[Federal Register Volume 84, Number 21 (Thursday, January 31, 2019)]
[Notices]
[Pages 833-836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00481]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84976; File No. SR-NYSEARCA-2018-77]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To Amend Rule 7.44-E To Expand and Modify the Exchange's
Retail Liquidity Program
December 26, 2018.
I. Introduction
On October 26, 2018, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``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 Rule 7.44-E to expand the Exchange's
Retail Liquidity Program (``RLP'') to all securities traded on NYSE
Arca and make certain other modifications.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on November 14, 2018.\3\ On December 10, 2018, the Commission
extended to February 12, 2019, the time period in which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove, the proposed rule change.\4\ The Commission received no
comments on the proposed rule change. This order institutes proceedings
under Section 19(b)(2)(B) of the Act \5\ to determine whether to
approve or disapprove the proposed rule change.
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\3\ See Securities Exchange Act Release No. 84547 (November 7,
2018), 83 FR 56890 (``Notice'').
\4\ See Securities Exchange Act Release No. 84772, 83 FR 64381
(December 14, 2018).
\5\ 15 U.S.C. 78(s)(b)(2)(B).
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II. Summary of the Proposed Rule Change
The Exchange proposes to amend Rule 7.44-E, which sets forth the
Exchange's Retail Liquidity Program (the ``Program''), to: (i) Expand
the Program's availability to all securities traded on the Exchange;
(ii) remove
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unused functionality by eliminating the Type 2--Retail Order and no
longer permit Retail Price Improvement Orders (``RPI'') to be
designated as a Mid-Point Liquidity (``MPL'') Order; \6\ and (iii)
offer additional functionality to RPI Orders by allowing them to
include an optional offset.
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\6\ Rule 7.31-E(d)(3).
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The Program is intended to attract retail order flow to the
Exchange, and allow such order flow to receive potential price
improvement.\7\ The Program is currently limited to trades occurring at
prices equal to and greater than $1.00 a share. The program currently
operates on a pilot basis and was set to expire on December 31, 2018,
but was recently extended to expire on June 30, 2019.\8\
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\7\ See Securities Exchange Act Release No. 71176 (December 23,
2013), 78 FR 79524 (December 30, 2013) (SR-NYSEArca-2013-107) (``RLP
Approval Order'').
\8\ See Securities Exchange Act Release No. 84773 (December 10,
2018), 83 FR 64419 (December 14, 2018).
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Under Exchange Rule 7.44-E, a class of market participant called
Retail Liquidity Providers (``RLPs'') \9\ and non-RLP member
organizations are able to provide potential price improvement to retail
investor orders in the form of a non-displayed order that is priced
better than the best protected bid or offer (``PBBO''), called an RPI.
When there is an RPI in a particular security priced at least $0.001
better than the PBB or PBO, the Exchange disseminates an indicator,
known as the Retail Liquidity Identifier (``RLI''), that such interest
exists. Retail Member Organizations (``RMOs'') can submit a Retail
Order to the Exchange, which interacts, to the extent possible, with
available contra-side RPIs and orders with a working price between the
PBBO. The segmentation in the Program allows retail order flow to
receive potential price improvement as a result of their order flow
being deemed more desirable by liquidity providers.\10\
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\9\ The Program also allows for RLPs to register with the
Exchange. However, any firm can enter RPI orders into the system.
\10\ RLP Approval Order, 77 FR at 79528.
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Expansion of Program's Scope
The Exchange proposes to expand the Program's availability to all
securities traded on the Exchange. As more fully set forth in the
Notice, the Exchange proposed that in addition to NYSE Arca-listed
securities and UTP Securities, the Program would cover securities
listed on the New York Stock Exchange LLC (``NYSE''), which are
currently excluded from the Program would be covered by the Program.
The Exchange states that this expansion would make the Program more
similar to the retail price improvement program offered by Cboe BYX
Exchange, Inc. (``BYX''), that is available to all securities trading
on BYX.\11\
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\11\ See Notice at supra note 3 at 56891.
