
[Federal Register Volume 78, Number 70 (Thursday, April 11, 2013)]
[Notices]
[Pages 21681-21691]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08444]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69335; File No. SR-NYSEArca-2013-34]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change and Amendment No. 1 Thereto To Implement a One-
Year Pilot Program for Issuers of Certain Exchange-Traded Products 
(``ETPs'') Listed on the Exchange

April 5, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\ 
notice is hereby given that, on March 21, 2013, NYSE Arca, Inc. 
(``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On April 5, 2013, the Exchange submitted Amendment No. 1 to 
the proposed rule change, which replaces and supersedes the proposed 
rule change in its entirety. The Commission is publishing this notice 
to solicit comments on the proposed rule change, as modified by 
Amendment No. 1 thereto, from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 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 implement a one-year pilot program for 
issuers of certain exchange-traded products (``ETPs'') listed on the 
Exchange. The text of the proposed rule change is available on the 
Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

[[Page 21682]]

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.

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

1. Purpose
    This Amendment No. 1 to SR-NYSEArca-2013-34 replaces and supercedes 
SR-NYSEArca-2013-34 in its entirety.\4\
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    \4\ SR-NYSEArca-2013-34 replaced and superceded SR-NYSEArca-
2012-37, which was withdrawn by the Exchange. See Securities 
Exchange Act Release Nos. 66966 (May 11, 2012), 77 FR 29419 (May 17, 
2012) and 68616 (Jan. 10, 2013), 78 FR 3482 (Jan. 16, 2013) (SR-
NYSEArca-2012-37). Attached hereto is Exhibit 4, which reflects the 
changes made to Exhibit 5.
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    The Exchange proposes to create a one-year pilot program for 
issuers of certain ETPs listed on the Exchange. The pilot program would 
be called the NYSE Arca ETP Incentive Program (``Incentive Program''). 
As described in more detail below, the Incentive Program is designed to 
enhance the market quality for ETPs by incentivizing Market Makers \5\ 
to take Lead Market Maker (``LMM'') assignments in certain lower volume 
ETPs by offering an alternative fee structure for such LMMs that would 
be funded from the Exchange's general revenues. The costs of the 
Incentive Program would be offset by charging participating issuers 
non-refundable Optional Incentive Fees, which would be credited to the 
Exchange's general revenues. Participation would be entirely voluntary 
on the part of both LMMs and issuers. The Exchange proposes to add new 
NYSE Arca Equities Rule 8.800 to set forth the requirements for the 
Incentive Program, including performance standards specific to LMMs 
participating in the Incentive Program.
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    \5\ A Market Maker is an Equity Trading Permit Holder (``ETP 
Holder'') that acts as a Market Maker pursuant to NYSE Arca Equities 
Rule 7. See NYSE Arca Equities Rule 1.1(v). An ETP Holder is a sole 
proprietorship, partnership, corporation, limited liability company, 
or other organization in good standing that has been issued an 
Equity Trading Permit. See NYSE Arca Equities Rule 1.1(n).
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Background
    Under the current Fee Schedule for listings, an issuer of an ETP is 
required to pay a Listing Fee that ranges from $5,000 to $45,000.\6\ An 
ETP issuer also pays a graduated Annual Fee based on the number of 
shares of the ETP that are outstanding. The Annual Fee ranges from 
$5,000 to $55,000.
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    \6\ The Exchange has one Schedule of Fees and Charges for 
Exchange Services that is for listings (``Listing Fee Schedule'') 
and another that is for trade-related charges (``Trading Fee 
Schedule''). To differentiate them, the Exchange proposes to change 
the name of the former to ``SCHEDULE OF FEES AND CHARGES FOR 
EXCHANGE LISTING SERVICES.'' ETPs are generally classified as either 
Derivative Securities Products or Structured Products for purposes 
of the Listing Fee Schedule. See Listing Fee Schedule, available at 
http://www.nyse.com/pdfs/NYSEArca_Listing_Fees.pdf.
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    A qualified Market Maker may request an assignment as an LMM for an 
ETP, and the request is subject to approval by the Exchange.\7\ For 
some ETPs, no Market Maker requests an assignment as an LMM, and the 
ETP therefore trades without an LMM assigned to it. The Exchange 
operates under the price-time priority model for all market 
participants, so there is no distinct transactional benefit to being 
assigned as an LMM. However, LMMs must meet certain obligations and 
requirements and therefore incur greater risks than other market 
participants on the Exchange.
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    \7\ See NYSE Arca Equities Rule 7.22(d).
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    An LMM is currently subject to the obligations for Market Makers 
that are set forth in NYSE Arca Equities Rule 7.23 and the minimum 
performance standards that are referenced in NYSE Arca Equities Rule 
7.24. Under NYSE Arca Equities Rule 7.24, the minimum performance 
standards include (i) Percent of time at the National Best Bid (the 
``NBB'') or National Best Offer (the ``NBO'') (collectively, the 
``NBBO''), (ii) percent of executions better than the NBBO, (iii) 
average displayed size, (iv) average quoted spread, and (v) in the 
event that the security is a derivative security, the ability to 
transact in underlying markets. An LMM's minimum performance standards 
are described in an official NYSE Arca policy, titled NYSE Arca LMM 
Requirements, which may be amended from time to time. The minimum 
performance standards are measured daily and reviewed as a monthly 
average. The Exchange believes that they are stringent and help foster 
liquidity provision and stability in the market.\8\
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    \8\ References in this rule filing to an LMM's minimum 
performance standards outside of the Incentive Program mean those 
set forth in NYSE Arca LMM Requirements. The proposed standards for 
LMMs in the Incentive Program are referred to as the ``proposed 
Incentive Program LMM performance standards.''
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    The risks for LMMs that exceed those of other market participants 
include risks associated with managing position inventory as well as 
risks associated with maintaining quotes. Inventory risks may be higher 
for certain ETPs with low volume and low shares outstanding because 
there are fewer opportunities to turn over positions in such ETPs and 
there is an accumulation of costs from carrying those positions as well 
as positions in the underlying securities used for hedging.\9\ LMMs are 
currently required to continuously quote on both sides of the market; 
therefore, they must be willing to buy as well as sell by posting 
displayed and firm quotes on the Exchange. When there is a low volume 
of shares outstanding, there is often less supply for securities 
lending purposes. In order to meet settlement requirements, LMMs acting 
in ETPs with low shares outstanding are often required to maintain long 
ETP positions. Quoting risks exist due to the complexity of pricing 
ETPs and the potential for human and/or technological errors. ETPs are 
open-ended and derivatively priced securities that typically track 
returns of underlying assets. LMMs' quotes can diverge from the 
underlying assets' values, and in such cases, the LMMs are more likely 
to buy (sell) at prices that are above (below) theoretical fair values. 
Because LMMs are currently required to continuously quote on both sides 
of the market and maintain certain minimum performance standards, they 
are more likely to face these types of risks because other market 
participants have more freedom to withdraw quotes upon experiencing 
difficulties or unusual market conditions.
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    \9\ Costs of carrying ETP inventories include the expense ratio, 
which includes the management fee, financing costs or the cost of 
capital, and the opportunity cost of allocating capital. At times, 
it may also include stock loan costs for maintaining a hedge in 
hard-to-borrow securities.
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    To incentivize firms to take on the LMM designation and foster 
liquidity provision and stability in the market, the Exchange currently 
provides LMMs with an opportunity to receive incrementally higher 
transaction credits and incur incrementally lower transaction fees 
(``LMM Rates'') compared to standard liquidity maker-taker rates 
(``Standard Rates'').\10\ LMM

