
[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Notices]
[Pages 78426-78435]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30767]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71146; File No. SR-NYSEArca-2013-141]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Adopt New NYSE Arca Equities Rule 7.25 in 
Order To Create a Crowd Participant Program To Incent Competitive 
Quoting and Trading Volume in Exchange-Traded Products by Market Makers 
Qualified With the Exchange as CPs

December 19, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on December 6, 2013, 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\ 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 proposes to [sic] adopt new NYSE Arca 
Equities Rule 7.25 (``Rule 7.25'') in order to create a Crowd 
Participant (``CP'') program (the ``CP Program'') to incent competitive 
quoting and trading volume in exchange-traded products (``ETPs'') by 
Market Makers qualified with the Exchange as CPs. 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.

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,

[[Page 78427]]

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
    The Exchange proposes to adopt new Rule 7.25 in order to create the 
CP Program to incent competitive quoting and trading volume in ETPs by 
Market Makers \4\ qualified with the Exchange as CPs.
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    \4\ A Market Maker is an Equity Trading Permit Holder that acts 
as a Market Maker pursuant to NYSE Arca Equities Rule 7. See NYSE 
Arca Equities Rule 1.1(v). An Equity Trading Permit 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
    By establishing this new class of market participant, the Exchange 
is seeking to incentivize Market Makers on the Exchange to quote and 
trade in certain low-volume ETPs by offering issuers an alternative fee 
program funded by participating issuers and credited to CPs from the 
Exchange's general revenues. At the same time, the Exchange is seeking 
to add competition among existing qualified Market Makers on the 
Exchange. By requiring CPs to quote at the National Best Bid (``NBB'') 
or the National Best Offer (``NBO,'' and together with NBB, ``NBBO'') 
for a percentage of the regular trading day, the Exchange proposes to 
reward competitive liquidity-providing Market Makers. The Exchange 
believes that this rebate program will encourage the additional 
utilization of, and interaction with, the Exchange and further enhance 
the Exchange's standing as a premier venue for price discovery, 
liquidity, competitive quotes and price improvement, which will benefit 
investors.
    The Exchange also believes that the voluntary CP Program will offer 
an alternative to the existing Lead Market Maker (``LMM'') program on 
the Exchange, as well as an alternative to the ETP Incentive Program 
under NYSE Arca Equities Rule 8.800,\5\ for issuers to consider when 
determining where to list their securities. While the LMM program, the 
ETP Incentive Program and the proposed CP Program would share certain 
similarities (e.g., each is designed to incentivize quoting and 
trading), they are each fundamentally different. For example, the LMM 
program is designed to incentivize firms to take on the LMM designation 
and foster liquidity provision and stability in the market. In order to 
accomplish this, 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'').\6\ LMM Rates 
are intended to balance the increased risks and requirements assumed by 
LMMs. The ETP Incentive Program, however, is designed to enhance the 
market quality of, and incentivize Market Makers to take LMM 
assignments in, certain lower-volume ETPs by offering an alternative 
fee structure for such LMMs, which is funded from the Exchange's 
general revenues. ETP Incentive Program costs are offset by charging 
participating issuers non-refundable Optional Incentive Fees, which are 
credited to the Exchange's general revenues. LMMs under the ETP 
Incentive Program have additional, more stringent performance standards 
as compared to the LMM program.
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    \5\ See Securities Exchange Act Release No. 69706 (June 6, 
2013), 78 FR 35340 (June 12, 2013) (SR-NYSEArca-2013-34).
    \6\ The Exchange generally employs a maker-taker transactional 
fee structure, whereby an Equity Trading Permit Holder that removes 
liquidity is charged a fee (``Take Rate''), and an Equity Trading 
Permit Holder that provides liquidity receives a credit (``Make 
Rate''). See Trading Fee Schedule, available at https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees_for_12-3-13.pdf.
