[Federal Register Volume 73, Number 215 (Wednesday, November 5, 2008)]
[Notices]
[Pages 65904-65912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26391]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58877; File No. SR-NYSE-2008-108]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
for a Six-Month Pilot Program To Establish a New Class of NYSE Market
Participants That Will Be Referred to as ``Supplemental Liquidity
Providers'' (``SLPs'') and Will Be Designated as Exchange Rule 107B
October 29, 2008.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on October 24, 2008, New York Stock Exchange LLC (``NYSE''
or the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a six-month pilot program (``Pilot'' or
``program'') to establish a new class of NYSE market participants that
will be referred to as ``Supplemental Liquidity Providers'' (``SLPs'')
and will be designated as Exchange Rule 107B.
The text of the proposed rule change is available at NYSE, http://www.nyse.com, and the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
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 these 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 aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
With this rule filing, the NYSE is proposing a six-month pilot
program to establish a new class of market participants: Supplemental
Liquidity Providers (``SLP''). SLPs will supplement the liquidity
provided by Designated Market Makers (``DMMs'') when the NYSE ``New
Market Model'' is approved by the SEC. SLPs may only enter orders
electronically from off the Floor of the Exchange and may only enter
such orders directly into Exchange systems and facilities designated
for this purpose. All SLP orders must only be for the proprietary
account of the SLP member organization. Thus, an SLP will not handle
orders from public customers or otherwise act on an agency basis. They
will have a 5% average quoting requirement per assigned security.
Additionally, if an SLP posts displayed or non-displayed liquidity in
its assigned securities that results in an execution, the Exchange will
pay the SLP a financial rebate.
By establishing this new class of market participant, the NYSE is
seeking to provide incentives for quoting and to
[[Page 65905]]
add competition to the existing group of liquidity providers. By
requiring SLPs to quote at the National Best Bid (``NBB'') or the
National Best Offer (``NBO'') a percentage of the regular trading day
in their assigned securities, and by paying a rebate when the SLP's
interest results in an execution, the Exchange is rewarding aggressive
liquidity providers in the market. The Exchange believes that this
rebate program will encourage the additional utilization of, and
interaction with, the NYSE and provide customers with the premier venue
for price discovery, liquidity, competitive quotes and price
improvement.
Responsibilities of the Supplemental Liquidity Provider
SLP's 5% Avearge Quoting Requirement
An SLP is required to maintain a bid or an offer at the NBB or NBO
(e.g., the ``inside'') averaging at least 5% of the trading day for
each assigned security in round lots in order to maintain its status as
an SLP. If an SLP fails to meet the quoting requirement for three
consecutive months, the Exchange may revoke the SLP status pursuant to
Section (i)(1)(C)(iii) of the proposed Rule.
SLP's 3% Average or More Quoting Requirement for Rebate Purposes
If an SLP posts liquidity in its assigned securities that results
in an execution, the Exchange will pay the SLP a financial rebate of
$.0015 per share for such executions provided the SLP meets its monthly
quoting requirement for rebates averaging at least 3% at the NBB or the
NBO in its assigned securities in round lots (see Section (i) (``Non-
Regulatory Penalties'') and Section (f) (``Calculation of Quoting
Requirements'') of the proposed Rule). Meeting the 3% average quoting
requirement for rebates does not satisfy the 5% average quoting
requirement which SLPs must meet in order to remain in the SLP program.
The rebate calculation is described in more detail below.
A member organization that acts as an SLP is not permitted to act
as a Designated Market Maker (``DMM'') on the Floor of the Exchange in
the same security. Thus, a member organization that acts as a DMM on
the Floor may not also act as an SLP in those securities registered to
the DMM unit.
Like all other member organizations of the Exchange, an SLP must
abide by NYSE and SEC rules and regulations and must deal in a manner
consistent with just and equitable principles of trade. SLPs are
subject to regulatory oversight by NYSE Regulation and FINRA.
Assigned Securities
During the proposed SLP Pilot program, the SLP Liaison Committee,
as defined in Section (d)(1) of the proposed Rule, will initially
assign a cross section of NYSE-listed securities to each SLP. The SLP
Liaison Committee will determine which securities will be assigned to
an SLP and the number of securities assigned to each SLP. The eligible
securities available to be assigned to SLPs will initially include five
hundred (500) of the most actively traded NYSE-listed securities.
Depending upon the success of the SLP program, the Exchange will
gradually add more NYSE-listed securities to the program, with the
intent of including all NYSE-listed securities to the program.
The Exchange believes that the Pilot will provide the Exchange with
a unique opportunity to monitor the success of the SLP incentives by
starting with a smaller cross section of securities. By doing so, the
Exchange will be better equipped to address actual and potential
administrative and operational problems without unnecessary risk to the
Exchange and to its customers. The Pilot will also provide the Exchange
with the opportunity to identify and address any such problems and make
beneficial changes to the SLP program before expanding the program.
In addition to its usefulness to the Exchange, the Pilot will
provide the SLPs with essential practical experience with the new
program and enable the SLPs to become proficient in the SLP role before
expanding the assigned securities to all NYSE-listed securities.
The SLP Liaison Committee, in its discretion, will assign one or
more SLPs to each security depending upon the trading activity of the
security. The SLP Liaison Committee will likely assign a greater number
of SLPs to more actively traded securities.