[[Page 21683]]

Rates are intended to balance the increased risks and requirements 
assumed by LMMs. Accordingly, the value of acting as an LMM can be 
measured by the incremental difference in the transaction credits or 
fees under the LMM Rates as compared to the Standard Rates. However, 
the absolute incremental difference depends on the LMM's trading 
volume. Trading volume for different ETPs can vary significantly and 
result in a corresponding variance in LMM trading volume. The benefit 
of acting as an LMM can therefore vary significantly depending upon the 
ETP to which the LMM is assigned. There are fewer financial benefits 
for LMM assignments in ETPs with lower CADVs than ETPs with higher 
CADVs. The table below provides hypothetical examples based on 
assumptions that NYSE Arca market share equals 22%, LMM participation 
rate equals 20%, LMM make ratio equals 80%, and LMM take ratio equals 
20%: \11\
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    \10\ The Exchange generally employs a maker-taker transactional 
fee structure, whereby an ETP Holder that removes liquidity is 
charged a fee (``Take Rate''), and an ETP Holder that provides 
liquidity receives a credit (``Make Rate''). The Take Rate for LMMs 
is currently $0.0025 per share. The Make Rate for LMMs is currently 
generally between $0.0035 and $0.0045 per share depending on 
consolidated average daily volume (``CADV''). See Trading Fee 
Schedule, available at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees__4_4__13_copy.pdf.
    \11\ Market share is the percentage of CADV traded on NYSE Arca. 
Participation rate is the percentage of NYSE Arca volume traded by 
the LMM. Make ratio is the percentage of LMM volume that provides 
liquidity. Take ratio is the percentage of LMM volume that takes 
liquidity. The formula for calculating the transaction credit is as 
follows: (LMM make volume * Make Rate) + (LMM take volume * Take 
Rate). LMM make volume equals CADV * Arca market share * LMM 
participation rate * LMM make ratio. LMM take volume equals CADV * 
Arca market share * LMM participation rate * LMM take ratio.

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                                                                                      Annual
                                                                      Annual        transaction       Annual
                     Symbol                            CADV         transaction     credit/fee      incremental
                                                                    credit/fee       (standard      difference
                                                                    (LMM rates)       rates)
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ABC.............................................      25,000,000        $637,560        $332,640        $304,920
DEF.............................................       5,100,000         130,062          67,859          62,204
GHI.............................................       2,500,000          74,844          33,264          41,580
JKL.............................................       1,100,000          32,931          14,636          18,295
MNO.............................................         750,000          25,780           9,979          15,800
PQR.............................................         500,000          17,186           6,653          10,534
STU.............................................         100,000           3,437           1,331           2,107
VWX.............................................          10,000             344             133             211
YZ..............................................           1,000              34              13              21
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    The Exchange believes that the assignment of an LMM, which is held 
to higher standards as compared to Market Makers and other market 
participants, is a critical component of the promotion of a consistent, 
fair and orderly market in ETPs on the Exchange. However, market 
participants may be forgoing LMM assignments in ETPs--instead choosing 
to trade ETPs as Market Makers or ETP Holders with lower or no 
obligations or minimum performance standards--because the incentives to 
serve as an LMM in low-volume ETPs are insufficient to outweigh the 
obligations, minimum performance standards, and other risks described 
above. To illustrate how this change has transpired, the following 
table highlights the increasing proportion of new NYSE Arca ETPs that 
are listed without an LMM present:

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                                                        2003      2004      2005      2006      2007      2008      2009      2010      2011      2012
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New NYSE Arca ETP Listings..........................       11        34        49       133       223       195       124       196       297       147
Listed with LMM.....................................       11        34        49       133       218       190       121       175       271       135
Listed without LMM..................................        0         0         0         0         5         5         3        21        26        12
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    The Exchange is concerned that this trend will continue or worsen 
if there is no mechanism to appropriately remunerate capable Market 
Makers to take on the obligations and accountability that are part and 
parcel of the LMM assignment. The Exchange also is concerned that this 
would not be limited to future listings and that existing listings 
could also be subject to LMM withdrawals. Indeed, since January 2008, 
nearly 100% of all LMM withdrawal requests for ETPs already listed and 
trading were made for securities that exhibited low CADV in the period 
prior to the withdrawal requests being made. This behavior further 
signals a connection between low CADV and low interest levels from 
firms seeking to act as LMMs. Likewise, it supports the assertion that 
there is less value relative to the risks of acting as the LMM for 
certain ETPs.
    The Exchange believes that there is ample evidence, along with 
logical inference, to support the assertion that the presence of an 
obligated and accountable liquidity provider leads to superior market 
quality and thus benefits long-term investors. When there is an LMM 
assigned to a security listed on NYSE Arca, long-term investors trading 
on the Exchange in the secondary market likely experience enhanced 
market quality compared to similar securities for which there are no 
LMMs assigned. For instance, in the fourth quarter of 2012, there were 
609 ETPs listed on NYSE Arca that traded less than 10,000 shares CADV. 
Of those ETPs, 567 had LMMs while 42 did not. The average spread for 
the ETPs with LMMs was 0.79% and the average quote size was 3,014 
shares. The average spread for the ETPs without LMMs was 11.52% and the 
average quote size was 1,655 shares. During the same time period, there 
were 410 ETPs listed on NYSE Arca that traded between 10,000 shares and 
100,000 shares CADV. Of those ETPs, 396 had LMMs while 14 did not. The 
average spread for the ETPs with LMMs was 0.23% and the average quote 
size was 6,643 shares. The average spread for ETPs without LMMs was 
0.36% and the average quote size was 2,613 shares. Exhibits 1 and 2 
illustrate that these observations were consistent over longer time 
periods and that there has been a greater variance in market quality 
for ETPs without LMMs.\12\
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    \12\ All open-ended ETPs trading over 100,000 CADV have LMMs 
except SPY, which has significant liquidity without the need for an 
LMM, and UBS E-TRACS Alerian MLP Infrastructure ETN (symbol: MLPI).

