[Federal Register Volume 77, Number 96 (Thursday, May 17, 2012)]
[Notices]
[Pages 29419-29425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-11914]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66966; File No. SR-NYSEArca-2012-37]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Proposing a Pilot Program To Create a Lead 
Market Maker Issuer Incentive Program for Issuers of Certain Exchange-
Traded Products Listed on NYSE Arca, Inc.

May 11, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that, on April 27, 2012, NYSE Arca, Inc. (``Exchange'' 
or ``NYSE Arca'') 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 substantially prepared 
by the Exchange. 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a pilot program to create a Lead Market Maker 
(``LMM'') Issuer Incentive Program (``Fixed Incentive Program'') for 
issuers of certain exchange-traded products (``ETPs'') listed on the 
Exchange. The text of the proposed rule change is available at the 
Exchange, www.nyse.com, the Commission's Public Reference Room, and the 
Commission's Web site at www.sec.gov.

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 a pilot program to create a Fixed Incentive 
Program for issuers of certain ETPs listed on the Exchange.
Background
    Under the current Fee Schedule for listings, an issuer of an ETP is 
required to pay a Listing Fee that ranges from $5,000 to $45,000.\3\ 
ETP issuers also pay a graduated Annual Fee based on the number of 
shares of the ETP that are outstanding. The Annual Fee ranges from 
$5,000 to $55,000.
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    \3\ The Exchange has one Schedule of Fees and Charges for 
Exchange Services that is for listings (``Listing Fee Schedule'') 
and another that is for trade-related charges (``Trading Fee 
Schedule''). To differentiate them, the Exchange proposes to change 
the name of the former to ``SCHEDULE OF FEES AND CHARGES FOR 
EXCHANGE LISTING SERVICES.'' ETPs are generally classified as either 
Derivative Securities Products or Structured Products for purposes 
of the Listing Fee Schedule. See Listing Fee Schedule, available at 
http://www.nyse.com/pdfs/NYSEArca_Listing_Fees.pdf.
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    A qualified Market Maker may request an assignment as an LMM for an 
ETP, and the request is subject to approval by the Exchange.\4\ For 
some ETPs, no Market Maker requests an assignment as an LMM, and the 
ETP therefore trades without an LMM assigned to it. The Exchange 
operates under the price-time priority model for all market 
participants, so there is no distinct transactional benefit to being 
assigned as an LMM. However, LMMs are obligated to meet certain 
obligations and requirements \5\ and therefore incur greater risks than 
other market participants on the Exchange. The risks include those 
associated with managing position inventory as well as those associated 
with maintaining quotes. Inventory risks may be higher for certain ETPs 
with low volume and low shares outstanding because there are fewer 
opportunities to turn over positions in such ETPs and the accumulation 
of costs from carrying those positions as well as positions in the 
underlying securities used for hedging.\6\ LMMs are required to 
continuously quote on both sides of the market; therefore, they must be 
willing to buy as well as sell by posting displayed and firm quotes on 
the Exchange. When there is a low volume of shares outstanding, there 
is often less supply for securities lending purposes. In order to meet 
settlement requirements established by Regulation SHO,\7\ LMMs acting 
in ETPs with low shares outstanding are often required to maintain a 
long ETP position. Quoting risks exist due to the complexity of pricing 
ETPs and the potential for human and/or technological errors. ETPs are 
open-ended and derivatively priced securities that typically track 
returns of underlying assets. If, due to human error such as the input 
of an inaccurate underlying basket or technological error such as a 
static data

[[Page 29420]]