Qualifications of the Supplemental Liquidity Provider
A member organization of the Exchange must have the following
qualifications in order to obtain SLP status:
(1) Adequate technology to support electronic trading through the
related systems and facilities of the Exchange and report qualifying
trading activity to Exchange systems utilizing unique and separate
mnemonics specifically dedicated to SLP trading activity;
(2) Adequate trading infrastructure to support SLP trading
activity, which includes support staff to maintain operational
efficiencies in the SLP program and adequate administrative staff to
manage the member organization's SLP program;
(3) Quoting performance that demonstrates an ability to meet the 5%
quoting requirement in each assigned security;
(4) A disciplinary history that is consistent with just and
equitable business practices; and
(5) The business unit of the member organization acting as an SLP
must have in place adequate information barriers between the SLP unit
and the member organization's customer, research and investment banking
business.
Adequate Technology for Trading and Reporting: Because the SLP will
only be permitted to trade electronically from off the Floor of the
Exchange, a member organization's off-Floor technology must be fully
automated to accommodate the Exchange's trading and reporting systems
that are relevant to operating as an SLP. If a member organization is
unable to support the relevant electronic trading and reporting systems
of the Exchange for SLP trading activity, it will not qualify as an
SLP.
Adequate Trading Infrastructure: Upon applying for status as an
SLP, a member organization must have adequate trading infrastructure,
which includes support staff to maintain operational efficiencies in
the SLP program and adequate administrative staff to manage the member
organization's SLP program.
Disciplinary History: Upon applying for SLP status, a member
organization's disciplinary history must reflect conduct that is
consistent with just and equitable business practices.
Quoting Performance: Upon applying for SLP status, a member
organization's ability to meet the 5% quoting requirement may be
demonstrated by past and or current trading activity. If an applicant
has not demonstrated an ability to meet the 5% quoting requirement to
the satisfaction of the SLP Liaison Committee, the applicant may not
qualify as an SLP.
Information Barriers: The business unit of the SLP that submits
orders on behalf of the member organization must have in place adequate
information barriers between the SLP unit and the member organization's
customer, research and investment banking business.
SLP Application Process
To become an SLP, a member organization must submit an SLP
application form with all supporting documentation to the SLP Liaison
Committee. The SLP Liaison Committee
[[Page 65906]]
will determine whether an applicant is qualified to become an SLP based
on the qualifications described in Section (c) of the proposed Rule
(``Qualifications of a Supplemental Liquidity Provider''). The
qualifications focus on the adequacy of the applicant's trading and
reporting technology and trading infrastructure. The applicant's
disciplinary history will be considered as well.
After submission of the SLP application form and supporting
documentation, the SLP Liaison Committee will notify the applicant
member organization of its decision. If an applicant is approved by the
SLP Liaison Committee to receive SLP status, the applicant must
establish connectivity with relevant Exchange systems and facilities.
The processing of all applications may be suspended when the SLP
Liaison Committee has determined that there is a sufficient number of
SLPs assigned to each eligible security in the SLP program (see Section
(g)(2) of the proposed Rule).
If an applicant is disapproved or ``disqualified,'' pursuant to
Section (i)(2) of the proposed Rule, by the SLP Liaison Committee, such
applicant may request an appeal of such disapproval or disqualification
by the SLP Panel as provided in Section (j) (``Appeal of Non-Regulatory
Penalties'') of this Rule, and/or reapply for SLP status three (3)
months after the month in which the applicant received a disapproval or
disqualification notice from the Exchange (see Section (d)(6) of the
proposed Rule).
Voluntary Withdrawal of SLP Status
An SLP may withdraw from the status of an SLP at any time by giving
notice to the SLP Liaison Committee, the Market Surveillance Division
of NYSE Regulation, Inc. and the NYSE Operations Division (see Section
(e) (``Voluntary Withdrawal of Supplemental Liquidity Provider Status''
of the proposed Rule). However, withdrawal of SLP status will not
become effective until the withdrawing SLP's assigned securities are
reassigned to other SLPs. After the notice of withdrawal is received by
the SLP Liaison Committee, the Market Surveillance Division and the
NYSE Operations Division, the SLP Liaison Committee will reassign said
securities as soon as practicable but no later than 30 days of the date
said notice is received by the SLP Liaison Committee, the Market
Surveillance Division and the NYSE Operations Division. In the event
the reassignment of securities takes longer than the 30-day period, the
withdrawing SLP will have no obligations under this Rule 107B and will
not be held responsible for any matters concerning its previously
assigned SLP securities upon termination of the 30-day period.
Quoting Requirements of the Supplemental Liquidity Provider
In order to maintain SLP status, an SLP is required to maintain a
bid or an offer at the NBB or NBO on the Exchange averaging at least 5%
of the trading day in round lots for each assigned security.\4\ While
the SLP may provide displayed and non-displayed liquidity (e.g.,
reserve and dark orders), the 5% average quoting requirement can only
be satisfied when an SLP posts displayed liquidity in its assigned
securities in round lots at the NBB or the NBO. Thus, non-displayed
liquidity will not be counted as credit towards the 5% quoting
requirement. Additionally, tick sensitive orders (i.e., ``Sell Plus,''
``Buy Minus'' (see Rule 13) and ``Buy Minus Zero Plus'') will not be
counted as credit towards the 5% quoting requirement.
---------------------------------------------------------------------------
\4\ See Section (a) of the proposed Rule.
---------------------------------------------------------------------------
In order for an SLP to be entitled to a rebate, an SLP must post
liquidity on the Exchange that executes against incoming orders and
meet the monthly minimum quoting requirement for rebates averaging at
least 3% at the NBB or the NBO in round lots in its assigned securities
(see Section (b) (``Financial Rebates for Executed Transactions'') in
the proposed Rule). If the SLP does not meet a minimum monthly quoting
requirement averaging at least 3%, an SLP will not be entitled to a
rebate on executed volume in that given month in that particular
affected security (see Section (i) (``Non-Regulatory Penalties'') of
the proposed Rule).