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    Both the CP Program, if approved, and the ETP Incentive Program 
would be subject to one-year pilot periods. During these pilot periods, 
the Exchange would provide the Securities and Exchange Commission 
(``Commission'') with certain market quality reports each month, which 
would also be posted on the Exchange's Web site. The analysis and 
market quality data provided in the CP Program reports would be 
identical to that of the ETP Incentive Program reports. The CP Program 
pilot reports would also compare, to the extent practicable, the CP 
Program against the ETP Incentive Program, including with respect to 
the potential impact that one program may have on the other and how the 
analysis included in the reports with respect to the CP Program, as 
described further below, compares to the Exchange's similar analysis 
with respect to the ETP Incentive Program. Other aspects of the CP 
Program that would be the same as, or substantially similar to, the ETP 
Incentive Program are (1) payment of an optional fee by a participating 
issuer, which would be credited to the Exchange's general revenues 
(although the fee amounts would differ between the CP Program and the 
ETP Incentive Program); (2) issuer eligibility (although the CP Program 
would permit an issuer's ETP to participate therein even if the issuer 
had suspended the issuance of new shares of such ETP, whereas the ETP 
Incentive Program does not); (3) the notifications provided by the 
Exchange on its Web site related to the CP Program; (4) the press 
releases, and the contents thereof, required of issuers whose ETPs are 
participating in the CP Program; and (5) the consolidated average daily 
volume (``CADV'') threshold related to an ETP's ``graduation'' from the 
CP Program (although the threshold under the CP Program would be two 
million shares, whereas the threshold under the ETP Incentive Program 
is one million shares).
    The CP Program differs from the LMM program and the ETP Incentive 
Program primarily by providing for competition among market 
participants to earn incentive rebates (referred to as ``CP Payments'') 
based on CP performance in an assigned ETP. In this regard, under the 
LMM program and the ETP Incentive Program, only one Market Maker--the 
LMM--is incentivized to be active with respect to the market for the 
particular ETP. However, as proposed under the CP Program, multiple CPs 
would compete for the daily CP Payments, which, like the ETP Incentive 
Program, would be funded from the Exchange's general revenues and 
offset by charging issuers an optional, non-refundable ``CP Program 
Fee,'' which would be credited to the Exchange's general revenues. As 
proposed, CPs would be subject to a daily quoting requirement in order 
to be eligible to receive CP Payments. CPs would also be subject to a 
monthly quoting requirement in order to remain qualified as CPs. The 
Exchange believes that offering three programs with different 
structures and incentives would allow issuers and Market Makers to 
choose an alternative that makes the most sense for their business 
models and allow the Exchange and the Commission to compare the 
features of, participation in, and performance of the programs over 
time before determining whether to convert the CP Program, the ETP 
Incentive Program, or both to permanent status.
    The Exchange does not anticipate that offering the CP Program would 
have any adverse impact on the ETP Incentive Program or the existing 
LMM program. Rather, the Exchange believes that it is in the interest 
of issuers, LMMs, Market Makers, and the investing public to have the 
benefit of alternatives with respect

[[Page 78428]]

to the particular program that an issuer's ETP participates in on the 
Exchange. The Exchange believes that an issuer would select the program 
that it believes is best suited for its ETP. In this regard, to the 
extent an issuer's ETP is participating in, for example, the ETP 
Incentive Program, but decides that the CP Program may actually be 
better tailored for the ETP, the issuer could withdraw the ETP from the 
ETP Incentive Program at the end of a calendar quarter and apply for 
the ETP to participate in the CP Program. This would also be true for 
issuers that choose to withdraw their ETPs from the CP Program and 
instead have their ETPs participate in the ETP Incentive Program. After 
participating in either the CP Program or the ETP Incentive Program, an 
issuer could also decide that the traditional LMM program is the best 
program for its ETP.