feed caused by networking or hardware breakdowns, the LMM's quote 
diverges from the underlying assets value, the LMMs are more likely to 
buy (sell) at prices that are above (below) theoretical fair values. 
Because LMMs are required to continuously quote on both sides of the 
market and maintain certain minimum performance standards, they are 
more likely to face these types of risks because other market 
participants have more freedom to withdraw quotes upon experiencing 
difficulties or unusual market conditions.
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    \4\ See NYSE Arca Equities Rule 7.22(d).
    \5\ An LMM is subject to the obligations for Market Makers that 
are set forth in NYSE Arca Equities Rule 7.23 and the minimum 
performance standards that are referenced in NYSE Arca Equities Rule 
7.24. Under NYSE Arca Equities Rule 7.24, the minimum performance 
standards include (i) percent of time at the National Best Bid or 
Offer (``NBBO''), (ii) percent of executions better than the NBBO, 
(iii) average displayed size, (iv) average quoted spread, and (v) in 
the event the security is a derivative security, the ability to 
transact in underlying markets. An LMM's minimum performance 
standards are higher than those of a Designated Market Maker and are 
described in an official NYSE Arca policy titled NYSE Arca LMM 
Requirements, which may be amended from time to time. The minimum 
performance standards are measured daily and reviewed as a monthly 
average. The Exchange believes that they are stringent and help 
foster liquidity provision and stability in the market. References 
in this rule filing, including in the proposed rule text, to an 
LMM's minimum performance standards mean those set forth in NYSE 
Arca LMM Requirements.
    \6\ Costs of carrying ETP inventories include the expense ratio, 
which includes the management fee, financing costs or the cost of 
capital, and the opportunity cost of allocating capital. At times it 
may also include stock loan costs for maintaining a hedge in hard-
to-borrow securities.
    \7\ See 17 CFR 242.203-204.
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    To incentivize firms to take on the LMM designation and foster 
liquidity provision and stability in the market, the Exchange currently 
provides LMMs with an opportunity to receive incrementally higher 
transaction credits and incur incrementally lower transaction fees 
(``LMM Rates'') compared to standard liquidity maker-taker rates 
(``Standard Rates'').\8\ LMM Rates are intended to balance the 
increased risks and requirements assumed by LMMs. Accordingly, the 
value of acting as an LMM could be measured by the incremental 
difference in the transaction credits or fees under the LMM Rates as 
compared to the Standard Rates. However, the absolute incremental 
difference depends on the LMM's volume traded. Trading volume for 
different ETPs can vary significantly and result in a corresponding 
variance in LMM trading volume. The benefit of acting as an LMM can 
therefore vary significantly depending upon the ETP to which the LMM is 
assigned. There are fewer financial benefits for LMM assignments in 
ETPs with lower CADV than ETPs with higher CADV. The table below 
provides hypothetical examples based on assumptions that NYSE Arca 
market share equals 22%, LMM participation rate equals 20%, LMM make 
ratio equals 80%, and LMM take ratio equals 20%: \9\
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    \8\ The Exchange generally employs a maker-taker transactional 
fee structure, whereby an ETP Holder that removes liquidity is 
charged a fee (``Take Rate''), and an Equity Trading Permit Holder 
(``ETP Holder'') that provides liquidity receives a credit (``Make 
Rate''). The Take Rate for LMMs is currently $0.0025 per share. The 
Make Rate for LMMs is currently between $0.0035 and $0.0045 per 
share depending on consolidated average daily volume (``CADV''). 
Standard NYSE Arca Tape B Make Rates (rebates paid for adding 
liquidity) range from $0.0022 to $0.0033 per share. Standard NYSE 
Arca Tape B Take Rates (fees charged for removing liquidity) range 
from $0.0026 to $0.0030 per share. See the Trading Fee Schedule, 
available at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees__3_01_12_.pdf.
    \9\ Market share is the percentage of CADV traded on NYSE Arca. 
Participation rate is the percentage of NYSE Arca volume traded by 
the LMM. Make ratio is the percentage of LMM volume that provides 
liquidity. Take ratio is the percentage of LMM volume that takes 
liquidity. The formula for calculating the transaction credit is as 
follows: (LMM make volume * Make Rate) + (LMM take volume * Take 
Rate). LMM make volume equals CADV * NYSE Arca market share * LMM 
participation rate * LMM make ratio. LMM take volume equals CADV * 
NYSE Arca market share * LMM participation rate * LMM take ratio.

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                                                                                      Annual
                                                                      Annual        transaction       Annual
                     Symbol                            CADV         transaction     credit/fee      incremental
                                                                    credit/fee       (standard      difference
                                                                    (LMM rates)       rates)
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ABC.............................................      25,000,000        $637,560        $332,640        $304,920
DEF.............................................       5,100,000         130,062          67,859          62,204
GHI.............................................       2,500,000          74,844          33,264          41,580
JKL.............................................       1,100,000          32,931          14,636          18,295
MNO.............................................         750,000          25,780           9,979          15,800
PQR.............................................         500,000          17,186           6,653          10,534
STU.............................................         100,000           3,437           1,331           2,107
VWX.............................................          10,000             344             133             211
YZ..............................................           1,000              34              13              21
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    The Exchange believes that the assignment of an LMM, which is held 
to higher standards as compared to Market Makers and other market 
participants, is a critical component of the promotion of a consistent, 
fair and orderly market in ETPs on the Exchange. However, market 
participants may be forgoing LMM assignments in ETPs--instead choosing 
to trade ETPs as Market Makers or ETP Holders with lower or no 
obligations or minimum performance standards--because the incentives to 
serve as an LMM are insufficient to outweigh the obligations, minimum 
performance standards, and other risks described above. To illustrate 
how this change has transpired, the following table highlights the 
increasing proportion of new NYSE Arca ETPs that are listed without an 
LMM present:

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                                   2003     2004     2005     2006     2007     2008     2009     2010     2011
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New NYSE Arca ETP Listings.....       11       34       49      133      223      195      124      196      297
Listed with LMM................       11       34       49      133      218      190      121      175      271
Listed without LMM.............        0        0        0        0        5        5        3       21       26
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    Since January 2008, nearly 100% of all LMM withdrawal requests for 
ETPs already listed and trading were made for securities that exhibited 
low CADV in the period prior to the withdrawal request being made. This 
behavior signals a connection between low CADV and low interest levels 
from firms seeking to act as the LMM. Likewise, it supports the 
assertion that there is less value relative to risks of acting as the 
LMM for certain ETPs.
Proposed Fixed Incentive Program
    The Exchange proposes to add new NYSE Arca Equities Rule 8.800, 
which would offer a pilot program to incentivize Market Makers to 
undertake LMM assignments in ETPs. An issuer of an ETP that 
participates in the proposed Fixed Incentive Program would continue to 
pay the currently applicable Listing and Annual Fees. Such issuer also 
could elect to pay the Exchange an Optional Incentive Fee, which would 
range from $10,000 to $40,000 per year.\10\
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    \10\ The Exchange would provide notification on its Web site 
regarding the ETPs participating in the Fixed Incentive Program and 
the assigned LMMs.
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    Proposed NYSE Arca Equities Rule 8.800(a) would describe the ETPs 
that would be eligible for inclusion in the

[[Page 29421]]

Fixed Incentive Program. Eligible products would include any ETP that 
is listed on the Exchange as of the commencement of the pilot period or 
that becomes listed during the pilot period, and the listing is under 
NYSE Arca Equities Rules 5.2(j)(3) (Investment Company Units), 
5.2(j)(5) (Equity Gold Shares), 5.2(j)(6) (Equity Index-Linked 
Securities, Commodity-Linked Securities, Currency-Linked Securities, 
Fixed Income Index-Linked Securities, Futures-Linked Securities, and 
Multifactor Index-Linked Securities), 8.100 (Portfolio Depositary 
Receipts), 8.200 (Trust Issued Receipts), 8.201 (Commodity-Based Trust 
Shares), 8.202 (Currency Trust Shares), 8.203 (Commodity Index Trust 
Shares), 8.204 (Commodity Futures Trust Shares), 8.300 (Partnership 
Units), 8.600 (Managed Fund Shares), and 8.700 (Managed Trust 
Securities).
    Proposed NYSE Arca Equities Rule 8.800(b)(1) would describe the 
issuer's application process. An issuer that wishes to have an ETP 
participate in the Fixed Incentive Program and pay the Exchange an 
Optional Incentive Fee would be required to submit a written 
application in a form prescribed by the Exchange for each ETP. The 
issuer could elect to participate at the time of listing or thereafter 
at the beginning of each quarter during the pilot period. An issuer 
could not have more than five existing ETPs, that are listed on the 
Exchange prior to pilot [sic], participate in the Fixed Incentive 
Program. The Exchange would communicate the ETP(s) proposed for 
inclusion in the Fixed Incentive Program on a written solicitation that 
would be sent to all qualified LMM firms \11\ along with the Optional 
Incentive Fee the issuer proposes to pay the Exchange for each ETP. The 
permitted range for the Optional Incentive Fee would be set forth in 
the Exchange's Fee Schedule. The issuer and the LMM thereafter would 
agree upon the final Optional Incentive Fee for each ETP. If more than 
one qualified LMM proposed to serve as such, the issuer would choose 
the LMM.
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    \11\ The written solicitation would be included in the Green 
Sheet, which is the common term for an email communication sent by 
NYSE Arca staff members to all qualified LMMs prior to an LMM 
selection. The Green Sheet includes, among other things, the name, 
symbol, and description of the ETP(s) as well as the name of the 
issuer and a link to the ETP prospectus. A qualified LMM must 
complete the application for a specific ETP or group of ETPs.
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    Proposed NYSE Arca Equities Rule 8.800(b)(2) would set forth 
eligibility requirements for issuers' participation in the Fixed 
Incentive Program. To be eligible to participate in the Fixed Incentive 
Program, an issuer would be required to be current in all payments due 
to the Exchange if it had other securities listed on the Exchange. In 
addition, the issuer would be required to be current in all payments 
