[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]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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

[[Page 834]]

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.
---------------------------------------------------------------------------

    \6\ Rule 7.31-E(d)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \11\ See Notice at supra note 3 at 56891.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \12\ See Id.
    \13\ See Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \14\ See id. at 56892.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \15\ Under Rule 7.44-E(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \16\ The Exchange proposes to renumber the remaining paragraphs 
under Rule 7.44-E(a)(4) accordingly.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \17\ 17 CFR 242.201.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \19\ Id.
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

[[Page 836]]

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.
---------------------------------------------------------------------------

    \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]
BILLING CODE P