[Federal Register Volume 84, Number 188 (Friday, September 27, 2019)]
[Notices]
[Pages 51205-51210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20969]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87056; File No. SR-NYSE-2019-34]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, a
Proposed Rule Change To Amend Exchange Rule 104 To Specify Designated
Market Maker Requirements for Exchange Traded Products Listed on the
Exchange
September 23, 2019.
I. Introduction
On June 7, 2019, New York Stock Exchange LLC (``Exchange'' or
``NYSE'') 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 Exchange Rule 104 to specify Designated
Market Maker (``DMM'') requirements for Exchange Traded Products
(``ETPs'') listed on the Exchange pursuant to Exchange Rules 5P and 8P.
The proposed rule change was published for comment in the Federal
Register on June 25, 2019.\3\
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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. 86151 (June 19,
2019), 84 FR 29908 (June 25, 2019) (``Notice'').
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On July 24, 2019, the Commission extended to September 23, 2019,
the time period in which to approve the proposal, disapprove the
proposal, or institute proceedings to determine whether to approve or
disapprove the proposal.\4\ The Commission has received one comment on
the proposal.\5\ On September 18, 2019, the Exchange filed Amendment
No. 1 to the proposal, which supersedes the original filing in its
entirety. The Commission is publishing this notice to solicit comments
on Amendment No. 1 from interested persons, and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
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\4\ See Securities Exchange Act Release No. 86460 (July 24,
2019), 84 FR 36983 (July 30, 2019).
\5\ See Letter from Bernard B. Fudim, to Secretary, Commission
(June 19, 2019).
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II. Self-Regulatory Organization's Description of the Proposal, as
Modified by Amendment No. 1
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 to amend Rule 104 (Dealings and
Responsibilities of DMMs) to specify DMM requirements for ETPs listed
on the Exchange pursuant to Rules 5P and 8P.
Background
Currently, the Exchange trades securities, including ETPs, on its
Pillar trading platform on an unlisted trading privileges (``UTP'')
basis, subject to Pillar Platform Rules 1P-13P.\6\ In the next phase of
Pillar, the Exchange proposes to transition trading of Exchange-listed
securities to the Pillar trading platform, which means that DMMs would
be trading on Pillar in their assigned securities.\7\ Once transitioned
to Pillar, such securities will also be subject to the Pillar Platform
Rules 1P-13P.
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\6\ ``UTP Security'' is defined as a security that is listed on
a national securities exchange other than the Exchange and that
trades on the Exchange pursuant to unlisted trading privileges. See
Rule 1.1.
\7\ The Exchange has announced that, subject to rule approvals,
the Exchange will begin transitioning Exchange-listed securities to
Pillar on August 5, 2019, available here: https://www.nyse.com/publicdocs/nyse/markets/nyse/Revised_Pillar_Migration_Timeline.pdf.
The Exchange will publish by separate Trader Update a complete
symbol migration schedule.
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Rules 5P (Securities Traded) and 8P (Trading of Certain Exchange
Traded Products) provide for the listing of certain ETPs \8\ on the
Exchange that (1)
[[Page 51206]]
meet the applicable requirements set forth in those rules, and (2) do
not have any component NMS Stock \9\ that is listed on the Exchange or
is based on, or represents an interest in, an underlying index or
reference asset that includes an NMS Stock listed on the Exchange. ETPs
listed under Rules 5P and 8P are ``Tape A'' listings and would be
traded pursuant to the rules applicable to NYSE-listed securities.
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\8\ Rule 1.1P(k) defines ``Exchange Traded Product'' as a
security that meets the definition of ``derivative securities
product'' in Rule 19b-4(e) under the Act.
\9\ NMS Stock is defined in Rule 600 of Regulation NMS, 17 CFR
242.600(b)(47).
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The Exchange does not currently list any ETPs and anticipates that
it would not do so until Exchange-listed securities transition to
Pillar. Once an ETP is listed, it will be assigned to a DMM pursuant to
Rule 103B. The DMMs' role with respect to ETPs assigned to them will be
subject to the same DMM rules governing all other listed securities,
including Rules 36, 98, and 104. For example, DMMs will be responsible
for facilitating the opening, reopening, and close of trading for
assigned ETPs as required by Rule 104(a)(2) and (3). To facilitate DMM
trading of Exchange-listed ETPs pursuant to Rules 5P and 8P, with this
proposed change, the Exchange proposes to amend Rule 104 relating
specified DMM requirements.
