and
Charges (``Fee Schedule'') to (1) introduce a new Lead Market Maker
(``LMM'') credit, (2) introduce a new LMM rebate, and (3) replace the
rebate applicable to ETP Holders and Market Makers with a monthly
rebate payable on a per-security basis that is tied to quoting
requirements in NYSE Arca-listed securities. The Exchange proposes to
implement the fee changes effective January 2, 2020. 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
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to amend the Fee Schedule to (1) introduce a
new LMM \3\ credit, (2) introduce a new LMM rebate, and (3) replace the
rebate applicable to ETP Holders \4\ with a monthly rebate payable on a
per-security basis that is tied to quoting requirements in NYSE Arca-
listed securities.
---------------------------------------------------------------------------

\3\ The term ``Lead Market Maker'' is defined in Rule 1.1(w) to
mean a registered Market Maker that is the exclusive Designated
Market Maker in listings for which the Exchange is the primary
market.
\4\ All references to ETP Holders in connection with this
proposed fee change include Market Makers.
---------------------------------------------------------------------------

The proposed changes respond to the current competitive environment
where order flow providers have a choice of where to direct liquidity-
providing orders by offering further incentives for ETP Holders and
LMMs to send additional displayed liquidity to the Exchange.
The Exchange proposes to implement the fee changes effective
January 2, 2020.
Background
The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. In Regulation NMS,
the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \5\
---------------------------------------------------------------------------

\5\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
---------------------------------------------------------------------------

As the Commission itself recognized, the market for trading
services in NMS stocks has become ``more fragmented and competitive.''
\6\ Indeed, equity trading is currently dispersed across 13
exchanges,\7\ 31 alternative trading systems,\8\ and numerous broker-
dealer internalizers and wholesalers, all competing for order flow.
Based on publicly-available information for November 2019, no single
exchange has more than 18% market share (whether including or excluding
auction volume).\9\ Therefore, no exchange possesses significant
pricing power in the execution of equity order flow. More specifically,
in November 2019, the Exchange had 7.6% market share of executed volume
of equity trades (excluding auction volume).\10\
---------------------------------------------------------------------------

\6\ See Securities Exchange Act Release No. 51808, 84 FR 5202,
5253 (February 20, 2019) (File No. S7-05-18) (Final Rule).
\7\ See Cboe U.S Equities Market Volume Summary, available at
https://markets.cboe.com/us/equities/market_share. See generally
https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
\8\ See FINRA ATS Transparency Data, available at https://otctransparency.finra.org/otctransparency/AtsIssueData. A list of
alternative trading systems registered with the Commission is
available at https://www.sec.gov/foia/docs/atslist.htm.
\9\ See Cboe Global Markets U.S. Equities Market Volume Summary,
available at https://markets.cboe.com/us/equities/market_share/.
\10\ See id.
---------------------------------------------------------------------------

The Exchange believes that the ever-shifting market share among the
exchanges from month to month demonstrates that market participants can
move order flow, or discontinue or reduce use of certain categories of
products. While it is not possible to know a firm's reason for shifting
order flow, the Exchange believes that one such reason is because of
fee changes at any of the registered exchanges or non-

[[Page 3728]]

exchange venues to which a firm routes order flow. With respect to non-
marketable order flow that would provide displayed liquidity on an
Exchange against which market makers can quote, ETP Holders and LMMs
can choose from any one of the 13 currently operating registered
exchanges to route such order flow. Accordingly, competitive forces
constrain exchange transaction fees and credits that relate to orders
that would provide displayed liquidity on an exchange.
Proposed Rule Change
The proposed rule change is designed to be available to all ETP
Holders and LMMs on the Exchange, and is intended to provide ETP
Holders and LMMs an opportunity to receive enhanced rebates by quoting
and trading more on the Exchange.
The Exchange currently provides incentives in the form of tiered
and/or incremental credits to ETP Holders and LMMs who submit orders
that provide displayed liquidity on the Exchange. The Exchange
currently has multiple levels of credits for orders that provide
displayed liquidity that are based on the amount of volume of such
orders that participants send to the Exchange.
As described in greater detail below, the Exchange proposes the
following changes:
Adopt a new incremental credit of $0.00005 per share if an
LMM is registered as the LMM in at least 50 but less than 75 Less
Active ETP Securities;
Adopt a new monthly rebate that ranges between $100 per
security and $50 per security payable to LMMs that quote and trade in
NYSE Arca-listed Tape B Securities that are not actively traded; and
Adopt an ETF Incentive Program that provides a monthly
rebate on a per-security basis to ETP Holders that meet certain quoting
requirements.
LMM Credits
The Exchange currently provides tier-based incremental credits to
LMMs \11\ and to ETP Holders affiliated with the LMM that provide
displayed liquidity to the NYSE Arca Book in Tape B Securities.
Specifically, LMMs that are registered as the LMM in Tape B Securities
that have a consolidated average daily volume (``CADV'') in the
previous month of less than 100,000 shares, or 0.0010% of Consolidated
Tape B ADV, whichever is greater (``Less Active ETP Securities''), and
the ETP Holders affiliated with such LMMs, currently receive an
additional credit for orders that provide displayed liquidity to the
Book in any Tape B Securities that trade on the Exchange.\12\ The
current incremental credits and volume thresholds are as follows:
---------------------------------------------------------------------------

