80 FR 36015 - Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving Proposed Rule Change To Remove the Exchange's Quote Mitigation Plan as Provided in Commentary .03 to Exchange Rule 6.86
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 120 (June 23, 2015)
Federal Register Volume 80, Issue 120 (June 23, 2015)
| Page Range | 36015-36019 | |
| FR Document | 2015-15341 |
[Federal Register Volume 80, Number 120 (Tuesday, June 23, 2015)] [Notices] [Pages 36015-36019] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-15341] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-75191; File No. SR-NYSEArca-2014-117] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving Proposed Rule Change To Remove the Exchange's Quote Mitigation Plan as Provided in Commentary .03 to Exchange Rule 6.86 June 17, 2015. I. Introduction On October 2, 2014, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 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 remove the Exchange's quote mitigation plan as provided by Commentary .03 to NYSE Arca Rule 6.86. The proposed rule change was published for comment in the Federal Register on October 21, 2014.\3\ On December 2, 2014, pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.\5\ On January 8, 2015, the Exchange submitted a comment letter in further support of its proposal.\6\ On January 16, 2015, the Commission issued an Order Instituting Proceedings to Determine Whether to Approve or Disapprove the proposed rule change.\7\ On February 27, 2015 and June 4, 2015, the Exchange submitted comment letters in further support of its proposal.\8\ No additional comment letters were submitted. This order disapproves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 73362 (October 15, 2014), 79 FR 62983 (``Notice''). \4\ 15 U.S.C. 78s(b)(2). \5\ See Securities Exchange Act Release No. 73720, 79 FR 72747 (December 8, 2014). The Commission designated January 19, 2015, as the date by which it should approve, disapprove, or institute proceedings to determine whether to approve or disapprove the proposed rule change. \6\ See Letter from Elizabeth King, Secretary & General Counsel, Exchange, to Kevin O'Neill, Deputy Secretary, Commission, dated January 8, 2015 (``NYSE Arca Letter 1'') available at http://www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117.shtml. \7\ See Securities and Exchange Release No. 74088, 80 FR 3687 (January 23, 2015) (Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposal Rule Change to Remove the Exchange's Quote Mitigation Plan as Provided by Commentary .03 to Exchange Rule 6.86) (``OIP''). \8\ See Letters from Elizabeth King, Secretary & General Counsel, Exchange, to Kevin O'Neill, Deputy Secretary, Commission, dated February 27, 2015 (``NYSE Arca Letter 2'') available athttp:// www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117-2.pdf and to Brent Fields, Secretary, Commission, dated June 4, 2015 (``NYSE Arca Letter 3'') available at http://www.sec.gov/comments/sr-nysearca-2014-117/nysearca2014117-3.pdf. --------------------------------------------------------------------------- II. Description of the Proposal In 2007, the Exchange adopted a quote mitigation plan in connection with the Options Penny Pilot Program (``Penny Pilot'').\9\ According to the Exchange, the quote mitigation plan was designed to reduce the number of quotation messages sent by the Exchange to the Options Price Reporting Authority (``OPRA'') by only submitting quote messages for ``active'' series.\10\ The Exchange defines active series under the quote mitigation plan in Commentary .03 to Exchange Rule 6.86 as: (i) Series that have traded on any options exchange in the previous 14 calendar days; or (ii) series that are solely listed on the Exchange; or (iii) series that have been trading ten days or less; or (iv) series for which the Exchange has received an order.\11\ In addition, under the Exchange's quote mitigation plan, the Exchange may define a series as active on an intraday basis if: (i) The series trades at any options exchange; (ii) the Exchange receives an order in the series; or (iii) the Exchange receives a request for quote from a customer in that series.\12\ --------------------------------------------------------------------------- \9\ See Securities and Exchange Release No. 55156 (January 23, 2007), 72 FR 4759 (February 1, 2007) (Order Granting Approval of SR- NYSEArca-2006-73) (``Quote Mitigation Approval Order''). In this Order, the Commission approved a proposed rule change to amend the NYSE Arca rules to (i) permit thirteen options classes to be quoted in pennies on a pilot basis and (ii) adopt a quote mitigation plan. In approving the Penny Pilot, the Commission analyzed data provided by the options exchanges to assess the potential impact the Penny Pilot would have on, among other things, the increase in quotation message traffic. According to the Exchange, the quote mitigation plan was designed to mitigate the volume of data processed and disseminated by OPRA. See Securities and Exchange Release No. 55590 (October 12, 2006), 72 FR 4759 (October 18, 2006) (Notice of SR- NYSEArca-2006-73). In approving the Exchange's quote mitigation plan the Commission stated that ``because the Commission expects that the Penny Pilot Program will increase quote message traffic, the Commission is also approving the Exchange's proposal to reduce the number of quotations it disseminates.'' See Quote Mitigation Approval Order at 4760. \10\ See Notice, supra note 3, at 62983. \11\ See Exchange Rule 6.86, Commentary .03, and Notice, supra note 3, at 62983. \12\ See id. --------------------------------------------------------------------------- The Exchange proposes to remove its quote mitigation plan from its rules by deleting Commentary .03 to Exchange Rule 6.86.\13\ The Exchange states that its quote mitigation plan is no longer necessary primarily for three reasons. First, the Exchange states that its incorporation of select provisions of the Options Listing Procedures Plan (``OLPP'') \14\ in Exchange Rule 6.4A serves to reduce the potential for excess quoting because the OLPP limits the number of options series eligible to be listed, which, according to the Exchange, reduces the number of options series a market maker would be obligated to quote.\15\ Second, the [[Page 36016]] Exchange states its view that Exchange Rule 6.37B Commentary .01, which removes certain options series from market makers' continuous quoting obligations, reduces the number of quote messages that the Exchange sends to OPRA.\16\ The Exchange states that reliance on the OLPP, via Exchange Rule 6.4A, and the refined market maker quoting obligations, pursuant to Commentary .01 to Exchange Rule 6.37B, is sufficient as a quote mitigation plan.\17\ Third, the Exchange states that both the Exchange's systems capacity and OPRA's systems capacity are more than sufficient to accommodate any additional increase in quote message traffic that might be sent to OPRA as a result of the deletion of the quote mitigation plan.\18\ The Exchange represents that it continually assesses its capacity needs and ensures that the capacity that it requests from OPRA is sufficient and compliant with the requirements established in the OPRA Capacity Guidelines.\19\ --------------------------------------------------------------------------- \13\ See Notice, supra note 3, at 62984. In addition, the Exchange proposes to amend paragraphs (b)(1) and (b)(2) of Exchange Rule 6.86 to delete references to the ``Quote Mitigation Plan,'' which refer to the quote mitigation plan set forth in Commentary .03 to Exchange Rule 6.86. See id. \14\ See Amendment to Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act available at http://www.theocc.com/clearing/industry-services/olpp.jsp (providing for the most current OLPP). See also Securities and Exchange Release No. 44521 (July 6, 2001), 66 FR 36809 (July 13, 2001) (order approving the OLPP). \15\ See Notice, supra note 3, at 62983. See also Securities and Exchange Release No. 61977 (April 23, 2010), 75 FR 22884 (April 30, 2010) (SR-NYSEArca-2010-30) (in which the Exchange adopted select provisions of the OLPP into Exchange Rule 6.4A). \16\ Commentary .01 to Exchange Rule 6.37B provides that Exchange market makers continuous quoting obligations do not apply ``to adjusted option series, and series with a time to expiration of nine months or greater, for options on equities and Exchange Traded Fund Shares, and series with a time to expiration of twelve months or greater for Index options.'' See also Notice, supra note 3, at 62984. \17\ See Notice, supra note 3, at 62984. The Exchange states its view that limiting the number of options series listed on the Exchange is preferable to suppressing the quotes of inactive options series, as required under current Exchange Rule 6.86, because all quotes sent by Exchange market makers are actionable even if not displayed. See id. \18\ See Notice, supra note 3, at 62984. \19\ See id. --------------------------------------------------------------------------- The Exchange further represents that it has in place certain measures that act as additional safeguards against excessive quoting.\20\ According to the Exchange, these safeguards include monitoring and alerting market makers disseminating an unusual number of quotes, a business plan designed to ensure that new listings are actively traded,\21\ and a ratio threshold fee designed to encourage the efficient use of orders.