The SLP is not subject to any minimum or maximum quoting size
requirement apart from the requirement that an order be for at least
one round lot (see Section (f)(2) of the proposed Rule).
An SLP must use its SLP mnemonic when trading as an SLP in its
assigned securities in order to obtain credit for their SLP trading
activity (see Section (f)(2) of the proposed Rule). Quoting and rebate
credit will be measured only by using the SLP's unique mnemonics
specifically designated for SLP trading activity.
Calculation of the Quoting Requirements
The SLP's quoting requirements will not be in effect in the first
month the SLP operates as an SLP. The Exchange will provide the SLP
with a one-month grace period to allow preparation time for the SLP.
Therefore, this quoting requirement will not take effect until the
second month of an SLP's operation as an SLP.
Beginning with the second month an SLP is operating as an SLP, an
SLP must satisfy the 5% quoting requirement for each assigned
security.\5\ The SLP Liaison Committee will determine whether an SLP
has met its quoting requirement for the trading days \6\ in a calendar
month by calculating the following:
---------------------------------------------------------------------------
\5\ The Exchange Strategic Analysis Department will be
responsible for generating SLP performance data and providing such
data to the SLP Liaison Committee in order to determine which SLPs
are meeting their quoting requirements and are eligible for
financial rebates.
\6\ For purposes of Section (f)(1) of the proposed rule text
(Exhibit 5), ``trading day'' shall mean any day on which the
Exchange is scheduled to be open for business. Days on which the
Exchange closes prior to 4 p.m. (Eastern Time) for any reason, which
may include any regulatory halt or trading halt, shall be considered
a trading day.
---------------------------------------------------------------------------
(1) The ``Daily NBB Quoting Percentage'' by determining the
percentage of time an SLP has at least one round lot of displayed
interest in an Exchange bid at the NBB during each trading day for a
calendar month;
(2) The ``Daily NBO Quoting Percentage'' by determining the
percentage of time an SLP has at least one round lot of displayed
interest in an Exchange offer at the NBO during each trading day for a
calendar month;
(3) The ``Average Daily NBBO Quoting Percentage'' for each trading
day by summing the ``Daily NBB Quoting Percentage'' and the ``Daily NBO
Quoting Percentage'' in each assigned security then dividing such sum
by two; and
(4) The ``Monthly Average NBBO Quoting Percentage'' for each
assigned security by summing the security's ``Average Daily NBBO
Quoting Percentages'' for each trading day in a calendar month then
dividing the resulting sum by the total number of trading days in such
calendar month.
Example of Quoting Requirement Calculation
Below is an example of a quoting requirement calculation. For
purposes of this example, it is assumed that SLP No. 1 has two assigned
securities, A and B, and that there were 5 trading days in the selected
calendar month.
The ``Average Daily NBBO Quoting Percentage'' for SLP No. 1 is
calculated for each security by summing the daily NBB and NBO of each
security for that day and dividing that number by two:
[[Page 65907]]
Security A
------------------------------------------------------------------------
Calculation of
Trading NBB NBO ``Average Daily NBBO ``Average Daily
days (percent) (percent) Quoting Percentage'' NBBO Quoting
for SLP No. 1 Percentage''
------------------------------------------------------------------------
T1........ 4 6 4% + 6% = 10% divided 5
by 2 = 5%.
T2........ 3 5 3% + 5% = 8% divided 4
by 2 = 4%.
T3........ 4 4 4% + 4% = 8% divided 4
by 2 = 4%.
T4........ 6 8 6% + 8% = 14% divided 7
by 2 = 7%.
T5........ 5 5 5% + 5% = 10% divided 5
by 2 = 5%.
------------------------------------------------------------------------
Security B
------------------------------------------------------------------------
Calculation of
Trading NBB NBO ``Average Daily NBBO ``Average Daily
days (percent) (percent) Quoting Percentage'' NBBO Quoting
for SLP No. 1 Percentage''
------------------------------------------------------------------------
T1........ 5 7 5% + 7% = 12% divided 6
by 2 = 6%.
T2........ 4 6 4% + 6% = 10% divided 5
by 2 = 5%.
T3........ 6 8 6% + 8% = 14% divided 7
by 2 = 7%.
T4........ 7 9 7% + 9% = 16% divided 8
by 2 = 8%.
T5........ 9 9 9% + 9% = 18% divided 9
by 2 = 9%.
------------------------------------------------------------------------
The ``Monthly Average NBBO Quoting Percentage'' for each security
is then calculated by summing the security's ``Average Daily NBBO
Quoting Percentages'' for all five trading days of the calendar month
and then dividing the resulting total by the number of trading days in
the calendar month (in this instance 5).
