
[Federal Register Volume 76, Number 170 (Thursday, September 1, 2011)]
[Notices]
[Pages 54516-54518]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-22442]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65210; File No. SR-NYSEArca-2011-59]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Adding Commentary .01 to Rule 6.37B To Indicate 
That Market Makers Will Not Be Obligated To Quote in Adjusted Option 
Series and To Clarify an Existing Exception to the Quoting Obligations

August 26, 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 August 16, 2011, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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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 add Commentary .01 to Rule 6.37B to 
indicate that Market Makers will not be obligated to quote in adjusted 
option series and to clarify an existing exception to the quoting 
obligations. The text of the proposed rule change is available at the 
Exchange, the Commission's Public Reference Room, 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 54517]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposal is to add Commentary .01 to Rule 6.37B 
to relieve Market Makers of the obligation to quote in adjusted option 
series and to propose a definition of adjusted options series. The 
proposal is similar to a rule change for NASDAQ OMX Phlx (``Phlx'').\3\
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    \3\ See Exchange Act Release No. 61095 (December 2, 2009) 74 FR 
64786 (December 8, 2009).
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    Rule 6.37B discusses the quoting obligations that are applicable to 
Market Makers on the Exchange. The Rule states that, in addition to 
other requirements, Lead Market Makers (``LMMs'') must provide 
continuous two-sided quotations throughout the trading day in its 
appointed issues for 90% of the time the Exchange is open for trading 
in each issue. Similarly, Market Makers must provide continuous two-
sided quotations throughout the trading day in its appointed issues for 
60% of the time the Exchange is open for trading in each issue.
    Under Rule 6.4(e)(i), LEAPS are series added as part of an extended 
far term expiration month, and under the same provision, the Exchange 
Rules regarding continuity do not apply to index option series until 
the time to expiration is less than 12 months, and do not apply to 
equity option series or option series on Exchange Traded Fund Shares 
until the time to expiration is less than nine months.
    The Exchange proposes to clarify that the exception for LEAPS is an 
exception to the obligations in Rule 6.37B by adding Commentary .01. 
The Exchange further proposes to extend the exception to certain 
adjusted series,\4\ and to define ``adjusted series'' for the purposes 
of Rule 6.37B. An ``adjusted series'' under the Rule would be defined 
as an option series wherein, as a result of a corporate action by the 
issuer of the underlying security, one option contract in the series 
represents the delivery of other than 100 shares of underlying stock or 
Exchange-Traded Fund Shares.
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    \4\ NYSE Arca Rule 6.4(c) states ``Option contracts shall be 
subject to adjustments in accordance with the Rules of the Options 
Clearing Corporation.''
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    After a corporate action and a subsequent adjustment to the 
existing options, the series in question are identified by the Options 
Price Reporting Authority (``OPRA'') and at OCC with a separate symbol 
consisting of the underlying symbol and a numerical appendage. As a 
standard procedure, exchanges listing options on an underlying security 
which undergoes a corporate action resulting in adjusted series will 
list new standard option series across all appropriate expiration 
months the day after the existing series are adjusted. The adjusted 
series are generally active for a short period of time following 
adjustment, but orders to open an options position in the underlying 
are almost exclusively placed in the new standard contracts. Although 
the adjusted series may not expire for as much as 27 months, in a short 
time the adjusted series become inactive. Thus, the burden of quoting 
these series generally outweighs the benefit of being appointed in the 
class because of the lack of interest in the series by various market 
participants.
    On NYSE Arca, such series may not meet the standards to be 
considered active, and, under Commentary .03 to NYSE Arca Rule 6.86, 
the Exchange shall no longer disseminate quotes in the series. Thus, 
the current obligation holds Market Makers to submit quotes in series 
that are generally not published to OPRA unless requested.\5\ Since the 
obligation to submit electronic quotes upon request of a Trading 
Official will continue if the proposed rule is approved, a fair and 
orderly market in the inactive series is readily available.
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    \5\ Commentary .03 to Rule 6.86 states, in part, ``The Exchange 
may determine that a series has become active intraday if (i) The 
series trades at any options exchange; (ii) NYSE Arca receives an 
order in the series; or (iii) NYSE Arca receives a request for quote 
from a customer in that series. If a series becomes active intraday, 