Current Rule 104
Rule 104 sets forth the obligations of Exchange DMMs. Under Rule
104(a), DMMs registered in one or more securities traded on the
Exchange are required to engage in a course of dealings for their own
account to assist in the maintenance of a fair and orderly market
insofar as reasonably practicable. Rule 104(a) also enumerates the
specific responsibilities and duties of a DMM, including: (1)
Maintenance of a continuous two-sided quote, which mandates that each
DMM maintain a bid or an offer at the National Best Bid (``NBB'') and
National Best Offer (``NBO'') (together, the ``NBBO'' or ``inside'') at
least 15% of the trading day for securities with a consolidated average
daily volume of less than one million shares, and at least 10% for
securities with a consolidated average daily volume equal to or greater
than one million shares,\10\ and (2) the facilitation of, among other
things, openings, re-openings, and the close of trading for the DMM's
assigned securities, all of which may include supplying liquidity as
needed.\11\
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\10\ See Rule 104(a)(1)(A).
\11\ See Rule 104(a)(2)-(3). Rule 104(e) further provides that
DMM units must provide contra-side liquidity as needed for the
execution of odd-lot quantities eligible to be executed as part of
the opening, reopening, and closing transactions but that remain
unpaired after the DMM has paired all other eligible round lot sized
interest.
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Rule 104(f) imposes an affirmative obligation on DMMs to maintain,
insofar as reasonably practicable, a fair and orderly market on the
Exchange in assigned securities, including maintaining price continuity
with reasonable depth and trading for the DMM's own account when lack
of price continuity, lack of depth, or disparity between supply and
demand exists or is reasonably to be anticipated. The Exchange supplies
DMMs with suggested Depth Guidelines for each security in which a DMM
is registered, and DMMs are expected to quote and trade with reference
to the Depth Guidelines.\12\
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\12\ See Rule 104(f)(3).
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Rule 104(g) provides that transactions on the Exchange by a DMM for
the DMM's account must be effected in a reasonable and orderly manner
in relation to the condition of the general market and the market in
the particular stock. Rule 104(g)(1) also describes certain
transactions on the Exchange by a DMM for the DMM's account must be
effected in a reasonable and orderly manner in relation to the
condition of the general market and the market in the particular stock.
In addition, if a DMM unit engages in an ``Aggressing Transaction,''
i.e., a transaction that (i) is a purchase (sale) that reaches across
the market to trade as the contra-side to the Exchange published offer
(bid); and (ii) is priced above (below) the last-differently priced
trade on the Exchange and above (below) the last differently-priced
published offer (bid) on the Exchange, such DMM is subject to specified
requirements to re-enter on the opposite side of the Aggressing
Transaction. Rule 104(g) also sets forth the re-entry obligations for
DMM transactions. Specifically, Rule 104(g)(2) provides that a DMM
unit's obligation to maintain a fair and orderly market may require re-
entry on the opposite side of the market after effecting one or more
transactions and that such re-entry should be commensurate with the
size of the transaction(s) and the immediate and anticipated needs of
the market.
Rules 104(g)(2)(A) and (B) specify the re-entry obligations for
Aggressing Transactions. Following an Aggressing Transaction, Rule
104(g)(2)(A) requires the DMM unit to re-enter the opposite side of the
market at or before the applicable PPP for that security commensurate
with the size of the Aggressing Transaction. Under Rule 104(g)(2)(B),
immediate re-entry on the opposite side of the market at or before the
applicable PPP for the security commensurate with the size of the
Aggressing Transaction is required if the Aggressing Transaction (i) is
10,000 shares or more or has a market value of $200,000 or more, and
(ii) exceeds 50% of the published offer (bid) size.
Proposed Rule Change
To reflect the differences in how ETPs trade and the unique role of
exchange market makers in the trading of ETPs, in order to facilitate
DMM trading of Exchange-listed ETPs pursuant to Rules 5P and 8P, the
Exchange proposes certain amendments to Rule 104.