\22\ --------------------------------------------------------------------------- \20\ See id. \21\ See id. (citing to NYSE Arca Options Listing Policy Statement, available at, http://www.nyse.com/pdfs/TraderNoticeArcaLOPSChanges092713.pdf). \22\ See id. (citing to NYSE Arca Options Fee Schedule, available at, https://www.theice.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf). --------------------------------------------------------------------------- III. Summary of Comment Letters NYSE Arca submitted three comment letters in which it: (1) Supports its position that Rule 6.4A of the OLPP together with the current exceptions from a market maker's continuous quoting obligations for certain options series would be sufficient as a quote mitigation plan; \23\ (2) provides additional information to support its argument that relying on the OLPP requirements in Rule 6.4A would suffice as a quote mitigation plan; and (3) supports its argument that the Exchange and OPRA have sufficient capacity to accommodate an increase in quote message traffic resulting from elimination of the Exchange's quote mitigation plan.\24\ --------------------------------------------------------------------------- \23\ See NYSE Arca Letter 1, supra note 6, at 1. See also NYSE Arca Letter 2, supra note 8, at 1-2. The Exchange also supplies an actual illustration of how the Rule results in quote mitigation. Id. at 2. \24\ See NYSE Arca Letter 1, supra note 6. --------------------------------------------------------------------------- The Exchange states that at least one other options exchange primarily relies on the OLPP requirements in Rule 6.4A as a quote mitigation plan.\25\ The Exchange explains that the OLPP Rule 6.4A puts a restriction on the range of permissible strike prices based on the price of the underlying security.\26\ The Exchange states its view that reliance on the OLPP requirements is consistent with the Act and would sufficiently limit the number of options series listed on the Exchange.\27\ --------------------------------------------------------------------------- \25\ See NYSE Arca Letter 1, supra note 6, at 1-2. The comment letter further notes that the Miami International Securities Exchange, LLC (``MIAX'') stated in a response to comments on a proposed rule change relating to increasing the number of options series associated with Short Term Options Series that it was not using a quote mitigation strategy, but instead employs a listing policy that mitigates the number of classes and series listed on its exchange by not listing illiquid options classes and products that are not already trading on another market. (See NYSE Arca Letter 1, supra note 6, at 2 (citing Letter to Elizabeth Murphy, Secretary, U.S. Securities Exchange Commission, from Brian O'Neill, VP and Senior Counsel, MIAX, dated June 2, 2013, available at http://www.sec.gov/comments/sr-miax-2013-23/miax201323-2.pdf.)). NYSE Arca notes that it has a similar policy designed to help ensure that the Exchange does not list options that generate quote volume without providing the benefit of trading volume. See NYSEArca Letter 1, supra note 6, at 2 and 4. \26\ See NYSE Arca Letter 2, supra note 8, at 1-2. \27\ See NYSE Arca Letter 1, supra note 6, at 1. --------------------------------------------------------------------------- Next, the Exchange argues that eliminating its quote mitigation plan is consistent with the Act because refined market maker quoting obligations currently in place on the Exchange, which exempt certain options series from market makers' continuous quoting obligations, reduce the universe of series in which a market maker is required to quote.\28\ The Exchange notes that these refined obligations were adopted following implementation of its quote mitigation plan,\29\ and believes that as a result, market makers do not need to quote in approximately 5,000 options series, thereby decreasing quote message traffic.\30\ --------------------------------------------------------------------------- \28\ See NYSE Arca Letter 1, supra note 6, at 1. \29\ See id. \30\ Id. --------------------------------------------------------------------------- The Exchange argues that it has sufficient capacity to handle quoting in all options series, including quotes in those series that are inactive and not currently disseminated pursuant to the Exchange's quote mitigation plan.\31\ In support of this statement, the Exchange explains that although quotes in inactive series do not generate quote traffic from NYSE Arca, the Exchange must nonetheless receive and process quotes in such series, and perform additional processing to suppress quotes in these series to comply with their quote mitigation plan.\32\ The Exchange states that because it is already processing the quotes it suppresses, it is ``confident that its own systems capacity is more than sufficient to accommodate any increase in the traffic that might be sent to OPRA.'' \33\ The Exchange notes that in its requests for capacity submitted to the Independent Systems Capacity Advisory (``ISCA'') (which OPRA uses to ensure overall aggregate capacity), NYSE Arca assumes that (1) options series that are inactive at that time could become active in the future, thereby increasing overall message traffic sent to OPRA, and (2) that all options series that it lists, including those without continuous quoting obligations for market makers, will generate message traffic to OPRA.\34\ The Exchange further states its belief that OPRA also would be able to accommodate any increase in quote message traffic resulting from NYSE Arca no longer suppressing quotes in inactive series.\35\ --------------------------------------------------------------------------- \31\ See NYSE Arca Letter 1, supra note 6, at 2. \32\ See NYSE Arca Letter 1, supra note 6, at 2. \33\ See NYSE Arca Letter 1, supra note 6, at 2-3. \34\ Id. \35\ See NYSE Arca Letter 1, supra note 6, at 2. --------------------------------------------------------------------------- The Exchange further argues that eliminating its quote mitigation plan is consistent with the Act because the Exchange actively monitors market maker quoting activity and alerts market makers to heightened levels of quoting activity, which could result from systems issues or an incorrectly set parameter that generates erroneous quotes.\36\ The Exchange notes that NYSE Arca's requests for capacity to the ISCA are adjusted to account for ``some level'' of erroneous quoting.\37\ --------------------------------------------------------------------------- \36\ See NYSE Arca Letter 1, supra note 6, at 3-4. \37\ Id. at 4. --------------------------------------------------------------------------- The Exchange also states that the landscape regarding quote message traffic and capacity has changed since the adoption of the Penny Pilot.\38\ NYSE [[Page 36017]] Arca represents that in January 2007, 15% of quotes received by the Exchange were not sent to OPRA, compared to 5.8% as of April 2015.\39\ The Exchange also states that at the time the Penny Pilot was adopted, OPRA's total capacity was set to 359,000 messages per seconds (``mps''), and that by July 2015, OPRA's peak capacity is anticipated to be 42,100,000 mps.\40\ In addition, the Exchange states, based on peak message traffic figures on the Exchange for one day in May 2015,\41\ that if the quotes the Exchange suppressed on that day had been sent to OPRA, industry quotes published by OPRA would have increased by no more than 1%, and that this would use less than .05% of total OPRA capacity.\42\ --------------------------------------------------------------------------- \38\ See NYSE Arca Letter 3, supra note 8, at 2. \39\ Id. \40\ Id. \41\ Id. The Exchange represents that as of Friday May 29, 2015, peak message traffic for the Exchange was 1,707,820 mps, measured over a 100 millisecond period. Based on this, the Exchange believes that if the highest percentage of quotes suppressed by the Exchange during this period (8.3%) had been published at the same rate as quotes the Exchange had not suppressed during this time, the mps rate would instead be 1,849,569. Id. \42\ Id. --------------------------------------------------------------------------- IV. Discussion Under Section 19(b)(2)(C) of the Act, the Commission shall approve a proposed rule change of a self-regulatory organization if the Commission finds that such proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder that are applicable to such organization.\43\ The Commission shall disapprove a proposed rule change if it does not make such a finding.\44\ Rule 700(b)(3) of the Commission's Rules of Practice states that the ``burden to demonstrate that a proposed rule change is consistent with the [Act] . . . is on the self-regulatory organization that proposed the rule change'' and that a ``mere assertion that the proposed rule change is consistent with those requirements . . . is not sufficient.'' \45\ --------------------------------------------------------------------------- \43\ 15 U.S.C. 78s(b)(2)(C)(i). \44\ 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR 201.700(b)(3) and note 45 infra, and accompanying text. \45\ 17 CFR 201.700(b)(3). The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding. See id. Any failure of a self-regulatory organization to provide the information solicited by Form 19b-4 may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Act and the rules and regulations issued thereunder that are applicable to the self-regulatory organization. Id. --------------------------------------------------------------------------- After careful consideration, the Commission cannot find that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\46\ In particular, the Commission cannot find that the proposed rule change is consistent with Section 6(b)(5) of the Act,\47\ which requires that the rules of a national securities exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and to protect investors and the public interest. --------------------------------------------------------------------------- \46\ In disapproving the proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). \47\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- In conjunction with the adoption of the Penny Pilot in 2007 that permitted the options exchanges to quote certain options series in one and five cent increments, and in response to a letter sent by the then Chairman of the Commission,\48\ the options exchanges, including NYSE Arca, adopted quote mitigation plans.