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[[Page 21684]]

    For ETPs <10,000 Shares CADV:
    [GRAPHIC] [TIFF OMITTED] TN11AP13.000
    

[[Page 21685]]


    For ETPs between 10,000 and 100,000 Shares CADV:
    [GRAPHIC] [TIFF OMITTED] TN11AP13.001
    
Proposed Incentive Program
    To address these issues, the Exchange proposes to establish the 
Incentive Program as a one-year pilot to enhance the market quality for 
ETPs by incentivizing Market Makers to take LMM assignments in certain 
lower volume ETPs by offering an alternative fee structure for such 
LMMs funded from the Exchange's general revenues. Incentive Program 
costs would be offset by charging participating issuers non-refundable 
Optional Incentive Fees, which would be credited to the Exchange's 
general revenues. Participation would be entirely voluntary on the part 
of both LMMs and issuers. The Exchange proposes to add new NYSE Arca 
Equities Rule 8.800, which would set forth Incentive Program 
requirements, including performance standards specific to LMMs 
participating in the Incentive Program, as described in more detail 
below.
Proposed Rule
    Proposed NYSE Arca Equities Rule 8.800(a) would describe the ETPs 
that would be eligible to participate in the Incentive Program. An ETP 
would be eligible to participate in the Incentive Program if:
    (1) It is listed on the Exchange as of the commencement of the 
pilot period or becomes listed during the pilot period;
    (2) the listing is under NYSE Arca Equities Rules 5.2(j)(3) 
(Investment Company Units), 5.2(j)(5) (Equity Gold Shares), 8.100 
(Portfolio Depositary Receipts), 8.200 (Trust Issued Receipts), 8.201 
(Commodity-Based Trust Shares), 8.202 (Currency Trust Shares), 8.203 
(Commodity Index Trust Shares), 8.204 (Commodity Futures Trust Shares), 
8.300 (Partnership Units), 8.600 (Managed Fund Shares), or 8.700 
(Managed Trust Securities);
    (3) with respect to an ETP that listed on the Exchange before the 
commencement of the Incentive Program, the ETP has a CADV of one 
million shares or less for at least the preceding three months and the 
issuer of such ETP has not suspended the issuance or redemption of new 
shares; \13\ and
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    \13\ The Exchange maintains a list of ETPs that have suspended 
the issuance of new shares, which is available at https://etp.nyx.com/en/trading-information/us/funds-closed-creation.
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    (4) it is compliant with continuing listing standards, if the ETP 
was added to the Incentive Program after listing on the Exchange.
    Proposed NYSE Arca Equities Rule 8.800(b) would describe the issuer 
application and LMM assignment process. Specifically, under proposed 
NYSE Arca Equities Rule 8.800(b)(1), an issuer that wished to have an 
ETP participate in the Incentive Program and pay the Exchange an 
Optional Incentive Fee would be required to submit a written 
application in a form prescribed by the Exchange for each ETP. The 
issuer could apply to have its ETP participate at the time of listing 
or thereafter at the beginning of each quarter during the pilot period. 
An issuer could not have more than five ETPs that were listed on the 
Exchange prior to the pilot period participate in the Incentive 
Program.\14\ However, there would not be a limitation on the number of 
an issuer's ETPs listed during the pilot period that could participate.
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    \14\ In light of this limitation, the Exchange does not believe 
that there would be any improper incentive for an LMM to pressure an 
issuer to place currently listed ETPs in the Incentive Program.
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    Proposed NYSE Arca Equities Rule 8.800(b)(2) would set forth 
eligibility requirements for issuers. Specifically, in order for its 
ETP to be eligible to participate in the Incentive Program, an issuer 
must be current in all payments due to the Exchange.
    Proposed NYSE Arca Equities Rule 8.800(b)(3) would provide that the 
Exchange would communicate the ETP(s) proposed for inclusion in the 
Incentive Program on a written solicitation that would be sent to all 
qualified LMMs \15\ along with the

[[Page 21686]]

