Document ID: SEC-2011-0486-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-04-12T04:00Z

[Federal Register Volume 76, Number 70 (Tuesday, April 12, 2011)]
[Notices]
[Pages 20396-20399]
From the Federal Register Online via the Government Printing 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 rule-comments@sec.gov. 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