\11\ The term ``Lead Market Maker'' is defined in Rule 1.1(w) to
mean a registered Market Maker that is the exclusive Designated
Market Maker in listings for which the Exchange is the primary
market.
\12\ The Exchange defines ``affiliate'' to ``mean any ETP Holder
under 75% common ownership or control of that ETP Holder.'' See Fee
Schedule, NYSE Arca Marketplace: General.
---------------------------------------------------------------------------

An additional credit of $0.0004 per share if an LMM is
registered as the LMM in at least 300 Less Active ETP Securities
An additional credit of $0.0003 per share if an LMM is
registered as the LMM in at least 200 but less than 300 Less Active ETP
Securities
An additional credit of $0.0002 per share if an LMM is
registered as the LMM in at least 100 but less than 200 Less Active ETP
Securities
An additional credit of $0.0001 per share if an LMM is
registered as the LMM in at least 75 but less than 100 Less Active ETP
Securities
With this proposed rule change, the Exchange proposes to adopt a
new incremental credit of $0.00005 per share if a LMM is registered as
the LMM in at least 50 but less than 75 Less Active ETP Securities.
The purpose of the proposed rule change is to encourage LMMs and
ETP Holders to enhance the market quality in Tape B securities that are
listed and traded on the Exchange by offering incremental credits,
which would support the quality of price discovery in Less Active ETP
Securities on the Exchange and provide additional liquidity for
incoming orders for the benefit of all market participants. The
Exchange believes that providing increased credits to LMMs and ETP
Holders that are affiliated with a LMM that add liquidity in Tape B
securities to the Exchange could lead to more LMMs to register to quote
and trade in Less Active ETP Securities. The Exchange believes the
incremental credit for adding liquidity could also encourage
competition in Tape B securities quoted and traded on the Exchange.
The Exchange does not know how much order flow LMMs and ETP Holders
choose to route to other exchanges or to off-exchange venues. The
incremental credits in NYSE Arca-listed securities are available to all
LMMs that are registered as the LMM in a security, and to ETP Holders
that are affiliated with a LMM. Currently, there are 2 LMMs that meet
the requirements of the proposed tier and that would qualify for the
incremental credit.\13\ Without having a view of a LMM's activity on
other markets and off-exchange venues, the Exchange has no way of
knowing whether this proposed rule change would result in more LMMs
sending their orders in NYSE Arca-listed securities to the Exchange to
qualify for the existing credits or whether this proposed rule change
would result in LMMs to send more of their orders in NYSE Arca-listed
securities to the Exchange to qualify for the proposed new credits. The
Exchange cannot predict with certainty how many LMMs would avail
themselves of this opportunity but additional liquidity-providing
orders would benefit all market participants because it would provide
greater execution opportunities on the Exchange.
---------------------------------------------------------------------------

\13\ As of November 27, 2019, there are 13 LMMs on the Exchange
that could qualify for the incremental rebates for Less Active ETP
Securities, all of whom are affiliated with an ETP holder.
---------------------------------------------------------------------------