\49\ The Commission emphasized the importance of options exchanges' quote mitigation strategies in connection with the Penny Pilot in its orders approving an expansion of the Penny Pilot in 2007. In those orders, the Commission noted that options exchanges participating in the Penny Pilot would continue to use quote mitigation strategies.\50\ Likewise, when the Commission approved NYSE Arca's proposal to again expand the Penny Pilot in 2009, the Commission reiterated that the Exchange would retain and continue to employ its quote mitigation strategy.\51\ --------------------------------------------------------------------------- \48\ In a letter sent to the options exchanges on June 7, 2006, encouraging the implementation of a penny pilot program, then Chairman Cox noted that quoting options in pennies would increase quote message traffic, which the systems of exchanges, market data vendors, and securities firms must be able to manage, and for that reason, quoting options in pennies would begin in a small number of options. To assist in managing the anticipated increase in quote traffic, Chairman Cox asked that options exchanges include a workable quote mitigation strategy in any proposal to allow quoting in pennies. See Commission Press Release 2006-91, ``SEC Chairman Cox Urges Options Exchanges to Start Limited Penny Quoting,'' June 7, 2006. \49\ See Quote Mitigation Approval Order, supra note 9. \50\ See Securities Exchange Act Release No. 56568, 72 FR 56422 (October 3, 2007) (SR-NYSEArca-2007-88); 56567 (September 27, 2007), 72 FR 56307 (October 3, 2007) (Amex-2007-96); 56565 (September 27, 2007), 72 FR 56403 (October 3, 2007) (CBOE-2007-98); 56564 (September 27, 2007), 72 FR 56412 (October 3, 2007) (ISE-2007-74); 56563 (September 27, 2007), 72 FR 56429 (October 3, 2007) (Phlx- 2007-62); and 56566 (September 27, 2007), 72 FR 56400 (October 3, 2007) (BSE-2007-40). \51\ See Securities Exchange Act Release No. 60711, 74 FR 49419 (September 28, 2009) (SR-NYSEArca-2009-44). See also Securities Exchange Act Nos. 60373 (October 23, 2009), 74 FR 56675 (November 2, 2009) (Phlx-2009-91); 60864 (October 22, 2009), 74 FR 55876 (October 29, 2009) (CBOE-2009-076); 60865 (October 22, 2009), 74 FR 55880 ((ISE-2009-82); 60886 (October 27, 2009), 74 56897 (November 3, 2009); 60874 (October 23, 2009), 74 FR 56682 (November 2, 2009) (NASDAQ-2009-091); and 61106 (December 3, 2009), 74 FR 65193 (December 9, 2009) (NYSEAmex-2009-74). --------------------------------------------------------------------------- When considering whether the Exchange's quote mitigation plan was consistent with the Act, the Commission relied upon supporting data and analysis provided by the Exchange.\52\ In its proposal to provide for a quote mitigation plan, NYSE Arca represented that the quote mitigation plan was intended to reduce the number of quotations generated by the Exchange for all option issues traded at NYSE Arca, not just options on issues included in the Penny Pilot, and that the Exchange anticipated the quote mitigation plan would reduce quote message traffic by 20- 30%.\53\ In approving NYSE Arca's proposal in February 2007, the Commission stated that because it expected that the Penny Pilot would increase quote message traffic, the Commission also approved the Exchange's proposal to reduce the number of quotations it disseminates.\54\ --------------------------------------------------------------------------- \52\ See Quote Mitigation Approval Order, supra note 9. \53\ See Quote Mitigation Approval Order, supra note 9, at 4760. \54\ See Quote Mitigation Approval Order, supra note 9, at 4760. --------------------------------------------------------------------------- In 2007 and 2009, the Commission approved rule changes submitted by NYSE Arca expanding the number of classes eligible to participate in the Penny Pilot.\55\ In so approving, the Commission reviewed data provided by the options exchanges, including data relating to OPRA's capacity to process the increase in quotes resulting from the expansion of the Penny Pilot and the effectiveness of its quote mitigation plan.\56\ In approving each of these expansions, the Commission noted that [[Page 36018]] it relied, in part, on the Exchange's representation that it would continue to use its quote mitigation plan to suppress certain quotation traffic that would otherwise be sent to OPRA.\57\ The Commission also relied on data provided by the options exchanges to support representations that capacity was not a concern, and that the quote mitigation plans in place were successful.\58\ For example, NYSE Arca, provided the Commission with data supporting its claim that the Exchange's quote mitigation plan mitigated 12.1 million quotes a day or 13 percent of NYSE Arca's daily quote traffic sent to OPRA.\59\ In another report, NYSE Arca provided data on OPRA's then-current capacity, future capacity, and peaks in message traffic sent to OPRA to support its argument that quote traffic increases were manageable.\60\ --------------------------------------------------------------------------- \55\ The Commission approved thirteen classes to participate in the Penny Pilot on January 23, 2007. See Quote Mitigation Approval Order, supra note 9. On September 27, 2007, the Commission approved an expansion of Penny Pilot, which raised the number of participating classes to 63. See Securities Exchange Act Release No. 56568, 72 FR 56422 (October 3, 2007) (SR-NYSEArca-2007-88) (``Order Approving Expansion 1''). On September 23, 2009, the Commission approved another expansion, raising the number of participating classes to 363. See Securities Exchange Act Release No. 60711, 74 FR 49419 (September 28, 2009) (SR-NYSEArca-2009-44) (``Order Approving Extension 2''). \56\ See Order Approving Expansion 1 and Order Approving Expansion 2, supra note 55 at 56423-24 and 49422-23, respectively. \57\ Id. \58\ Id. For example, in Order Approving Expansion 2, the Commission noted that on June 2, 2009, the sustained message traffic peak of 852,350 messages per second reported by OPRA is still well below the OPRA's current message per second capacity limit of 2,050,000. See Order Approving Expansion 2, supra note 55 at 49422. \59\ See Understanding Economic and Capacity Impacts of the Penny Pilot, NYSE ARCA Options, May 31, 2007. \60\ See The Options Penny Pilot, NYSE ARCA, received August 18, 2009. --------------------------------------------------------------------------- As noted above, the Exchange believes that its quote mitigation plan is no longer necessary because: (1) the Exchange has incorporated select provisions of the OLPP in Exchange Rule 6.4A, which the Exchange believes limits the number of series eligible to be traded; (2) current Exchange Rule 6.37B Commentary .01 removes certain options series from market makers' continuous quoting obligations, which the Exchange believes reduces the number of quote messages that the Exchange sends to OPRA; and (3) both the system capacity at the Exchange and at OPRA are more than sufficient to accommodate any additional increase in quote message traffic that might be disseminated if NYSE Arca's quote mitigation plan is eliminated. However, the Exchange has not provided the Commission with sufficient data regarding potential changes in quote message traffic if the Commission approves its proposal. For example, the Exchange does not provide sufficient data about the number of quote messages that its quote mitigation plan currently suppresses relative to capacity at OPRA. Specifically, the Exchange provided data from May 29, 2015 that purports to show that if all quote messages suppressed by the Exchange were instead sent to OPRA, industry quotes published by OPRA would increase by no more than 1%. The Exchange asserts that this increase would use less than .05% of total OPRA capacity across all option exchanges. Importantly, however, the Exchange does not provide data that shows the excess capacity between peak quote message traffic sent from all options exchanges and OPRA's Peak Capacity for the May 29, 2015 sample. If peak quote message traffic sent to OPRA by all the options exchanges was at or approached OPRA's Peak Capacity, then potentially even a small increase in quote message traffic from one exchange could result in OPRA's capacity being exceeded. In addition, the Exchange does not provide data or analysis demonstrating the potential impact the Exchange's proposal would have on market participants who consume the OPRA and/or the Exchange's quotation message feeds.