[Federal Register Volume 80, Number 120 (Tuesday, June 23, 2015)]
[Notices]
[Pages 36015-36019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-15341]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75191; File No. SR-NYSEArca-2014-117]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving Proposed Rule Change To Remove the Exchange's Quote 
Mitigation Plan as Provided in Commentary .03 to Exchange Rule 6.86

June 17, 2015.

I. Introduction

    On October 2, 2014, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
remove the Exchange's quote mitigation plan as provided by Commentary 
.03 to NYSE Arca Rule 6.86. The proposed rule change was published for 
comment in the Federal Register on October 21, 2014.\3\ On December 2, 
2014, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\5\ On January 8, 2015, the Exchange submitted a comment letter 
in further support of its proposal.\6\ On January 16, 2015, the 
Commission issued an Order Instituting Proceedings to Determine Whether 
to Approve or Disapprove the proposed rule change.\7\ On February 27, 
2015 and June 4, 2015, the Exchange submitted comment letters in 
further support of its proposal.\8\ No additional comment letters were 
submitted. This order disapproves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73362 (October 15, 
2014), 79 FR 62983 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 73720, 79 FR 72747 
(December 8, 2014). The Commission designated January 19, 2015, as 
the date by which it should approve, disapprove, or institute 
proceedings to determine whether to approve or disapprove the 
proposed rule change.
    \6\ See Letter from Elizabeth King, Secretary & General Counsel, 
Exchange, to Kevin O'Neill, Deputy Secretary, Commission, dated 
January 8, 2015 (``NYSE Arca Letter 1'') available at http://www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117.shtml.
    \7\ See Securities and Exchange Release No. 74088, 80 FR 3687 
(January 23, 2015) (Order Instituting Proceedings to Determine 
Whether to Approve or Disapprove a Proposal Rule Change to Remove 
the Exchange's Quote Mitigation Plan as Provided by Commentary .03 
to Exchange Rule 6.86) (``OIP'').
    \8\ See Letters from Elizabeth King, Secretary & General 
Counsel, Exchange, to Kevin O'Neill, Deputy Secretary, Commission, 
dated February 27, 2015 (``NYSE Arca Letter 2'') available athttp://
www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117-2.pdf and 
to Brent Fields, Secretary, Commission, dated June 4, 2015 (``NYSE 
Arca Letter 3'') available at http://www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117-3.pdf.
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II. Description of the Proposal

    In 2007, the Exchange adopted a quote mitigation plan in connection 
with the Options Penny Pilot Program (``Penny Pilot'').\9\ According to 
the Exchange, the quote mitigation plan was designed to reduce the 
number of quotation messages sent by the Exchange to the Options Price 
Reporting Authority (``OPRA'') by only submitting quote messages for 
``active'' series.\10\ The Exchange defines active series under the 
quote mitigation plan in Commentary .03 to Exchange Rule 6.86 as: (i) 
Series that have traded on any options exchange in the previous 14 
calendar days; or (ii) series that are solely listed on the Exchange; 
or (iii) series that have been trading ten days or less; or (iv) series 
for which the Exchange has received an order.\11\ In addition, under 
the Exchange's quote mitigation plan, the Exchange may define a series 
as active on an intraday basis if: (i) The series trades at any options 
exchange; (ii) the Exchange receives an order in the series; or (iii) 
the Exchange receives a request for quote from a customer in that 
series.\12\
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    \9\ See Securities and Exchange Release No. 55156 (January 23, 
2007), 72 FR 4759 (February 1, 2007) (Order Granting Approval of SR-
NYSEArca-2006-73) (``Quote Mitigation Approval Order''). In this 
Order, the Commission approved a proposed rule change to amend the 
NYSE Arca rules to (i) permit thirteen options classes to be quoted 
in pennies on a pilot basis and (ii) adopt a quote mitigation plan. 
In approving the Penny Pilot, the Commission analyzed data provided 
by the options exchanges to assess the potential impact the Penny 
Pilot would have on, among other things, the increase in quotation 
message traffic. According to the Exchange, the quote mitigation 
plan was designed to mitigate the volume of data processed and 
disseminated by OPRA. See Securities and Exchange Release No. 55590 
(October 12, 2006), 72 FR 4759 (October 18, 2006) (Notice of SR-
NYSEArca-2006-73). In approving the Exchange's quote mitigation plan 
the Commission stated that ``because the Commission expects that the 
Penny Pilot Program will increase quote message traffic, the 
Commission is also approving the Exchange's proposal to reduce the 
number of quotations it disseminates.'' See Quote Mitigation 
Approval Order at 4760.
    \10\ See Notice, supra note 3, at 62983.
    \11\ See Exchange Rule 6.86, Commentary .03, and Notice, supra 
note 3, at 62983.
    \12\ See id.
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    The Exchange proposes to remove its quote mitigation plan from its 
rules by deleting Commentary .03 to Exchange Rule 6.86.\13\ The 
Exchange states that its quote mitigation plan is no longer necessary 
primarily for three reasons. First, the Exchange states that its 
incorporation of select provisions of the Options Listing Procedures 
Plan (``OLPP'') \14\ in Exchange Rule 6.4A serves to reduce the 
potential for excess quoting because the OLPP limits the number of 
options series eligible to be listed, which, according to the Exchange, 
reduces the number of options series a market maker would be obligated 
to quote.\15\ Second, the