Additionally, with this proposed rule change, the Exchange proposes
to adopt a new rebate as another incentive for LMMs to actively improve
market quality in the opening and closing auctions in NYSE Arca-listed
securities that are not actively traded. As proposed, LMMs registered
as the LMM in a NYSE Arca-listed security where the security has been
listed on NYSE Arca for an entire calendar month would be eligible for
a rebate payable each month provided that there has been either an
opening auction or a closing auction of at least one round-lot
conducted in the security each day during the billing month, and where,
in the case of an opening auction, the security's opening auction price
is within 1.50% of the Auction Reference Price (as defined in Rule
7.35-E), and in the case of a closing auction, the security's closing
auction price is within 0.50% of the Auction Reference Price, for every
auction in that security during the billing month. Qualifying LMMs in a
security that meets the criteria described above would receive a
monthly rebate, as follows:
$100 per security for each security that had a CADV in the
previous month of less than 100,000 shares;
$75 per security for each security that had a CADV in the
previous month between 100,000 shares and up to 175,000 shares;
$50 per security for each security that had a CADV in the
previous month between 175,000 shares and up to 250,000 shares.
The purpose of the proposed rule change is to incentivize LMMs to
increase auction liquidity in less liquid NYSE Arca-listed securities
to support price discovery in the Exchange's opening and closing
auctions for the

[[Page 3729]]

benefit of all market participants. The Exchange believes that
providing monthly rebates on a per-security basis could lead to more
LMMs to register in less liquid securities and encourage greater
participation in the opening and closing auctions on the Exchange. The
Exchange believes the proposed monthly rebate, in addition to the
incremental credit for adding liquidity, could encourage competition in
Tape B securities quoted and traded on the Exchange.
ETF Incentive Program
The Exchange proposes to replace the rebate applicable to ETP
Holders with a monthly rebate payable on a per-security basis that is
tied to quoting requirements in NYSE Arca-listed securities. The
Exchange believes that the proposed ETF Incentive Program (``EIP
Program'') would encourage ETP Holders to maintain better market
quality in NYSE Arca-listed securities, and, in particular, in lower
volume securities.
The Exchange currently offers an Exchange Traded Fund Liquidity
Provider Program (``ELP Program'') pursuant to which the Exchange
provides an incremental credit of $0.0001 per share to ETP Holders for
providing displayed liquidity that result in an execution to ETP
Holders that meet prescribed quoting standards in NYSE Arca-listed
securities that have a CADV in the previous month of less than 250,000
shares. Under the ELP Program, for each billing month, in at least 50
qualifying securities, an ETP Holder must quote at the National Best
Bid or Offer (``NBBO'') for at least an average of 15% of the time, and
display at least 2,500 shares that are priced no more than 2% away from
the NBBO at least 90% of the time. The Exchange proposes to eliminate
the ELP Program and replace it with the EIP Program.
The Exchange is now proposing to adopt an incentive program that
would provide ETP Holders with a monthly rebate for each NYSE Arca-
listed security that has been listed on the Exchange for an entire
calendar month and that had a CADV in the previous month of less than
10,000 shares (``EIP Security''). To qualify for the proposed rebate,
an EIP Security must have a time-weighted quoting size at the NBBO.
Specifically, for each billing month, ETP Holders must quote at the
NBBO with average time-weighted minimum bid and minimum offer of at
least 300 on each side (``Share Size''). An ETP Holder with the largest
Share Size in an EIP Security would receive a rebate of $60 per
security that meets the Share Size requirements for the billing month.
An ETP Holder with the second largest Share Size in an EIP Security
would receive a rebate of $40 per security. No registration is required
to participate in the program.
For example, assume a NYSE Arca-listed security had a CADV in the
previous month of 5,000 shares, and is listed on the Exchange for every
day of a billing month. Further, assume the following:
ETP Holder 1 has a time-weighted bid size of 800 shares
and a time-weighted offer size of 600 shares, for an average Share Size
of 700 shares.
The LMM registered as the LMM in the security has a time-
weighted bid size of 400 shares and a time-weighted offer size of 800
shares, for an average Share Size of 600 shares.
ETP Holder 2 has a time-weighted bid size of 2,000 shares
and a time- weighted offer size of 200 shares, for an average Share
Size of 1,100 shares.
In the example above, ETP Holder 1 would qualify for the $60 rebate
with an average Share Size of 700 shares, and the LMM would qualify for
the $40 rebate with an average Share Size of 600 shares. While ETP
Holder 2 has the largest average Share Size with 1,100 shares, ETP
Holder 2 had a time-weighted offer size of 200 shares, which is less
than the 300 share requirement, and therefore ETP Holder 2 would not
qualify for the rebate.
The Exchange will calculate the Share Size for each ETP Holder, on
a daily basis, up to and including the last trading day of a calendar
month to determine at the end of each month whether an ETP Holder is
meeting the requirements of the EIP Program.
The purpose of the proposed rule change is to provide superior
market quality and price discovery for NYSE Arca-listed securities,
specifically securities that are less active, through a quoting size
requirement that would also promote liquidity in the opening and
closing auction in such securities. The proposed program is intended to
provide a more meaningful incentive to ETP Holders to provide liquidity
in less active securities. The proposed EIP Program would allow the
Exchange to provide financial incentives to ETP Holders as long as they
meet certain prescribed quoting criteria. The Exchange believes this
type of an incentive, which provides a rebate on a per-security basis
rather on a per-transaction basis, would encourage ETP Holders to
provide meaningful quotes in the less active securities that are the
focus of the proposed EIP Program.
Additionally, for newly listed and low volume ETP securities, the
cost to a firm for making a market, such as holding inventory in the
security, is often not fully offset by the revenue through rebates
provided by the Exchange. In some cases, ETP Holders may even operate
at a loss in new and low volume ETFs. The Exchange believes the
proposed EIP Program, which would compensate ETP Holders on a per-
security basis as long as they meet the prescribed quoting requirement,
is a more deterministic program from an ETP Holder's perspective. The
ETP Holder would decide how many, if any, low volume securities in
which it wants to provide tight and deep markets. The more securities
it provides heightened quoting in, the more the ETP Holder could
collect in the form of the proposed per-security rebate.
The proposed changes are not otherwise intended to address any
other issues, and the Exchange is not aware of any significant problems
that market participants would have in complying with the proposed
changes.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\14\ in general, and furthers the
objectives of Sections 6(b)(4) and (5) of the Act,\15\ in particular,
because it provides for the equitable allocation of reasonable dues,
fees, and other charges among its members, issuers and other persons
using its facilities and does not unfairly discriminate between
customers, issuers, brokers or dealers.
---------------------------------------------------------------------------