due to the Exchange and compliant with continuing listing standards for 
the ETP proposed for inclusion if the issuer elected to participate in 
the Fixed Incentive Program after listing such ETP on the Exchange.
    Proposed NYSE Arca Equities Rule 8.800(c) would describe the 
process for the payment of the Optional Incentive Fee for each ETP. The 
Optional Incentive Fee would be paid by the issuer to the Exchange in 
quarterly installments for each participating ETP at the beginning of 
each quarter and prorated if the issuer commences participation for an 
ETP in the Fixed Incentive Program after the beginning of a quarter. 
The issuer would receive a prorated credit from the Exchange following 
the end of the quarter if the LMM did not meet its minimum performance 
standards for an ETP in any given month in such quarter. The credit 
would be applied against the issuer's next quarterly installment of the 
Optional Incentive Fee for the ETP, or otherwise credited or refunded 
to the issuer if the ETP was withdrawn from the Fixed Incentive 
Program. If an issuer did not pay its quarterly installments to the 
Exchange on time and the ETP continued to be listed, the Exchange would 
continue to credit the LMM as described in proposed Rule 8.800(d) 
below, except that after two quarters, if an issuer was not current in 
its quarterly installments for an ETP, such ETP would be automatically 
terminated from the Fixed Incentive Program.
    Proposed NYSE Arca Equities Rule 8.800(d) would describe the LMM 
Payments by the Exchange. Under this provision, the Exchange would 
credit an LMM for the LMM Payment, which would be equal to the Optional 
Incentive Fee paid by the issuer, less an Exchange administration fee 
set forth in the Fee Schedule.\12\ An LMM that receives an LMM Payment 
would not be eligible for LMM Rates for such ETP under the Exchange's 
Fee Schedule while participating in the Fixed Incentive Program but 
would instead be subject to Standard Rates.\13\
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    \12\ As noted below, the Exchange proposes that the initial 
administration fee be 5%.
    \13\ See supra note 8.
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    The Exchange would credit an LMM for the LMM Payment at the end of 
each quarter. If an LMM did not meet or exceed its minimum performance 
standards for the ETP for a particular month, then the LMM Payment 
would be prorated accordingly. As noted above, the issuer in turn would 
receive a prorated credit that could be used toward the following 
quarterly LMM Payment for that particular ETP or others that they have 
elected to participate in the Fixed Incentive Program. As is the case 
with all liquidity-adding credits currently payable to NYSE Arca 
members, LMM Payments would be paid directly by the Exchange from its 
general revenues.
    Proposed NYSE Arca Equities Rule 8.800(e) would describe the 
circumstances for withdrawal from the Fixed Incentive Program and a 
reallocation process. If an ETP no longer met continuing listing 
standards or is being liquidated, it would be automatically withdrawn 
from the Fixed Incentive Program as of the ETP suspension date. In 
addition, NYSE Arca, in its discretion, could allow an issuer to 
withdraw an ETP from the Fixed Incentive Program before the end of the 
pilot if the assigned LMM was unable to meet its minimum performance 
standards for any two of the three months of a quarter or five months 
during the pilot and no other qualified ETP Holder was able to take 
over the assignment.
    An LMM also could withdraw from all of its ETP assignments in the 
Fixed Incentive Program. Alternatively, NYSE Arca, in its discretion, 
could allow an LMM to withdraw from a particular ETP before the end of 
the pilot period if the Exchange determined that there were extraneous 
circumstances that prevented the LMM from meeting its minimum 
performance standards for such ETP that did not affect its other ETP 
assignments in the Fixed Incentive Program. In either such event, the 
LMM's ETP(s) would be reallocated as described below.
    If an LMM, for a particular ETP, did not meet or exceed its minimum 
performance standards for any two of the three months of a quarter or 
five months during the pilot, or chose to withdraw from the Fixed 
Incentive Program, and at least one other qualified Market Maker agreed 
to become the assigned LMM under the Fixed Incentive Program, then the 
ETP would be reallocated via the written solicitation process described 
above. The issuer could select another LMM and renegotiate the Optional 
Incentive Fee. The reallocation process would be completed no sooner 
than the end of the current quarter and no later than the end of the 
following quarter.
    The proposed LMM Payment is designed to encourage additional Market 
Makers to pursue LMM assignments and thereby support the