Proposed Rule
    Proposed NYSE Arca Equities Rule 7.25(a) would describe a CP, which 
would be an Equity Trading Permit Holder that (1) would be qualified as 
a Market Maker, and in good standing, on the Exchange; (2) would 
electronically enter quotes and orders into the systems and facilities 
of the Exchange; and (3) would be obligated to maintain a displayed bid 
or offer at the NBB or the NBO, respectively, in each assigned ETP 
consistent with paragraph (g) of proposed Rule 7.25.\7\
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    \7\ The Exchange's proposed description of a CP would be 
substantially the same as a ``Competitive Liquidity Provider'' or 
``CLP'' under Interpretation and Policy .02(a) of BATS Exchange, 
Inc. (``BATS'') Rule 11.8 (the ``Competitive Liquidity Provider 
Program'' or ``CLP Program'').
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    Proposed NYSE Arca Equities Rule 7.25(b) would describe the 
products eligible for the CP Program.\8\ Specifically, an ETP would be 
eligible to participate in the CP Program if:
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    \8\ The products that would be eligible to join the CP Program 
would be substantially the same as the products eligible for the ETP 
Incentive Program under Rule 8.800(a), except that proposed Rule 
7.25(b)(3) would be added to describe that, to participate in the CP 
Program, an ETP could neither participate in the ETP Incentive 
Program under NYSE Arca Equities Rule 8.800 nor have an LMM assigned 
to it.
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    (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) it is neither participating in the ETP Incentive Program under 
NYSE Arca Equities Rule 8.800 nor has an LMM assigned to it; \9\
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    \9\ If an issuer of an ETP with an LMM assigned to it chose to 
have the ETP participate in the CP Program, the LMM would be 
relieved of its status as such. The LMM would be permitted to apply 
for CP status for the particular ETP. In this regard, the Exchange 
believes that existing Market Maker identifiers could be utilized to 
identify CP activity for purposes of the CP Program, since the same 
Market Maker could not also act in the capacity as an LMM, either 
pursuant to the LMM Program or the ETP Incentive Program.
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    (4) with respect to an ETP that was listed on the Exchange before 
the commencement of the CP Program, the ETP has a CADV of two million 
shares or less for at least the preceding three months; and
    (5) it is compliant with continuing listing standards, if the ETP 
is added to the CP Program after listing on the Exchange.
    Proposed NYSE Arca Equities Rule 7.25(c) would describe the issuer 
application process.\10\ Specifically, under proposed NYSE Arca 
Equities Rule 7.25(c)(1), to be eligible for an ETP to participate in 
the CP Program, the issuer must be current in all payments due to the 
Exchange.
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    \10\ The issuer application process under proposed Rule 7.25(c) 
would be substantially similar to the process under Rule 8.800(b) 
for issuers whose ETPs participate in the ETP Incentive Program, 
except that (i) proposed Rule 7.25(c)(2) would not include a 
restriction with respect to the number of ETPs that an issuer could 
designate to participate in the CP Program that were listed on the 
Exchange prior to the pilot period, (ii) as described below, an 
issuer whose ETP is participating in the CP Program would not be 
able to determine the amount of the CP Program Fee, and (iii) the 
process described under Rule 8.800(b)(4)-(5) for the ETP Incentive 
Program related to issuer-LMM contact, LMM meetings/presentations 
to/with the Exchange, and issuer indications of preference regarding 
the specific LMM assigned to an ETP would not be applicable.
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    Proposed NYSE Arca Equities Rule 7.25(c)(2) would describe that an 
issuer that wished to have an ETP participate in the CP Program and pay 
the Exchange a CP Program Fee would be required to submit a written 
application in a form prescribed by the Exchange for each ETP. An 
issuer could elect for its ETP to participate at the time of listing or 
thereafter at the beginning of each quarter. The Exchange notes that it 
may, on a CP Program-wide basis, limit the number of ETPs that any one 
issuer may have in the CP Program, and any such limitation would be 
uniformly applied to all issuers.\11\
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    \11\ This would be similar to the manner in which the Nasdaq 
Stock Market LLC (``NASDAQ'') may, in relation to its Market Quality 
Program (``MQP''), on an MQP-wide basis limit the number of MQP 
securities that any one ``MQP Company'' may have in the MQP. See 
NASDAQ Rule 5950(a)(1)(A). See also note 50, infra [sic].