\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

The Proposed Fee Change Is Reasonable
As discussed above, the Exchange operates in a highly fragmented
and competitive market. The Commission has repeatedly expressed its
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. Specifically,
in Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and, also, recognized
that current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' \16\
---------------------------------------------------------------------------

\16\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
---------------------------------------------------------------------------

As the Commission itself recognized, the market for trading
services in NMS stocks has become ``more fragmented

[[Page 3730]]

and competitive.'' \17\ Indeed, equity trading is currently dispersed
across 13 exchanges,\18\ 31 alternative trading systems,\19\ and
numerous broker-dealer internalizers and wholesalers, all competing for
order flow. As noted above, no exchange possesses significant pricing
power in the execution of equity order flow.
---------------------------------------------------------------------------

\17\ See Securities Exchange Act Release No. 51808, 84 FR 5202,
5253 (February 20, 2019) (File No. S7-05-18) (Final rule).
\18\ See Cboe Global Markets, U.S Equities Market Volume
Summary, available at https://markets.cboe.com/us/equities/market_share/.
\19\ See FINRA ATS Transparency Data, available at https://otctransparency.finra.org/otctransparency/AtsIssueData. A list of
alternative trading systems registered with the Commission is
available at https://www.sec.gov/foia/docs/atslist.htm.
---------------------------------------------------------------------------