Security A
----------------------------------------------------------------------------------------------------------------
``Average Daily NBBO Quoting Percentage'' ``Monthly
------------------------------------------------- Calculation of ``Monthly Average NBBO Average NBBO
Quoting Percentage'' for SLP No. 1 Quoting
T1 T2 T3 T4 T5 Percentage''
----------------------------------------------------------------------------------------------------------------
5% 4% 4% 7% 5% 5%+4%+4%+7%+5% = 25% divided by 5 = 5%...... 5%
----------------------------------------------------------------------------------------------------------------
Security B
----------------------------------------------------------------------------------------------------------------
``Average Daily NBBO Quoting Percentage'' ``Monthly
------------------------------------------------- Calculation of ``Monthly Average NBBO Average NBBO
Quoting Percentage'' for SLP No. 1 Quoting
T1 T2 T3 T4 T5 Percentage''
----------------------------------------------------------------------------------------------------------------
6% 5% 7% 8% 9% 6%+5%+7%+8%+9% = 35% divided by 5 = 7%...... 7%
----------------------------------------------------------------------------------------------------------------
Financial Rebates for Executed Transactions
When an SLP posts liquidity, displayed or non-displayed, on the
Exchange in its SLP assigned securities and such liquidity executes
against an incoming order, the SLP will receive a financial rebate for
that executed transaction provided the SLP has met its rebate quoting
requirement averaging at least 3% at the NBB or the NBO in each
assigned security pursuant to Section (i)(1)(A) and (B) (``Non-
Regulatory Penalties''). An SLP will only receive a rebate when it has
met the monthly 3% or better quoting requirement in its assigned
securities and the SLP's posted displayed or non-displayed liquidity
results in an execution.
SLP Rebate Calculation
The SLP rebate will be $.0015 per share on executed volume when the
SLP provides liquidity.\7\ The rebate will be paid for displayed and
non-displayed orders provided that the SLP meets the quoting
requirement averaging 3% or more at the NBB or NBO in its assigned
securities for a given month. If an SLP does not meet the average
quoting requirement described above, such SLP will not be entitled to a
rebate. As discussed previously, if an SLP does not meet its quoting
requirement averaging 5% at the NBB or the NBO for each assigned
security for 3 consecutive months, such SLP may be disqualified from
SLP status. The Exchange will track the volume and quoting requirement
of SLPs by their designated SLP mnemonics.
---------------------------------------------------------------------------
\7\ The Exchange will file a separate fee filing with the SEC
pursuant to the provisions of Section 19b-4 that will outline the
SLP rebate program described above. Thereafter, the calculation and
amount of the SLP rebate ($0.0015 per executed share) will be
published in the NYSE Price List available on the NYSE Web site.
---------------------------------------------------------------------------
Except for the rebate, all other SLP fees are the same as existing
customer fees on the Exchange (see the NYSE Price List for equities on
the NYSE Web site).
SLP Parity With Other Market Participants Pursuant to Rule 72
Proposed New Market Model
In the New Market Model Exchange systems will be responsible for
share allocation and thus will create interest files for each market
participant. Individual Floor brokers and the DMM registered in the
security shall each constitute single participants. All off-Floor
orders entered in Exchange
[[Page 65908]]
systems at the Exchange BBO shall together constitute a single
participant (``Book Participant'') for the purpose of share allocation.
SLP orders will be in the ``Book Participant'' category pursuant to
Rule 72 of the proposed New Market Model (see Section (f)(4) of the
proposed Rule).
Market Data and Trading Information Available to the SLP
The universe of trading information and market data available to
the SLP will include market data published by the NYSE and all other
automated trading centers (as defined in Rule 600 of Regulation NMS),
trading information published on the Consolidated Tape and on the NYSE
Open Book[supreg] (``Open Book'').\8\ Thus, the SLP will have the same
published trading information and market data that all other NYSE
customers have available to them.
---------------------------------------------------------------------------
\8\ The NYSE Open Book is provided by the NYSE to vendors and
customers in two modes. The first displays the depth of the market
refreshed every five seconds. The second displays the depth of the
market in real time. NYSE Open Book discloses limit order interest
at the price at the best bid and offer and at prices below the best
bid and above the best offer.
---------------------------------------------------------------------------
Non-Regulatory Penalties
If an SLP fails to meet the 5% average quoting requirement for any
assigned security, the SLP may be subject to non-regulatory penalties
imposed by the SLP Liaison Committee (see Section (i) of the proposed
Rule). Such non-regulatory penalties include: (1) Denial of the
financial rebate; (2) removal of one or more assigned securities from
the SLP; and (3) disqualification. These non-regulatory penalties and
the conditions under which such penalties are imposed may be appealed
by an SLP as provided in Section (j) (``Appeal of a Non-Regulatory
Penalty'') of the proposed Rule and described in more detail below.
Penalties for Quoting Less than 5% in a Given Calendar Month
In a given calendar month, if an SLP maintains a quote at the NBB
or NBO averaging 3% of the trading day, but less than the average of 5%
of the trading day in any assigned security, the SLP will receive a
financial rebate for that calendar month for executed transactions in
that particular security as described in Section (b) (``Rebates for
Executed Transactions'') of the proposed Rule. Failure to meet the 5%
quoting requirement for each assigned security in that month will be
counted towards the three-month disqualification period provided in
paragraph (i)(C) of the proposed Rule.
In a given calendar month, if an SLP maintains a quote at the NBB
or the NBO averaging less than 3% of the regular trading day in an
assigned security, the SLP will not receive the financial rebate for
that month for transactions executed in that particular assigned
security. The failure to meet the 5% average quoting requirement for
any assigned security in that month will also be counted towards the
three-month disqualification period.
If an SLP fails to meet the 5% quoting requirement for three
consecutive calendar months in any assigned security, the SLP Liaison
Committee may, in its discretion, take the following non-regulatory
action:
(1) Revoke the assignment of the affected security(ies);
(2) Revoke the assignment of an additional, unaffected security
from an SLP; or
(3) Disqualify a member organization's status as an SLP.