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    Proposed NYSE Arca Equities Rule 7.25(c)(3) would describe that the 
Exchange would communicate the ETP(s) proposed for inclusion in the CP 
Program on a written solicitation that would be sent to all qualified 
CPs along with the CP Program Fee the issuer will pay the Exchange for 
each ETP, which would be set forth in the Exchange's Listing Fee 
Schedule.\12\
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    \12\ The Exchange notes that, whereas the Optional Incentive Fee 
for the ETP Incentive Program is determined by the issuer within a 
range of $10,000 to $40,000, the CP Program Fee would be fixed at 
$50,000 for any issuers whose ETPs are participating.
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    Proposed NYSE Arca Equities Rules 7.25(c)(4) and (5) would describe 
required public notices relating to the CP Program. Under proposed NYSE 
Arca Equities Rule 7.25(c)(4), the Exchange would provide notification 
on a dedicated page on its Web site regarding (i) the ETPs 
participating in the CP Program, (ii) the date a particular ETP began 
participating in the CP Program, (iii) the date the Exchange received 
written notice of an issuer's intent to withdraw its ETP from the CP 
Program, and the intended withdrawal date, if provided, (iv) the date a 
particular ETP ceased participating in the CP Program, (v) the CPs 
assigned to each ETP participating in the CP Program, (vi) the date the 
Exchange received written notice of a CP's intent to withdraw from its 
ETP assignment(s) in the CP Program, and the intended withdrawal date, 
if provided, and (vii) the amount of the CP Program Fee for each ETP. 
This page would also include a fair and balanced description of the CP 
Program, including (a) a description of the CP Program's operation as a 
pilot, including the effective date thereof, (b) the potential benefits 
that may be realized by an ETP's participation in the CP Program, (c) 
the potential risks that may be attendant with an ETP's participation 
in the CP Program, (d) the potential impact resulting from an ETP's 
entry into and exit from the CP Program, and (e) how interested parties 
can request additional information regarding the CP Program and/or the 
ETPs participating therein.
    Under proposed NYSE Arca Equities Rule 7.25(c)(5), an issuer of an 
ETP that is approved to participate in the CP Program would be required 
to issue a press release to the public when an ETP commences or ceases 
participation in the CP Program. The press release would be in a form 
and manner prescribed by the Exchange, and if practicable, would be 
issued at least two

[[Page 78429]]

days before the ETP commences or ceases participation in the CP 
Program.\13\ 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 CP 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 would also 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) includes any such press releases and (ii) provides a hyperlink to 
the dedicated page on the Exchange's Web site that describes the CP 
Program.\14\
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    \13\ 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 CP Program, which is optional, 
cannot be fully understood until objective observations can be made 
in the context of the CP 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.
    \14\ 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 7.25(d) would describe the CP 
application process.\15\ To qualify as a CP, as described in proposed 
NYSE Arca Equities Rule 7.25(d)(1), an Equity Trading Permit Holder 
must: \16\
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    \15\ The proposed CP application process would be substantially 
similar to the BATS CLP Program application process under 
Interpretation and Policy .02(e) of BATS Rule 11.8.
    \16\ The proposed qualifications would be, in the Exchange's 
opinion, more straightforward as compared to the BATS CLP Program 
qualifications under Interpretation and Policy .02(c) of BATS Rule 
11.8. For example, proposed Rule 7.25(d)(1) would not require unique 
identifiers, since an ETP could participate only in one of either 
the LMM program, the ETP Incentive Program or the proposed CP 
Program, such that unique identifiers to distinguish Market Maker 
activity on the Exchange would not be necessary. Several other BATS 
CLP requirements (e.g., regarding trading infrastructure) are 
overarching for Market Makers on the Exchange, generally, and 
therefore are not specifically included in Rule 7.25.