[[Page 36016]]

Exchange states its view that Exchange Rule 6.37B Commentary .01, which 
removes certain options series from market makers' continuous quoting 
obligations, reduces the number of quote messages that the Exchange 
sends to OPRA.\16\ The Exchange states that reliance on the OLPP, via 
Exchange Rule 6.4A, and the refined market maker quoting obligations, 
pursuant to Commentary .01 to Exchange Rule 6.37B, is sufficient as a 
quote mitigation plan.\17\ Third, the Exchange states that both the 
Exchange's systems capacity and OPRA's systems capacity are more than 
sufficient to accommodate any additional increase in quote message 
traffic that might be sent to OPRA as a result of the deletion of the 
quote mitigation plan.\18\ The Exchange represents that it continually 
assesses its capacity needs and ensures that the capacity that it 
requests from OPRA is sufficient and compliant with the requirements 
established in the OPRA Capacity Guidelines.\19\
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    \13\ See Notice, supra note 3, at 62984. In addition, the 
Exchange proposes to amend paragraphs (b)(1) and (b)(2) of Exchange 
Rule 6.86 to delete references to the ``Quote Mitigation Plan,'' 
which refer to the quote mitigation plan set forth in Commentary .03 
to Exchange Rule 6.86. See id.
    \14\ See Amendment to Plan for the Purpose of Developing and 
Implementing Procedures Designed to Facilitate the Listing and 
Trading of Standardized Options Submitted Pursuant to Section 
11A(a)(3)(B) of the Securities Exchange Act available at http://www.theocc.com/clearing/industry-services/olpp.jsp (providing for 
the most current OLPP). See also Securities and Exchange Release No. 
44521 (July 6, 2001), 66 FR 36809 (July 13, 2001) (order approving 
the OLPP).
    \15\ See Notice, supra note 3, at 62983. See also Securities and 
Exchange Release No. 61977 (April 23, 2010), 75 FR 22884 (April 30, 
2010) (SR-NYSEArca-2010-30) (in which the Exchange adopted select 
provisions of the OLPP into Exchange Rule 6.4A).
    \16\ Commentary .01 to Exchange Rule 6.37B provides that 
Exchange market makers continuous quoting obligations do not apply 
``to adjusted option series, and series with a time to expiration of 
nine months or greater, for options on equities and Exchange Traded 
Fund Shares, and series with a time to expiration of twelve months 
or greater for Index options.'' See also Notice, supra note 3, at 
62984.
    \17\ See Notice, supra note 3, at 62984. The Exchange states its 
view that limiting the number of options series listed on the 
Exchange is preferable to suppressing the quotes of inactive options 
series, as required under current Exchange Rule 6.86, because all 
quotes sent by Exchange market makers are actionable even if not 
displayed. See id.
    \18\ See Notice, supra note 3, at 62984.
    \19\ See id.
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    The Exchange further represents that it has in place certain 
measures that act as additional safeguards against excessive 
quoting.\20\ According to the Exchange, these safeguards include 
monitoring and alerting market makers disseminating an unusual number 
of quotes, a business plan designed to ensure that new listings are 
actively traded,\21\ and a ratio threshold fee designed to encourage 
the efficient use of orders.\22\
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    \20\ See id.
    \21\ See id. (citing to NYSE Arca Options Listing Policy 
Statement, available at, http://www.nyse.com/pdfs/TraderNoticeArcaLOPSChanges092713.pdf).
    \22\ See id. (citing to NYSE Arca Options Fee Schedule, 
available at, https://www.theice.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf).
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III. Summary of Comment Letters