\61\ Nor does the Exchange quantify the number or percentage of quote messages that have been and would continue to be suppressed as a result of the implementation of Exchange Rule 6.4A \62\ or current Exchange Rule 6.37B Commentary .01.\63\ The Commission notes that the Exchange's comment letter stated its belief that as a result of refined quoting obligations, market makers do not need to quote in approximately 5,000 options series, and that this has resulted in a decrease in message traffic,\64\ however, the Exchange did not provide data to quantify the decrease in message traffic for the Commission to consider. Absent sufficient information and data of this type, the Commission is not able to adequately evaluate the Exchange's assertion that ``reliance on the OLPP, via Rule 6.4A, together with the refined market maker obligation, pursuant to Commentary .01 to Rule 6.37B, is sufficient as a quote mitigation strategy and obviates the need for Rule 6.86.'' \65\ Other information or data may also be helpful for the Commission's consideration of the proposed rule change. Without sufficient supporting data and analysis, the Commission is not able to adequately assess the impact of NYSE Arca's proposed rule change to eliminate its quote mitigation plan and make a determination that the proposed rule change is consistent with the Act. --------------------------------------------------------------------------- \61\ See Order Approving Expansion 2, supra note 55 at 49421 (The Commission noted that several commenters expressed concerns that increased quotation message traffic imposes costs on exchanges and other market participants to process and store the additional quotations and they questioned the ability of market systems to effectively handle the increased quote message traffic that would likely result from the expansion of the Penny Pilot to 363 classes. In approving the expansion, the Commission noted that NYSE Arca ``had adopted and [would] continue to utilize quote mitigate strategies that should continue to mitigate the expected increase in quotation traffic.'') Id. at 49422-23. \62\ In 2009, the OLPP Participants, including NYSE Arca, represented that the new strategy they were proposing as Amendment No. 3 to the OLPP (which was subsequently codified as Rule 6.4A on the Exchange's rulebook) would be ``an additional strategy'' to be used to address overall capacity concerns in the industry. See Securities Exchange Act Release No. 60365 (July 22, 2009), 74 FR 37266 (July 28, 2009) (Notice of Filing of Amendment No. 3 to the OLPP proposing uniform standards to the range of options series exercise prices available for trading). Although it was anticipated that the exercise price limitation bands set forth in Amendment No. 3 would also have the attendant benefit of further reducing increases in quote message traffic, nothing in the language in the exchanges' OLPP filings suggest that the methodology set forth in Amendment No. 3 (to limit the number of options series available for trading) was intended to replace the options exchanges' quote mitigation strategies, nor does the language in those filings suggest that it was contemplated at the time that the options exchanges would eliminate their existing exchange-specific quote mitigation strategies. \63\ While NYSE Arca stated in its proposed rule change to adopt Exchange Rule 6.37B Commentary .01 that the burden of continuous quoting in adjusted series is counter to efforts to mitigate the number of quotes collected and disseminated, and that the proposal would further the goal of quote mitigation, this was not a basis given for the proposed rule change, and the Exchange did not provide any data on what the impact of the proposal on quote volume would be. See Securities Exchange Act Release No. 65210 (August 26, 2011), 76 FR 54516 (September 1, 2011) (SR-NYSEArca-2011-59). Additionally, the Commission did not consider the potential impact of the proposal on quote mitigation as a basis for approving the elimination of continuous quoting obligation in certain series. See Securities Exchange Act Release No. 65573 (October 14, 2011), 76 FR 65305 (October 20, 2011) (SR-NYSEArca-2011-59). \64\ See NYSE Arca Letter 1, supra note 6, at 3. \65\ See Notice, supra note 3, at 62984. --------------------------------------------------------------------------- Given the limitations in the data provided by NYSE Arca, as described above, the Commission cannot find a sufficient basis to conclude that the proposal is consistent with the Act. The Commission notes, however, that the Penny Pilots for each of the options exchanges are anticipated to be extended for an additional year, until June 30, 2016. In connection with any future requests to extend the Penny Pilots after that date, the Commission intends to require each exchange to submit detailed information to allow for permanent approval or disapproval by the Commission. Such proposals should, among other things, provide detailed data and analysis to support the efficacy, or any proposed modification or elimination, of any exchanges' quote mitigation plan.\66\ --------------------------------------------------------------------------- \66\ In reviewing the quote mitigation plans in this manner, the Commission would be able to consider the market-wide impact of any proposed modification to or elimination of an exchange's quote mitigation practices. --------------------------------------------------------------------------- For the foregoing reasons, the Commission does not believe that NYSE [[Page 36019]] Arca has met its burden to demonstrate that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder, including that the rules of an exchange be designed 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.\67\ --------------------------------------------------------------------------- \67\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- IV. Conclusion For the reasons set forth above, the Commission does not believe that NYSE Arca has met its burden to demonstrate that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, Section 6(b)(5) of the Act. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NYSEArca-2014-117) be, and hereby is, disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\68\ --------------------------------------------------------------------------- \68\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2015-15341 Filed 6-22-15; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 80, No. 120 / Tuesday, June 23, 2015 / Notices 36015
staff members who have an interest in Register on October 21, 2014.3 On Exchange, the quote mitigation plan was
the matters also may be present. December 2, 2014, pursuant to Section designed to reduce the number of
The General Counsel of the 19(b)(2) of the Act,4 the Commission quotation messages sent by the
Commission, or her designee, has designated a longer period within which Exchange to the Options Price Reporting
certified that, in her opinion, one or to approve the proposed rule change, Authority (‘‘OPRA’’) by only submitting
more of the exemptions set forth in 5 disapprove the proposed rule change, or quote messages for ‘‘active’’ series.10
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) institute proceedings to determine The Exchange defines active series
and 17 CFR 200.402(a)(3), (a)(5), (a)(7), whether to approve or disapprove the under the quote mitigation plan in
(a)(9)(ii) and (a)(10), permit proposed rule change.5 On January 8, Commentary .03 to Exchange Rule 6.86
consideration of the scheduled matter at 2015, the Exchange submitted a as: (i) Series that have traded on any
the Closed Meeting. comment letter in further support of its options exchange in the previous 14
Commissioner Piwowar, as duty proposal.6 On January 16, 2015, the calendar days; or (ii) series that are
officer, voted to consider the items Commission issued an Order Instituting solely listed on the Exchange; or (iii)
listed for the Closed Meeting in closed Proceedings to Determine Whether to series that have been trading ten days or
session. Approve or Disapprove the proposed less; or (iv) series for which the
The subject matter of the Closed rule change.7 On February 27, 2015 and Exchange has received an order.11 In
Meeting will be: June 4, 2015, the Exchange submitted addition, under the Exchange’s quote
Institution and settlement of injunctive comment letters in further support of its mitigation plan, the Exchange may
actions; proposal.8 No additional comment define a series as active on an intraday
Institution and settlement of letters were submitted. This order basis if: (i) The series trades at any
administrative proceedings; disapproves the proposed rule change. options exchange; (ii) the Exchange
Resolution of litigation claims; and
II. Description of the Proposal receives an order in the series; or (iii)
Other matters relating to enforcement
the Exchange receives a request for
proceedings. In 2007, the Exchange adopted a
At times, changes in Commission quote from a customer in that series.12
quote mitigation plan in connection The Exchange proposes to remove its
priorities require alterations in the with the Options Penny Pilot Program quote mitigation plan from its rules by
scheduling of meeting items. (‘‘Penny Pilot’’).9 According to the
For further information and to deleting Commentary .03 to Exchange
ascertain what, if any, matters have been 3 See Securities Exchange Act Release No. 73362
Rule 6.86.13 The Exchange states that its
added, deleted, or postponed, please (October 15, 2014), 79 FR 62983 (‘‘Notice’’).
