[Federal Register Volume 73, Number 217 (Friday, November 7, 2008)]
[Notices]
[Pages 66279-66281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26571]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58888; File No. SR-NYSEArca-2008-100]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Rules 
6.100 and 6.82

October 30, 2008.
    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 20, 2008, NYSE Arca, Inc. (``NYSE Arca'' 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE Arca proposes to amend its rules governing Allocation of 
Options Issues and Lead Market Maker (``LMM'') Evaluations. The 
Exchange proposes to eliminate Rule 6.100 and revise Rule 6.82. The 
text of the proposed rule change is available on the Exchange's Web 
site at http://www.nyse.com, at the Exchange's principal office and at 
the Public Reference Room of the Commission.

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. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The purpose of this filing is to delete certain obsolete provisions 
of Rule 6.100. The Exchange then proposes to incorporate the remaining 
relevant provisions of Rule 6.100 into a revised Rule 6.82, so that all 
relevant provisions related to LMM issue allocation reside within one 
consolidated rule. Finally, the Exchange proposes to add new relevant 
provisions to Rule 6.82 and logically renumber the Rule.

History

    Rule 6.100 was originally adopted from Options Floor Procedural 
Advice (``OFPA'') \4\ B13, issued on April 2, 1988, which described 
Trading Crowd evaluations and the process for allocating option issues. 
On October 3, 1996, the Exchange revised OFPA-B13 to describe the 
process for evaluating LMMs for purposes of allocating option issues. 
OFPA-B13 was ultimately incorporated into the Exchange's rules, as part 
of SR-PCX-1999-48.\5\
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    \4\ OFPAs were previously issued by the Exchange as a way of 
distributing information such as committee decisions, policies and 
procedures, and rule interpretations. Such information is now 
conveyed through the issuance of Regulatory Bulletins.
    \5\ See Securities Exchange Act Release No. 44345 (May 23, 
2001), 66 FR 30037 (June 4, 2001) (approval notice for SR-PCX-1999-
48).
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    Prior to the Exchange's conversion to its Lead Market Maker system 
(a conversion which is now 100% complete), options issues, or classes 
of options, on NYSE Arca were allocated to either a Trading Crowd, 
consisting of a group of individual Market Makers, or to LMMs. An 
allocation to a Trading Crowd simply designated the physical post on 
the trading floor where a particular issue would trade. Traditionally, 
a Market Maker's Appointment was generally limited to issues allocated 
to a particular Trading Crowd.\6\ The allocation did not convey any 
specific rights, nor confer any specific obligations on any individual 
Market Maker of the crowd, other than those already specified in NYSE 
Arca 6.37.\7\ A Market Maker's obligations, conveyed as a condition of 
his or her Appointment, are not affected due to the allocation, or 
reallocation of an options issue. An allocation of a particular class 
of options to an LMM, which in turn becomes part of that Market Maker's 
Appointment, does however guarantee certain rights, in return for 
fulfilling certain obligations. Presently, these obligations and rights 
are detailed, in part, in Rule 6.82.
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    \6\ Market Maker Appointments are governed by NYSE Arca Rule 
6.35. Since the advent of electronic access to the Exchange in 2003, 
a Market Maker's ``Appointment'' is no longer necessarily bound by 
the physical layout of the Trading Floor.
    \7\ See NYSE Arca Rule 6.37 (Obligations of Market Makers).
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    By the end of the period in which the Exchange allocated issues to 
both LMMs and Trading Crowds, the Exchange determined that most issues 
that were allocated to an LMM (as opposed to a Trading Crowd) had 
tighter bid/ask spreads, offered more liquidity and were generally 
thought to offer a better product for public investors. As a result, 
since 1999, all option issues on the Exchange have been allocated 
exclusively to LMMs.\8\ Presently, there are no issues allocated to a 
Trading Crowd.
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    \8\ It should be noted that in mid-2007 the Exchange received 
approval to designate certain option issues as ``non-LMM'' issues. 
See Securities Exchange Act Release No. 56001 (July 2, 2007), 72 FR 
37557 (July 10, 2007) (SR-NYSEArca-2007-34). To qualify for non-LMM 
status, the option issues must be highly liquid, highly active 
issues that have sufficient participation by OTP Holders that there 
is no need for an LMM. By their very definition, non-LMM issues are 
not allocated to an LMM, nor are they allocated to a Trading Crowd. 
The proposed changes described herein do not encompass or otherwise 
impact non-LMM issues.
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Delete Obsolete Provisions of Rule 6.100

    Rule 6.100(b)-(c). The Exchange proposes to eliminate Rules 
6.100(b)-(c) that relate solely to Trading Crowd questionnaires and 
evaluations. As described above, since options issues are no longer 
allocated to Trading Crowds, these rules are obsolete and unnecessary.
    Rule 6.100(d)-(g). The Exchange proposes to eliminate Rules 
6.100(d)-(g)

[[Page 66280]]

that establish certain procedures related to informal meetings 
regarding LMM evaluations. The Exchange, however, will retain certain 
procedures related to informal hearings regarding LMM evaluations. As 
set forth more fully below, in a revised Rule 6.82(g), the Exchange may 
afford LMMs an opportunity to informal hearings prior to a final 
determination regarding their performance--consistent with the current 
rule. The Exchange will also afford LMMs an opportunity to appeal 
allocation decisions pursuant to the Exchange's formal appeals process 
codified in Rule 10.14.