    NYSE Arca submitted three comment letters in which it: (1) Supports 
its position that Rule 6.4A of the OLPP together with the current 
exceptions from a market maker's continuous quoting obligations for 
certain options series would be sufficient as a quote mitigation plan; 
\23\ (2) provides additional information to support its argument that 
relying on the OLPP requirements in Rule 6.4A would suffice as a quote 
mitigation plan; and (3) supports its argument that the Exchange and 
OPRA have sufficient capacity to accommodate an increase in quote 
message traffic resulting from elimination of the Exchange's quote 
mitigation plan.\24\
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    \23\ See NYSE Arca Letter 1, supra note 6, at 1. See also NYSE 
Arca Letter 2, supra note 8, at 1-2. The Exchange also supplies an 
actual illustration of how the Rule results in quote mitigation. Id. 
at 2.
    \24\ See NYSE Arca Letter 1, supra note 6.
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    The Exchange states that at least one other options exchange 
primarily relies on the OLPP requirements in Rule 6.4A as a quote 
mitigation plan.\25\ The Exchange explains that the OLPP Rule 6.4A puts 
a restriction on the range of permissible strike prices based on the 
price of the underlying security.\26\ The Exchange states its view that 
reliance on the OLPP requirements is consistent with the Act and would 
sufficiently limit the number of options series listed on the 
Exchange.\27\
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    \25\ See NYSE Arca Letter 1, supra note 6, at 1-2. The comment 
letter further notes that the Miami International Securities 
Exchange, LLC (``MIAX'') stated in a response to comments on a 
proposed rule change relating to increasing the number of options 
series associated with Short Term Options Series that it was not 
using a quote mitigation strategy, but instead employs a listing 
policy that mitigates the number of classes and series listed on its 
exchange by not listing illiquid options classes and products that 
are not already trading on another market. (See NYSE Arca Letter 1, 
supra note 6, at 2 (citing Letter to Elizabeth Murphy, Secretary, 
U.S. Securities Exchange Commission, from Brian O'Neill, VP and 
Senior Counsel, MIAX, dated June 2, 2013, available at http://www.sec.gov/comments/sr-miax-2013-23/miax201323-2.pdf.)). NYSE Arca 
notes that it has a similar policy designed to help ensure that the 
Exchange does not list options that generate quote volume without 
providing the benefit of trading volume. See NYSEArca Letter 1, 
supra note 6, at 2 and 4.
    \26\ See NYSE Arca Letter 2, supra note 8, at 1-2.
    \27\ See NYSE Arca Letter 1, supra note 6, at 1.
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    Next, the Exchange argues that eliminating its quote mitigation 
plan is consistent with the Act because refined market maker quoting 
obligations currently in place on the Exchange, which exempt certain 
options series from market makers' continuous quoting obligations, 
reduce the universe of series in which a market maker is required to 
quote.\28\ The Exchange notes that these refined obligations were 
adopted following implementation of its quote mitigation plan,\29\ and 
believes that as a result, market makers do not need to quote in 
approximately 5,000 options series, thereby decreasing quote message 
traffic.\30\
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    \28\ See NYSE Arca Letter 1, supra note 6, at 1.
    \29\ See id.
    \30\ Id.
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    The Exchange argues that it has sufficient capacity to handle 
quoting in all options series, including quotes in those series that 
are inactive and not currently disseminated pursuant to the Exchange's 
quote mitigation plan.\31\ In support of this statement, the Exchange 
explains that although quotes in inactive series do not generate quote 
traffic from NYSE Arca, the Exchange must nonetheless receive and 
process quotes in such series, and perform additional processing to 
suppress quotes in these series to comply with their quote mitigation 
plan.\32\ The Exchange states that because it is already processing the 
quotes it suppresses, it is ``confident that its own systems capacity 
is more than sufficient to accommodate any increase in the traffic that 
might be sent to OPRA.'' \33\ The Exchange notes that in its requests 
for capacity submitted to the Independent Systems Capacity Advisory 
(``ISCA'') (which OPRA uses to ensure overall aggregate capacity), NYSE 
Arca assumes that (1) options series that are inactive at that time 
could become active in the future, thereby increasing overall message 
traffic sent to OPRA, and (2) that all options series that it lists, 
including those without continuous quoting obligations for market 
makers, will generate message traffic to OPRA.\34\ The Exchange further 
states its belief that OPRA also would be able to accommodate any 
increase in quote message traffic resulting from NYSE Arca no longer 
suppressing quotes in inactive series.\35\
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    \31\ See NYSE Arca Letter 1, supra note 6, at 2.
    \32\ See NYSE Arca Letter 1, supra note 6, at 2.
    \33\ See NYSE Arca Letter 1, supra note 6, at 2-3.
    \34\ Id.
    \35\ See NYSE Arca Letter 1, supra note 6, at 2.
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    The Exchange further argues that eliminating its quote mitigation 
plan is consistent with the Act because the Exchange actively monitors 
market maker quoting activity and alerts market makers to heightened 
levels of quoting activity, which could result from systems issues or 
an incorrectly set parameter that generates erroneous quotes.\36\ The 
Exchange notes that NYSE Arca's requests for capacity to the ISCA are 
adjusted to account for ``some level'' of erroneous quoting.\37\
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    \36\ See NYSE Arca Letter 1, supra note 6, at 3-4.
    \37\ Id. at 4.
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    The Exchange also states that the landscape regarding quote message 
traffic and capacity has changed since the adoption of the Penny 
Pilot.\38\ NYSE