the Exchange will immediately disseminate quotes in the series to 
OPRA, and continue to disseminate quotes for the balance of the 
trading day.''
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    The Exchange has recently noticed requests for withdrawals from 
appointment in classes that include adjusted series by Market Makers, 
including LMMs, resulting in a reduction in liquidity in these classes. 
Market Makers and LMMs that have withdrawn from assignments in these 
classes have informed the Exchange that the withdrawals were based in 
part on the obligation to continuously quote adjusted options series 
whereby the quoting obligations on these often less frequently traded 
option series impacted the risk parameters acceptable to the Market 
Makers and LMMs. The Market Makers and LMMs have also expressed that 
the adjusted nature of these series also complicates the calculation of 
an appropriate quote.
    This lack of interest is exacerbated by Market Makers withdrawing 
from the appointments which in turn, has caused liquidity (as well as 
volume) to be negatively impacted in the affected options classes 
listed on the Exchange. The Exchange believes that the proposed 
Commentary will ameliorate the liquidity impact by allowing Market 
Makers and Lead Market Makers to continue their appointment in these 
option classes.
    The proposed rule change is similar to the Phlx rule, in that the 
Exchange is merely proposing to exclude the adjusted series from the 
continuous quoting obligation, but not from other obligations under 
Rules 6.37, 6.37A, 6.37B and 6.82. The Phlx rule excludes adjusted 
series (and Quarterly Options) from the Streaming Quote Trader's 
assignment. Of particular note, the proposal would not excuse a Market 
Maker from the obligation, when called upon by a Trading Official, to 
submit a single quote or maintain continuous quotes in one or more 
series of an option issue within the Market Maker's appointment 
whenever, in the judgment of such Trading Official, it is necessary to 
do so in the interest of maintaining fair and orderly markets.\6\
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    \6\ See NYSE Arca Rule 6.37B(d).
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    Further, the proposed rule does not excuse the Market Maker from 
the obligations to respond with a two-sided, legal width market to a 
call for a market by a Floor Broker.\7\
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    \7\ See NYSE Arca Rule 6.37(b)(5) and Commentary .05.
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    The current quoting obligation in such illiquid series is a minor 
part of a Market Maker's overall obligation, and the proposed modicum 
of relief is mitigated by the obligation to respond to a request for 
quote from a Trading Official or a Floor Broker. Because of the lack of 
interest in such series, there is little demonstrable benefit to being 
a market maker in them other than the ability to maintain market maker 
margins for what little activity may occur. In addition, the burden of 
continuous quoting in these series is counter to efforts to mitigate 
the number of quotes collected and disseminated.
    The Exchange believes that the proposed rule change should incent 
Market Makers and Lead Market Makers to continue appointments and 
thereby expand liquidity in options classes listed on the Exchange to 
the benefit of the Exchange and its OTP Holders and public customers.
2. Statutory Basis
    The Exchange believes that this proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (``Act'') \8\, 
in general, and furthers the objectives of Section 6(b)(5) of the Act 
\9\ in particular, in that it is designed to prevent fraudulent and

[[Page 54518]]

manipulative acts and practices, promote just and equitable principles 
of trade, 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal is consistent with the Act 
because, on balance, the elimination of the continuous quoting 
obligations in adjusted series is a minor change and should not impact 
the quality of Arca's market. Among other things, adjusted series are 
not common, and trading interest is often very low after the corporate 
event has passed. Consequently, continuous quotes in such series 
increases quote traffic and burdens systems without a corresponding 
benefit. By not requiring Market Makers to continuously quote in such 
series, the Exchange's proposal would further its goal of measured 
quote mitigation. Further, while they will not be tasked with 
continually quoting such series, Market Makers will be obligated to 
quote the series when called upon by a Trading Official. In addition, a 
MM [sic] will be required to quote the series when it becomes ``lit'' 
in response to a request for quote being received. Accordingly, the 
proposal supports the quality of Arca's market by helping to ensure 
that Market Makers will continue to be obligated to quote in adjusted 
series when the need arises.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 No. SR-NYSEArca-2011-59 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2011-59. 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 such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEArca-2011-59 and should be submitted on or before September 22, 
2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-22442 Filed 8-31-11; 8:45 am]
BILLING CODE 8011-01-P


