[Federal Register Volume 76, Number 70 (Tuesday, April 12, 2011)]
[Notices]
[Pages 20396-20399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8732]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64216; File No. SR-NYSEArca-2011-16]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Modifying Credits
for Posting Liquidity for Certain Transactions and Imposing Routing
Fees To Defray the Costs of Routing Orders to Away Markets
April 6, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on April 1, 2011, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to modify credits for posting liquidity for
certain transactions and impose routing fees to defray the costs of
routing orders to away markets. The text of the proposed rule change is
available at the Exchange, at the Commission's Public Reference Room,
on the Commission's Web site at http://www.sec.gov, and http://www.nyse.com.
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 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.
[[Page 20397]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NYSE Arca proposes to modify its credits for posting liquidity in
Penny Pilot issues.\3\ The Exchange also proposes to replace certain
premium credits in high volume issues and volume tier pricing
incentives for Customers and Market Makers in Penny Pilot issues with a
Customer Monthly Posting Threshold structure in Penny Pilot issues that
will provide increased credits in certain circumstances. In addition,
the Exchange is proposing a routing fee and is also eliminating certain
references to products that are no longer traded on the Exchange.
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\3\ 363 issues have been approved to trade in a minimum price
variation of $0.01 as part of a Pilot Program (``Penny Pilot'') in
accordance with NYSE Arca Rule 6.72.
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Changes to Post Liquidity Credits
Electronic transactions in Penny Pilot issues are assessed Take
Liquidity fees and credited with Post Liquidity credits. The Exchange
proposes to increase the Post Liquidity credit for Lead Market Makers
and Market Makers from $0.30 per contract to $0.32 per contract. The
Exchange proposes to reduce the Post Liquidity credit for Firm and
Broker Dealer Electronic orders from $0.25 per contract to $0.10 per
contract to reflect the fact that attempts to attract Firm and Broker
Dealer liquidity with higher posting credits have not proved fruitful
because based on our observations, such entities are proprietary
traders who seek opportunities and venues to trade against Customer
order flow to capture the spread rather than trade based on rebates and
fees.
Lead Market Makers and Market Makers pay significantly higher OTP
fees than OTP Holders that are Firm proprietary traders, while Broker
Dealers that are not OTP Holders pay no OTP fee. The proposed
difference in Posting Credits between these categories is intended to
partially offset the difference in OTP costs. Additionally, Market
Makers and Lead Market Makers have an affirmative continuous quoting
obligation that does not apply to Firms and Broker Dealers. This
obligation imposes greater costs and potentially greater risks on
Market Makers and Lead Market Makers than the costs and risks realized
by Firms and Broker Dealers, and Market Makers and Lead Market Makers
should thus be rewarded with a greater posting credit. The proposed
differential is less than that found on NASDAQ OMX PHLX (``Phlx''), a
competing market, which provides an ``adding liquidity rebate'' of
$0.23 for market makers and $0.00 for Firms and Broker-Dealers, while
charging an ``adding liquidity fee'' of $0.00 for Market Makers, but
$0.05 for Firms and Broker Dealers. The differential on Phlx between
the two classifications of market participants is $0.28, while NYSE
Arca proposes a differential of $0.22.\4\
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\4\ See Phlx Price List, ``Make/Take Pricing Program'' at
(http://www.nasdaqtrader.com/Micro.aspx?id=PHLXPricing).
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The Exchange proposes to eliminate the ``Premium Tier'' of issues
which received an additional $0.05 per contract Post Liquidity credit
above the stated Post Liquidity rates. The Premium Tier distinction did
not have the intended effect of increasing market share in these
products, and the Exchange proposes a more streamlined fee schedule.
In addition, the Exchange proposes to increase the Post Liquidity
credit above the base Customer Post Liquidity credit of $0.25 per
contract for OTP Holders that aggregate Customer orders that meet
certain volume thresholds in Penny Pilot issues. An OTP Holder sending
Customer orders that in the aggregate exceed 500,000 contracts executed
in a month from posting liquidity will receive a posting credit of
$0.32 per contract on all executions resulting from posted liquidity.
If such aggregated Customer orders exceed 800,000 contracts executed in
a month from posting liquidity, the OTP Holder will receive a posting
credit of $0.34 per contract on all executions resulting from posted
liquidity. If such aggregated Customer orders exceed 1,200,000
contracts executed in a month from posting liquidity, the OTP Holder
will receive a posting credit of $0.38 per contract on all executions
resulting from posted liquidity. The volume thresholds are intended to
incentivize firms that route some Customer orders to the Exchange to
increase the number of orders that are posted to achieve the next
threshold. Increasing the number of orders posted on the Exchange will
in turn provide tighter and more liquid markets, and therefore attract
more business overall.