quote mitigation plan is no longer
contact the Office of the Secretary at 4 15 U.S.C. 78s(b)(2). necessary primarily for three reasons.
(202) 551–5400. 5 See Securities Exchange Act Release No. 73720, First, the Exchange states that its
79 FR 72747 (December 8, 2014). The Commission incorporation of select provisions of the
Dated: June 18, 2015. designated January 19, 2015, as the date by which Options Listing Procedures Plan
Brent J. Fields, it should approve, disapprove, or institute
proceedings to determine whether to approve or (‘‘OLPP’’) 14 in Exchange Rule 6.4A
Secretary. disapprove the proposed rule change. serves to reduce the potential for excess
[FR Doc. 2015–15449 Filed 6–19–15; 11:15 am] 6 See Letter from Elizabeth King, Secretary & quoting because the OLPP limits the
BILLING CODE 8011–01–P General Counsel, Exchange, to Kevin O’Neill, number of options series eligible to be
Deputy Secretary, Commission, dated January 8,
2015 (‘‘NYSE Arca Letter 1’’) available at http://
listed, which, according to the
www.sec.gov/comments/sr-nysearca-2014-117/ Exchange, reduces the number of
SECURITIES AND EXCHANGE nysearca2014117.shtml. options series a market maker would be
COMMISSION 7 See Securities and Exchange Release No. 74088,
obligated to quote.15 Second, the
80 FR 3687 (January 23, 2015) (Order Instituting
[Release No. 34–75191; File No. SR– Proceedings to Determine Whether to Approve or
NYSEArca–2014–117] quote mitigation plan the Commission stated that
Disapprove a Proposal Rule Change to Remove the
‘‘because the Commission expects that the Penny
Exchange’s Quote Mitigation Plan as Provided by
Pilot Program will increase quote message traffic,
Self-Regulatory Organizations; NYSE Commentary .03 to Exchange Rule 6.86) (‘‘OIP’’).
8 See Letters from Elizabeth King, Secretary &
the Commission is also approving the Exchange’s
Arca, Inc.; Order Disapproving proposal to reduce the number of quotations it
General Counsel, Exchange, to Kevin O’Neill, disseminates.’’ See Quote Mitigation Approval
Proposed Rule Change To Remove the Deputy Secretary, Commission, dated February 27,
Exchange’s Quote Mitigation Plan as Order at 4760.
2015 (‘‘NYSE Arca Letter 2’’) available athttp:// 10 See Notice, supra note 3, at 62983.
Provided in Commentary .03 to www.sec.gov/comments/sr-nysearca-2014-117/ 11 See Exchange Rule 6.86, Commentary .03, and
Exchange Rule 6.86 nysearca2014117-2.pdf and to Brent Fields,
Secretary, Commission, dated June 4, 2015 (‘‘NYSE Notice, supra note 3, at 62983.
12 See id.
June 17, 2015. Arca Letter 3’’) available at http://www.sec.gov/
13 See Notice, supra note 3, at 62984. In addition,
comments/sr-nysearca-2014-117/nysearca2014117-
I. Introduction 3.pdf. the Exchange proposes to amend paragraphs (b)(1)
9 See Securities and Exchange Release No. 55156 and (b)(2) of Exchange Rule 6.86 to delete
On October 2, 2014, NYSE Arca, Inc. (January 23, 2007), 72 FR 4759 (February 1, 2007) references to the ‘‘Quote Mitigation Plan,’’ which
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed (Order Granting Approval of SR–NYSEArca–2006– refer to the quote mitigation plan set forth in
73) (‘‘Quote Mitigation Approval Order’’). In this Commentary .03 to Exchange Rule 6.86. See id.
with the Securities and Exchange 14 See Amendment to Plan for the Purpose of
Order, the Commission approved a proposed rule
Commission (‘‘Commission’’), pursuant change to amend the NYSE Arca rules to (i) permit Developing and Implementing Procedures Designed
to Section 19(b)(1) of the Securities thirteen options classes to be quoted in pennies on to Facilitate the Listing and Trading of
Exchange Act of 1934 (‘‘Act’’) 1 and Rule a pilot basis and (ii) adopt a quote mitigation plan. Standardized Options Submitted Pursuant to
19b–4 thereunder,2 a proposed rule In approving the Penny Pilot, the Commission Section 11A(a)(3)(B) of the Securities Exchange Act
analyzed data provided by the options exchanges to available at http://www.theocc.com/clearing/
mstockstill on DSK4VPTVN1PROD with NOTICES
change to remove the Exchange’s quote assess the potential impact the Penny Pilot would industry-services/olpp.jsp (providing for the most
mitigation plan as provided by have on, among other things, the increase in current OLPP). See also Securities and Exchange
Commentary .03 to NYSE Arca Rule quotation message traffic. According to the Release No. 44521 (July 6, 2001), 66 FR 36809 (July
6.86. The proposed rule change was Exchange, the quote mitigation plan was designed 13, 2001) (order approving the OLPP).