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    (A) be qualified as a Market Maker, and in good standing, on the 
Exchange; and
    (B) have adequate information barriers between the business unit of 
the Equity Trading Permit Holder acting as a CP in a proprietary 
capacity and the Equity Trading Permit Holder's customer, research and 
investment banking business, if any.
    To become a CP, an Equity Trading Permit Holder must submit a CP 
application form with all supporting documentation to the Exchange. 
Exchange staff would determine whether an applicant was qualified to 
become a CP based on the qualifications described in proposed Rule 
7.25(d)(1). After an applicant submits a CP application to the 
Exchange, with supporting documentation, the Exchange would notify the 
applicant of its decision. If an applicant were approved by the 
Exchange to receive CP status, such applicant would be required to have 
connectivity with relevant Exchange systems before such applicant would 
be permitted to quote and trade as a CP on the Exchange.\17\ In the 
event that an applicant were disapproved by the Exchange, such 
applicant could seek review under existing NYSE Arca Equities Rule 
10.13 and/or reapply for CP status at least three calendar months 
following the month in which the applicant received the disapproval 
notice from the Exchange.\18\ The Exchange does not anticipate placing 
a limit on the number of CPs assigned to a particular ETP or on the 
number of ETPs that a particular CP would be assigned to. This is 
consistent with the goal of the CP Program, which is to promote quoting 
and trading and to add competition on the Exchange.\19\
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    \17\ If approved to receive CP status, a CP would be assigned to 
participating ETPs in the same manner that Market Makers are 
currently assigned to securities listed on the Exchange.
    \18\ NYSE Arca Equities Rule 10.13 provides the procedure for 
persons aggrieved by certain actions taken by the Exchange to apply 
for an opportunity to be heard and to have the action reviewed.
    \19\ This would be unlike securities traded on the Exchange for 
which a single LMM is assigned as well as for securities 
participating in the ETP Incentive Program.
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    Proposed NYSE Arca Equities Rule 7.25(e) would describe an issuer's 
payment of the CP Program Fee. An issuer of an ETP that is 
participating in the CP Program would be required to pay the Exchange a 
CP Program Fee in accordance with the Exchange's Listing Fee Schedule, 
which would be credited to the Exchange's general revenues. In this 
regard, the Exchange proposes to amend its Listing Fee Schedule to 
provide that the CP Program Fee under Rule 7.25 would be $50,000.\20\ 
Specifically, the Listing Fee Schedule would specify that the CP 
Program Fee for each ETP would be paid by the issuer to the Exchange in 
quarterly installments at the beginning of each quarter and prorated if 
the issuer commenced participation for an ETP in the CP Program after 
the beginning of a quarter.\21\ The CP Program Fee paid by an issuer 
would be credited to the Exchange's general revenues. The issuer would 
not receive a credit from the Exchange following the end of the quarter 
if a CP were assigned to the ETP during such quarter, even if the 
assigned CPs did not satisfy their daily or monthly quoting 
requirements in any given month in such quarter for the ETP.\22\ If the 
ETP had a sponsor, the sponsor could pay the CP Program Fee to the 
Exchange.\23\
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    \20\ As noted above, whereas the Optional Incentive Fee for the 
ETP Incentive Program is determined by the issuer within a range of 
$10,000 to $40,000 per ETP, the CP Program Fee would be fixed at 
$50,000 per ETP for any issuers whose ETPs are participating. Like 
the ETP Incentive Program, the issuer would still be required to pay 
applicable Listing Fees and Annual Fees. Under the current Listing 
Fee Schedule, an issuer of an ETP is required to pay a Listing Fee 
that ranges from $5,000 to $45,000. 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.
    \21\ The description of payment of the CP Program Fee by issuers 
would be substantially similar to that of the Optional Incentive Fee 
under the ETP Incentive Program, including by describing the 
circumstance under which the issuer would not receive a credit from 
the Exchange.