The Exchange believes that the ever-shifting market share among the
exchanges from month to month demonstrates that market participants can
shift order flow, or discontinue to reduce use of certain categories of
products, in response to fee changes. With respect to non-marketable
order which provide liquidity on an Exchange, ETP Holders can choose
from any one of the 13 currently operating registered exchanges to
route such order flow. Accordingly, competitive forces reasonably
constrain exchange transaction fees that relate to orders that would
provide displayed liquidity on an exchange. Stated otherwise, changes
to exchange transaction fees can have a direct effect on the ability of
an exchange to compete for order flow.
Given this competitive environment, the proposal represents a
reasonable attempt to attract additional order flow to the Exchange.
The Exchange believes the proposed rule change to introduce a new
$0.00005 per share incremental credit is reasonable because it is
intended to encourage LMMs to promote price discovery and market
quality in Less Active ETP Securities for the benefit of all market
participants. The Exchange believes the proposed rule change is
reasonable and appropriate in that the credits are based on the amount
of business transacted on the Exchange. The Exchange notes that the
proposed incremental credit is similar to market quality incentive
programs already in place on other markets, such as the Qualified
Market Maker incentive on the Nasdaq Stock Market LLC (``Nasdaq''),
which requires a member on that exchange to provide meaningful and
consistent support to market quality and price discovery by quoting at
the National Best Bid and Offer in a large number of securities. In
return, Nasdaq provides such member with an incremental rebate.\20\
Nasdaq PHLX LLC (``PHLX'') also provides enhanced credits to Market
Makers on certain volumes based on an affiliate's activity.
Specifically, PHLX offers a tiered Customer Rebate Program that
qualifies either a Specialist or Market Maker or its affiliate under
Common Ownership \21\ to an additional rebate provided the Specialist
or Market Maker has reached the Monthly Market Maker Cap.\22\ The
Exchange believes that providing increased credits to ETP Holders and
Market Makers that are affiliated with a LMM that add liquidity in Tape
B securities to the Exchange is reasonable because the Exchange
believes that by providing increased rebates to affiliated ETP Holders
and Market Makers of a LMM, more LMMs will register to quote and trade
in Less Active ETP Securities. The Exchange believes the proposed
incremental credit for adding liquidity is also reasonable because it
will encourage liquidity and competition in Tape B securities quoted
and traded on the Exchange. Moreover, the Exchange believes that the
proposed fee change will incentivize LMMs to register as an LMM in Less
Active ETP Securities and thus, add more liquidity in Tape B securities
to the benefit of all market participants.
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\20\ See Equity 7 Pricing Schedule, Section 114. Market Quality
Incentive Programs, at https://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp%5F1%5F1%5F2%5F3&manual=%2Fnasdaq%2Fmain%2Fnasdaq%2Dllcrules%2F.
\21\ The term ``Common Ownership'' is defined as meaning
``members or member organizations under 75% common ownership or
control.'' See PHLX fee schedule, at https://www.nasdaqtrader.com/Micro.aspx?id=phlxpricing.
\22\ See Options 7 Pricing Schedule, Section I, B. Customer
Rebate Program, at https://nasdaqphlx.cchwallstreet.com/NASDAQPHLXTools/PlatformViewer.asp?selectednode=chp%5F1%5F1%5F2&manual=%2Fnasdaqomxphlx%2Fphlx%2Fphlx%2Dllcrules%2F. See also Securities Exchange Act
Release No. 70969 (December 3, 2013), 78 FR 73906 (December 9, 2013)
(SR-Phlx-2013-114).
---------------------------------------------------------------------------

Submission of additional liquidity to the Exchange would promote
price discovery and transparency and enhance order execution
opportunities for LMMs from the substantial amounts of liquidity
present on the Exchange. All participants, including LMMs, would
benefit from the greater amounts of liquidity that will be present on
the Exchange, which would provide greater execution opportunities.
The Exchange believes that proposal to adopt market quality based
incentives under the proposed EIP Program is a reasonable means to
incentivize liquidity provision in ETPs listed on the Exchange. The
marketplace for listings is extremely competitive and the Exchange is
not the only venue for listing ETPs. Competition in ETPs is further
exacerbated by the fact that listings can and do transfer from one
listing market to another. The proposed EIP Program is intended to help
the Exchange compete as an ETP listing venue. Further, the Exchange
notes that the proposed incentives are not transaction fees, nor are
they fees paid by participants to access the Exchange. Rather, the
proposed rebates are based on achieving certain objective market
quality metrics. The Exchange believes providing monthly rebates for
the two largest Share Sizes in less active securities will allow ETP
Holders to anticipate their revenue as participants of the EIP Program
and will incentivize ETP Holders to participate in the EIP Program.
Given the proposed EIP Program is a new program, the Exchange
cannot be certain that ETP Holders will choose to actively compete for
this incentive. For ETP Holders that do choose to actively participate
by increasing their quoting at the NBBO with a time-weighted minimum
bid and minimum offer of at least 300 shares on each side of their
quote, the Exchange generally expects ETP Holders would receive
payments comparable to what they currently receive under the ELP
Program, with the potential for additional upside when they meet the
quoting requirement in a greater number of less active securities.
The Exchange believes that eliminating the existing ELP Program is
reasonable because the Exchange is not required to maintain the program
and the Exchange is proposing to implement the new EIP Program in its
place, as described above. The Exchange notes that only 2 ETP Holders
qualified for the ELP Program in November 2019.
On the backdrop of the competitive environment in which the
Exchange currently operates, the proposed rule change is a reasonable
attempt to increase liquidity on the Exchange and improve the
Exchange's market share relative to its competitors.
The Proposed Fee Change Is an Equitable Allocation of Fees and Credits
The Exchange believes the proposed rule change to amend the LMM
credits are equitable because they provide discounts that are
reasonably related to the value to the Exchange's market quality
associated with higher volumes. The Exchange further believes that the
proposed incremental rebate is equitable because it is consistent with
the market quality and competitive benefits associated with the fee
program and because the magnitude of the additional rebate is not
unreasonably high in