It is possible for an OTP Holder routing Customer orders to the
Exchange to reach a threshold that provides for a greater posting
credit than that of a Market Maker or Lead Market Maker. Market Makers
and Lead Market Makers incorporate Post Liquidity credits into their
models for quote calculations based on their overhead costs and prefer
to have a single credit apply across all similar transactions. OTP
Holders who aggregate Customer business are subject to the relative
level of activity of the industry, and thus may not have enough
business in a particular month to meet a volume threshold. To the
extent that Market Makers have an obligation to be present on the
Exchange, but Customer order flow may be directed anywhere, the
Exchange wishes to incentivize the directing of Customer order flow to
NYSE Arca. As indicated above, Firms and Broker Dealers are proprietary
traders that seek to trade with Customer order flow to capture the
spread rather than trade based on rebates and fees. We have found over
time that the higher Post Liquidity credit for such entities has not
caused them to post more liquidity on the Exchange. To incentivize such
entities to send order flow to the Exchange, we have determined to
increase the incentive to send Customer order flow to the Exchange,
which in turn is designed to attract more trading interest from such
entities to trade with that Customer order flow, and enhance trading
opportunities for all market participants.
The Exchange proposes to eliminate the ``Tiered Pricing For Penny
Pilot Issues,'' which provided escalating Take Discounts for Customer
executions in certain volume ranges, and provided additional Post
Credits for Market Maker executions in certain volume ranges. The Take
Discounts for Customers did not encourage more business, because
Customers generally only take liquidity if there is no charge, or if
there is liquidity at the NBBO that does not have a fee. Because of
this, there is no structural incentive to increase the amount of
liquidity-taking order flow since the Take Discounts only eliminate a
portion of the fee. The Penny Pilot Tiered Pricing, which provided
increased posting credits for Market Makers with volume in certain
tiers, was problematic in that Market Makers, as stated above, could
not build the potential credit into their overhead models for quote
calculations. Market Makers preferred a definite credit for the first
contract rather than those over 1,000,000.
The Exchange believes the adjustments to the Post Liquidity credits
will encourage Market Makers and Customers to post liquidity in Penny
Pilot issues on NYSE Arca, thereby providing reduced market spreads
overall and increasing available liquidity on the Exchange.
Routing Fees
In order to defray costs associated with non-Penny Pilot
executions, the
[[Page 20398]]
Exchange is proposing a routing surcharge of $0.11 per contract for
orders that are routed and executed at away market centers pursuant to
order protection requirements of the Options Order Protection and
Locked/Crossed Market Plan. In addition, the Exchange proposes to pass
through any transaction fees charged by the destination exchange on
executions of routed orders. This is a new fee for NYSE Arca options
intended to offset the costs and fees of routing orders for execution
in non-Penny Pilot issues. NYSE Arca pays a fee to its routing brokers,
and in turn pays clearing fees to OCC to clear routed orders. At this
time the fee is to be charged only to non-Penny Pilot issues, as orders
in Penny Pilot issues which are routed are charged a take liquidity fee
that offsets the cost of routing.
Firms may avoid routing charges by either routing orders themselves
directly to the away market that is at the NBBO, or by use of various
order types on NYSE Arca which carry an instruction to not route the
order.
Deletion of Obsolete Reference
The Exchange is also proposing to delete references to Foreign
Currency Options in the Transaction Fee schedule and in endnote 6, as
Foreign Currency Options are no longer listed on the Exchange.
The proposed changes will be effective on April 1, 2011.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Securities Exchange Act of 1934
(the ``Act''),\5\ in general, and Section 6(b)(4) of the Act,\6\ in
particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees, and other charges among its
members and other persons using its facilities. In addition, the
Exchange believes that the proposed rule change is consistent with
Section 6(b)(5) of the Exchange Act in that it is not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\5\ 15 U.S.C. 78f.
\6\ 15 U.S.C. 78f(b)(4).
