[Federal Register Volume 83, Number 209 (Monday, October 29, 2018)]
[Notices]
[Pages 54384-54385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23507]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84471; File No. SR-NYSEArca-2018-63]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change To Amend NYSE Arca Rule 1.1(ll) To Modify the 
Formula for Establishing the Official Closing Price for a Derivative 
Securities Product When There Is No Closing Auction or if the Closing 
Auction Is Less Than One Round Lot, by Excluding the NBBO Midpoint if 
the Midpoint Multiplied by 10% Is Less Than the NBBO Spread or if the 
NBBO Is Crossed

October 23, 2018.

I. Introduction

    On August 29, 2018, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
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 
amend NYSE Arca Rule 1.1(ll) to exclude from the time-weighted average 
price (``TWAP'') calculation, for purpose of determining the Official 
Closing Price \3\ for an Exchange-listed security that is a Derivative 
Securities Product \4\ if the Exchange does not conduct a Closing 
Auction \5\ or if a Closing Auction trade is less than a round lot, a 
midpoint that is based on a National Best Bid and Offer (``NBBO'') that 
may not be reflective of the security's true and current value. The 
proposed rule change was published for comment in the Federal Register 
on September 17, 2018.\6\ The Commission received no comment letters on 
the proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See NYSE Arca Rule 1.1(ll) for a definition of Official 
Closing Price.
    \4\ With respect to equities traded on the Exchange, the term 
``Derivative Securities Product'' means a security that meets the 
definition of ``derivative securities product'' in Rule 19b-4(e) 
under the Act. See NYSE Arca Rule 1.1(k). For purposes of Rule 19b-
4(e), a ``derivative securities product'' means any type of option, 
warrant, hybrid securities product or any other security, other than 
a single equity option or a security futures product, whose value is 
based, in whole or in part, upon the performance of, or interest, 
in, an underlying instrument. 17 CFR 240.19b-4(e).
    \5\ See NYSE Arca Rule 7.35-E(d) regarding the operation of 
Closing Auctions on the Exchange.
    \6\ See Securities Exchange Act Release No. 84079 (September 11, 
2018), 83 FR 46981 (``Notice'').
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II. Description of the Proposed Rule Change