Optional Incentive Fee the issuer would pay the Exchange for each ETP. 
The issuer would determine the amount of the Optional Incentive Fee for 
each ETP within a permitted range that would be set forth in the 
Exchange's Listing Fee Schedule. In this regard, the Exchange proposes 
to amend its Listing Fee Schedule to provide that the Optional 
Incentive Fee under NYSE Arca Rule 8.800 may initially range from 
$10,000 to $40,000, as determined by the issuer of an ETP.\16\ The 
Optional Incentive Fee would be paid by the issuer to the Exchange in 
quarterly installments for each participating ETP at the beginning of 
each quarter and prorated if the issuer commenced participation for an 
ETP in the Incentive Program after the beginning of a quarter. If the 
LMM did not meet its proposed Incentive Program LMM performance 
standards for an ETP in any given month in such quarter, the issuer 
would not receive any refund or credit from the Exchange following the 
end of the quarter.\17\ If the ETP had a sponsor, the sponsor could pay 
the Optional Incentive Fee to the Exchange.\18\
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    \15\ The written solicitation would be included in the Green 
Sheet, which is the common term for an email communication sent by 
NYSE Arca staff members to all qualified LMMs prior to an LMM 
selection. The Green Sheet includes, among other things, the name, 
symbol and description of the ETP(s) as well as the name of the 
issuer and a link to the ETP prospectus. A qualified LMM must 
complete the application for a specific ETP or group of ETPs.
    \16\ Optional Incentive Fees would be credited to the Exchange's 
general revenues. The issuer would still be required to pay 
applicable Listing Fees and Annual Fees.
    \17\ However, as described below, if an issuer did not pay its 
quarterly installments to the Exchange on time and the ETP continued 
to be listed, the Exchange would continue to credit the LMM as long 
as the LMM met its performance standards.
    \18\ The term ``sponsor'' means the registered investment 
adviser that provides investment management services to an ETP or 
any of such investment adviser's parents or subsidiaries.
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    Proposed NYSE Arca Equities Rule 8.800(b)(4) would provide that 
after the Exchange provided the written solicitation to LMMs, no 
individual associated with an LMM could contact such issuer or the 
Exchange staff about that ETP until the assignment of the LMM is made, 
except as otherwise permitted in the rules.
    Proposed NYSE Arca Equities Rule 8.800(b)(5) would describe the 
assignment of an LMM if more than one qualified LMM proposed to serve 
as such for a particular ETP.\19\ If more than one qualified LMM 
proposed to serve as such for a particular ETP, Exchange staff would 
select the LMM. Each LMM could provide material to the Exchange staff, 
which could include a corporate overview of the LMM and the trading 
experience of its personnel. Exchange staff would meet with 
representatives of each LMM if requested by the LMM. No more than three 
representatives of each LMM could participate in the meeting, each of 
whom must be employees of the LMM, and one of whom must be the 
individual trader of the LMM who is proposed to trade the ETP. If the 
LMM were unavailable to appear in person, a telephone interview with 
that LMM would be acceptable. Meetings would normally be held at the 
Exchange, unless the Exchange agreed that they may be held elsewhere. 
The issuer of the ETP could choose to submit a letter to the Exchange 
staff indicating its preference and supporting justification for a 
particular LMM, and the Exchange staff could consider such letter in 
performing its duty to select an LMM, but such letter would not be 
determinative of the particular LMM selected by the Exchange. Within 
two business days after the final LMM interview, the Exchange staff, in 
its sole discretion, would select an LMM and notify the LMM and the 
issuer.\20\
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    \19\ As is the case with all securities traded on the Exchange, 
only one LMM would be assigned per ETP participating in the 
Incentive Program. The Exchange's market structure has long included 
a single LMM structure and the Exchange does not propose to change 
this for the Incentive Program. Indeed, the Exchange believes that 
its proposed payment (the range of which was established after 
significant analysis) might not be sufficient if it had to be 
divided among multiple Market Makers.
    \20\ Proposed NYSE Arca Equities Rule 8.800(b)(5) is modeled in 
part on New York Stock Exchange (``NYSE'') Rule 103B(III)(B)(1), 
which governs Designated Market Maker unit assignments for equities 
listed on the NYSE.
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    Proposed NYSE Arca Equities Rules 8.800(b)(6) and (7) would 
describe required public notices relating to the Incentive Program. 
Under proposed NYSE Arca Equities Rule 8.800(b)(6), the Exchange would 
provide notification on a dedicated page on its Web site regarding (i) 
The ETPs participating in the Incentive Program, (ii) the date a 
particular ETP began participating in the Incentive Program, (iii) the 
date a particular ETP ceased participating in the Incentive Program, 
(iv) the LMM assigned to each ETP participating in the Incentive 
Program, and (v) the amount of the Optional Incentive Fee for each ETP. 
This page would also include a fair and balanced description of the 
Incentive Program, including (i) A description of the Incentive 
Program's operation as a pilot, including the effective date thereof, 
(ii) the potential benefits that may be realized by an ETP's 
participation in the Incentive Program, (iii) the potential risks that 
may be attendant with an ETP's participation in the Incentive Program, 
(iv) the potential impact resulting from an ETP's entry into and exit 
from the Incentive Program, and (v) how interested parties can request 
additional information regarding the Incentive Program and/or the ETPs 
participating therein.
    Under proposed NYSE Arca Equities Rule 8.800(b)(7), an issuer of an 
ETP that is approved to participate in the Incentive Program would be 
required to issue a press release to the public when an ETP commences 
or ceases participation in the Incentive Program. The press release 
would be in a form and manner prescribed by the Exchange, and if 
practicable, would be issued at least two days before the ETP commences 
or ceases participation in the Incentive Program.\21\ For example, 
there could be instances in which it would not be known two days in 
advance that an ETP would be ceasing participation in the Incentive 
Program, in which case the Exchange would request that the issuer 
distribute the press release as soon as possible under the particular 
circumstances. The issuer also would be required to dedicate space on 
its Web site, or, if it does not have a Web site, on the Web site of 
the adviser or sponsor of the ETP, that (i) included any such press 
releases and (ii) provided a hyperlink to the dedicated page on the 
Exchange's Web site that describes the Incentive Program.\22\
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    \21\ The issuer's press release would be required to include 
language describing, for example, that while the impact of 
participation in or exit from the Incentive Program, which is 
optional, cannot be fully understood until objective observations 
can be made in the context of the Incentive Program, potential 
impacts on the market quality of the issuer's ETP may result, 
including with respect to the average spread and average quoted size 
for the ETP.
    \22\ These disclosure requirements would be in addition to, and 
would not supersede, the prospectus disclosure requirements under 
the Securities Act of 1933 or the Investment Company Act of 1940.
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    Proposed NYSE Arca Equities Rule 8.800(c) would describe the 
proposed Incentive Program LMM performance standards that would apply 
to an LMM for each Incentive Program security it is assigned.\23\ Under 
proposed NYSE Arca Equities Rule 8.800(c)(1), an LMM in the Incentive 
Program would remain obligated to satisfy the general requirements of 
NYSE Arca Rule 7.23.
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    \23\ The Exchange would specify in proposed Commentary .01 to 
Rule 8.800 that only displayed quotes and orders would be considered 
for purposes of the LMM performance standards of proposed Rule 
8.800(c).
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    Under proposed NYSE Arca Equities Rule 8.800(c)(2), an LMM would be 
subject to a ``market wide'' requirement. Specifically, an LMM would be 
required to maintain quotes or orders at the NBBO or better (the 
``Inside'') during the month during Core Trading Hours in accordance 
with certain maximum width and minimum depth thresholds, which would be 
provided in

[[Page 21687]]