[[Page 3731]]

comparison to the rebate paid with respect to other displayed
liquidity-providing orders. The Exchange believes that it is equitable
to offer increased rebates to LMMs as LMMs are subject to additional
requirements and obligations (such as quoting requirements) that other
market participants are not. When PHLX adopted its proposal to provide
enhanced credits, it noted its belief that the additional rebate it
provides was equitable, and not unfairly discriminatory because, among
other things, PHLX Specialists and Market Makers ``have burdensome
quoting obligations,'' to the market that other market participants do
not, and ``also serve an important role on the Exchange with regard to
order interaction and they provide liquidity in the marketplace.'' \23\
PHLX further noted that the ``proposed differentiation as between
Specialists and Market Makers as compared to other market participants
recognizes the differing contributions made to the trading environment
on the Exchange by these market participants.'' The Exchange also
believes that allowing ETP Holders to receive enhanced credits based on
activities of their affiliates is equitable and not unfairly
discriminatory because the Exchange believes that ETP Holders
affiliated with LMMs may qualify to earn enhanced credits in
recognition of their shared economic interest, which includes the
heightened obligations imposed on LMMs. ETP Holders unaffiliated with
LMMs do not share the same type of economic interests. Further, ETP
Holders not affiliated with a LMM have an opportunity to establish such
affiliation by several means, including but not limited to, a business
combination or the establishment of their own market making operation,
which each unaffiliated firm has the potential to establish.
---------------------------------------------------------------------------

\23\ See Securities Exchange Act Release No. 70969 (December 3,
2013), 78 FR 73906 (December 9, 2013) (SR-Phlx-2013-114).
---------------------------------------------------------------------------