[[Page 36017]]

Arca represents that in January 2007, 15% of quotes received by the 
Exchange were not sent to OPRA, compared to 5.8% as of April 2015.\39\ 
The Exchange also states that at the time the Penny Pilot was adopted, 
OPRA's total capacity was set to 359,000 messages per seconds 
(``mps''), and that by July 2015, OPRA's peak capacity is anticipated 
to be 42,100,000 mps.\40\ In addition, the Exchange states, based on 
peak message traffic figures on the Exchange for one day in May 
2015,\41\ that if the quotes the Exchange suppressed on that day had 
been sent to OPRA, industry quotes published by OPRA would have 
increased by no more than 1%, and that this would use less than .05% of 
total OPRA capacity.\42\
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    \38\ See NYSE Arca Letter 3, supra note 8, at 2.
    \39\ Id.
    \40\ Id.
    \41\ Id. The Exchange represents that as of Friday May 29, 2015, 
peak message traffic for the Exchange was 1,707,820 mps, measured 
over a 100 millisecond period. Based on this, the Exchange believes 
that if the highest percentage of quotes suppressed by the Exchange 
during this period (8.3%) had been published at the same rate as 
quotes the Exchange had not suppressed during this time, the mps 
rate would instead be 1,849,569. Id.
    \42\ Id.
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IV. Discussion