Disqualification Determinations:
In the second consecutive calendar month that an SLP fails to meet
the 5% quoting requirement, the SLP Liaison Committee's will notify the
SLP in writing that the SLP may be disqualified if it fails to meet the
quoting requirement the third consecutive month.\9\ If the SLP fails to
meet the 5% quoting requirement for a third consecutive month, the SLP
may be disqualified from SLP status.
---------------------------------------------------------------------------
\9\ The SLP Liaison Committee will be responsible for issuing
the letter to an SLP that fails to meet its quoting requirement for
three consecutive months. It will also be responsible for advising
an SLP of its eligibility or ineligibility to become an SLP.
---------------------------------------------------------------------------
When disqualification determinations are made, the SLP Liaison
Committee will provide a disqualification notice to the member
organization informing the member organization of its disqualification
as an SLP.
If a member organization is disqualified from its status as an SLP
pursuant to Section (i)(1)(C)(iii) of the proposed Rule, the member
organization may appeal the disqualification pursuant to Section (j)
(``Appeal of a Non-Regulatory Penalties'') of the proposed Rule, or re-
apply for SLP status in accordance with Section (d)(6) (``Re-
application for SLP Status'') of the proposed Rule. However, the re-
application processes may not begin until three calendar months after
the month in which the member organization received its
disqualification notice.
Appeal of Non-Regulatory Penalties
An SLP may request an appeal of the decision to impose a non-
regulatory penalty as provided in Section (j) of the proposed Rule.
Upon receiving a request for an appeal, a panel of NYSE employees
referred to as the ``SLP Panel'' will review the decision to impose
non-regulatory penalties. The SLP Panel shall consist of the NYSE's
Chief Regulatory Officer (``CRO''), or a designee of the CRO, and two
(2) officers of the Exchange designated by the Head of the U.S. Markets
Division.
The SLP Panel will review the facts of the subject non-regulatory
penalty and render a decision as to the correctness of the decision to
impose the penalty. The SLP Panel may overturn or modify an action
taken by the SLP Liaison Committee, and all determinations by the SLP
Panel will constitute final action by the Exchange on the disputed
matter.
Regulatory Oversight of SLPs
Member organizations that act as SLPs will be subject to regulatory
oversight by NYSE Regulation and FINRA.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\10\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\11\
in particular, in that it is designed 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. The Exchange
believes the proposed Rule is consistent with these principles in that
it seeks to establish a new class of market participant that will
provide additional liquidity to the market and add competition to the
existing group of liquidity providers. The NYSE believes that by
requiring an SLP to quote at the NBB or the NBO a percentage of the
regular trading day in their assigned securities, and by paying an SLP
a rebate when its posted interest results in an execution, the Exchange
is rewarding aggressive liquidity providers in the market, and by doing
so, the Exchange will encourage the additional utilization of, and
interaction with, the NYSE and provide customers with the premier venue
for price discovery, liquidity, competitive quotes and price
improvement.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
[[Page 65909]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) thereunder \13\
because the foregoing proposed rule change: (1) Does not significantly
affect the protection of investors or the public interest; (2) does not
impose any significant burden on competition; and (3) by its terms,
does not become operative for 30 days after the date of filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
The Exchange states that the Commission recently issued
interpretative guidance regarding the rule-filing process (the ``Rule
Streamlining Guidance'').\14\ In that release, the Commission
recognized the need to expedite the rule-making process for self-
regulatory organizations in order to help the U.S. capital markets
remain competitive both domestically (with ECNs, ATSs and other less-
regulated venues), and internationally:
---------------------------------------------------------------------------
\14\ See Securities Exchange Commission Release No. 58092 (July
3, 2008), 73 FR 40144 (July 11, 2008) (``Commission Guidance and
Amendment to the Rule Relating to Organization and Program
Management Concerning Proposed Rule Changes by Self-Regulatory
Organizations'').
---------------------------------------------------------------------------
The national securities exchanges' need to implement quickly new
trading rules has become increasingly critical, particularly given the
evolving role of securities exchanges, innovations in U.S. and cross-
border trading, and the increasingly competitive financial
marketplace.\15\
---------------------------------------------------------------------------
\15\ Id. at page 12 [sic].
---------------------------------------------------------------------------
The Exchange states that, in recognition of the highly competitive
environment for national securities exchanges today, the Commission
gave interpretative guidance on Section 19(b)(3)(A) and Rule 19b-4(f),
which permit SROs to designate proposed rule changes as ``immediately
effective'' without the formal approval process provided elsewhere in
the Act. In particular, the Commission ``encourage[d] exchanges to
consider filing a broader range of proposed rules'' based on the
standards outlined in Rule 19b-4(f)(6).\16\ These standards generally
permit immediate effectiveness for trading rule changes that meet
certain technical requirements \17\ and do not ``significantly affect
the protection of investors or the public interest,'' or ``impose any
significant burden on competition.''
---------------------------------------------------------------------------
\16\ 17 CFR 240.19b-4(f)(6)(i) and (ii).
\17\ Filings must be submitted for pre-clearance at least five
days prior to filing, and must not become effective, on their terms,
until the thirtieth day after the filing date.
---------------------------------------------------------------------------
The proposed rule meets the immediate effectiveness criteria in the
Rule Streamlining Guidance because it is consistent with previously
approved rules for market makers.
As explained more fully in the Rule Streamlining Guidance, proposed
trading rules can be filed for immediate effectiveness if each policy
issue raised by the proposed trading rule ``(i) has previously been
considered by the Commission when the Commission approved another
trading rule (that was subject to notice and comment) pursuant to
19(b)(2) of the Exchange Act, and (ii) the rule change resolves such
policy issue in a manner consistent with such prior approval.'' \18\
---------------------------------------------------------------------------
\18\ Id. at page 14 [sic].