Commentary .01 to Rule 8.800.\24\ However, this requirement would not 
apply to an LMM if the thresholds provided in Commentary .01 were 
otherwise met by quotes or orders of other market participants on the 
Exchange or across all other markets trading the security.
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    \24\ The Exchange would specify in proposed Commentary .01 to 
Rule 8.800 that (i) the spread thresholds would be calculated as the 
time-weighted average throughout the trading day and then averaged, 
by day, across the month and (ii) the depth thresholds would be 
calculated as the average of (a) the average time-weighted bid depth 
and (b) the average time-weighted ask depth.
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    Under proposed NYSE Arca Equities Rule 8.800(c)(3), an LMM would 
also be subject to an NYSE Arca-specific requirement, which could be 
satisfied in one of two ways. First, an LMM could choose to satisfy the 
``Time-at-the-Inside Requirement'' under proposed NYSE Arca Equities 
Rule 8.800(c)(3)(A), pursuant to which an LMM would be required to 
maintain quotes or orders on NYSE Arca at the NBBO or better at least 
15% of the time when quotes may be entered during Core Trading Hours 
each trading day, as averaged over the course of a month.\25\ 
Alternatively, an LMM could choose to satisfy the ``Size-Setting NBBO 
Requirement'' under proposed NYSE Arca Equities Rule 8.800(c)(3)(B), 
pursuant to which an LMM would be required to maintain ``Size-Setting'' 
quotes or orders on NYSE Arca, as compared to trading interest on other 
markets, at the NBBO or better at least 25% of the time when quotes may 
be entered during Core Trading Hours each trading day, as averaged over 
the course of a month.\26\ However, this requirement would not apply to 
an LMM if this threshold is otherwise met by quotes or orders of other 
market participants on NYSE Arca.
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    \25\ The Exchange would specify in proposed Commentary .01 to 
Rule 8.800 that the Time-at-the-Inside Requirement would be 
calculated as the average of (a) the percentage of time the LMM has 
a bid on NYSE Arca at the NBB and (b) the percentage of time the LMM 
has an offer on NYSE Arca at the NBO.
    \26\ The Exchange would specify in proposed Commentary .01 to 
Rule 8.800 that the Size-Setting NBBO Requirement would be 
calculated throughout the trading day and then averaged, by day, 
across the month. Quotes and orders of all market participants 
across all markets trading the security would be considered when 
calculating the Size-Setting NBBO Requirement. A quote or order 
would be considered ``Size-Setting'' if it is at the NBB or NBO. If 
multiple quotes or orders exist at the same price, the quote or 
order with the largest size would be considered ``Size-Setting.'' If 
multiple quotes or orders exist at the same price and the same size, 
the quote or order with the earliest entry time would be considered 
``Size-Setting.''
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    Finally, under proposed NYSE Arca Equities Rule 8.800(c)(4), for at 
least 90% of the time when quotes may be entered during Core Trading 
Hours each trading day, as averaged over the course of a month, an LMM 
would be required to maintain (A) at least 2,500 shares of 
attributable, displayed posted buy liquidity on the Exchange that is 
priced no more than 2% away from the NBB for the particular ETP; and 
(B) at least 2,500 shares of attributable, displayed posted offer 
liquidity on the Exchange that is priced no more than 2% away from the 
NBO for the particular ETP.
    Proposed NYSE Arca Equities Rule 8.800(d) would describe the 
payment to an LMM by the Exchange (``LMM Payment''). Under this 
provision, the Exchange would credit an LMM for the LMM Payment, which 
would be determined by the Exchange and set forth in the Trading Fee 
Schedule. An LMM participating in the Incentive Program would not be 
entitled to an LMM Payment unless and until it meets or exceeds the 
proposed Incentive Program LMM performance standards for an assigned 
ETP, as determined by the Exchange. In this regard, the Exchange 
proposes to amend its Trading Fee Schedule to provide that at the end 
of each quarter the Exchange would credit an LMM an ``LMM Payment'' for 
each month during such quarter that the LMM meets or exceeds its 
proposed Incentive Program LMM performance standards for an assigned 
ETP. If an LMM does not meet or exceed its proposed Incentive Program 
LMM performance standards for an assigned ETP for a particular month, 
or the ETP is withdrawn from the Incentive Program pursuant to 
paragraph (e) of NYSE Arca Equities Rule 8.800, then the LMM Payment 
would be zero for such month. The amount of the LMM Payment for a 
particular month would not exceed \1/3\ of the quarterly Optional 
Incentive Fee, less an Exchange administration fee of 5%, and such LMM 
would be subject to Standard Rates during that quarter instead of LMM 
Rates. As is the case with all liquidity-adding credits currently 
payable to NYSE Arca ETP Holders, LMM Payments would be paid by the 
Exchange from its general revenues. The Trading Fee Schedule would also 
reflect that if an issuer did not pay its quarterly installments to the 
Exchange on time and the ETP continued to be listed, the Exchange would 
continue to credit the LMM if the LMM met its proposed Incentive 
Program LMM performance standards.
    Proposed NYSE Arca Equities Rule 8.800(e) would describe the 
circumstances for withdrawal from the Incentive Program. First, if an 
ETP no longer met continuing listing standards, suspended the creation 
and/or redemption of shares, or liquidated, it would be automatically 
withdrawn from the Incentive Program as of the ETP suspension date.
    Second, NYSE Arca, in its discretion, could allow an issuer to 
withdraw an ETP from the Incentive Program before the end of the pilot 
period if the assigned LMM was unable to meet its proposed Incentive 
Program LMM performance standards for any two of the three months of a 
quarter or for five months during the pilot period and no other 
qualified ETP Holder was able to take over the assignment.
    Third, an LMM also could withdraw from all of its ETP assignments 
in the Incentive Program. Alternatively, NYSE Arca, in its discretion, 
could allow an LMM to withdraw from a particular ETP before the end of 
the pilot period if the Exchange determined that there were extraneous 
circumstances that prevented the LMM from meeting its proposed 
Incentive Program LMM performance standards for such ETP that did not 
affect its other ETP assignments in the Incentive Program. In either 
such event, the LMM's ETP(s) would be reallocated as described below.
    Fourth, if an ETP maintained a CADV of one million shares or more 
for three consecutive months, it would be automatically withdrawn from 
the Incentive Program within one month thereafter. If after such 
automatic withdrawal the ETP failed to maintain a CADV of one million 
shares or more for three consecutive months, the issuer of the ETP 
could reapply for the Incentive Program one month thereafter. The 
Exchange believes that setting a one-million-share threshold would 
focus Incentive Program resources on particularly low volume ETPs and 
provide an objective measurement for evaluating the effectiveness of 
the Incentive Program.
    Fifth, if the issuer was not current in all payments due to the 
Exchange for two consecutive quarters, its ETP would be automatically 
terminated from the Incentive Program.
    Finally, proposed NYSE Arca Equities Rule 8.800(f) would describe 
the LMM reallocation process. If the LMM for a particular ETP did not 
meet or exceed its proposed Incentive Program LMM performance standards 
for any two of the three months of a quarter or for five months during 
the pilot period, or chose to withdraw from the Incentive Program, and 
at least one other qualified Market Maker had agreed to become the 
assigned LMM under the Incentive Program, then the ETP would be 
reallocated. If more than one qualified LMM proposed to serve as such, 
another

[[Page 21688]]

LMM would be selected in accordance with the written solicitation and 
assignment processes described above. The reallocation process would be 
completed no sooner than the end of the current quarter and no later 
than the end of the following quarter.
Implementation of Incentive Program
    The Incentive Program would be offered to issuers from the date of 
implementation, which would occur no later than 90 days after 
Securities and Exchange Commission (``Commission'') approval of this 
filing, until one calendar year after implementation. As described 
above, each issuer could select ETPs to participate in the Incentive 
Program. During the pilot period, the Exchange would assess the 
Incentive Program and could expand the criteria for ETPs that are 
eligible to participate, for example, to permit issuers to include more 
than five ETPs that were listed on the Exchange before the pilot period 
commenced. At the end of the pilot period, the Exchange would determine 
whether to continue or discontinue the Incentive Program or make it 
permanent and submit a rule filing as necessary. If the Exchange 
determined to change the terms of the Incentive Program while it was 
ongoing, it would submit a rule filing to the Commission.
    During the Incentive Program, the Exchange would provide the 
Commission with certain market quality reports each month, which would 
also be posted on the Exchange's Web site. Such reports would include 
the Exchange's analysis regarding the Incentive Program and whether it 
is achieving its goals, as well as market quality data such as, for all 
ETPs listed as of the date of implementation of the Incentive Program 
and listed during the pilot period (for comparative purposes), volume 
(CADV and NYSE Arca ADV), NBBO bid/ask spread differentials, LMM 
participation rates, NYSE Arca market share, LMM time spent at the 
inside, LMM time spent within $0.03 of the inside, percent of time NYSE 
Arca had the best price with the best size, LMM quoted spread, LMM 
quoted depth, and Rule 605 statistics (one-month delay) as agreed upon 
by the Exchange and the Commission staff. In connection with this 
proposal, the Exchange would provide other data and information related 
to the Incentive Program as may be periodically requested by the 
Commission. In addition, and as described further below, issuers could 
utilize ArcaVision to analyze and replicate data on their own.\27\
---------------------------------------------------------------------------