Unlike operating company securities listed on the Exchange, the
value of ETPs are derived from the underlying assets owned. The end-of-
day net asset value (``NAV'') of an ETP is a daily calculation based
off the most recent closing prices of the underlying assets and an
accounting of the ETP's total cash position at the time of calculation.
The NAV generally is calculated by taking the sum of fund assets,
including any securities and cash, subtracting liabilities, and
dividing by the number of outstanding shares. Additionally, ETPs are
generally subject to a creation and redemption mechanism to ensure that
the ETP's price does not fluctuate too far away from NAV, which
mechanisms mitigate the potential for exchange trading to impact the
price of an ETP.
Moreover, each business day, ETPs make publicly available a
creation and redemption ``basket'' which may, for example, be in the
form of a portfolio composition file (i.e., a specific list of names
and quantities of securities or other assets designed to track the
performance of the portfolio as a whole). ETP shares are created when
an Authorized Participant, typically a market maker or other large
institutional investor, deposits the daily creation basket or cash with
the issuer. In return for the creation basket or cash (or both), a
``creation unit'' is issued to the Authorized Participant that consists
of a specified number of ETF shares.\13\
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\13\ For example, assume a given ETP is designed to track the
performance of a specific index. An Authorized Participant will
generally purchase certain of the constituent securities of that
index, then deliver those shares to the issuer. In exchange, the
issuer gives the Authorized Participant a block of equally valued
ETP shares, on a one-for-one fair value basis. This process also
works in reverse. A redemption is achieved when the Authorized
Participant accumulates a sufficient number of shares to constitute
a creation unit and then exchanges these shares with the issuer,
thereby decreasing the supply of ETP shares in the marketplace.
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The principal, and perhaps most important, feature of ETPs is their
[[Page 51207]]
reliance on an ``arbitrage function'' performed by market participants
that influences the supply and demand of shares and, thus, trading
prices relative to NAV. As noted above, new ETP shares can be created
and existing shares redeemed based on investor demand; thus, ETP supply
is generally open-ended. As the Commission has acknowledged, the
arbitrage function helps to keep an ETP's price in line with the value
of its underlying portfolio, i.e., it minimizes deviation from NAV.\14\
Generally, the higher the liquidity and trading volume of an ETP, the
more likely the ETP's price will not deviate from the value of its
underlying portfolio. Market makers registered in ETPs play a key role
in this arbitrage function and DMMs, along with other market
participants, would perform this role for ETPs listed on the Exchange.
In short, the Exchange believes that the arbitrage mechanism is
generally an effective and efficient means of ensuring that intraday
pricing in ETPs closely tracks the value of the underlying portfolio or
reference assets.
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\14\ See Securities Exchange Act Release No. 75165, 80 FR 34729,
34733 (June 17, 2015) (S7-11-15) (arbitrage ``generally helps to
prevent the market price of ETP Securities from diverging
significantly from the value of the ETP's underlying or reference
assets''). See also generally id., 80 FR at 34739 (``In the
Commission's experience, the deviation between the daily closing
price of ETP Securities and their NAV, averaged across broad
categories of ETP investment strategies and over time periods of
several months, has been relatively small[,]'' although it had been
``somewhat higher'' in the case of ETPs based on international
indices.).
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To reflect the role of market makers--including DMMs--in the
trading of ETPs, the Exchange proposes to amend Rule 104 in several
respects. First, the Exchange proposes to exclude ETPs from the re-
entry obligations for Aggressing Transactions in Rule 104(g)(2) (Re-
Entry Obligations). The Exchange believes that because of the unique
characteristics of ETPs--in particular, that ETPs trade at intra-day
market prices rather than at NAV and the existence of arbitrage pricing
mechanisms that are designed to help ensure that secondary market
prices of ETP shares do not vary substantially from the NAV--the re-
entry obligations set forth in Rule 104(g)(2) not only are not
necessary, but also could impede the ability of a DMM to effectively
make markets in ETPs. For example, a market maker engaging in the
arbitrage function may need to update the quote for an ETP to bring the
price of the security in line with the underlying assets. If updating
the quote consistent with that arbitrage function were to require the
DMM to first to engage in an Aggressing Transaction (i.e., to trade
with the existing BBO in order to post a new quote), the Exchange
believes that the current re-entry obligations for Aggressing
Transactions would defeat the purpose of the DMM engaging in such
Aggressing Transaction to update the quote in the first place. More
specifically, the re-entry obligation could be inconsistent with the
new quote that the DMM is seeking to post as part of the arbitrage
function. Indeed, the Exchange believes that without the proposed
changes, DMMs assigned to ETPs would be at a competitive disadvantage
vis-[agrave]-vis registered market makers in the same ETP on competing
exchanges as well as other market participants on the NYSE and would be
impeded in their ability to effectively make competitive markets in
their assigned ETP securities.