---------------------------------------------------------------------------
The Exchange believes that the proposed rule filing meets both the
statutory standards for filings under Rule 19b-4(f)(6) and the
standards set out in the Rule Streamlining Guidance. In particular, and
as explained more fully below, the policies raised in this proposed
rule:
(1) Have previously been considered by the Commission when the
Commission approved other market maker rules after public notice and
comment under Section 19(b)(2) of the Exchange Act; and
(2) The rule resolves such policy issues in a manner that is
consistent with such prior approvals.
According to the Exchange, the concepts contained in the proposed
rule are not new. Indeed, the Exchange notes that the Commission has
had extensive opportunities to consider and hear comment on how market
makers should interact with markets and the appropriate rewards for
those services.\19\ As a result, the Exchange believes that each policy
issue raised by proposed Rule 107B ``has previously been considered by
the Commission when the Commission approved another trading rule (that
was subject to notice and comment) pursuant to 19(b)(2) of the Exchange
Act.''
---------------------------------------------------------------------------
\19\ Footnote 44 of the Rule Streamlining Guidance includes
cites to several SRO market maker rules that were filed ``regular
way'' pursuant to Section 19(b)(2) of the Act.
---------------------------------------------------------------------------
While the SLP is not a ``market maker'' per se, the Exchange
believes that the proposed SLP rule filing shares most, if not all, of
the same policy issues previously commented upon and resolved in some
of the market maker rules referred to in the Rule Streamlining Guidance
at footnote 44 and other rules that were filed ``regular way,''
noticed, commented upon and approved by the SEC.\20\ The Exchange
believe that, by analogy, the market maker policy issues are the same
or similar to those of the SLP, but to a lesser extent. According to
the Exchange, a market maker may have more obligations and more trading
advantages than an SLP, but the quoting requirements of a market maker
and an SLP are not materially different. The same argument may be made
for the rebate. A market maker rebate for posting liquidity is not
materially different in policy or application than the SLP rebate.
Therefore, the Exchange contends that the resolution and approval of
market maker policies is analogous to the resolution of SLP policies.
The policy issues that have been ``resolved'' in prior market maker
filings include:
---------------------------------------------------------------------------
\20\ The filings referenced herein include some of those noted
by the Commission in footnote 44 of the Rule Streamlining Guidance,
see Securities Exchange Act Release Nos. 53652 (April 13, 2006), 71
FR 20422 (April 20, 2006) (SR-Amex-2005-100) and 54580 (October 6,
2006), 71 FR 60781 (October 16, 2006) (SR-ISE-2006-40), as well as
other filings submitted, reviewed and approved by the Commission
pursuant to Section 19b-2, See Securities Exchange Act Release Nos.
43004 (June 30, 2000), 65 FR 43060 (July 12, 2000) (SR-CBOE-1998-
54), 50003 (July 12, 2004), 69 FR 43028 (July 19, 2004) (SR-CBOE-
2004-24) and 53635 (April 12, 2006), 71 FR 20144 (April 19, 2006)
(SR-Amex-2005-75).
---------------------------------------------------------------------------
Application process for market maker and SLP status; \21\
---------------------------------------------------------------------------
\21\ See AMEX Rules 993 and 994-ANTE (concerning Supplemental
and Remote Registered Options Traders (``SROTs'' and ``RROTs''),
respectively); ISE Rule 902 (concerning Second Market Competitive
Market Makers (``SMCMMs'')); CBOE Rules 8.83 and 8.92 (concerning
Designated Primary Market Makers (``DPMs'') and e-DPMs,
respectively).
---------------------------------------------------------------------------
Market maker qualifications for on-Floor or off-Floor
electronic trading; \22\
---------------------------------------------------------------------------
\22\ See AMEX Rules 993 and 994-ANTE; ISE Rule 902; CBOE Rules
8.83 and 8.92.
---------------------------------------------------------------------------
Process for voluntary withdrawal from the marker maker
program; \23\
---------------------------------------------------------------------------
\23\ See AMEX Rules 993 and 994-ANTE; CBOE Rule 8.83.
---------------------------------------------------------------------------
[[Page 65910]]
Appeal process if disapproved or disqualified; \24\
---------------------------------------------------------------------------
\24\ See AMEX Rule 993-ANTE.
---------------------------------------------------------------------------
Process for allocation of assigned securities; \25\
---------------------------------------------------------------------------
\25\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.84 and 8.92.
---------------------------------------------------------------------------
Quoting requirement at the NBB or the NBO a percentage of
the trading day for proprietary accounts; \26\
---------------------------------------------------------------------------
\26\ See AMEX Rules 993 and 994-ANTE; ISE Rule 904; CBOE Rules
8.85 and 8.93.
---------------------------------------------------------------------------
Creation of information barriers to prevent prohibited
sharing of trading information; \27\
---------------------------------------------------------------------------
\27\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.91 and 8.93.
---------------------------------------------------------------------------
Imposition of penalties when quoting requirement is not
met; \28\ and
---------------------------------------------------------------------------
\28\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.90 and 8.94.
---------------------------------------------------------------------------
Appeal process when penalties are imposed.\29\
---------------------------------------------------------------------------
\29\ See AMEX Rules 993 and 994-ANTE; CBOE Rules 8.90 and 8.94.