Delete Obsolete Provisions of Rule 6.82

    Rule 6.82(a)(1) Lead Market Maker Defined. The Exchange proposes to 
remove the reference to ``nominee.'' The concept of nominee, as it 
pertains to the definition of LMMs, is obsolete and unnecessarily 
confusing. To clarify who must be registered with the Exchange as a 
Market Maker, the Exchange is replacing the reference to ``nominee'' 
and will refer instead to individuals trading on behalf of the LMM, as 
follows: Each individual trading on behalf of an LMM must be registered 
with the Exchange as a Market Maker or Market Maker Authorized Trader.
    Rule 6.82(e)(1) Allocation. The Exchange proposes to delete the 
obsolete and unnecessary reference to ``trading crowd''. The Exchange 
also proposes to remove the reference to ``Rule 6.100'' and replace it 
with a reference to ``subparagraph (g) of this Rule''. As described 
more fully below, this change relates to the Exchange's effort to 
consolidate all provisions relating to issue allocation into one rule.
    Rule 6.82(e)(2) Transfer of Issues. The Exchange proposes removing 
the reference to ``nominees.'' The reference to nominees is historic 
and obsolete. Since issues are allocated to LMMs and not to nominees, 
this restriction on transferring issues between nominees is both 
confusing and unnecessary.
    Rule 6.82(e)(3) Evaluation of LMMs. The Exchange proposes to 
eliminate this provision and replace it with a revised Rule 6.82(g), 
which will incorporate Rule 6.82(e)(3) as well as certain provision of 
Rule 6.100. As set forth more fully below, the revised Rule 6.82(g) 
will clarify the performance standards by which LMMs will be evaluated, 
the process by which LMMs will be evaluated, and the LMMs' right to 
appeal such evaluation.
    Rule 6.82(f)(1) Reallocation. The Exchange proposes to remove 
obsolete references to Trading Crowds and Nominees. The Exchange is not 
otherwise amending or altering the substance of this rule.
    Rule 6.82(f)(2) Continued Quality and Service. The Exchange 
proposes to eliminate Rule 6.82(f)(2), which governs the reallocation 
of issues to the Market Maker system (Trading Crowd). Since option 
issues are no longer allocated to Trading Crowds, this provision is 
obsolete and unnecessary.
    Rule 6.82(f)(3) LMM Compensation. The Exchange also proposes to 
eliminate Rule 6.82(f)(3), which states that in the event an LMM has an 
option issue(s) reallocated, the Exchange may award compensation to 
that LMM based on various factors. Option issues are generally 
reallocated in situations where LMMs either fail to meet certain 
performance standards or have been otherwise disqualified to act as an 
LMM by the Exchange. As a result, the Exchange has determined that 
compensating LMMs in these circumstances is not appropriate and 
therefore proposes to eliminate this provision.
    Rule 6.82(g) Review of Exchange Decisions. The Exchange proposes 
remove Rule 6.82(g), which generally sets forth that a LMM may appeal 
allocation decisions pursuant to Rule 10. In its place, the Exchange 
proposes to add new Rule 6.82(b)(5), which affords LMMs an opportunity 
to appeal allocation decisions pursuant to the Exchange's formal 
appeals process codified in Rule 10.14.