To maintain the balance between DMM benefits and obligations under
Rule 104, the Exchange proposes to amend Rule 104 to require heightened
DMM quoting obligations for Exchange-listed ETPs. As proposed, for
listed ETPs, DMMs would be required to maintain a bid or offer at the
NBB and NBO at least 25% of the trading day. Time at the inside for
ETPs would be calculated in the same way as other securities in which
DMM units are registered as the average of the percentage of time the
DMM unit has a bid or offer at the inside. In other words, this would
be a portfolio-based quoting requirement. Orders entered by the DMM in
ETPs that are not displayed would not be included in the inside quote
calculation as is also currently the case for other securities in which
DMM units are registered. Reserve or other non-displayed orders entered
by the DMM in their assigned ETP would not be included in the inside
quote calculations.
To effectuate this change, Rule 104(a)(1)(A) would be amended as
follows:
The phrase ``for securities in which the DMM unit is
registered'' would be added following the first sentence in Rule
104(a)(1)(A) and the comma following that initial sentence would be
removed;
New subsections (i), (ii) and (iii) would be created;
The phrase ``that are not ETPs'' would be added following
``at least 15% of the trading day for securities'' in new subsection
(i) and ``in which the DMM unit is registered'' would be deleted;
The phrase ``of the trading day'' \15\ would added after
``at least 10%'' and ``that are not ETPs'' would be added after ``for
securities'' in new subsection (ii). The phrase ``in which the DMM unit
is registered'' would be deleted since it would appear in the first
sentence of the amended rule;
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\15\ This is a non-substantive conforming change that would
mirror the current rule text for the 15% requirement.
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New subdivision (iii) providing that DMM units must
maintain a bid or an offer at the inside ``at least 25% of the trading
day for ETPs'' would be added;
The phrase ``respective percentage'' would replace ``15%
and 10%'' in the next to last sentence of Rule 104(a)(1)(A) and ``non-
displayed'' would replace ``hidden'' in the last sentence of the rule;
and
The phrase ``other than Aggressing Transactions involving
an ETP'' would be added to Rule 104(g)(2)(A) and (B) following
``Following an Aggressing Transaction.''
The Exchange also proposes non-substantive amendments to replace
the terms ``stock'' and ``stocks'' in Rule 104(f)(2) (Function of DMMs)
with the terms ``security'' and ``securities,'' respectively, and to
replace the term ``stock'' in Rule 104(g)(1) with ``security.'' The
Exchange would also add a new subsection (5) to Rule 104(f) providing
that, for those ETPs in which they are registered, DMM units will be
responsible for the affirmative obligation of maintaining a fair and
orderly market, including maintaining price continuity with reasonable
depth for their registered ETPs in accordance with Depth Guidelines
published by the Exchange. To provide the Exchange time to collect
trading data adequate to calculate appropriate Depth Guidelines for
listed ETPs, the Exchange proposes that these provisions would not be
operative until 18 weeks after the approval of the proposed rule change
by the Commission.\16\
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\16\ See, e.g., Securities Exchange Act Release Nos. 62479 (July
9, 2010), 75 FR 41264, 41265 (July 15, 2010) (SR-NYSEAmex-2010-31)
(providing for a delayed implementation of Depth Guidelines to
enable the collection of trading data adequate to calculate the
guidelines in connection with the Floor-based DMM trading of Nasdaq
securities on a UTP basis). Such an approach is necessary so that
appropriate Depth Guidelines may be calculated based on actual
trading data on the Exchange. Accordingly, following implementation
and roll-out of the pilot program, the Exchange proposes to collect
60 trading days of trade data before implementing Depth Guidelines
for trading ETPs securities on the Exchange within 30 calendar days
of the collection of the trade data. See generally id., 75 FR at
41267 & n. 19.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\17\ in general, and furthers the objectives of
Sections 6(b)(5) of the
[[Page 51208]]
Act,\18\ in particular, because 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 regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to, and perfect the mechanisms of, a
free and open market and a national market system and, in general, to
protect investors and the public interest and because it is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that proposed requirements for
DMM trading of ETPs would remove impediments to and perfect the
mechanism of a free and open market and a national market system by
facilitating market making by DMMs in listed ETPs and maintaining the
Exchange's current structure to trade listed securities. The Exchange
believes that the proposed exclusion of listed ETPs from the
requirements of Rule 104(g)(2) would not be inconsistent with the
public interest and the protection of investors because the unique
characteristics of ETPs, including that ETPs trade at intra-day market
prices rather than end-of-day NAV and are constrained by arbitrage
pricing mechanisms that are designed to ensure that secondary market
prices of ETP shares do not vary substantially from the NAV, render
those obligations unnecessary or potentially even harmful. As discussed
above, the Exchange also believes the DMM obligations set forth in Rule
104(g)(2) could impede the ability of a DMM to effectively make markets
in ETPs.