to mitigate the volume of data processed and 15 See Notice, supra note 3, at 62983. See also
published for comment in the Federal disseminated by OPRA. See Securities and Securities and Exchange Release No. 61977 (April
Exchange Release No. 55590 (October 12, 2006), 72 23, 2010), 75 FR 22884 (April 30, 2010) (SR–
1 15 U.S.C. 78s(b)(1). FR 4759 (October 18, 2006) (Notice of SR– NYSEArca–2010–30) (in which the Exchange
2 17 CFR 240.19b–4. NYSEArca-2006–73). In approving the Exchange’s Continued
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Arca represents that in January 2007, proposed rule change is consistent with continue to employ its quote mitigation
15% of quotes received by the Exchange the requirements of the Act and the strategy.51
were not sent to OPRA, compared to rules and regulations thereunder When considering whether the
5.8% as of April 2015.39 The Exchange applicable to a national securities Exchange’s quote mitigation plan was
also states that at the time the Penny exchange.46 In particular, the consistent with the Act, the Commission
Pilot was adopted, OPRA’s total Commission cannot find that the relied upon supporting data and
capacity was set to 359,000 messages proposed rule change is consistent with analysis provided by the Exchange.52 In
per seconds (‘‘mps’’), and that by July Section 6(b)(5) of the Act,47 which its proposal to provide for a quote
2015, OPRA’s peak capacity is requires that the rules of a national mitigation plan, NYSE Arca represented
anticipated to be 42,100,000 mps.40 In securities exchange be designed, among that the quote mitigation plan was
addition, the Exchange states, based on other things, to prevent fraudulent and intended to reduce the number of
peak message traffic figures on the manipulative acts and practices, to quotations generated by the Exchange
Exchange for one day in May 2015,41 promote just and equitable principles of for all option issues traded at NYSE
that if the quotes the Exchange trade, to remove impediments to and Arca, not just options on issues
suppressed on that day had been sent to perfect the mechanism of a free and included in the Penny Pilot, and that
OPRA, industry quotes published by open market and a national market the Exchange anticipated the quote
OPRA would have increased by no more system, and to protect investors and the mitigation plan would reduce quote
than 1%, and that this would use less public interest. message traffic by 20–30%.53 In
than .05% of total OPRA capacity.42 In conjunction with the adoption of approving NYSE Arca’s proposal in
the Penny Pilot in 2007 that permitted February 2007, the Commission stated
IV. Discussion
the options exchanges to quote certain that because it expected that the Penny
Under Section 19(b)(2)(C) of the Act, Pilot would increase quote message
options series in one and five cent
the Commission shall approve a traffic, the Commission also approved
increments, and in response to a letter
proposed rule change of a self- the Exchange’s proposal to reduce the
sent by the then Chairman of the
regulatory organization if the number of quotations it disseminates.54
Commission,48 the options exchanges,
Commission finds that such proposed In 2007 and 2009, the Commission
including NYSE Arca, adopted quote
rule change is consistent with the approved rule changes submitted by
mitigation plans.49 The Commission
requirements of the Act, and the rules NYSE Arca expanding the number of
emphasized the importance of options
and regulations thereunder that are classes eligible to participate in the
applicable to such organization.43 The exchanges’ quote mitigation strategies in
connection with the Penny Pilot in its Penny Pilot.55 In so approving, the
Commission shall disapprove a Commission reviewed data provided by
proposed rule change if it does not make orders approving an expansion of the
Penny Pilot in 2007. In those orders, the the options exchanges, including data
such a finding.44 Rule 700(b)(3) of the relating to OPRA’s capacity to process
Commission’s Rules of Practice states Commission noted that options
exchanges participating in the Penny the increase in quotes resulting from the
that the ‘‘burden to demonstrate that a expansion of the Penny Pilot and the
proposed rule change is consistent with Pilot would continue to use quote
mitigation strategies.50 Likewise, when effectiveness of its quote mitigation
the [Act] . . . is on the self-regulatory plan.56 In approving each of these
organization that proposed the rule the Commission approved NYSE Arca’s
proposal to again expand the Penny expansions, the Commission noted that
change’’ and that a ‘‘mere assertion that
the proposed rule change is consistent Pilot in 2009, the Commission reiterated 51 See Securities Exchange Act Release No. 60711,
with those requirements . . . is not that the Exchange would retain and 74 FR 49419 (September 28, 2009) (SR–NYSEArca–
sufficient.’’ 45 2009–44). See also Securities Exchange Act Nos.
After careful consideration, the 46 In disapproving the proposed rule change, the 60373 (October 23, 2009), 74 FR 56675 (November
Commission has considered the proposed rule’s 2, 2009) (Phlx–2009–91); 60864 (October 22, 2009),
Commission cannot find that the 74 FR 55876 (October 29, 2009) (CBOE–2009–076);
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f). 60865 (October 22, 2009), 74 FR 55880 ((ISE–2009–
39 Id. 47 15 U.S.C. 78f(b)(5). 82); 60886 (October 27, 2009), 74 56897 (November
40 Id.
48 In a letter sent to the options exchanges on June 3, 2009); 60874 (October 23, 2009), 74 FR 56682
41 Id. The Exchange represents that as of Friday
7, 2006, encouraging the implementation of a penny (November 2, 2009) (NASDAQ–2009–091); and
May 29, 2015, peak message traffic for the Exchange pilot program, then Chairman Cox noted that 61106 (December 3, 2009), 74 FR 65193 (December
was 1,707,820 mps, measured over a 100 quoting options in pennies would increase quote 9, 2009) (NYSEAmex–2009–74).
millisecond period. Based on this, the Exchange 52 See Quote Mitigation Approval Order, supra
message traffic, which the systems of exchanges,
believes that if the highest percentage of quotes market data vendors, and securities firms must be note 9.
suppressed by the Exchange during this period able to manage, and for that reason, quoting options 53 See Quote Mitigation Approval Order, supra
(8.3%) had been published at the same rate as in pennies would begin in a small number of note 9, at 4760.
quotes the Exchange had not suppressed during this options. To assist in managing the anticipated 54 See Quote Mitigation Approval Order, supra
time, the mps rate would instead be 1,849,569. Id. increase in quote traffic, Chairman Cox asked that note 9, at 4760.
42 Id.
options exchanges include a workable quote 55 The Commission approved thirteen classes to
43 15 U.S.C. 78s(b)(2)(C)(i). mitigation strategy in any proposal to allow quoting participate in the Penny Pilot on January 23, 2007.
44 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR in pennies. See Commission Press Release 2006–91, See Quote Mitigation Approval Order, supra note
201.700(b)(3) and note 45 infra, and accompanying ‘‘SEC Chairman Cox Urges Options Exchanges to 9. On September 27, 2007, the Commission
text. Start Limited Penny Quoting,’’ June 7, 2006. approved an expansion of Penny Pilot, which raised
45 17 CFR 201.700(b)(3). The description of a 49 See Quote Mitigation Approval Order, supra the number of participating classes to 63. See
proposed rule change, its purpose and operation, its note 9. Securities Exchange Act Release No. 56568, 72 FR
effect, and a legal analysis of its consistency with 50 See Securities Exchange Act Release No. 56568, 56422 (October 3, 2007) (SR–NYSEArca–2007–88)
applicable requirements must all be sufficiently 72 FR 56422 (October 3, 2007) (SR–NYSEArca– (‘‘Order Approving Expansion 1’’). On September
mstockstill on DSK4VPTVN1PROD with NOTICES
detailed and specific to support an affirmative 2007–88); 56567 (September 27, 2007), 72 FR 56307 23, 2009, the Commission approved another
Commission finding. See id. Any failure of a self- (October 3, 2007) (Amex–2007–96); 56565 expansion, raising the number of participating
regulatory organization to provide the information (September 27, 2007), 72 FR 56403 (October 3, classes to 363. See Securities Exchange Act Release
solicited by Form 19b–4 may result in the 2007) (CBOE–2007–98); 56564 (September 27, No. 60711, 74 FR 49419 (September 28, 2009) (SR–
Commission not having a sufficient basis to make 2007), 72 FR 56412 (October 3, 2007) (ISE–2007– NYSEArca–2009–44) (‘‘Order Approving Extension
an affirmative finding that a proposed rule change 74); 56563 (September 27, 2007), 72 FR 56429 2’’).
is consistent with the Act and the rules and (October 3, 2007) (Phlx–2007–62); and 56566 56 See Order Approving Expansion 1 and Order
regulations issued thereunder that are applicable to (September 27, 2007), 72 FR 56400 (October 3, Approving Expansion 2, supra note 55 at 56423–24
the self-regulatory organization. Id. 2007) (BSE–2007–40). and 49422–23, respectively.