    \22\ As described in proposed NYSE Arca Equities Rule 
7.25(e)(1), an ETP would not be permitted to begin participation in 
the CP Program unless there were eligible CPs assigned to such ETP.
    \23\ This is identical to the ETP Incentive Program, including 
that 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 7.25(f) would describe Size Event 
Tests (``SETs'').\24\ The Exchange would measure the performance of a 
CP in an assigned ETP by calculating SETs during Core Trading Hours on 
every day on which the Exchange is open for business. The Exchange 
would measure the quoted displayed size at the NBB (NBO) of each CP at 
least once per second to determine bid (offer) SETs (a ``Bid (Offer) 
SET''). A CP would be considered to have a winning Bid (Offer) SET (a 
``Winning Bid (Offer) SET'') for a particular ETP if, at the time of 
the SET, the CP:
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    \24\ The Exchange notes that the ETP Incentive Program only 
contemplates one LMM for each participating ETP. The concept of SETs 
is substantially similar to that of the BATS CLP Program under 
Interpretation and Policy .02(g)(1) and (4) (5) of BATS Rule 11.8.
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    (A) was quoting at least 500 shares of the ETP at the NBB (NBO);
    (B) had the greatest aggregate displayed size at the NBB (NBO); and
    (C) was quoting an offer (bid) of at least 100 shares at a price at 
or within 1.2% of the CP's best bid (offer).
    Proposed NYSE Arca Equities Rule 7.25(g) would describe the CP 
quoting requirements.\25\ Under the general

[[Page 78430]]

quoting requirement of proposed Rule 7.25(g)(1), each CP assigned to 
one or more ETPs in the CP Program would be required to maintain 
continuous, two-sided displayed quotes or orders in accordance with 
existing NYSE Arca Equities Rule 7.23(a)(1) for each such ETP. Under 
the daily quoting requirement of proposed Rule 7.25(g)(2), a CP would 
be required to have Winning Bid (Offer) SETs equal to at least 10% of 
the total Bid (Offer) SETs on any trading day in order to meet its 
daily quoting requirement and to be eligible for the daily CP Payments 
for an ETP, as described in the Exchange's Trading Fee Schedule. 
Furthermore, under the monthly quoting requirement of proposed Rule 
7.25(g)(3), a CP must have displayed quotes or orders of at least 100 
shares at the NBB (NBO) at least 10% of the time that the Exchange 
calculates Bid (Offer) SETs to meet its monthly quoting requirement. 
Finally, proposed Rule 7.25(g)(4) would provide that, for purposes of 
meeting the daily and monthly quoting requirements, CP quotes may be 
for the account of the CP in either a proprietary capacity or a 
principal capacity on behalf of an affiliated or unaffiliated 
person.\26\ For purposes of measuring CP quoting, the Exchange would 
include all Market Maker quotes and orders in assigned ETPs of an 
Equity Trading Permit Holder that is a CP.
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    \25\ The proposed CP quoting requirements would be substantially 
similar to the quoting requirements of the BATS CLP Program under 
Interpretation and Policy .02(g)(1)(A) and (B) and (g)(2)-(4) of 
BATS Rule 11.8, except that, as described in proposed Rule 
7.25(g)(4), for purposes of meeting the daily and monthly quoting 
requirements, CP quotes may be for the account of the CP in either a 
proprietary capacity or a principal capacity on behalf of an 
affiliated or unaffiliated person. The Exchange notes that the 
proposed quoting requirements under the CP Program would differ 
significantly from the LMM Performance Standards under the ETP 
Incentive Program because only one LMM is assigned to each ETP 
participating in the ETP Incentive Program, whereas several CPs may 
be assigned to each ETP participating in the CP Program.
    \26\ A CP's quotes in a principal capacity could include quotes 
submitted to the Exchange on behalf of customers or other 
unaffiliated or affiliated persons.