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Elimination of Type 2--Retail Orders
Also as more fully set forth in the Notice, the Exchange proposes
to amend Rule 7.44-E(k) to remove unused functionality by eliminating
the Type 2--Retail Order.\12\ As a result, the Exchange would offer a
single category of Retail Orders. The Exchange states that it has not
received a Retail Order designated as Type 2 and, therefore, proposes
to no longer support this functionality.\13\
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\12\ See Id.
\13\ See Id.
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RPI Orders
In addition, as more fully set forth in the Notice, the Exchange
proposes to remove unused functionality by no longer permitting RPI
Orders to be designated as MPL Orders, and also proposes to offer
additional functionality to RPI Orders by allowing them to include an
optional offset.\14\
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\14\ See id. at 56892.
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RPIs are non-displayed and only execute against Retail Orders. RPIs
are generally entered at a single limit price, rather than being pegged
to the PBBO. One exception is that a RPI Order could also be designated
as an MPL Order, in which case the order would be pegged to the
midpoint of the PBBO and re-priced as the PBBO changes.
Designation as MPL Orders. The Exchange proposes to remove unused
functionality that permits RPI Orders to be designated as MPL Orders.
Rule 7.44-E(a)(4)(D) currently states that ``[a]n RPI must be
designated as either a Limit Non-Displayed Order or MPL Order, and an
order so designated will interact with incoming Retail Orders only and
will not interact with either a Type 2--Retail Order Day or Type 2--
Retail Order Market that is resting on the NYSE Arca Book.'' The
Exchange notes that to date all RPI Orders have been designated as Non-
Displayed Limit Orders, not MPL Orders.
As proposed, RPI Orders could no longer be designated as MPL
Orders. To effect this change, the Exchange proposes to revise the
above-referenced sentence from Rule 7.44-E(a)(4)(D) to provide instead
that ``[a]n RPI . . . will interact with incoming Retail Orders only.''
The remaining text of the current rule is no longer necessary because
the reference to Non-Displayed Limit Orders is superfluous as RPI
Orders by definition are non-displayed and must include a limit
price.\15\ Further, references to Type 2--Retail Orders are unnecessary
because they would no longer be offered by the Exchange, as proposed
above.
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\15\ Under Rule 7.44-E(a).
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Optional Offset Functionality. The Exchange proposes to allow RPIs
to include an optional offset. Rule 7.44-E(a)(4) would be amended to
include new paragraph (a)(4)(C) \16\ that would provide that an RPI may
include an optional offset, which may be specified up to three
decimals. The working price of an RPI to buy (sell) with an offset
would be the lower (higher) of the PBB (PBO) plus (minus) the offset or
the limit price of the RPI. An RPI with an offset would not be eligible
to trade if the working price is below $1.00. If an RPI to buy (sell)
with an offset would have a working price that is more than three
decimals, the working price would be truncated to three decimals.
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\16\ The Exchange proposes to renumber the remaining paragraphs
under Rule 7.44-E(a)(4) accordingly.
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RPIs that include an offset would interact with Retail Orders as
follows. Assume an RLP enters RPI sell interest with an offset of
$0.001 and a limit price of $10.10 while the PBO is $10.11. The RPI
could interact with an incoming buy Retail Order at $10.109. If the PBO
changes to $10.12, the RPI could interact with an incoming buy Retail
Order at $10.119. If, however, the PBO changes again to $10.10, the RPI
could not interact with the Retail Order because the price required to
deliver the minimum $0.001 price improvement ($10.099) would violate
the RLP's limit price of $10.10.
If an RLP otherwise enters an offset greater than the minimum
required price improvement and the offset would produce a price that
would violate the RLP's limit price, the offset would be applied only
to the extent that it respects the RLP's limit price. By way of
illustration, assume RPI buy interest is entered with an offset of
$0.005 and a limit price of $10.112 while the PBB is at $10.11. The RPI
could interact with an incoming sell Retail Order at $10.112, because
it would produce the required price improvement without violating the
RLP's limit price, but it could not interact above the $10.112 limit
price.