The Exchange believes that the proposed heightened quoting
obligations for DMMs in listed ETPs requiring maintenance of a bid or
offer at the inside of at least 25% of the trading day would maintain
the balance of benefits and obligations under Rule 104 because
exclusion of listed ETPs from the re-entry requirements for Aggressing
Transactions under Rule 104(g)(2) would be offset by the heightened DMM
quoting obligations for listed ETPs. DMMs would also be required to
facilitate the opening, reopening, and closing of listed ETPs assigned
to them, as required by Rule 104(a)(2) and (3), which is an obligation
unique to the Exchange. As noted, listed ETPs would also be subject to
the requirement that DMM transactions be effected in a reasonable and
orderly manner in relation to the condition of the general market and
the market in the particular stock. These safeguards are designed to
ensure that DMM transactions in listed ETPs bear a reasonable
relationship to overall market conditions and that DMMs cannot
destabilize, inappropriately influence or manipulate a security. For
the same reasons, the proposal would not alter or disrupt the balance
between DMM benefits and obligations of being an Exchange DMM.
The proposed heightened quoting obligation for listed ETPs assigned
to a DMM would also encourage additional stable displayed liquidity on
the Exchange in listed securities, thereby promoting price discovery
and transparency. The Exchange further believes that by establishing
distinct requirements for DMMs, the proposal is also designed to
prevent fraudulent and manipulative acts and practices and to promote
just and equitable principles of trade.
The Exchange believes that the proposal would not be inconsistent
with the public interest and the protection of investors. As noted, the
proposal would subject DMMs to the Exchange's current structure for
trading listed securities and the responsibilities and duties of DMMs
set forth in Rule 104, including facilitating openings, reopenings, and
closings and adding a heightened quoting obligation at the inside. In
addition, the proposed rule would subject listed ETPs to the
requirement that all DMM transactions be effected in a reasonable and
orderly manner in relation to the condition of the general market and
the market in the particular stock. Although the implementation of
Depth Guidelines will be delayed, DMM units will still have the
obligation once ETPs are listed and begin trading to maintain a fair
and orderly market. The Exchange believes that the delayed
implementation of Depth Guidelines will allow it to develop guidelines
that are appropriately tailored for how ETPs will trade on the
Exchange, which should improve the DMM units' ability to maintain a
fair and orderly market and also the broader market for those
securities here on the Exchange and on other markets.\19\
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\19\ See note 16, supra.
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For the foregoing reasons, the Exchange believes that the proposal
is consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\20\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The Exchange believes that the proposed change
would promote competition by facilitating the listing and trading of
ETPs on the Exchange. The Exchange believes that without this proposed
change, DMMs assigned to ETPs would be at a competitive disadvantage
vis-[agrave]-vis registered market makers in the same ETP on competing
exchanges or other market participants on the NYSE because if they were
required to comply with the re-entry requirements for Aggressing
Transactions in Rule 104(g)(2), they would be impeded in their ability
to effectively make markets in their assigned ETP securities. The
Exchange believes that the proposed heightened DMM quoting obligations
in listed ETPs would promote competition by promoting the display of
liquidity on an exchange, which would benefit all market participants.