    \27\ NYSE Arca provides ArcaVision free of charge to the public 
via the Web site www.ArcaVision.com. ArcaVision offers a significant 
amount of trading data and market quality statistics for every 
Regulation NMS equity security traded in the United States, 
including all ETPs. Publicly available reports within ArcaVision, 
which include relevant comparative data, are the Symbol Summary, 
Symbol Analytics, Volume Comparison and Quotation Comparison 
reports, among others. In addition, users can create the reports on 
a per[hyphen]symbol basis over a flexible time frame. They can also 
take advantage of predefined, accurate and up[hyphen]to[hyphen]date 
symbol sets based on type of ETP or issuer. Users can also create 
their own symbol lists. ArcaVision also allows an ETP issuer to see 
additional information specific to its LMM and other Market Makers 
in each ETP via the ``ArcaVision Market Maker Summary'' reporting 
mechanism.
---------------------------------------------------------------------------

Benefits of the Incentive Program
    The proposed LMM Payment is designed to encourage additional Market 
Makers to pursue LMM assignments and thereby support the provision of 
consistent liquidity in lower-volume ETPs listed on the Exchange. The 
Exchange believes that providing a quarterly LMM Payment would create a 
more equitable system of incentives for LMMs. The Exchange would 
administer all aspects of the LMM Payments, which, as noted above, 
would be paid by the Exchange to LMMs out of the Exchange's general 
revenues.
    The Exchange believes that the Incentive Program would increase the 
supply of Market Makers seeking to take on LMM assignments, ultimately 
leading to improved market quality for long[hyphen]term investors in 
ETPs, which would lead to multiple benefits. It would help to ensure 
that a diversified pool of qualified LMM candidates exists in the 
present and future. It would also help to discover a competitive 
balance to set the fair Optional Incentive Fees within the proposed 
range of $10,000 to $40,000 per ETP annually, based on the risk/reward 
of receiving specific LMM assignments. Issuers would be able to monitor 
the performance of LMMs as well as registered Market Makers and other 
participants that opted into the ``ArcaVision Market Maker Summary'' 
reporting mechanism. Thus, issuers would be able to compare and 
contrast the performance of various Market Makers to ensure that they 
were optimizing benefits vis[hyphen]a[hyphen]vis cost.
Consistency with FINRA Rule 5250
    The Exchange believes that the Incentive Program is designed to 
mitigate risks and concerns that Financial Industry Regulatory 
Authority (``FINRA'') Rule 5250 addresses. FINRA Rule 5250 prohibits a 
FINRA member or a person associated with a FINRA member from accepting 
any payment or other consideration, directly or indirectly, from an 
issuer of a security, or any affiliate or promoter thereof, for 
publishing a quotation, acting as market maker in a security, or 
submitting an application in connection therewith.
    FINRA Rule 5250 is designed to preserve the integrity of the 
marketplace by ensuring that quotations accurately reflect a broker-
dealer's interest in buying or selling a security and that the decision 
by a firm to make a market in a given security and the question of 
price should not be influenced by payments to members from issuers or 
promoters.\28\ The Exchange believes that the Incentive Program is 
carefully tailored to promote the beneficial purpose of improved market 
quality, while at the same time being designed to mitigate the public 
policy risks and concerns that FINRA Rule 5250 addresses and to not 
adversely affect market integrity.
---------------------------------------------------------------------------

    \28\ See Securities Exchange Act Release No. 60066 (June 8, 
2009), 74 FR 28308 (June 15, 2009) (SR-FINRA-2009-36). See also 
Securities Exchange Act Release No. 38812 (July 3, 1997), 62 FR 
37105 (July 10, 1997) (SR-NASD-97-29) (order approving NASD Rule 
2460, predecessor to FINRA Rule 5250).
---------------------------------------------------------------------------

    First, the derivative and open-ended nature of many of the ETPs 
eligible to participate in the Incentive Program would allow for 
transparent intrinsic intraday pricing. As such, the Exchange does not 
believe that such products would lend themselves to the type of market 
manipulation that FINRA Rule 5250 was designed to prevent. The 
transparent nature of many ETPs' portfolio composition as well as their 
accessibility and the elasticity of shares outstanding contribute to an 
arbitrage process that will lead to executions of orders of many ETPs 
priced at or near net asset values (``NAVs''). The typical unit size is 
50,000 shares to 100,000 shares and each share represents fractional 
ownership of the portfolio, allowing low minimum investments to access 
the exposure of a large notional portfolio. ETP supply (i.e., shares 
outstanding) can be increased or decreased through the creation and 
redemption process. Clearing firms that are authorized participants 
will have the opportunity to deliver, or take delivery of, unit-sized 
amounts of the underlying securities. Proprietary traders engaging in 
arbitrage are able to calculate an estimated intraday NAV. Such traders 
understand what the intrinsic per-share price is, hedge themselves 
using the underlying securities or correlated equivalents, and manage 
their positions by either creating or redeeming units. If and when the 
quote is priced beyond

[[Page 21689]]

the intrinsic value of an ETP, an arbitrage opportunity can arise, and 
market participants will arbitrage such spread until price equilibrium 
is restored.
    Second, the Incentive Program would have numerous structural 
safeguards that were designed to prevent any adverse effect on market 
integrity. First, the Incentive Program would be administered by the 
staff of the Exchange, which is a self-regulatory organization,\29\ and 
which would be interposed between LMMs and issuers. Second, both LMMs 
and issuers would be required to apply to participate in the program 
and to meet certain standards. The Exchange would collect the Optional 
Incentive Fees from issuers and credit them to the Exchange's general 
revenues. An LMM would be eligible to receive an LMM Payment, again 
from the Exchange's general revenues, only after it met the proposed 
Incentive Program LMM performance standards set and monitored by the 
Exchange. Third, the Incentive Program is rules based and subject to 
significant public disclosure. Application to, continuation in, and 
withdrawal from the Incentive Program would be governed by published 
Exchange rules and policies, and there would be extensive public notice 
regarding the Incentive Program and payments thereunder on both the 
Exchange's and the issuers' Web sites.
---------------------------------------------------------------------------

    \29\ FINRA surveils trading on the Exchange, including ETP 
trading, pursuant to a Regulatory Services Agreement (``RSA''). The 
Exchange is responsible for FINRA's performance under this RSA.
---------------------------------------------------------------------------

    In light of the pricing mechanisms of ETPs and the structural 
safeguards of the Incentive Program, the Exchange believes that the 
payments under the Incentive Program are designed to mitigate the risks 
and concerns that FINRA Rule 5250 addresses. In this regard, the 
Exchange understands, based upon discussions with FINRA, that FINRA 
will file an immediately effective rule change with the Commission 
indicating that participation by LMMs and issuers in the Incentive 
Program would not violate Rule 5250.
Consistency With Regulation M
    Rule 102 of Regulation M prohibits an issuer from directly or 
indirectly attempting ``to induce any person to bid for or purchase, a 
covered security during the applicable restricted period'' unless an 
exemption is available.\30\ For the reasons discussed below, the 
Exchange believes that exemptive relief from Rule 102 should be granted 
for the Incentive Program.
---------------------------------------------------------------------------