---------------------------------------------------------------------------
The Exchange acknowledges that the cited market maker rules do not
specifically discuss rebates for executions of quoted liquidity, which
is offered in the proposed SLP rule. However, the Exchange argues that
other SRO rule filings relating to pricing incentive programs for
market makers have been submitted pursuant to Section 19(b)(3)(a)(f)(2)
and received SEC approval.\30\
---------------------------------------------------------------------------
\30\ See SR-NYSE Arca-2008-36 (approving Market Maker Post
Liquidity Incentive credits) and SR-NASDAQ-2007-61 (approving
incentives for market makers for ETFs and ILSs).
---------------------------------------------------------------------------
For example, on NYSE Arca, the exchange pays a rebate to the Lead
Marker Maker (``LMM'') and customers for executions on posted
liquidity.\31\ The Exchange itself currently offers ``liquidity
provision payments'' to specialists, which are similar to rebates,
based on Exchange revenue and the amount of liquidity posted by each
specialist unit.\32\ Rebates for liquidity providers have become a
common industry practice and are utilized by most, if not all, trading
venues including NASDAQ, BATS, Direct Edge and others.\33\
---------------------------------------------------------------------------
\31\ See NYSE Arca Equities Fee Schedule.
\32\ See SR-NYSE-2007-78.
\33\ See the following Web sites for price lists: NASDAQ (http://www.nasdaqtrader.com); BATS (http://www.batstrading.com); Direct
Edge (http://www.directedge.com).
---------------------------------------------------------------------------
To the extent that an SLP's quoting requirement is one of the
services also provided by a market maker, approving a commensurate
rebate for an SLP is analogous to the rebates previously approved by
the Commission for one aspect of a market maker's services.
In view of the analogous precedents established in the market maker
rules, the Exchange believes that its proposed rule for SLPs presents
no novel issues and that the compensation scheme is consistent with
both industry practice and prior approval of market maker rules.
Accordingly, the Exchange believes that immediate effectiveness would
be appropriate under the Exchange Act, the Exchange Act rules, and the
Rule Streamlining Guidance.
The proposed rule meets the immediate effectiveness criteria in the
Rule Streamlining Guidance for rules relating to market participants.
The Exchange believes that the proposed rule also qualifies for
immediate effectiveness because it is a trading rule that addresses the
obligations of market participants (e.g., SLPs), would have the effect
of strengthening the market, and provides a reward to SLPs that is not
disproportionate to the services they provide to the market.
At the outset, the Exchange notes that in the Rule Streamlining
Guidance, the Commission provided examples of proposed rule filings
that are ``appropriate'' for immediate effectiveness in the rule
streamlining publication, and specifically included proposed rule
filings that address market maker obligations:
The Commission carefully reviews special advantages provided to
market makers when it considers exchange trading rule proposals. Market
makers can play an important role in providing liquidity to the market,
and an exchange can appropriately reward them for that as well as the
services they provide to the exchange's market, as long as the rewards
are not disproportionate to the services provided. For example, a
proposed trading rule change that strengthens the market while
providing benefits to market makers is eligible for immediate
effectiveness if the benefits conferred are offset by corresponding
responsibilities to the market that provide customer trading interest a
net benefit.\34\
---------------------------------------------------------------------------
\34\ See Rule Streamlining Guidance, page 16 [sic], paragraph 2,
``Market Maker Obligations.''
---------------------------------------------------------------------------
Thus, under Commission precedent, a rule filing involving
incentives for market makers would be appropriate for immediate
effectiveness if the reward to market makers is in line with the
services or benefits that the market maker is providing to the market.
The proposed rebate to SLPs is not disproportionate to the benefit
they provide.
The Exchange asserts that the payment of rebates to market makers
has long been considered by the SEC to be an appropriate incentive for
adding liquidity to the market thereby improving the market. As noted
more fully above, the SEC has previously approved the payment of
incentives to market makers on Nasdaq,\35\ NYSE Arca,\36\ Direct Edge
\37\ and BATS,\38\ among others. The Exchange also notes that previous
NYSE fee filings for rebates have been submitted to the SEC pursuant to
Section (f)(2), and have become immediately effective. For example,
Nasdaq submitted a filing that became immediately effective upon
filing, which had the same effect as the NYSE's proposed SLP filing. In
particular, SR-NASDAQ-2007-61, which is similar to NYSE Arca's
Designated Marker Maker filing (see NYSE Arca Equities Rule 7.24(b)
which refers to DMMs who also act as LMMs),\39\ requires the Designated
Liquidity Provider (``DLP'') to maintain a ``minimum performance
standard'' in which the DLP must quote a percentage of the trading day
at the NBB or the NBO in ETFs and ILSs. If the DLP quotes a certain
percentage of the trading day, it will receive a 40 cent rebate for
posting liquidity and a 25 cent fee for taking liquidity. In this fee
filing, NASDAQ indicated that by allocating pricing benefits to certain
market makers who have ``tangible commitments to the market,'' the
program would encourage, among other things, development of new
financial products. In reviewing Nasdaq's proposal, the Exchange
believes that the SEC evaluated the balance struck between the rewards
obtained and services provided by the various market makers.
---------------------------------------------------------------------------
\35\ See SR-Nasdaq-2007-61. See also ``http://www.nasdaqtrader.com.''
\36\ See SR-NYSE Arca-2008-36.
\37\ See Direct Edge Price List at ``http://www.directedge.com.''
\38\ See BATS Price List at ``http://www.batstrading.com.''
\39\ See NYSE Arca Equities Rule 7.24.