    Under Section 19(b)(2)(C) of the Act, the Commission shall approve 
a proposed rule change of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act, and the rules and regulations thereunder that 
are applicable to such organization.\43\ The Commission shall 
disapprove a proposed rule change if it does not make such a 
finding.\44\ Rule 700(b)(3) of the Commission's Rules of Practice 
states that the ``burden to demonstrate that a proposed rule change is 
consistent with the [Act] . . . is on the self-regulatory organization 
that proposed the rule change'' and that a ``mere assertion that the 
proposed rule change is consistent with those requirements . . . is not 
sufficient.'' \45\
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    \43\ 15 U.S.C. 78s(b)(2)(C)(i).
    \44\ 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR 201.700(b)(3) 
and note 45 infra, and accompanying text.
    \45\ 17 CFR 201.700(b)(3). The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis 
of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. See id. Any failure of a self-regulatory 
organization to provide the information solicited by Form 19b-4 may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a proposed rule change is consistent with 
the Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization. Id.
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    After careful consideration, the Commission cannot find that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\46\ In particular, the Commission cannot find that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\47\ which requires that the rules of a national securities 
exchange be designed, among other things, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and to protect 
investors and the public interest.
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    \46\ In disapproving the proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \47\ 15 U.S.C. 78f(b)(5).
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    In conjunction with the adoption of the Penny Pilot in 2007 that 
permitted the options exchanges to quote certain options series in one 
and five cent increments, and in response to a letter sent by the then 
Chairman of the Commission,\48\ the options exchanges, including NYSE 
Arca, adopted quote mitigation plans.\49\ The Commission emphasized the 
importance of options exchanges' quote mitigation strategies in 
connection with the Penny Pilot in its orders approving an expansion of 
the Penny Pilot in 2007. In those orders, the Commission noted that 
options exchanges participating in the Penny Pilot would continue to 
use quote mitigation strategies.\50\ Likewise, when the Commission 
approved NYSE Arca's proposal to again expand the Penny Pilot in 2009, 
the Commission reiterated that the Exchange would retain and continue 
to employ its quote mitigation strategy.\51\
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    \48\ In a letter sent to the options exchanges on June 7, 2006, 
encouraging the implementation of a penny pilot program, then 
Chairman Cox noted that quoting options in pennies would increase 
quote message traffic, which the systems of exchanges, market data 
vendors, and securities firms must be able to manage, and for that 
reason, quoting options in pennies would begin in a small number of 
options. To assist in managing the anticipated increase in quote 
traffic, Chairman Cox asked that options exchanges include a 
workable quote mitigation strategy in any proposal to allow quoting 
in pennies. See Commission Press Release 2006-91, ``SEC Chairman Cox 
Urges Options Exchanges to Start Limited Penny Quoting,'' June 7, 
2006.
    \49\ See Quote Mitigation Approval Order, supra note 9.
    \50\ See Securities Exchange Act Release No. 56568, 72 FR 56422 
(October 3, 2007) (SR-NYSEArca-2007-88); 56567 (September 27, 2007), 
72 FR 56307 (October 3, 2007) (Amex-2007-96); 56565 (September 27, 
2007), 72 FR 56403 (October 3, 2007) (CBOE-2007-98); 56564 
(September 27, 2007), 72 FR 56412 (October 3, 2007) (ISE-2007-74); 
56563 (September 27, 2007), 72 FR 56429 (October 3, 2007) (Phlx-
2007-62); and 56566 (September 27, 2007), 72 FR 56400 (October 3, 
2007) (BSE-2007-40).
    \51\ See Securities Exchange Act Release No. 60711, 74 FR 49419 
(September 28, 2009) (SR-NYSEArca-2009-44). See also Securities 
Exchange Act Nos. 60373 (October 23, 2009), 74 FR 56675 (November 2, 
2009) (Phlx-2009-91); 60864 (October 22, 2009), 74 FR 55876 (October 
29, 2009) (CBOE-2009-076); 60865 (October 22, 2009), 74 FR 55880 
((ISE-2009-82); 60886 (October 27, 2009), 74 56897 (November 3, 
2009); 60874 (October 23, 2009), 74 FR 56682 (November 2, 2009) 
(NASDAQ-2009-091); and 61106 (December 3, 2009), 74 FR 65193 
(December 9, 2009) (NYSEAmex-2009-74).
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    When considering whether the Exchange's quote mitigation plan was 
consistent with the Act, the Commission relied upon supporting data and 
analysis provided by the Exchange.\52\ In its proposal to provide for a 
quote mitigation plan, NYSE Arca represented that the quote mitigation 
plan was intended to reduce the number of quotations generated by the 
Exchange for all option issues traded at NYSE Arca, not just options on 
issues included in the Penny Pilot, and that the Exchange anticipated 
the quote mitigation plan would reduce quote message traffic by 20-
30%.\53\ In approving NYSE Arca's proposal in February 2007, the 
Commission stated that because it expected that the Penny Pilot would 
increase quote message traffic, the Commission also approved the 
Exchange's proposal to reduce the number of quotations it 
disseminates.\54\
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    \52\ See Quote Mitigation Approval Order, supra note 9.
    \53\ See Quote Mitigation Approval Order, supra note 9, at 4760.
    \54\ See Quote Mitigation Approval Order, supra note 9, at 4760.
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    In 2007 and 2009, the Commission approved rule changes submitted by 
NYSE Arca expanding the number of classes eligible to participate in 
the Penny Pilot.\55\ In so approving, the Commission reviewed data 
provided by the options exchanges, including data relating to OPRA's 
capacity to process the increase in quotes resulting from the expansion 
of the Penny Pilot and the effectiveness of its quote mitigation 
plan.\56\ In approving each of these expansions, the Commission noted 
that