[[Page 29422]]

provision of consistent liquidity in ETPs listed on the Exchange. The 
Exchange would administer all aspects of the LMM Payments and believes 
that providing a quarterly LMM Payment would create a more equitable 
system of incentives for LMMs. The Exchange notes that the proposal 
would not alter the current requirements and obligations of LMMs under 
Exchange rules or any policies and procedures related to LMMs.\14\
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    \14\ See supra note 5.
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Implementation of Fixed Incentive Program
    The pilot program would be offered to issuers from the date of 
implementation, which would occur no later than 90 days after the 
effective date of this filing, until December 31, 2013. As referenced 
above, each issuer could select ETPs to participate in the Fixed 
Incentive Program. During the course of the pilot period, the Exchange 
would assess the Fixed Incentive Program and may expand the criteria 
for ETPs that are eligible to participate for example, to permit 
issuers to include more than five ETPs that were listed on the Exchange 
before the pilot. At the end of the pilot, the Exchange would determine 
whether to continue or discontinue the pilot or make it permanent and 
submit a rule filing as necessary. If the Exchange determines to change 
the terms of the pilot while it is ongoing, it would submit a rule 
filing to the Commission.
    During the pilot program, the Exchange would provide the Commission 
with certain market quality data on a confidential basis each month. 
Such data would include, for all ETPs listed as of the date of 
implementation of the pilot program and listed during the pilot (for 
comparative purposes), volume (CADV and NYSE Arca ADV), NBBO bid/ask 
spread differentials, LMM participation rates, NYSE Arca market share, 
LMM time spent at the inside, LMM time spent within $0.03 of the 
inside, percent of time NYSE Arca has the best price with the best 
size, LMM quoted spread, LMM quoted depth, and Rule 605 statistics 
(one-month delay) as agreed upon by the Exchange and the Commission 
staff. In connection with this proposal, the Exchange would provide 
such data as may be periodically requested by the Commission.
Amendments to Listing Fee Schedule and Trading Fee Schedule
    To implement the pilot, the Exchange also proposes to amend its 
Listing Fee Schedule to provide that the Optional Incentive Fee under 
NYSE Arca Rule 8.800 may range from $10,000 to $40,000 and to amend its 
Trading Fee Schedule to provide that at the end of each quarter, the 
Exchange would credit the LMM assigned to an ETP the Optional Incentive 
Fee, less a 5% Exchange administration fee, and that an LMM that 
receives an LMM Payment under NYSE Arca Rule 8.800 would be subject to 
Standard Rates rather than LMM Rates.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\15\ in general, and 
Sections 6(b)(4) and 6(b)(5) of the Act,\16\ in particular.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(4) of the Act in that it is designed to provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other persons using its facilities 
and that it is not unfairly discriminatory. The Exchange believes that 
the proposed Optional Incentive Fees for ETPs are reasonable, given the 
additional costs to the Exchange of providing the LMM Payment. The 
Exchange also believes that the proposed fees are reasonable because 
they would be used by the Exchange to offset, in part, the cost that 
the Exchange incurs to provide listing services for ETPs. These costs 
include, but are not limited to, ETP rulemaking initiatives, listing 
administration processes, issuer services, consultative legal services 
provided to ETP issuers in support of new product development, and 
administration of the proposed quarterly LMM Payment.
    The Exchange believes that the Optional Incentive Fee is 
reasonable, equitably allocated, and not unreasonably discriminatory. 
The fee would be equitably allocated and not unfairly discriminatory 
because it is entirely voluntary on the issuer's part to join the pilot 
program. The amount of the fee would be determined and paid by the 
issuer within the $10,000 to $40,000 band per ETP.
    The Exchange believes that the LMM Payment and standard transaction 
fees and credits are equitable in that any LMM could seek to 
participate in the program. The Exchange further believes that the 
range of credits is fair and equitable in light of the LMM's 
obligations and minimum performance standards and that it is reasonable 
for the Exchange to retain an administration fee to recover the costs 
of administering the pilot program.
    The Exchange further believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act 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 mechanism of a 
free and open market and a national market system. In particular, the 
Exchange believes that creating an incentive for an ETP Holder to act 
as an LMM would foster cooperation and coordination with persons 
engaged in facilitating securities transactions and enhance the 
mechanism of a free and open market. The assignment of an LMM, which is 
held to higher minimum performance standards as compared to other 
market participants, helps to promote fair and orderly markets in ETPs 
on the Exchange.
    The Exchange believes that its implementation plan and the pilot 
period are reasonable in that they would permit the Commission, the 
Exchange, LMMs, and issuers to assess the impact of the Fixed Incentive 
Program before making it available to all ETPs. In particular, the 
Exchange believes that it is beneficial and not unfairly discriminatory 
to limit the ETPs participating so that the Exchange and issuers could 
measure the experience against non-participating ETPs and thereby 
conserve the commitment of resources to the pilot program.
    The Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products to monitor trading in the 
ETPs participating in the pilot program, which the Exchange believes 
are adequate to properly monitor Exchange trading of the participating 
ETPs in all trading sessions and to deter and detect violations of 
Exchange rules and applicable federal securities laws.
    Finally, the Exchange believes that the pilot program would not be 
inconsistent with Financial Industry Regulatory Authority (``FINRA'') 
Rule 5250, which prohibits payment for market making. The Exchange 
believes that FINRA Rule 5250 is designed to address issues associated 
with securities of operating companies, and such issues are not present 
with ETPs, which have derivative pricing, creation and/or redemption 
features, or upsizing that would preclude the type of manipulation that 
FINRA Rule 5250 is designed to prevent. Moreover, the Exchange believes 
that the structure of

[[Page 29423]]