---------------------------------------------------------------------------
Based on the rationale of previous rule filings for market maker
rebates, the Exchange contends that the proposed SLP rebate for
executions of posted liquidity is not ``disproportionate to the
services provided'' by the SLP. It is important to note that the SLP
rebate \40\ is the only benefit the SLP earns when posted liquidity
results in an execution. As discussed earlier, the SLP rebate will be
$.0015 per share on executed volume when the SLP posts liquidity to the
market provided that the SLP meets the quoting requirement averaging at
least 3% at the NBB or NBO in its assigned
[[Page 65911]]
securities for a given month.\41\ The rebate will be paid for displayed
and non-displayed orders. If an SLP does not meet the average quoting
requirement of at least 3% described above, such SLP will not be
entitled to a rebate. Further, if an SLP does not meet its monthly
quoting requirement averaging 5% at the NBB or the NBO for each
assigned security for 3 consecutive months, such SLP may be
disqualified from SLP status. Except for the rebate, all other SLP fees
are the same as existing customer fees on the Exchange.
---------------------------------------------------------------------------
\40\ The SLP rebate calculation will be provided in a subsequent
fee filing by the Exchange, and when filed with the SEC, the rebate
calculation will appear on the Exchange's published Price List.
\41\ The Exchange will file a separate fee filing pursuant to
Section 19b-4.
---------------------------------------------------------------------------
The Exchange notes that the proposed rebate is commensurate with
the quoting requirements the SLP has for each assigned security as the
SLP has no informational or trading advantage in the market. SLPs are
basically customers with quoting requirements that may receive a
financial incentive when posted SLP liquidity results in an execution.
Under the proposed Rule, even if an SLP meets its quoting requirement
averaging 3% or more in a given month, it may not receive a rebate if
the posted liquidity does not result in an execution. Further, the
Exchange believes that, while it is likely that when an SLP posts
liquidity to the market the posted liquidity will result in executions,
the SLP will not receive a rebate for such executions if it does not
meet its average monthly quoting requirement of at least 3%.
The Exchange believes that the SLP rebate is commensurate with
their limited role in the market. For example, NYSE Arca has tiered
rebates: the ``Market Maker Post Liquidity Incentive Credit,'' which is
a fee credit that applies to Market Makers (``MMs'') and LMMs, is
substantially higher than those fee credits available to customers who
have no affirmative obligations. Additionally, when posting liquidity
on Arca, LMMs are entitled to 40 cents per 100 shares, while customer
rebates, which are tiered, are only 22 cents and 23 cents per 100
shares.
Accordingly, the Exchange submits that this proposed filing
qualifies for immediate effectiveness pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b-4(f)(6) because the introduction of SLPs to the
Exchange would strengthen the market while providing benefits to
customers, the SLP's quoting requirement will increase liquidity in the
market and enhance trading opportunities for customers and the rebate,
which is conditioned on executions of posted liquidity, is commensurate
with the services the SLP will provide to the market. Additionally, as
discussed above, the Exchange believes that the Commission has already
approved the introduction of similar classes of market participants on
various exchanges in the past (e.g., AMEX, CBOE, ISE, NASDAQ, NYSE Arca
and NYSE) which, while filed regular way, were ultimately approved by
the Commission. The Exchange therefore proposes that this rule should
be made immediately effective upon filing in keeping with the policies
and guidance of the Commission's rule streamlining publication.
Based on the foregoing, the Exchange submits that this proposed
filing qualifies for immediate effectiveness pursuant to Section
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) because it is based on the
provisions of similar rule filings which, while filed regular way, were
ultimately approved by the Commission. The Exchange proposes that this
rule should be made immediately effective upon filing in keeping with
the policies and guidance enumerated in the Commission's Rule
Streamlining Guidance.
A proposed rule change filed under Rule 19b-4(f)(6) normally may
not become operative prior to 30 days after the date of filing.\42\
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has asked the
Commission to waive the 30-day operative delay, as specified in Rule
19b-4(f)(6)(iii),\43\ which would make the rule change effective and
operative upon filing. The Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest because waiving the operative delay would allow SLPs to
immediately add liquidity to the market and provide trading
opportunities that may benefit all market participants. By requiring
SLPs to quote at the NBB or the NBO a percentage of the regular trading
day in their assigned securities, and by paying a rebate when the SLP's
interest results in an execution, the Exchange proposes to reward
liquidity providers in the market. Further, the Commission believes
that the proposed quoting requirement and rebate is analogous to some
of the benefits and obligations of Registered Market Makers \44\ and
notes that the SLP has no informational or trading advantage in the
market.
---------------------------------------------------------------------------
\42\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the self-regulatory organization to give the
Commission notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. NYSE has satisfied this requirement.
\43\ 17 CFR 240.19b-4(f)(6)(iii).
\44\ See Securities Exchange Act Release No. 58845 (October 24,
2008) (SR-NYSE-2008-46) (approving NYSE's new market model and
noting that an exchange may reward market makers for benefits they
provide to the exchange's market, but such rewards must not be
disproportionate to the services provided by the market maker).
---------------------------------------------------------------------------
Accordingly, the Commission designates the proposed rule change
effective and operative upon filing with the Commission.\45\
---------------------------------------------------------------------------
\45\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether 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 e-mail to [email protected]. Please include
File Number SR-NYSE-2008-108 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, Station Place, 100 F Street, NE., Washington,
DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2008-108. This file
number should be included on the subject line if e-mail 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 Web site (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
[[Page 65912]]
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available. All
submissions should refer to File Number SR-NYSE-2008-108 and should be
submitted on or before November 26, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
---------------------------------------------------------------------------
\46\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26391 Filed 11-4-08; 8:45 am]
BILLING CODE 8011-01-P