[[Page 36018]]

it relied, in part, on the Exchange's representation that it would 
continue to use its quote mitigation plan to suppress certain quotation 
traffic that would otherwise be sent to OPRA.\57\ The Commission also 
relied on data provided by the options exchanges to support 
representations that capacity was not a concern, and that the quote 
mitigation plans in place were successful.\58\ For example, NYSE Arca, 
provided the Commission with data supporting its claim that the 
Exchange's quote mitigation plan mitigated 12.1 million quotes a day or 
13 percent of NYSE Arca's daily quote traffic sent to OPRA.\59\ In 
another report, NYSE Arca provided data on OPRA's then-current 
capacity, future capacity, and peaks in message traffic sent to OPRA to 
support its argument that quote traffic increases were manageable.\60\
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    \55\ The Commission approved thirteen classes to participate in 
the Penny Pilot on January 23, 2007. See Quote Mitigation Approval 
Order, supra note 9. On September 27, 2007, the Commission approved 
an expansion of Penny Pilot, which raised the number of 
participating classes to 63. See Securities Exchange Act Release No. 
56568, 72 FR 56422 (October 3, 2007) (SR-NYSEArca-2007-88) (``Order 
Approving Expansion 1''). On September 23, 2009, the Commission 
approved another expansion, raising the number of participating 
classes to 363. See Securities Exchange Act Release No. 60711, 74 FR 
49419 (September 28, 2009) (SR-NYSEArca-2009-44) (``Order Approving 
Extension 2'').
    \56\ See Order Approving Expansion 1 and Order Approving 
Expansion 2, supra note 55 at 56423-24 and 49422-23, respectively.
    \57\ Id.
    \58\ Id. For example, in Order Approving Expansion 2, the 
Commission noted that on June 2, 2009, the sustained message traffic 
peak of 852,350 messages per second reported by OPRA is still well 
below the OPRA's current message per second capacity limit of 
2,050,000. See Order Approving Expansion 2, supra note 55 at 49422.
    \59\ See Understanding Economic and Capacity Impacts of the 
Penny Pilot, NYSE ARCA Options, May 31, 2007.
    \60\ See The Options Penny Pilot, NYSE ARCA, received August 18, 
2009.
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    As noted above, the Exchange believes that its quote mitigation 
plan is no longer necessary because: (1) the Exchange has incorporated 
select provisions of the OLPP in Exchange Rule 6.4A, which the Exchange 
believes limits the number of series eligible to be traded; (2) current 
Exchange Rule 6.37B Commentary .01 removes certain options series from 
market makers' continuous quoting obligations, which the Exchange 
believes reduces the number of quote messages that the Exchange sends 
to OPRA; and (3) both the system capacity at the Exchange and at OPRA 
are more than sufficient to accommodate any additional increase in 
quote message traffic that might be disseminated if NYSE Arca's quote 
mitigation plan is eliminated. However, the Exchange has not provided 
the Commission with sufficient data regarding potential changes in 
quote message traffic if the Commission approves its proposal.
    For example, the Exchange does not provide sufficient data about 
the number of quote messages that its quote mitigation plan currently 
suppresses relative to capacity at OPRA. Specifically, the Exchange 
provided data from May 29, 2015 that purports to show that if all quote 
messages suppressed by the Exchange were instead sent to OPRA, industry 
quotes published by OPRA would increase by no more than 1%. The 
Exchange asserts that this increase would use less than .05% of total 
OPRA capacity across all option exchanges. Importantly, however, the 
Exchange does not provide data that shows the excess capacity between 
peak quote message traffic sent from all options exchanges and OPRA's 
Peak Capacity for the May 29, 2015 sample. If peak quote message 
traffic sent to OPRA by all the options exchanges was at or approached 
OPRA's Peak Capacity, then potentially even a small increase in quote 
message traffic from one exchange could result in OPRA's capacity being 
exceeded.
    In addition, the Exchange does not provide data or analysis 
demonstrating the potential impact the Exchange's proposal would have 
on market participants who consume the OPRA and/or the Exchange's 
quotation message feeds.\61\ Nor does the Exchange quantify the number 
or percentage of quote messages that have been and would continue to be 
suppressed as a result of the implementation of Exchange Rule 6.4A \62\ 
or current Exchange Rule 6.37B Commentary .01.\63\ The Commission notes 
that the Exchange's comment letter stated its belief that as a result 
of refined quoting obligations, market makers do not need to quote in 
approximately 5,000 options series, and that this has resulted in a 
decrease in message traffic,\64\ however, the Exchange did not provide 
data to quantify the decrease in message traffic for the Commission to 
consider. Absent sufficient information and data of this type, the 
Commission is not able to adequately evaluate the Exchange's assertion 
that ``reliance on the OLPP, via Rule 6.4A, together with the refined 
market maker obligation, pursuant to Commentary .01 to Rule 6.37B, is 
sufficient as a quote mitigation strategy and obviates the need for 