    On March 20, 2018, the Commission approved the Exchange's proposal 
(``OCP Filing'') to amend NYSE Arca Rule 1.1(ll) to provide for how the 
Official Closing Price is determined for an Exchange-listed security 
that is a Derivative Securities Product if the Exchange does not 
conduct a Closing Auction or if a Closing Auction trade is less than a 
round lot.\7\ As described in the Notice, the Exchange had sought a 
method for deriving the Official Closing Price that would be more 
indicative of the actual value of the securities, in particular for 
listed securities that are thinly traded or generally illiquid.\8\ 
Prior to approval of the OCP Filing, the Official Closing Price for 
such securities would have been based on a last-sale trade that may 
have been hours, days, or even months old and therefore not necessarily 
indicative of their true and current value. With approval of the OCP 
Filing, the Exchange adopted a revised calculation to derive the value 
for securities that have a potentially stale last-price, depending on 
when the last consolidated last-sale eligible trade occurred. 
Specifically, for such securities, the Official Closing Price would be 
derived by adding a percentage of the TWAP of the NBBO midpoint 
measured over the last five minutes before the end of Core Trading 
Hours and a percentage of the last consolidated last-sale eligible 
trade before the end of Core Trading Hours on that trading day.\9\
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    \7\ See Securities Exchange Act Release No. 82907 (March 20, 
2018), 83 FR 12980 (March 26, 2018) (order approving SR-NYSEArca-
2018-08).
    \8\ See Notice, supra, note 6, at 46981.
    \9\ See NYSE Arca Rule 1.1(ll)(1)(B)(i)-(vi).
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    The Exchange now proposes to further amend NYSE Arca Rule 
1.1(ll)(1)(B) to exclude from the TWAP calculation a midpoint that is 
based on an NBBO that the Exchange believes is too wide and therefore 
not reflective of the security's true and current value.\10\ 
Specifically, the Exchange proposes to exclude an NBBO midpoint from 
the calculation of the Official Closing Price if that midpoint, when 
multiplied by ten percent (10%), is less than the spread of that 
NBBO.\11\ The Exchange also would exclude a crossed NBBO from the 
calculation.\12\
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    \10\ See Notice, supra, note 6, at 46981.
    \11\ See proposed NYSE Arca Rule 1.1(ll)(1)(B).
    \12\ See id. For an example of this proposed new process, see 
Notice, supra, note 6, at 46981-82.
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    The Exchange notes that its proposed change to the Official Closing 
Price calculation in this scenario is similar to how it considers an 
``Auction NBBO,'' which is used as a basis for determining the Auction 
Reference Price for the Core Open Auction.\13\ To qualify as an Auction 
NBBO for the Core Open Auction, there must be both a bid and an offer 
that is not zero, the NBBO cannot be crossed, and the midpoint of the 
NBBO when multiplied by a designated percentage cannot be greater than 
or equal to the spread of the NBBO.\14\
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    \13\ The term ``Auction NBBO'' means an NBBO that is used for 
purposes of pricing an auction. See NYSE Arca Rule 7.35-E(a)(5). The 
Exchange also uses the Auction NBBO for determining the Indicative 
Match Price in specified situations for the Closing Auction. See 
NYSE Arca Rule 7.35-E(a)(8)(C).
    \14\ See NYSE Arca Rule 7.35-E(a)(5). The Exchange notes that, 
unlike its current proposal to codify a designated percentage of ten 
percent (10%) to be used in the TWAP calculation for the Official 
Closing Price, the designated percentage used for determining the 
Auction NBBO for the Core Open Auction is determined by the Exchange 
upon prior notice to ETP Holders. See Notice, supra, note 6, at 
46982.
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    The Exchange also proposes a non-substantive clarifying change to 
NYSE Arca Rule 1.1(ll) to specify that the process under NYSE Arca Rule 
1.1(ll)(1)(D) would be utilized if the Official Closing Price cannot be 
determined under NYSE Arca Rule1.1(ll)(1)(A), (B), or (C).\15\
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    \15\ See proposed NYSE Arca Rule 1.1(ll)(1)(D).
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    The Exchange anticipates the implementation date for the proposed 
rule change will be in the first quarter of 2019, and the Exchange will 
announce such implementation date by Trader Update.\16\
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    \16\ See Notice, supra, note 6, at 46982.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds 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.\17\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\18\ which 
requires, among other things, that the rules of a national securities 
exchange be

[[Page 54385]]

designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating 
transactions in securities, 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, and not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Commission also finds that the proposed rule 
change is consistent with Section 6(b)(8) of the Act,\19\ which 
requires that the rules of an exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \17\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78f(b)(8).
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    The proposal would set forth an additional procedure governing how 
the Exchange would determine the Official Closing Price in Exchange-
listed securities that are Derivative Securities Products when the 
Exchange does not conduct a Closing Auction or if a Closing Auction 
trade is less than a round lot. The Commission notes that the primary 
listing market's closing price for a security is relied upon by market 
participants for a variety of reasons, including, but not limited to, 
calculation of index values, calculation of the net asset value of 
mutual funds and exchange-traded products, the price of derivatives 
that are based on the security, and certain types of trading benchmarks 
such as volume weighted average price strategies. As the Exchange 
notes, its current calculation for the Official Closing Price in such a 
scenario is designed to utilize more recent and reliable market 
information to provide a closing price that more accurately reflects 
the true and current value of a security that may be thinly traded or 
generally illiquid and when the Official Closing Price for such 
security may otherwise be based on a potentially stale last-sale 
trade.\20\ The Exchange now proposes to exclude from the TWAP 
calculation used under this process a midpoint that is based on an NBBO 
that the Exchange believes is too wide and therefore not reflective of 
the security's true and current value.\21\ The Commission believes that 
this exclusion, utilizing a specified percentage of the midpoint value, 
is a reasonable approach to avoid utilizing market information in the 
TWAP calculation that may provide less accurate information about the 
true value of a security. The Commission therefore believes that the 
Exchange's proposal is reasonably designed to achieve the Act's 
objectives to protect investors and the public interest. Accordingly, 
the Commission finds that the proposed rule change is consistent with 
the requirements of the Act.
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    \20\ See Notice, supra note 6, at 46981.
    \21\ See id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NYSEArca-2018-63) be, and 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23507 Filed 10-26-18; 8:45 am]
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