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![36018 Federal Register / Vol. 80, No. 120 / Tuesday, June 23, 2015 / Notices
it relied, in part, on the Exchange’s published by OPRA would increase by The Commission notes that the
representation that it would continue to no more than 1%. The Exchange asserts Exchange’s comment letter stated its
use its quote mitigation plan to suppress that this increase would use less than belief that as a result of refined quoting
certain quotation traffic that would .05% of total OPRA capacity across all obligations, market makers do not need
otherwise be sent to OPRA.57 The option exchanges. Importantly, to quote in approximately 5,000 options
Commission also relied on data however, the Exchange does not provide series, and that this has resulted in a
provided by the options exchanges to data that shows the excess capacity decrease in message traffic,64 however,
support representations that capacity between peak quote message traffic sent the Exchange did not provide data to
was not a concern, and that the quote from all options exchanges and OPRA’s quantify the decrease in message traffic
mitigation plans in place were Peak Capacity for the May 29, 2015 for the Commission to consider. Absent
successful.58 For example, NYSE Arca, sample. If peak quote message traffic sufficient information and data of this
provided the Commission with data sent to OPRA by all the options type, the Commission is not able to
supporting its claim that the Exchange’s exchanges was at or approached OPRA’s adequately evaluate the Exchange’s
quote mitigation plan mitigated 12.1 Peak Capacity, then potentially even a assertion that ‘‘reliance on the OLPP, via
million quotes a day or 13 percent of small increase in quote message traffic Rule 6.4A, together with the refined
NYSE Arca’s daily quote traffic sent to from one exchange could result in market maker obligation, pursuant to
OPRA.59 In another report, NYSE Arca OPRA’s capacity being exceeded. Commentary .01 to Rule 6.37B, is
provided data on OPRA’s then-current In addition, the Exchange does not sufficient as a quote mitigation strategy
capacity, future capacity, and peaks in provide data or analysis demonstrating and obviates the need for Rule 6.86.’’ 65
message traffic sent to OPRA to support the potential impact the Exchange’s Other information or data may also be
its argument that quote traffic increases proposal would have on market helpful for the Commission’s
were manageable.60 participants who consume the OPRA consideration of the proposed rule
As noted above, the Exchange and/or the Exchange’s quotation change. Without sufficient supporting
believes that its quote mitigation plan is message feeds.61 Nor does the Exchange data and analysis, the Commission is
no longer necessary because: (1) the quantify the number or percentage of not able to adequately assess the impact
Exchange has incorporated select quote messages that have been and of NYSE Arca’s proposed rule change to
provisions of the OLPP in Exchange would continue to be suppressed as a eliminate its quote mitigation plan and
Rule 6.4A, which the Exchange believes result of the implementation of make a determination that the proposed
limits the number of series eligible to be Exchange Rule 6.4A 62 or current rule change is consistent with the Act.
traded; (2) current Exchange Rule 6.37B Exchange Rule 6.37B Commentary .01.63 Given the limitations in the data
Commentary .01 removes certain provided by NYSE Arca, as described
options series from market makers’ 61 See Order Approving Expansion 2, supra note
above, the Commission cannot find a
continuous quoting obligations, which 55 at 49421 (The Commission noted that several sufficient basis to conclude that the
commenters expressed concerns that increased
the Exchange believes reduces the quotation message traffic imposes costs on proposal is consistent with the Act. The
number of quote messages that the exchanges and other market participants to process Commission notes, however, that the
Exchange sends to OPRA; and (3) both and store the additional quotations and they Penny Pilots for each of the options
the system capacity at the Exchange and questioned the ability of market systems to exchanges are anticipated to be
effectively handle the increased quote message
at OPRA are more than sufficient to traffic that would likely result from the expansion extended for an additional year, until
accommodate any additional increase in of the Penny Pilot to 363 classes. In approving the June 30, 2016. In connection with any
quote message traffic that might be expansion, the Commission noted that NYSE Arca future requests to extend the Penny
disseminated if NYSE Arca’s quote ‘‘had adopted and [would] continue to utilize quote
mitigate strategies that should continue to mitigate
Pilots after that date, the Commission
mitigation plan is eliminated. However, the expected increase in quotation traffic.’’) Id. at intends to require each exchange to
the Exchange has not provided the 49422–23. submit detailed information to allow for
Commission with sufficient data 62 In 2009, the OLPP Participants, including
permanent approval or disapproval by
regarding potential changes in quote NYSE Arca, represented that the new strategy they the Commission. Such proposals
were proposing as Amendment No. 3 to the OLPP
message traffic if the Commission (which was subsequently codified as Rule 6.4A on should, among other things, provide
approves its proposal. the Exchange’s rulebook) would be ‘‘an additional detailed data and analysis to support the
For example, the Exchange does not strategy’’ to be used to address overall capacity efficacy, or any proposed modification
provide sufficient data about the concerns in the industry. See Securities Exchange
or elimination, of any exchanges’ quote
number of quote messages that its quote Act Release No. 60365 (July 22, 2009), 74 FR 37266
(July 28, 2009) (Notice of Filing of Amendment No. mitigation plan.66
mitigation plan currently suppresses 3 to the OLPP proposing uniform standards to the For the foregoing reasons, the
relative to capacity at OPRA. range of options series exercise prices available for Commission does not believe that NYSE
Specifically, the Exchange provided trading). Although it was anticipated that the
data from May 29, 2015 that purports to exercise price limitation bands set forth in
Amendment No. 3 would also have the attendant proposed rule change, and the Exchange did not
show that if all quote messages benefit of further reducing increases in quote provide any data on what the impact of the
suppressed by the Exchange were message traffic, nothing in the language in the proposal on quote volume would be. See Securities
exchanges’ OLPP filings suggest that the Exchange Act Release No. 65210 (August 26, 2011),
instead sent to OPRA, industry quotes 76 FR 54516 (September 1, 2011) (SR–NYSEArca–
methodology set forth in Amendment No. 3 (to limit
the number of options series available for trading) 2011–59). Additionally, the Commission did not
57 Id. consider the potential impact of the proposal on
was intended to replace the options exchanges’
58 Id. For example, in Order Approving Expansion
quote mitigation strategies, nor does the language in quote mitigation as a basis for approving the
2, the Commission noted that on June 2, 2009, the those filings suggest that it was contemplated at the elimination of continuous quoting obligation in
sustained message traffic peak of 852,350 messages time that the options exchanges would eliminate certain series. See Securities Exchange Act Release
mstockstill on DSK4VPTVN1PROD with NOTICES
per second reported by OPRA is still well below the their existing exchange-specific quote mitigation No. 65573 (October 14, 2011), 76 FR 65305 (October
OPRA’s current message per second capacity limit strategies. 20, 2011) (SR–NYSEArca–2011–59).
of 2,050,000. See Order Approving Expansion 2, 63 While NYSE Arca stated in its proposed rule 64 See NYSE Arca Letter 1, supra note 6, at 3.
supra note 55 at 49422. change to adopt Exchange Rule 6.37B Commentary 65 See Notice, supra note 3, at 62984.