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The proposed changes to the fee schedule are equitable and
reasonable in that they apply uniformly to all similarly situated
market participants, are within the range of fees assessed by other
exchanges employing similar pricing schemes, and are designed to
increase liquidity at the Exchange. In particular, the proposed
increase in the Post Liquidity credit from $0.30 to $0.32 per contract
for Lead Market Makers and Market Makers is equitable and reasonable
because it is within the range of a rebate paid on the NASDAQ Options
Market (``NOM'').\7\ Moreover, the Exchange is seeking to provide an
additional incentive for Lead Market Makers and Market Makers to post
liquidity on the Exchange. In addition, the proposed decrease in the
Post Liquidity credit from $0.25 to $0.10 per contract for Firms and
Broker Dealers is reasonable because it is consistent with a rebate
paid on NOM and a similar decrease NOM imposed in July 2010.\8\
Further, as discussed above, the Exchange has observed that such
entities are proprietary traders that seek to trade against Customer
order flow to capture the spread rather than trade based on rebates and
fees.
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\7\ See (http://www.nasdaqtrader.com/Micro.aspx?id=OptionsPricing). NOM provides a rebate of $0.36 per
contract for customers adding liquidity.
\8\ Id. NOM provides a rebate of $0.10 per contract for firms
adding liquidity. In addition, we note that in July 2010, NASDAQ
decreased its rebate for firms adding liquidity from $0.25 to $0.10
per contract. See Exchange Act Release No. 62543 (July 21, 2010), 75
FR 44037 (July 27, 2010).
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The proposed differential in the Post Liquidity credits between the
(1) Lead Market Maker/Market Maker, and (2) Firm/Broker Dealer
Electronic categories, is equitable and not unfairly discriminatory in
that it is intended to partially offset the significantly higher OTP
fees paid by Lead Market Makers and Market Makers. Further, this
differential is also equitable and not unfairly discriminatory in that
it provides additional compensation for the affirmative continuous
quoting obligation that Lead Market Makers and Market Makers have, but
which does not apply to Firms and Broker Dealers. In addition, as noted
above, the proposed differential will still be less than the equivalent
differential at the Phlx, a competing market.
Similarly, the proposed increase in Post Liquidity credits for OTP
Holders that aggregate Customer orders that meet certain volume
thresholds in Penny Pilot issues is equitable and reasonable in that it
applies uniformly to all similarly situated OTP Holders that direct
Customer orders to the Exchange and is very similar to rebates paid on
NOM.\9\ The fact that an OTP Holder routing Customer orders to the
Exchange may reach a threshold that provides for a greater posting
credit than that of a Market Maker or Lead Market Maker is not
inequitable or unfairly discriminatory because (1) Market Makers and
Lead Market Makers prefer a fixed credit not dependent on volume for
purposes of their models for quote calculations based on their overhead
costs, and (2) the higher posting credits for the top two threshold
levels (which would exceed the posting credit applicable to Market
Makers and Lead Market Makers) is subject to the overall level of
market activity and may not be reached in any given month. Moreover,
the difference between (1) the Post Liquidity credits received by OTP
Holders that aggregate Customer orders, and (2) the Post Liquidity
credit received by Firms and Broker Dealers, is not inequitable or
unfairly discriminatory because the Exchange believes that it has
structured its fee schedule in a manner to attract order flow from all
such entities. In this regard, the Exchange has found that the higher
Post Liquidity credit for Firms and Broker Dealers has not caused them
to send additional order flow to the Exchange. Based on its
observations, the Exchange believes that such entities focus on the
ability to trade with Customer order flow to capture the spread rather
than on rebates and fees. Accordingly, the Exchange is proposing to
increase the Post Liquidity credits for Customer order flow to attract
such order flow to the Exchange. With the anticipated increase in such
order flow to the Exchange, the Exchange expects to attract additional
order flow from Firms and Broker Dealers to trade with such order flow.
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\9\ See supra note 7.
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The imposition of routing fees in non-Penny Pilot issues is
reasonable in that it is intended to defray the significant cost of
routing orders, and these charges may be avoided by direct routing of
an order to the away market that is at the NBBO or by the use of do-
not-route order types on NYSE Arca. The routing fees are equitable and
not unfairly discriminatory in that they are applied in an identical
manner to all market participants with similarly situated orders.
Overall, the proposed changes to the fee schedule are structured to
increase incentives for posting liquidity in Penny Pilot names so that
the overall market is more competitive and spreads are tighter.
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.
[[Page 20399]]
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 foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \10\ of the Act and subparagraph (f)(2) of Rule
19b-4 \11\ thereunder, because it establishes a due, fee, or other
charge imposed by the NYSE Arca.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend 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-NYSEArca-2011-16 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2011-16. 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 those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
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 a.m. and 3 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; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NYSEArca-2011-16 and should be submitted on or before May 3, 2011.
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\12\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8732 Filed 4-11-11; 8:45 am]
BILLING CODE 8011-01-P