Move the Remaining Relevant Provisions of Rule 6.100 to Rule 6.82

    NYSE Arca proposes to move the remaining relevant portions of Rule 
6.100 to new Rule 6.82(g). This will eliminate all text associated with 
Rule 6.100. The Exchange also proposes to amend certain procedures 
contained in Rule 6.82 and eliminate confusing references to historic 
practices as detailed below.
    The Exchange proposes moving Rule 6.100(a) Evaluation of Options 
Trading Crowd Performance to new Rule 6.82(g)(1) and renaming the Rule: 
Evaluation of Lead Market Maker Performance. In addition to renumbering 
and renaming the rule, the Exchange will clarify the performance 
standards by which LMMs will be evaluated, the process by which LMMs 
will be evaluated, and the LMMs' right to appeal such evaluation. Upon 
revision, this provision will combine, in one rule, certain relevant 
aspects of Rule 6.82(e)(3), as well as certain relevant provisions of 
Rule 6.100. Relevant criteria such as quality of markets and adherence 
to ethical standards remain. On the other hand, items such as 
competition among Market Makers, which was a criterion used solely in 
connection with allocating issues to a Trading Crowd is no longer 
relevant and will be deleted. In addition, all references to Trading 
Crowd evaluations and questionnaires will be removed since they are 
obsolete an unnecessary.\9\
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    \9\ The Exchange notes that while Market Makers will no longer 
be evaluated for purposes of participating in a Trading Crowd, 
Market Makers will continue to be evaluated as a condition of their 
Appointment under Rule 6.35(j). The Exchange will periodically 
evaluate LMMs, in practice this may be as frequent as monthly and no 
less than semiannually. The Exchange notes, that pursuant to Rule 
6.41, the Exchange provides Market Makers, on a monthly basis, with 
statistical reports designed to measure trading volume and 
participation in trading activity in each option issue traded on the 
Exchange.
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Add New Relevant Provisions to Rule 6.82

    Rule 6.82(b)(5) Appeals. As Described above, the Exchange proposes 
adding this new provision which replaces Rule 6.82(g)(1) and affords 
LMMs an opportunity to appeal allocation decisions pursuant to the 
Exchange's formal appeals process codified in Rule 10.14.
    Rule 6.82(g)(1)(A). The Exchange proposes adding new Rule 
6.82(g)(1)(A), which explains how NYSE Arca market share shall be 
calculated. A minimum percentage of total national market volume shall 
be established at the time an issue is allocated and will be identified 
on the Request for Issue Allocation form that an LMM is required to 
complete.\10\ Failure to maintain the minimum percentage of national 
volume identified and agreed to at the time the issue is allocated to 
the LMM will be considered a failure to meet minimum performance 
standards.
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    \10\ Presently, the standard minimum acceptable total national 
market volume is 5%. The Exchange determines this minimum acceptable 
percentage based on NYSE Arca's percentage of total national 
contract volume per security.
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    Rule 6.82(g)(1)(B). The Exchange proposes adding new Rule 
6.82(g)(1)(B), which states that the Exchange will provide LMMs with 
information related to their national market share in each of their 
allocated issues. According to the new provision, LMMs shall have the 
ability to meet with Exchange staff, upon request, to discuss such 
findings.
    Rule 6.82(g)(1)(C). The Exchange proposes adding new Rule 
6.82(g)(1)(C), which outlines the informal hearing process the Exchange 
may undertake in the event an LMM has failed to meet performance 
standards pursuant Rule 6.82(g)(1). This section is generally 
consistent with current Rule 6.100(e)-(f) and (h).

[[Page 66281]]

    Rule 6.82(g)(1)(D). The Exchange proposes adding new Rule 
6.82(g)(1)(D), which outlines the process the Exchange will undertake 
in the event an LMM has failed to meet performance standards pursuant 
Rule 6.82(g)(1), including the right to appeal pursuant to Rule 10.14.

Conclusion

    NYSE Arca Rules 6.100 and 6.82 contain numerous obsolete and 
outdated provisions. The Exchange proposes eliminating those obsolete 
provisions of Rules 6.100 and 6.82 and renumbering the remaining 
relevant provisions of Rule 6.100 as part of the newly reconstituted 
Rule 6.82. The Exchange also proposes to add new relevant rules 
pertaining to the allocation of option issues and the evaluation of 
LMMs. Taken together, these changes will simplify and clarify the 
Exchange's rules regarding option issues allocation.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \11\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\12\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system. The Exchange proposes eliminating 
obsolete provisions of Rules 6.100 and 6.82 while adding new relevant 
rules pertaining to the allocation of option issues and the evaluation 
of LMMs. Taken together, these changes will simplify and clarify the 
Exchange's rules regarding option issues allocation.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6)(iii) thereunder.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the Exchange to give the Commission written 
notice of the Exchange's intent to file the proposed rule change 
along with a brief description and the text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied the pre-filing requirement.
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    The Exchange further asserts that the proposed changes simply serve 
to clarify the rules of NYSE Arca regarding option issues allocation by 
eliminating obsolete provisions of Rules 6.100 and 6.82 while adding 
new relevant rules pertaining to the allocation of option issues and 
the evaluation of LMMs. For the foregoing reasons, the Exchange has 
designated this rule filing as a ``non-controversial'' rule change 
under paragraph (f)(6) of Rule 19b-4.\17\
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    \17\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSEArca-2008-100 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-2008-100. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://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 inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the self-regulatory 
organization. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEArca-2008-100 and should be submitted on or before November 28, 
2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-26571 Filed 11-6-08; 8:45 am]
BILLING CODE 8011-01-P