    \30\ Rule 102 provides that ``[i]n connection with a 
distribution of securities effected by or on behalf of an issuer or 
selling security holder, it shall be unlawful for such person, or 
any affiliated purchaser of such person, directly or indirectly, to 
bid for, purchase, or attempt to induce any person to bid for or 
purchase, a covered security during the applicable restricted 
period'' unless an exception is available. See 17 CFR 242.102.
---------------------------------------------------------------------------

    First, the Exchange notes that the Commission and its staff have 
previously granted relief from Rule 102 to a number of ETPs (``Existing 
Relief'') in order to permit the ordinary operation of such ETPs.\31\ 
In granting the Existing Relief, the Commission has relied in part on 
the exclusion from the provisions of Rule 102 provided by paragraph 
(d)(4) of Rule 102 for securities issued by an open-end management 
investment company or unit investment trust. In granting the Existing 
Relief from Rule 102 to other types of ETPs, for which the (d)(4) 
exception is not available, the staff has relied on (i) representations 
that the fund in question would continuously redeem ETP shares in 
basket-size aggregations at their NAV and that there should be little 
disparity between the market price of an ETP share and the NAV per 
share and (ii) a finding that ``[t]he creation, redemption, and 
secondary market transactions in [shares] do not appear to result in 
the abuses that * * * Rules 101 and 102 of Regulation M * * * were 
designed to prevent.''\32\ The crux of the Commission's findings in 
granting the Existing Relief rests on the premise that the prices of 
ETP shares closely track their per-share NAVs. Given that the Incentive 
Program neither alters the derivative pricing nature of ETPs nor 
impacts the arbitrage opportunities inherent therein, the conclusion on 
which the Existing Relief is based remains unaffected by the Incentive 
Program. In this regard, most ETPs that would be eligible to 
participate in the Incentive Program would have previously been granted 
relief from Rule 102. Moreover, and as noted above, an ETP that 
suspended the creation and/or redemption of shares, or liquidated, 
would be automatically withdrawn from the Incentive Program as of the 
ETP suspension date.
---------------------------------------------------------------------------

    \31\ See, e.g., Letter from James A. Brigagliano, Acting 
Associate Director, Division of Market Regulation, to Stuart M. 
Strauss, Esq., Clifford Chance US LLP (Oct. 24, 2006) (regarding 
class relief for exchange traded index funds).
    \32\ See Rydex Specialized Products LLC, SEC No-Action Letter 
(June 21, 2006).
---------------------------------------------------------------------------

    Second, the Incentive Program requires, among other things, that an 
LMM make two-sided quotes and not just bids. It is not intended to 
raise ETP prices but rather to improve market quality. In light of the 
derivative nature of ETPs described above, the Exchange does not expect 
that LMMs would quote outside of the normal quoting ranges for these 
products as a result of the LMM Payment, but rather would quote within 
their normal ranges as determined by market factors. Indeed, the 
Incentive Program would not create any incentive for an LMM to quote 
outside such ranges.
    Finally, the staff of the Exchange, which is a self-regulatory 
organization, would be interposed between the issuer and the LMM, 
administering a rules-based program with numerous structural safeguards 
described in the previous section. Specifically, both LMMs and issuers 
would be required to apply to participate in the program and to meet 
certain standards. The Exchange would collect the Optional Incentive 
Fees from issuers and credit them to the Exchange's general revenues. 
An LMM would be eligible to receive an LMM Payment, again from the 
Exchange's general revenues, only after it met the proposed Incentive 
Program LMM performance standards set and monitored by the Exchange. 
Application to, continuation in, and withdrawal from the Incentive 
Program would be governed by published Exchange rules and policies, and 
there would be extensive public notice regarding the Incentive Program 
and payments thereunder on both the Exchange's and the issuers' Web 
sites. Given these structural safeguards, the Exchange believes that 
payments under the Incentive Program are appropriate for exemptive 
relief from Rule 102.
    In summary, the Exchange believes that exemptive relief from Rule 
102 should be granted for the Incentive Program because, for example, 
(1) The Incentive Program would not create any incentive for an LMM to 
quote outside of the normal quoting ranges for the ETPs included 
therein; (2) the Incentive Program has numerous structural safeguards, 
such as the application process for issuers and LMMs, the 
interpositioning of the Exchange between issuers and LMMs, and 
significant public disclosure surrounding the Incentive Program, which 
in general is designed to help inform investors about the potential 
impact of the Incentive Program; and (3) the Incentive Program does not 
alter the basis on which Existing Relief is based and, furthermore, 
most ETPs that would be eligible to participate in the Incentive 
Program would have previously been granted relief from Rule 102.\33\
---------------------------------------------------------------------------

    \33\ The Exchange notes that the Commission granted a limited 
exemption from Rule 102 of Regulation M to The NASDAQ Stock Market 
LLC (``NASDAQ'') for a program similar to the Exchange's proposed 
Incentive Program. See Securities Exchange Act Release No. 69196 
(March 20, 2013), 78 FR 18410 (March 26, 2013) (Order Granting a 
Limited Exemption From Rule 102 of Regulation M Concerning the 
NASDAQ Market Quality Program Pilot Pursuant to Regulation M Rule 
102(e)) (the ``NASDAQ Exemption''). The NASDAQ Exemption includes 
certain conditions related to, among other things, notices to the 
public and disclosures with respect to NASDAQ's program. The 
Exchange notes that if the Commission were to provide exemptive 
relief from Rule 102 of Regulation M for the Incentive Program it 
may include similar conditions.

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[[Page 21690]]

Surveillance
    The Exchange believes that its surveillance procedures would be 
adequate to properly monitor the trading of Incentive Program ETPs on 
the Exchange during all trading sessions and to detect and deter 
violations of Exchange rules and applicable federal securities laws. 
Trading of the ETPs through the Exchange would be subject to FINRA's 
surveillance procedures for derivative products including ETFs.\34\ The 
Exchange may obtain information via the Intermarket Surveillance Group 
(``ISG'') from other exchanges that are members or affiliates of the 
ISG;\35\ and from issuers and public and non-public data sources such 
as, for example, Bloomberg.
---------------------------------------------------------------------------