its proposal is unique and has appropriate safeguards. For example, the 
proposal includes the interposition of the Exchange between the issuers 
and LMMs, the payment of fees from the general revenues of the 
Exchange, and the existing obligations and minimum performance 
standards that are monitored by the Exchange under NYSE Arca Equities 
Rules 7.23 and 7.24, respectively. For these reasons, the Exchange does 
not believe that its proposal would be inconsistent with FINRA Rule 
5250.\17\
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    \17\ Notwithstanding the Exchange's views, and based upon 
discussions with FINRA, subsequent to the Exchange's filing of this 
proposal FINRA will file an immediately effective rule change 
indicating that participation by LMMs and issuers in the Fixed 
Incentive Program would not be prohibited by FINRA Rule 5250.
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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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. The Commission requests comment, in 
particular, on the following aspects of the proposed rule change:
    1. The Exchange asserts that LMMs in ETPs incur higher inventory, 
quoting, and other risks than other market participants on the Exchange 
and that there is less value relative to risk of acting as an LMM for 
ETPs that exhibit low CADV. Do commenters agree that low interest 
levels by LMMs in ETPs that have low CADV is a result of such value/
risk discrepancy? Why or why not? What other factors could contribute 
to a lack of interest by LMMs in such ETPs? What other factors could 
explain the apparent increasing proportion of new ETPs that are listed 
on the Exchange without a designated LMM?
    2. The Exchange asserts that providing a quarterly LMM Payment to 
LMMs assigned to ETPs in the Fixed Incentive Program will create a more 
equitable system of incentives for LMMs. Do commenters believe that the 
Fixed Incentive Program will incentivize more LMMs to take assignments 
in ETPs. If so, how? If not, why not?
    3. Given the inherent arbitrage link between trading ETPs and their 
underlying holdings, would a lack of liquidity in an ETP impact the 
ability of LMMs to quote relatively narrow bids and offers? What, if 
anything, does a lack of liquidity in an ETP indicate about the ability 
of an LMM or other market maker to make effective use of arbitrage and 
the creation/redemption mechanisms often associated with ETPs? How, if 
at all, would a market-making incentive program affect any intraday 
premium (discount) of the traded price of an ETP above (below) its 
intraday indicative value?
    4. The Exchange states that the Fixed Incentive Program is designed 
to encourage additional Market Makers to pursue LMM assignments and 
thereby support the provision of consistent liquidity in ETPs listed on 
the Exchange. The Commission seeks specific commentary on any potential 
impact of the proposed rules on the market quality of ETPs. Do 
commenters agree with the Exchange that the Fixed Incentive Program 
would support the provision of consistent liquidity in ETPs listed on 
the Exchange? If so, please explain. If not, why not?
    5. If two ETPs share similar market quality characteristics (quoted 
spread, size, volume, etc.) but one is supported by the Fixed Incentive 
Program and the other is not, what, if anything, does that suggest 
about the fundamental market qualities of the two ETPs? Would investors 
understand, and should they be concerned about, the differences 
underlying the seemingly similar market qualities of the two ETPs? Are 
there other aspects of this type of incentivized market quality that 
should concern investors? Are such apparent improvements in market 
quality consistent with the Act and investor protection? Why or why 
not?
    6. Under the proposal, LMMs for ETPs in the Fixed Incentive Program 
would continue to be subject to the current LMM performance standards 
and would not be subject to higher performance standards. Do commenters 
believe this is appropriate? Why or why not? Should LMMs for ETPs in 
the Fixed Incentive Program be subject to higher standards because of 
the LMM Payments that LMMs could be entitled to receive? Why or why 
not?
    7. FINRA Rule 5250 prohibits FINRA members from directly or 
indirectly accepting payment from an issuer of a security for acting as 
a market maker. The Exchange asserts that FINRA Rule 5250 is designed 
to address issues associated with securities of operating companies, 
and such issues are not present with ETPs, because they have derivative 
pricing, creation and/or redemption features, or upsizing that would 
preclude the type of manipulation that FINRA Rule 5250 is designed to 
prevent. Do commenters agree with this assertion? If so, why? If not, 
why not?
    8. The Exchange notes in its filing that it expects FINRA to file a 
proposed rule change to amend its Rule 5250 to indicate that 
participation by LMMs and issuers in the Fixed Incentive Program would 
not be prohibited by FINRA Rule 5250. FINRA Rule 5250 (previously NASD 
Rule 2460) was implemented, in part, to address concerns about issuers 
paying market makers to improperly influence the price of an issuer's 
stock.\18\ Do commenters believe the Fixed Incentive Program would 
raise the types of concerns that FINRA Rule 5250

[[Page 29424]]