The Exchange proposes to make a related change to Rule 7.16-
E(f)(5)(C) to specify that, like Pegged Orders and MPL Orders, RPIs
with an offset would use the National Best Bid (``NBB'') instead of the
PBB as the reference price when a Short Sale Price Test is triggered
[[Page 835]]
pursuant to Rule 201 of Regulation SHO.\17\
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\17\ 17 CFR 242.201.
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III. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \18\ to determine whether the proposal should be
approved or disapproved. Institution of proceedings is appropriate at
this time in view of the legal and policy issues raised by the
proposal. Institution of disapproval proceedings does not indicate that
the Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described in greater detail below, the
Commission seeks and encourages interested persons to provide
additional comment on the proposal.
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\18\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\19\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act,\20\ which requires that the rules of an 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, in general, to protect
investors and the public interest, and which prohibits the rules of an
exchange from being designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, and with Section 6(b)(8) of
the Act, which requires that the rules of an exchange not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\21\
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\19\ Id.
\20\ 15 U.S.C. 78f(b)(5).
\21\ 15 U.S.C. 78f(b)(8).
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The Exchange notes that the Program was intended to create
additional price improvement opportunities for retail investors by
segmenting retail order flow on the Exchange.\22\ When the Commission
initially approved the Program on a pilot basis, it explained that it
would monitor the Program throughout the pilot period for its potential
effects on public price discovery and on the broader market
structure.\23\ The Exchange seeks to modify and expand the Program as
the pilot is approaching expiration, prior to providing an analysis of
what it considers to be the economic benefits for retail investors and
the marketplace flowing from operation of the Program. Under the
Commission's Rules of Practice, the ``burden to demonstrate that a
proposed rule change is consistent with the [Act] and the rules and
regulations issued thereunder . . . is on the [SRO] that proposed the
rule change.'' \24\ 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,\25\
and any failure of an SRO to provide this information 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
applicable rules and regulations.\26\ The Commission questions whether
the proposal to expand and modify the Program prior to Commission
consideration of whether to approve the Program, as it has been
operating, on a permanent basis is consistent with the Act,
particularly given that the Commission has questioned whether similar
programs have achieved their stated goals.\27\ The Commission believes
it is appropriate to institute proceedings to allow for additional
consideration and comment on the issues raised herein, any potential
response to comments or supplemental information provided by the
Exchange, and any additional independent analysis by the Commission.
The Commission believes that these issues raise questions as to whether
the Exchange has met its burden to demonstrate that the Program, as
proposed to be expanded and amended, is consistent with the Act, and
specifically, with its requirements that the Program be designed to
perfect the mechanism of a free and open market and the national market
system, protect investors and the public interest, and not be unfairly
discriminatory; or not impose an unnecessary or inappropriate burden on
competition.\28\
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\22\ See Notice, supra note 3 at 56891.
\23\ See RLP Approval Order, supra note 7.
\24\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\25\ See id.
\26\ See id.
\27\ See Securities Exchange Act Release Nos. 84600 (November
15, 2018), 83 FR 58802 (November 21, 2018), 84472 (October 23,
2018), 83 FR 54411 (October 29, 2018), and 84183 (September 18,
2018), 83 FR 48350 (September 24, 2018) (orders instituting
proceedings to determine whether to approve or disapprove Pilot
Retail Price Improvement Programs of CboeBYX, Nasdaq BX, and NYSE,
respectively).
\28\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of
the Exchange Act, or the rules and regulations thereunder. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral presentation.\29\
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\29\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by February 21, 2019. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
March 7, 2019.
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-NYSE ARCA-2018-77 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEARCA-2018-77. The
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
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post all comments on the Commission's internet website (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 website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
such filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
publicly available. All submissions should refer to File Number SR-
NYSEARCA-2018-77 and should be submitted on or before February 21,
2019. Rebuttal comments should be submitted by March 7, 2019.
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\30\ 17 CFR 200.30-3(a)(57) and (58).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-00481 Filed 1-30-19; 8:45 am]
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