    \34\ See supra note 29.
    \35\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\36\ in general, and 
Sections 6(b)(4) and 6(b)(5) of the Act,\37\ in particular. The 
proposed rule change is consistent with Section 6(b)(5) of the Act in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
The Exchange believes that the Incentive Program would enhance quote 
competition, improve liquidity, support the quality of price discovery, 
promote market transparency, and increase competition for listings and 
trade executions while reducing spreads and transaction costs. The 
Exchange further believes that enhancing liquidity in Incentive Program 
ETPs with all of the structural safeguards described above would help 
raise investors' confidence in the fairness of the market generally and 
their transactions in particular. As such, the Incentive Program would 
foster cooperation and coordination with persons engaged in 
facilitating securities transactions, enhance the mechanism of a free 
and open market, and promote fair and orderly markets in ETPs on the 
Exchange.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Exchange further believes that designating ETPs as the products 
eligible for inclusion in the Incentive Program is reasonable because 
it would incentivize Market Makers to undertake LMM assignments in ETPs 
with lower trading volume. As described earlier in the filing, there is 
ample data demonstrating that there are generally fewer financial 
benefits for such ETPs as compared to ETPs with higher CADVs and that 
market quality has been affected.
    The Exchange believes that its implementation plan and the pilot 
period are reasonable in that they would permit the Commission, the 
Exchange, LMMs, and issuers to assess the impact of the Incentive 
Program before making it available to other securities. In particular, 
the Exchange believes that it is beneficial and not unfairly 
discriminatory to limit the ETPs participating so that the Exchange and 
issuers could measure the experience against nonparticipating ETPs and 
thereby conserve the commitment of resources to the Incentive Program. 
In particular, by setting an objective one-million-share CADV 
threshold, the Exchange and the Commission will have an opportunity to 
observe the impact, if any, on ETPs that exceed the threshold and 
``graduate'' from the Incentive Program and compare them to other ETPs.
    The Exchange believes that the proposed LMM minimum performance 
standards are reasonable, including aspects thereof that can be met by 
quotes or orders of other market participants on the Exchange or across 
all other markets trading the security, because such standards would 
contribute to reasonably ensuring that there is sufficient liquidity 
for the ETPs participating in the Incentive Program. In this regard, 
the role of the LMM is to reasonably ensure that sufficient liquidity 
exists for investors when such liquidity is not provided by other 
market participants, whether on the Exchange or across other markets 
trading the particular security, by submitting quotes and orders that 
contribute to the quality of the width and depth of liquidity for the 
ETP. Accordingly, when the quotes or orders of other market 
participants on the Exchange or across all other markets trading the 
security result in such sufficient liquidity, there is not a need for 
an LMM to quote according to the proposed LMM minimum performance 
standards, which are designed to reasonably ensure that such liquidity 
exists. However, when such liquidity is not otherwise present, the 
proposed LMM minimum performance standards would reasonably ensure that 
such liquidity exists and is available for investors.
    With respect to the proposed fees, the Exchange believes that the 
proposed rule change is consistent with Sections 6(b)(4) and 6(b)(5) of 
the Act, in that it is designed to provide for the equitable allocation 
of reasonable dues, fees, and other charges among its members and 
issuers and other persons using its facilities and that it is not 
unfairly discriminatory. The Exchange believes that the proposed 
Optional Incentive Fees for ETPs are reasonable, given the additional 
costs to the Exchange of providing the LMM Payments, which are paid by 
the Exchange out of the Exchange's general revenues. The Exchange also 
believes that the proposed fees are reasonable because they would be 
used by the Exchange to offset the cost that the Exchange incurs to 
provide listing services for ETPs. These costs include, but are not 
limited to, ETP rulemaking initiatives, listing administration 
processes, issuer services, consultative legal services provided to ETP 
issuers in support of new product development, and administration of 
the proposed quarterly LMM Payment. As such, the Exchange believes that 
it is reasonable for it to retain an administration fee to recover the 
costs of administering the Incentive Program.
    The Exchange believes that the Optional Incentive Fee is 
reasonable, equitably allocated, and not unreasonably discriminatory 
because it is entirely voluntary on an issuer's part to join the 
Incentive Program. The amount of the fee would be determined and paid 
by the issuer within the $10,000 to $40,000 band per ETP and credited 
to the Exchange's general revenues. Only issuers that voluntarily join 
the Incentive Program would be required to pay the fees. The Exchange 
believes that this is fairer than requiring all issuers to pay higher 
fees to fund the Incentive Program.
    The Exchange believes that the LMM Payment and standard transaction 
fees and credits are equitable and not unfairly discriminatory in that 
any Market Maker could seek to participate in the Incentive Program as 
an LMM. Moreover, an LMM participating in the Incentive Program would 
not be entitled to an LMM Payment unless and until it

[[Page 21691]]

meets or exceeds the proposed Incentive Program LMM performance 
standards for an assigned ETP, as determined by the Exchange. The 
Exchange further believes that the range of credits, which would be 
paid from the Exchange's general revenues, is fair and equitable in 
light of the LMM's obligations and proposed Incentive Program LMM 
performance standards, which would be higher than the standards for 
LMMs not participating in the Incentive Program.
    Finally, for the reasons stated above, the Exchange believes that 
the Incentive Program would be designed to mitigate risks and concerns 
that FINRA Rule 5250 addresses and that the Commission should provide 
exemptive relief from Rule 102 of Regulation M for the Incentive 
Program.\38\
---------------------------------------------------------------------------

    \38\ See supra note 33.
---------------------------------------------------------------------------

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. To the contrary, the 
Exchange believes that the Incentive Program, which is entirely 
voluntary, would encourage competition among markets for issuers' 
listings and among Market Makers for LMM assignments. The Incentive 
Program is designed to improve the quality of market for lower-volume 
ETPs, thereby incentivizing them to list on the Exchange. The 
competition for listings among the exchanges is fierce. The Exchange 
notes that BATS Exchange, Inc. (``BATS'') has already implemented a 
program similar to the Exchange's proposed Incentive Program,\39\ and 
NASDAQ has received approval to do so as well.\40\
---------------------------------------------------------------------------

    \39\ See Interpretation and Policy .02 of BATS Rule 11.8. See 
also Securities Exchange Act Release Nos. 66307 (February 2, 2012), 
77 FR 6608 (February 8, 2012) (SR-BATS-2011-051) and 66427 (February 
21, 2012), 77 FR 11608 (February 27, 2012) (SR-BATS-2012-011).
    \40\ See Securities Exchange Act Release No. 69195 (March 20, 
2013), 78 FR 18393 (March 26, 2013) (SR-NASDAQ-2012-137).
---------------------------------------------------------------------------

    In addition, the Exchange believes that the Incentive Program will 
properly promote competition among Market Makers to seek assignment as 
the LMM for eligible ETPs. As described in detail above, the Exchange 
believes that market quality is significantly enhanced for ETPs with an 
LMM as compared to ETPs without an LMM. The Exchange believes that 
market quality would be even further enhanced as a result of the 
proposed Incentive Program LMM performance standards that the Exchange 
would impose on LMMs in the Incentive Program. The Exchange anticipates 
that the increased activity of these LMMs would attract other market 
participants to the Exchange, and could thereby lead to increased 
liquidity on the Exchange in such ETPs. For these reasons, the Exchange 
does not believe that the proposed rule change would impose any 
unnecessary or inappropriate burden on competition.

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. The Commission previously received 
comments on SR-NYSEArca-2012-37, which proposed rule change was 
withdrawn by the Exchange,\41\ and all such comments are available on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.
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    \41\ See supra note 4.
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    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 email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2013-34 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-2013-34. This 
file number should be included on the subject line if email 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 Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between 10:00 
a.m. and 3:00 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-2013-34 and should 
be submitted on or before May 2, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08444 Filed 4-10-13; 8:45 am]
BILLING CODE 8011-01-P