was designed to address? Why or why not?
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    \18\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (SR-NASD-97-29) (``Specifically, 
the Commission finds that the rule preserves the integrity of the 
marketplace by ensuring that quotations accurately reflect a broker-
dealer's interest in buying or selling a security. The decision by a 
firm to make a market in a given security and the question of price 
generally are dependent on a number of factors, including, among 
others, supply and demand, the firm's expectations toward the 
market, its current inventory position, and exposure to risk and 
competition. This decision should not be influenced by payments to 
the member from issuers or promoters. Public investors expect 
broker-dealers' quotations to be based on the factors described 
above. If payments to broker-dealers by promoters and issuers were 
permitted, investors would not be able to ascertain which quotations 
in the marketplace are based on actual interest and which quotations 
are supported by issuers or promoters. This structure would harm 
investor confidence in the overall integrity of the marketplace. The 
Commission finds that the proposed rule supports a longstanding 
policy and position of the NASD and establishes a clear standard of 
fair practice for member firms.'')
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    9. The Exchange asserts that the structure of its proposal is 
unique and has appropriate safeguards to dispel the concerns that FINRA 
Rule 5250 was designed to address. For example, the Exchange notes that 
the proposal includes the interposition of the Exchange between the 
issuers and LMMs, the payment of fees from the general revenues of the 
Exchange, and the existing obligations and minimum performance 
standards that are monitored by the Exchange under NYSE Arca Equities 
Rules 7.23 and 7.24, respectively. Do commenters agree that the 
Exchange's proposal adequately addresses the policies and concerns 
behind FINRA Rule 5250? Why or why not? What are commenters' views on 
whether, and if so, how, the Fixed Incentive Program would be 
consistent with the rationale behind FINRA Rule 5250?
    10. Could there be conflicts of interest between an issuer of an 
ETP in the Fixed Incentive Program and the LMM assigned to such ETP? If 
so, what are those conflicts of interest? \19\ Please explain whether 
the Exchange's proposal adequately addresses such potential conflicts, 
and if so, how, and if not, why not.
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    \19\ The Commission's order approving NASD Rule 2460 discussed 
conflicts of interest that may exist between issuers and market 
makers. See id. at 37106 (``It has been a longstanding policy and 
position of the NASD that a broker-dealer is prohibited from 
receiving compensation or other payments from an issuer for quoting, 
making a market in an issuer's securities or for covering the 
member's out-of-pocket expenses for making a market, or for 
submitting an application to make a market in an issuer's 
securities. As stated in Notice to Members 75-16 (February 20, 
1975), such payments may be viewed as a conflict of interest since 
they may influence the member's decision as to whether to quote or 
make a market in a security and, thereafter, the prices that the 
member would quote.'')
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    11. Are the proposed criteria for participation by potential ETP 
issuers and/or LMMs in the Fixed Incentive Program sufficiently clear, 
precise, and objective to address concerns about potential conflicts of 
interest between issuers and market makers? Why or why not? Should such 
participation standards be more objective to ensure that there is a 
level playing field in determining who the issuers and market makers 
are for a particular ETP in the Fixed Incentive Program? Would more 
clear and objective standards help to address conflicts of interest 
that may be present between issuers and market makers, if any? Under 
the proposed Fixed Incentive Program, if more than one qualified LMM 
proposes to serve as such, the issuer would choose the LMM. What are 
commenters' views on allowing the issuer that has chosen to participate 
in the Fixed Incentive Program to choose the LMM? Should the Exchange 
establish objective standards and be responsible for choosing the 
designated LMM for a particular issuer and ETP in the Fixed Incentive 
Program? Would allowing an issuer that has chosen to participate in the 
Fixed Incentive Program to choose its LMM for the particular ETP be 
consistent or inconsistent with the policies and concerns behind FINRA 
Rule 5250?
    12. Is it appropriate and consistent with the Act to allow issuers 
to choose to enter into the Fixed Incentive Program and pay the 
Optional Incentive Fee? Why or why not? Would it be more or less 
appropriate to require all, or a fixed subset of, ETP issuers to enter 
the Fixed Incentive Program and pay the Optional Incentive Fee? What 
would be the impact on market maker incentives of allowing issuers to 
choose to enter into the Fixed Incentive Program and pay the Optional 
Incentive Fee?
    13. Is it appropriate and consistent with the Act to allow issuers 
and LMMs to negotiate the Optional Incentive Fee? Why or why not? Does 
allowing issuers to negotiate such fees directly with LMMs raise 
concerns regarding investor confidence, market integrity, and member 
standards, similar to those discussed in connection with FINRA Rule 
5250? \20\ If so, what are those concerns? Should the Optional 
Incentive Fee agreed upon between the issuer and the LMM for a 
particular ETP be publicly disclosed? Why or why not?
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    \20\ See supra note 18.
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    14. With respect to an ETP, should the entity paying the Optional 
Incentive Fee be the sponsor or the fund? What impact, if any, would it 
have on fund investors if the fund pays the Optional Incentive Fee as 
opposed to the sponsor? Are the proposed rules sufficiently clear as to 
which entity will be paying the Optional Incentive Fee?
    15. Section 11(d)(1) of the Act generally prohibits a firm that is 
both a broker and a dealer in securities from extending or maintaining 
any credit on any new issue security if the broker-dealer participated 
in the distribution of the new issue security within the preceding 30 
days. The Commission has granted relief to authorized participants from 
these restrictions if, among other things, neither the broker-dealer 
authorized participant, nor any natural person associated with such 
broker-dealer authorized participant, directly or indirectly, receives 
from the fund complex any payment, compensation, or other economic 
incentive to promote or sell the shares of the fund to persons outside 
the fund complex, other than non-cash compensation permitted under NASD 
Rule 2380. Should authorized participants participating in the creation 
and redemption of shares of ETPs that are also LMMs in those same ETPs 
be eligible to receive LMM Payments? Would the LMM Payments give these 
authorized participants economic incentives to promote or sell shares 
of the ETP? Should such payments be viewed by the Commission as coming 
directly or indirectly from the fund complex of the ETP? Should LMM 
Payments disqualify broker-dealer authorized participants from relying 
on the Commission's exemption from Section 11(d)(1) of the Act?
    16. Could the Fixed Incentive Program have an impact (either 
positive or negative) on incentives for market making in other ETPs 
listed and traded on the Exchange that are not eligible for and/or do 
not participate in the Fixed Incentive Program, either because the 
Exchange has limited the number of ETPs that an issuer may have in the 
program, the issuer does not qualify for the program, or the issuer's 
application for participation is otherwise denied? If so, what type of 
impact, and why? If not, why not? Please explain.
    17. The Exchange's stated rationale for the Fixed Incentive Program 
is that market makers need additional incentives to take on LMM 
assignments in ETPs with low CADV. However, the Fixed Incentive Program 
does not limit which ETPs can be included within the program based on 
trading volume, and does not provide for the removal or withdrawal of 
an ETP from the program if such ETP reaches a certain CADV level. Would 
it be more appropriate for an ETP to be removed from the Program once 
it reaches a certain liquidity level or volume threshold? Why or why 
not? If so, what would be an appropriate threshold? Would it be more 
appropriate to limit inclusion in the program to newly listed or low 
volume ETPs? Why or why not?
    18. Could the Fixed Incentive Program have unintended consequences 
on fair and orderly markets in an ETP when such security leaves the 
program? If so, what could these consequences be? If not, why not? 
Please explain.
    19. The Exchange has proposed to implement the Fixed Incentive 
Program on a pilot basis beginning no later than 90 days after the 
effective date of this filing, until December 31, 2013. Is this a 
reasonable amount of time to assess the impact of the proposed rules? 
If not, why not? Please explain.