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    By way of comparison, although CPs and LMMs share certain quoting 
requirements, the additional CP requirements to receive a payment under 
the CP Program differ from those of LMMs. All CPs, LMMs in the LMM 
program, and LMMs in the ETP Incentive Program must meet the general 
Market Maker quoting requirements under Rule 7.23. Under this rule, 
they must maintain continuous, two-sided trading interest where the 
price of the bid (offer) interest is not more than a designated 
percentage away from the then current NBBO. LMMs in the LMM program are 
also subject to the heightened performance standards of Rule 7.24, 
which relate to (i) percentage of time at the NBBO; (ii) percentage of 
executions better than the NBBO; (iii) average displayed size; and (iv) 
average quoted spread. Rule 7.24 does not apply, however, to LMMs in 
the ETP Incentive Program or CPs. Instead, ETP Incentive Program LMMs 
are subject to the specific performance standards under Rule 8.800(c), 
which relate only to quoting.\27\
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    \27\ ETP Incentive Program LMMs must meet a ``Market Wide 
Requirement,'' under which an LMM must 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 based on daily share volume and share price, as set 
forth in Commentary .01 to Rule 8.800, unless the thresholds are 
otherwise met by quotes or orders of all market participants across 
all markets trading the security. ETP Incentive Program LMMs must 
also meet an ``NYSE Arca-Specific Requirement'' under which the LMM 
must maintain quotes or orders on NYSE Arca at the NBBO that meet 
either a time-at-the-Inside requirement or a size-setting NBBO 
requirement. Finally, 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 must 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.
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    Proposed NYSE Arca Equities Rule 7.25(h) would describe the CP 
Payment by the Exchange. Specifically, the Exchange would credit a CP 
for a CP Payment from its general revenues in accordance with the 
Exchange's Trading Fee Schedule. In this regard, the Exchange proposes 
to amend its Trading Fee Schedule to provide for the CP Payment. 
Specifically, the Trading Fee Schedule would specify the amount of the 
total daily rebate, which would not exceed an amount equal to the CP 
Program Fee paid to the Exchange by an issuer, less a 5% Exchange 
administration fee, divided by the number of trading days in the 
calendar year.\28\ Half of this amount would be for bid SETs and half 
would be for offer SETs. Additionally, 70% of the bid (offer) SET 
amount would be credited to the CP with the highest number of Winning 
Bid (Offer) SETs and 30% of the bid (offer) SET amount would be 
credited to the CP with the second-highest number of Winning Bid 
(Offer) SETs.\29\ If only one CP were eligible for the bid (offer) SET 
amount, 100% of such rebate would be provided to such CP. If more than 
two CPs had an equal number of Winning Bid (Offer) SETs, the CP with 
the higher executed volume in the ETP on the Exchange on the particular 
trading day would be awarded the applicable daily rebate. A rebate 
would not be provided if no eligible CPs existed (e.g., if CPs were 
assigned to the ETP but did not satisfy the requirements to have a 
Winning Bid or Winning Offer).
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    \28\ BATS similarly provides a daily payment pursuant to its CLP 
Program, which is also based on size event tests. For example, for 
``Tier I'' securities, BATS pays $500 per day to CLPs, which is 
split between bid and offer size event tests. BATS allocates the 
payment to CLPs on a pro rata basis based on the combined sum of 
their winning bid/offer size event tests. See Interpretation and 
Policy .02(k)(1) of BATS Rule 11.8.
    \29\ The Trading Fee Schedule would include a cross-reference to 
the definition of Winning Bid (Offer) SET, as described above and as 
proposed within paragraph (f) of Rule 7.25.
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    The Exchange would credit a CP for the CP Payment at the end of 
each month. If the ETP were withdrawn from the CP Program pursuant to 
proposed paragraph (i) of Rule 7.25 during the month, then the CP would 
not be eligible for a CP Payment after the date of such withdrawal. 
Additionally, if an issuer did not pay its quarterly installments to 
the Exchange on time and the ETP continued to be included in the CP 
Program, the Exchange would continue to credit CPs in accordance with 
the Exchange's Fee Schedule.