These proposed rule changes would facilitate the trading of Exchange-
listed ETPs by DMMs on Pillar, which would enable the Exchange to
further compete with unaffiliated exchange competitors that also trade
ETPs.
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\20\ 15 U.S.C. 78f(b)(8).
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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. Discussion and Commission Findings
After careful review of the proposal, as modified by Amendment No.
1, and the comments received, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\21\ In particular, the
Commission finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\22\ which requires, among
other things, that the rules of a national securities exchange be
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, to remove impediments to and perfect the
[[Page 51209]]
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest; and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Commission also finds that the proposed rule
change, as amended, is consistent with Section 6(b)(8) of the Act,
which provides that the rules of a national securities exchange must
not ``impose any burden on competition not necessary or appropriate in
furtherance of the purposes of'' the Act.\23\
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\21\ In approving this proposed rule change, the Commission has
considered the propose rule's impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78f(b)(8).
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The Exchange has proposed to alter certain requirements of NYSE
Rule 104 (Dealings and Responsibilities of DMMs) with respect to ETPs.
Currently, under NYSE Rule 104(g)(1), DMMs are prohibited from engaging
in Aggressing Transactions in the last ten minutes prior to the
scheduled close of trading that would result in a new high (low) price
for a security on the Exchange for the day at the time of the DMM's
transaction (``Prohibited Transactions''). Furthermore, DMMs are
subject to certain quote re-entry obligations, following an Aggressing
Transaction, under NYSE Rule 104(g)(2).
In its original proposal, the Exchange proposed to exclude DMM
transactions in ETPs from the definition of ``Aggressing Transactions''
in NYSE Rule 104(g)(1) and, by extension, to exempt DMM transactions in
ETPs from the rule on Prohibited Transactions. The Exchange also
proposed to exclude Aggressing Transactions in ETPs from the DMM re-
entry obligations in NYSE Rule 104(g)(2). The Exchange also proposed to
require DMMs in ETPs to meet heightened quoting obligations for listed
ETPs, requiring DMMs to maintain a quote at the national best bid or
offer at least 25% of the trading day for ETPs (rather than the current
requirement of 15% of the trading day for non-ETPs).
In Amendment No. 1, the Exchange amended its original proposal
significantly to no longer seek to exclude DMM transactions in ETPs
from definition of Aggressing Transactions and thereby no longer seek
to exempt DMM transactions in ETPs from the rule on Prohibited
Transactions.\24\ As amended, the proposal would make two main
substantive changes: (1) Exclude Aggressing Transactions in ETPs from
the quote re-entry obligations in NYSE Rule 104(g)(2), and (2) require
DMMs to meet heightened quoting obligations for ETPs during the trading
day (maintaining bids or offers at the inside at least 25% of the
trading day, instead of 15% of the trading day as required for non-
ETPs).\25\
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\24\ In the one comment letter received on the proposed rule
change, the commenter states that ``any rule changes that might
negatively affect the ability of the designated market manager to
maintain the best interests of the investing public should not be
impaired [sic].'' See supra note 5. As noted above, the Commission
believes that Amendment No. 1 to the proposed rule change is
consistent with the protection of investors and the public interest.
\25\ As in the original proposal, the Exchange further proposes
to apply the requirements pertaining to the function of DMMs in NYSE
Rule 104(f)(2) and (3) to DMMs in ETPs on a delayed basis--upon
implementation of the Depth Guidelines, but in no event later than
eighteen weeks after the approval of this proposed rule change by
the Commission. Similarly, the Exchange also proposes certain non-
substantive changes to the rule text of NYSE Rule 104 (e.g.,
replacing the term ``stock'' with ``security'') to accommodate the
listing of ETPs.