Rule 6.86.'' \65\ Other information or data may also be helpful for the 
Commission's consideration of the proposed rule change. Without 
sufficient supporting data and analysis, the Commission is not able to 
adequately assess the impact of NYSE Arca's proposed rule change to 
eliminate its quote mitigation plan and make a determination that the 
proposed rule change is consistent with the Act.
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    \61\ See Order Approving Expansion 2, supra note 55 at 49421 
(The Commission noted that several commenters expressed concerns 
that increased quotation message traffic imposes costs on exchanges 
and other market participants to process and store the additional 
quotations and they questioned the ability of market systems to 
effectively handle the increased quote message traffic that would 
likely result from the expansion of the Penny Pilot to 363 classes. 
In approving the expansion, the Commission noted that NYSE Arca 
``had adopted and [would] continue to utilize quote mitigate 
strategies that should continue to mitigate the expected increase in 
quotation traffic.'') Id. at 49422-23.
    \62\ In 2009, the OLPP Participants, including NYSE Arca, 
represented that the new strategy they were proposing as Amendment 
No. 3 to the OLPP (which was subsequently codified as Rule 6.4A on 
the Exchange's rulebook) would be ``an additional strategy'' to be 
used to address overall capacity concerns in the industry. See 
Securities Exchange Act Release No. 60365 (July 22, 2009), 74 FR 
37266 (July 28, 2009) (Notice of Filing of Amendment No. 3 to the 
OLPP proposing uniform standards to the range of options series 
exercise prices available for trading). Although it was anticipated 
that the exercise price limitation bands set forth in Amendment No. 
3 would also have the attendant benefit of further reducing 
increases in quote message traffic, nothing in the language in the 
exchanges' OLPP filings suggest that the methodology set forth in 
Amendment No. 3 (to limit the number of options series available for 
trading) was intended to replace the options exchanges' quote 
mitigation strategies, nor does the language in those filings 
suggest that it was contemplated at the time that the options 
exchanges would eliminate their existing exchange-specific quote 
mitigation strategies.
    \63\ While NYSE Arca stated in its proposed rule change to adopt 
Exchange Rule 6.37B Commentary .01 that the burden of continuous 
quoting in adjusted series is counter to efforts to mitigate the 
number of quotes collected and disseminated, and that the proposal 
would further the goal of quote mitigation, this was not a basis 
given for the proposed rule change, and the Exchange did not provide 
any data on what the impact of the proposal on quote volume would 
be. See Securities Exchange Act Release No. 65210 (August 26, 2011), 
76 FR 54516 (September 1, 2011) (SR-NYSEArca-2011-59). Additionally, 
the Commission did not consider the potential impact of the proposal 
on quote mitigation as a basis for approving the elimination of 
continuous quoting obligation in certain series. See Securities 
Exchange Act Release No. 65573 (October 14, 2011), 76 FR 65305 
(October 20, 2011) (SR-NYSEArca-2011-59).
    \64\ See NYSE Arca Letter 1, supra note 6, at 3.
    \65\ See Notice, supra note 3, at 62984.
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    Given the limitations in the data provided by NYSE Arca, as 
described above, the Commission cannot find a sufficient basis to 
conclude that the proposal is consistent with the Act. The Commission 
notes, however, that the Penny Pilots for each of the options exchanges 
are anticipated to be extended for an additional year, until June 30, 
2016. In connection with any future requests to extend the Penny Pilots 
after that date, the Commission intends to require each exchange to 
submit detailed information to allow for permanent approval or 
disapproval by the Commission. Such proposals should, among other 
things, provide detailed data and analysis to support the efficacy, or 
any proposed modification or elimination, of any exchanges' quote 
mitigation plan.\66\
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    \66\ In reviewing the quote mitigation plans in this manner, the 
Commission would be able to consider the market-wide impact of any 
proposed modification to or elimination of an exchange's quote 
mitigation practices.
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    For the foregoing reasons, the Commission does not believe that 
NYSE

[[Page 36019]]

Arca has met its burden to demonstrate that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder, including that the rules of an exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.\67\
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    \67\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    For the reasons set forth above, the Commission does not believe 
that NYSE Arca has met its burden to demonstrate that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and in particular, Section 6(b)(5) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSEArca-2014-117) be, and hereby is, 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\68\
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    \68\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-15341 Filed 6-22-15; 8:45 am]
 BILLING CODE 8011-01-P