The Exchange believes that the proposed EIP Program represents an
equitable allocation of payments because ETP Holders would be required
to meet prescribed quoting requirements in order to qualify for the
payments, as described above. Where an ETP Holder does not achieve the
largest Share Size in an EIP Security or second largest Share Size in
an EIP Security, it will not receive the payments. Further, all ETP
Holders on the Exchange are eligible to participate in the program and
could do so by simply meeting the quoting requirement. The Exchange has
designed the EIP Program to be sustainable over the long-term and
generally expects that payments made to ETP Holders under the program
will be comparable to payments the Exchange currently makes under the
ELP Program. As such, the Exchange believes that the proposal
represents an equitable allocation of payments.
The Exchange believes that eliminating the existing ELP Program is
equitable because the Exchange is not required to maintain the program
and the Exchange is eliminating the program for all ETP Holders.
The Proposed Fee Change Is Not Unfairly Discriminatory
The Exchange believes that the proposed rule change is not unfairly
discriminatory. In the prevailing competitive environment, LMMs and ETP
Holders are free to disfavor the Exchange's pricing if they believe
that alternatives offer them better value.
The Exchange believes it is not unfairly discriminatory to adopt an
additional incremental credit applicable to a LMM, and ETP Holders
affiliated with such LMM, for orders that provide displayed liquidity
in NYSE Arca-listed securities for which they are registered as the
LMM, as the proposed credits would be provided on an equal basis to all
such participants. Further, the Exchange believes the proposed
additional incremental credit would incentivize LMMs that meet the
current tiered requirements to send more orders to the Exchange to
qualify for higher credits. The Exchange also believes that the
proposed change is not unfairly discriminatory because it is reasonably
related to the value to the Exchange's market quality associated with
higher volume.
The proposal to introduce an additional LMM credit neither targets
nor will it have a disparate impact on any particular category of
market participant. The proposal does not permit unfair discrimination
because the proposed threshold would be applied to all similarly
situated LMMs, who would all be eligible for the same credit on an
equal basis. Accordingly, no LMM already operating on the Exchange
would be disadvantaged by this allocation of fees.
The Exchange believes that the proposed EIP Program is not unfairly
discriminatory because ETP Holders would be required to meet prescribed
quoting requirements in order to qualify for the payments, as described
above. Where an ETP Holder does not achieve the largest Share Size in
an EIP Security or second largest Share Size in an EIP Security, it
will not receive the payments. Further, all ETP Holders on the Exchange
are eligible to participate in the program and could do so by simply
meeting the quoting requirement. The Exchange has designed the EIP
Program to be sustainable over the long-term and generally expects that
payments made to ETP Holders under the program will be comparable to
payments the Exchange currently makes under the ELP Program. As such,
the Exchange believes that the proposal is not unfairly discriminatory.
The Exchange believes that eliminating the existing ELP Program is
not unfairly discriminatory because the Exchange is not required to
maintain the program and the Exchange is eliminating the program for
all ETP Holders.
Finally, the submission of orders to the Exchange is optional for
ETP Holders in that they could choose whether to submit orders to the
Exchange and, if they do, the extent of its activity in this regard.
The Exchange believes that it is subject to significant competitive
forces, as described below in the Exchange's statement regarding the
burden on competition.
For 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,\24\ 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. Instead, as discussed above, the Exchange believes
that the proposed changes would encourage the submission of additional
liquidity to a public exchange, thereby promoting market depth, price
discovery and transparency and enhancing order execution opportunities
for ETP Holders. As a result, the Exchange believes that the proposed
change furthers the Commission's goal in adopting Regulation NMS of
fostering integrated competition among orders, which promotes ``more
efficient pricing of individual stocks for all types of orders, large
and small.'' \25\
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\24\ 15 U.S.C. 78f(b)(8).
\25\ See Securities Exchange Act Release No. 51808, 70 FR 37495,
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
---------------------------------------------------------------------------

Intramarket Competition. The proposed change is designed to attract
additional order flow to the Exchange. The Exchange believes that the
new incremental credit applicable to LMMs would continue to incentivize
market participants to direct their displayed order flow to the
Exchange. Greater

[[Page 3732]]

liquidity benefits all market participants on the Exchange by providing
more trading opportunities and encourages LMMs, to send orders to the
Exchange, thereby contributing to robust levels of liquidity, which
benefits all market participants. The proposed new incremental credit
would be applicable to all similarly-situated market participants, and,
as such, the proposed change would not impose a disparate burden on
competition among market participants on the Exchange. The Exchange
believes the proposed EIP Program would enhance competition as it is
intended to increase the Exchange's competitiveness in NYSE Arca-listed
ETPs, and all ETP Holders would be able to participate in the program
uniformly. Accordingly, the Exchange does not believe that the proposed
change will impair the ability of ETP Holders to maintain their
competitive standing.
Intermarket Competition. The Exchange operates in a highly
competitive market in which market participants can readily choose to
send their orders to other exchange and off-exchange venues if they
deem fee levels at those other venues to be more favorable. As noted
above, the Exchange's market share of intraday trading (i.e., excluding
auctions) was 7.6% in November 2019. In such an environment, the
Exchange must continually adjust its fees and rebates to remain
competitive with other exchanges and with off-exchange venues. Because
competitors are free to modify their own fees and credits in response,
and because market participants may readily adjust their order routing
practices, the Exchange does not believe its proposed fee change can
impose any burden on intermarket competition.
The Exchange believes that the proposed change could promote
competition between the Exchange and other execution venues, including
those that currently offer similar order types and comparable
transaction pricing, by encouraging additional orders to be sent to the
Exchange for execution.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were solicited or received with respect to the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \26\ of the Act and subparagraph (f)(2) of Rule
19b-4 \27\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
---------------------------------------------------------------------------

\26\ 15 U.S.C. 78s(b)(3)(A).
\27\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \28\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------

\28\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-NYSEArca-2020-03 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-NYSEArca-2020-03. 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-NYSEArca-2020-03, and should be
submitted on or before February 12, 2020.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

\29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00918 Filed 1-21-20; 8:45 am]
BILLING CODE 8011-01-P

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