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While the Exchange proposes to relieve DMMs in ETPs from the quote
re-entry obligations in NYSE Rule 104(g)(2), the Exchange has argued
that such an exclusion is necessary because DMMs engaging in an
arbitrage function to keep an ETP's share price in line with the value
of the ETP's underlying assets may need to update their quotes to align
the price of the ETP and the value of the underlying assets, and may
need to engage in Aggressing Transactions in the process. Therefore,
the Exchange argues that requiring a DMM to re-enter a quote on the
opposite side of the Aggressing Transaction would defeat the purpose of
entering into the Aggressing Transaction to update its quote as part of
the arbitrage function.\26\ Although the Exchange proposes to ease
these DMM quoting obligations, it also proposes to strengthen other DMM
quoting obligations in ETPs (i.e., increasing the inside quoting
obligation from 15% to 25%).
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\26\ The Exchange also asserts that, without this proposed
change, DMMs assigned to ETPs would be at a competitive disadvantage
as compared to registered market makers in the same ETP on competing
exchanges on the Exchange and would be impeded in their ability to
effectively make competitive markets in their assigned ETP
securities.
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The Commission believes that the Exchange's amended proposal with
respect to DMMs in ETPs is consistent with the Act. In 2015, when the
Commission approved the NYSE's proposal to make the New Market Model
permanent,\27\ the Commission noted the Prohibited Transactions
rule,\28\ among other aspects of the New Market Model, and reiterated
that the pilot program had been conducted, among other reasons, to seek
``further evidence that the benefits proposed for DMMs are not
disproportionate to their obligations.'' \29\ Given that the Exchange
has proposed to offset relief from one quoting obligation with another
heightened quoting obligation, and in light of the other requirements
of NYSE Rule 104 that would continue to apply to DMM transactions in
ETPs--particularly the requirements that DMMs assist in the maintenance
of fair and orderly markets and that transactions by DMMs be effected
in a reasonable and orderly manner in relation to the condition of the
general market and the market of a particular security \30\--the
Commission believes that the proposal would not substantially alter the
balance of DMM benefits and obligations previously approved by the
Commission.\31\
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\27\ See Securities Exchange Act Release No. 75578 (July 31,
2015), 80 FR 47008 (Aug. 6, 2015) (SR-NYSE-2015-26) (``NMM Approval
Order'').
\28\ See NMM Approval Order, 80 FR at 47010.
\29\ See id. at 47013.
\30\ See NYSE Rule 104(a) and (g), respectively.
\31\ The proposal would delay the operation of NYSE Rule
104(f)(2) and (3) to DMMs in ETPs until the implementation of Depth
Guidelines by the Exchange (but in no event later than eighteen
weeks after the approval of this proposed rule change by the
Commission). The Exchange represents that this delay is necessary to
provide the Exchange time to collect trading data adequate to
calculate the appropriate Depth Guidelines for listed ETPs. The
Commission notes that this aspect of the proposal is consistent with
a previous proposal approved by the Commission. See Securities
Exchange Act Release Nos. 62479 (July 9, 2010), 75 FR 41264, 41265
(July 15, 2010) (SR-NYSEAmex-2010-31).
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with
Sections 6(b)(5) and 6(b)(8) of the Act and the rules and regulations
thereunder applicable to a national securities exchange.
VI. Accelerated Approval of Proposed Rule Change, as Modified By
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As discussed above, Amendment No. 1
substantially modifies the original proposed rule change with respect
to excluding ETPs Rule from the requirements in Rule 104(g) relating to
Aggressing Transactions, narrowing the proposed rule change
significantly so that the only substantive change to the existing rule
would be to exclude Aggressing Transactions by DMMs in ETPs from the
quote re-entry obligations and to increase the requirements for DMM
quoting at the inside market in ETPs. As noted above, the Commission
does not believe that the proposal substantially alters the balance of
DMM benefits and obligations previously approved by the
[[Page 51210]]
Commission.\32\ Amendment No. 1 made no other substantive changes to
proposal as published in the original Notice.\33\
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\32\ See supra note 31 and accompanying text.
\33\ See Notice, supra note 3.
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Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\34\ to approve the proposed rule change, SR-NYSE-
2018-34, as modified by Amendment No. 1, on an accelerated basis.
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\34\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Act. 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-2019-34 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-NYSE-2019-34. 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 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 the 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 available publicly. All submissions
should refer to File Number SR-NYSE-2019-34 and should be submitted on
or before October 18, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20969 Filed 9-26-19; 8:45 am]
BILLING CODE 8011-01-P