59 See Understanding Economic and Capacity
.01 that the burden of continuous quoting in 66 In reviewing the quote mitigation plans in this
Impacts of the Penny Pilot, NYSE ARCA Options, adjusted series is counter to efforts to mitigate the manner, the Commission would be able to consider
May 31, 2007. number of quotes collected and disseminated, and the market-wide impact of any proposed
60 See The Options Penny Pilot, NYSE ARCA, that the proposal would further the goal of quote modification to or elimination of an exchange’s
received August 18, 2009. mitigation, this was not a basis given for the quote mitigation practices.
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![Federal Register / Vol. 80, No. 120 / Tuesday, June 23, 2015 / Notices 36019
Arca has met its burden to demonstrate HEARING OR NOTIFICATION OF HEARING: An 2. Innovator is a Delaware limited
that the proposed rule change is order granting the application will be partnership registered as an investment
consistent with the requirements of the issued unless the Commission orders a adviser under the Investment Advisers
Act and the rules and regulations hearing. Interested persons may request Act of 1940 (‘‘Advisers Act’’). Innovator
thereunder, including that the rules of a hearing by writing to the provides investment management
an exchange be designed to promote just Commission’s Secretary and serving services to the Funds under an
and equitable principles of trade, to applicants with a copy of the request, investment advisory agreement with the
remove impediments to and perfect the personally or by mail. Hearing requests Trust (the ‘‘Advisory Agreement’’).2 The
mechanism of a free and open market should be received by the Commission terms of the Advisory Agreement
and a national market system, and, in by 5:30 p.m. on July 8, 2015, and should comply or will comply with section
general, to protect investors and the be accompanied by proof of service on 15(a) of the Act. Each Advisory
public interest.67 the applicants, in the form of an Agreement was or will be approved by
affidavit or, for lawyers, a certificate of the board of trustees of the relevant
IV. Conclusion Fund (the board of trustees of any Fund,
service. Pursuant to rule 0–5 under the
For the reasons set forth above, the Act, hearing requests should state the a ‘‘Board’’), including by a majority of
Commission does not believe that NYSE nature of the writer’s interest, any facts the trustees who are not ‘‘interested
Arca has met its burden to demonstrate bearing upon the desirability of a persons’’ (as defined in section 2(a)(19)
that the proposed rule change is hearing on the matter, the reason for the of the Act) of the Trust or Adviser (the
consistent with the requirements of the request, and the issues contested. ‘‘Independent Trustees’’), and by the
Act and the rules and regulations Persons who wish to be notified of a shareholders of the respective Fund in
thereunder applicable to a national hearing may request notification by the manner required by sections 15(a)
securities exchange, and in particular, writing to the Commission’s Secretary. and (c) of the Act and rule 18f–2
Section 6(b)(5) of the Act. ADDRESSES: Secretary, U.S. Securities
thereunder.3
It is therefore ordered, pursuant to 3. Under the terms of each Advisory
and Exchange Commission, 100 F Street
Section 19(b)(2) of the Act, that the Agreement, Innovator is responsible for
NE., Washington, DC 20549–1090.
proposed rule change (SR–NYSEArca– the overall management of the Funds’
Applicants: 123 South Broad Street,
2014–117) be, and hereby is, business affairs and selecting
Suite 1630, Philadelphia, PA 19109.
disapproved. investments in accordance with the
FOR FURTHER INFORMATION CONTACT: Funds’ investment objectives, policies
For the Commission, by the Division of Bruce R. MacNeil, Senior Counsel, at
Trading and Markets, pursuant to delegated and restrictions. For the investment
(202) 551–6817, or James M. Curtis, management services that it provides to
authority.68
Branch Chief, at (202) 551–6712 the Funds, the Adviser receives the fee
Brent J. Fields, (Division of Investment Management, specified in the Advisory Agreements.
Secretary. Chief Counsel’s Office). In addition, pursuant to the Advisory
[FR Doc. 2015–15341 Filed 6–22–15; 8:45 am]
SUPPLEMENTARY INFORMATION: The Agreement, Innovator may retain one or
BILLING CODE 8011–01–P following is a summary of the more subadvisers (each, a ‘‘Subadviser’’)
application. The complete application for the purpose of managing all or a
may be obtained via the Commission’s portion of the assets of the Funds.
SECURITIES AND EXCHANGE Pursuant to its authority under the
Web site by searching for the file
COMMISSION Advisory Agreements, the Adviser
number, or an applicant using the
[Investment Company Act Release No. Company name box, at http:// intends to enter into subadvisory
31679; 812–14358] www.sec.gov/search/search.htm or by agreements (the ‘‘Subadvisory
calling (202) 551–8090. Agreements’’) with certain unaffiliated
Academy Funds Trust and Innovator Subadvisers to provide investment
Management LLC; Notice of Applicants’ Representations advisory services to the Funds. Each
Application 1. The Trust is organized as a Subadvisory Agreement has been or will
June 17, 2015. Delaware statutory trust and is be approved by the Board, including by
registered as an open-end management a majority of the Independent Trustees
ACTION: Notice of an application under investment company with multiple in accordance with Sections 15(a) and
section 6(c) of the Investment Company series. Each series of the Trust has its 15(c) of the Act. In addition, the terms
Act of 1940 (the ‘‘Act’’) for an own investment objective, policies and of each Subadvisory Agreements
exemption from section 15(a) of the Act restrictions, and each is managed by the comply or will comply fully with the
and rule 18f–2 under the Act. Adviser and may be managed by various requirements of Sections 15(a) and 15(c)
subadvisers.1 of the Act other than the shareholder
SUMMARY OF APPLICATION: Applicants approval required under Section 15(a).
request an order that would permit them 1 Applicants also request relief with respect to Each Subadviser to a Fund will be an
to enter into and materially amend any existing or future series of the Trust and any ‘‘investment adviser,’’ as defined in
subadvisory agreements without other existing or future registered open-end
section 2(a)(20)(B) of the Act, and
shareholder approval. management investment company or series thereof
that: (a) Is advised by Innovator or its successors, registered as an investment adviser
APPLICANTS: Academy Funds Trust (the including any entity controlling, controlled by or
‘‘Trust’’) and Innovator Management under common control with Innovator or its a reorganization into another jurisdiction or a
successors (included in the term ‘‘Adviser’’); (b) change in the type of organization.
mstockstill on DSK4VPTVN1PROD with NOTICES
LLC (‘‘Innovator’’ or the ‘‘Adviser’’).
uses the manager-of-managers structure (‘‘Manager 2 Innovator or another Adviser will enter into
FILING DATES: The application was filed of Managers Structure’’) described in the substantially similar investment advisory
on September 12, 2014 and amended on application; and (c) complies with the terms and agreements to provide investment management
January 28, 2015, May 12, 2015 and conditions of the application (each a ‘‘Fund’’ and services to each future Fund (each included in the
together, the ‘‘Funds’’). The only existing term ‘‘Advisory Agreement’’). Each other Adviser
June 3, 2015. investment company that currently intends to rely will also be registered as an investment adviser
on the requested order, the Trust, is named as an under the Advisers Act.
67 15 U.S.C. 78f(b)(5). applicant. For purposes of the requested order, 3 Applicants are not seeking any exemptions with
68 17 CFR 200.30–3(a)(12). ‘‘successor’’ is limited to an entity that results from respect to the Advisory Agreements.
VerDate Sep<11>2014 18:39 Jun 22, 2015 Jkt 235001 PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 E:\FR\FM\23JNN1.SGM 23JNN1](https://thefederalregister.org/doc/80_FR_36135/page/5.svg)
Document Created: 2018-02-22 11:15:06
Document Modified: 2018-02-22 11:15:06
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 80 FR 36015 |
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