[[Page 29425]]

    20. What additional data, if any, should be provided by the 
Exchange to help assess during the pilot period whether the Fixed 
Incentive Program is achieving its stated goals? For example, if the 
Exchange required ETPs to be listed and traded outside the Fixed 
Incentive Program for a period of time before being eligible for the 
program, could such a requirement provide useful ``before and after'' 
data for ETPs to permit the Exchange and the Commission to more 
accurately assess the market quality of the securities before 
participating in the program and the market quality of the same 
securities while participating in the program? If so, how? If not, 
please explain.
    21. The Exchange represents that it will provide certain public 
disclosures relating to the Fixed Incentive Program (i.e., notification 
on its Web site regarding the ETPs participating in the Fixed Incentive 
Program and the assigned LMMs). Do commenters believe that these 
disclosures would provide sufficient information to investors? If not, 
why not? Do commenters believe the program is sufficiently transparent? 
Why or why not? Is there any other information that the Exchange should 
provide on its Web site regarding the Fixed Incentive Program and 
participating ETPs, issuers, and LMMs? For example, should the Exchange 
be required to publish on its Web site any notices from an issuer or 
LMM to withdraw from the program, or notices that an issuer or LMM has 
been removed from the program? Should the Exchange be required to 
publish on its Web site the performance standards to which LMMs in the 
program are subject? What advantages or disadvantages would such 
disclosures provide? Please explain.
    22. Would it be helpful to investors to have public notice of an 
issuer's participation in the Fixed Incentive Program through means 
other than on the Exchange's Web site, such as in the issuer's periodic 
reports to the Commission, on the issuer's Web site, or through a 
ticker symbol identifier on the consolidated tape? Why or why not?
    23. What are commenters' views on whether the proposed disclosures 
are sufficient to enable all investors, even less sophisticated 
investors, to understand the potential impact of the proposed Fixed 
Incentive Program on an ETP, including that an issuer's participation 
in the program is voluntary and subject to withdrawal?
    24. Should the Exchange be required to publicly (and anonymously) 
disclose statistics on the performance of LMMs? Would such disclosure 
provide meaningful information to investors (e.g., would such 
disclosure provide investors the opportunity to assess how much 
perceived liquidity is being provided by LMMs in the Fixed Incentive 
Program, as opposed to liquidity provided by market makers and other 
market participants who are not paid an LMM Payment)? If so, what 
information should be disclosed and why? If not, why not? What 
advantages or disadvantages would such disclosure provide? Please 
explain.
    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 email to [email protected]. Please include 
File Number SR-NYSEArca-2012-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2012-37. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between 10:00 
a.m. and 3:00 p.m. Copies of the filing also will be available for 
inspection and copying at the NYSE's principal office and on its 
Internet Web site at www.nyse.com. 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-2012-37 and should be submitted on or before 
June 7, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11914 Filed 5-16-12; 8:45 am]
BILLING CODE 8011-01-P