    Proposed NYSE Arca Equities Rule 7.25(i) would describe the 
withdrawal of an ETP.\30\ Specifically, if an ETP liquidated or 
suspended the redemption of shares it would be automatically withdrawn 
from the CP Program as of the ETP liquidation or suspension date.\31\ 
Also, the Exchange would withdraw an ETP from the CP Program upon 
request from the issuer. Additionally, if the issuer was not current in 
all payments due to the Exchange after two consecutive quarters, such 
ETP would be automatically removed from the CP Program.\32\ Finally, if 
an ETP maintained a CADV of two million shares or more for three 
consecutive months, it would be automatically withdrawn from the CP 
Program within

[[Page 78431]]

one month thereafter.\33\ If after such automatic withdrawal the ETP 
failed to maintain a CADV of two million shares or more for three 
consecutive months, the issuer of the ETP could reapply for the CP 
Program one month thereafter. The Exchange believes that setting a two-
million-share threshold would provide an objective measurement for 
evaluating the effectiveness of the CP Program, such that the Exchange 
and the Commission could compare the quality of the market for ETPs, 
both during their participation in the CP Program and after their 
``graduation'' from the CP Program.
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    \30\ Inherent in the withdrawal of an ETP is that any CPs 
assigned to such ETP would be relieved of such assignment.
    \31\ The Exchange notes that under Rule 8.800(e)(1) of the ETP 
Incentive Program, an ETP would also be automatically withdrawn if 
it suspended the creation of shares. The Exchange believes that an 
ETP would benefit from having CPs assigned during a period when the 
issuer has suspended the issuance of new shares, in that the added 
liquidity that CPs would provide would contribute to the quality of 
the market for such an ETP, especially during such a time when 
liquidity in the ETP might otherwise be limited. The Exchange 
further notes that the BATS CLP Program does not require withdrawal 
in relation to suspension of creation of shares for participating 
securities.
    \32\ This would be identical to the process under Rule 
8.800(e)(5) of the ETP Incentive Program. Only the ETP for which an 
issuer is not current in payments would be subject to withdrawal. 
For example, if an issuer listed two ETPs on the Exchange that 
participated in the CP Program, and was current in payments for one 
but not for the other, only the latter ETP would be subject to 
withdrawal from the CP Program.
    \33\ Except for the difference in thresholds, this would be 
identical to the process under Rule 8.800(e)(4) of the ETP Incentive 
Program.
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    Finally, proposed NYSE Arca Equities Rule 7.25(j) would describe 
the withdrawal of CP status. Specifically, a CP that did not satisfy 
the monthly quoting requirement of proposed paragraph (g)(3) of Rule 
7.25 for three consecutive months would be subject to the potential 
withdrawal of its CP status.\34\ Any such withdrawal determinations 
would be for a specific ETP.\35\ A CP could also initiate withdrawal 
from an ETP assignment in the CP Program by giving notice to the 
Exchange. The Exchange would effect such withdrawal as soon as 
practicable, but no later than 30 days after the date the notice is 
received by the Exchange. Such withdrawal could be for a specific ETP 
or for all ETPs to which the CP is assigned.
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    \34\ This would be substantially similar to the potential loss 
of CLP status under the BATS CLP Program under Interpretation and 
Policy .02(j)(1)(B) and (j)(2) of BATS Rule 11.8.
    \35\ For example, if a CP satisfied its monthly quoting 
requirement for one ETP but not for another ETP that it was assigned 
to, the CP would be subject to withdrawal for the latter ETP, but 
not the former.
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Implementation of CP Program
    The CP Program would be offered to issuers from the date of 
implementation, which would occur no later than 90 days after 
Commission approval of this filing, until one calendar year after 
implementation. During the pilot period, the Exchange would assess the 
CP Program and could expand the criteria for ETPs that are eligible to 
participate, which would be accomplished pursuant to a proposed rule 
change with the Commission. At the end of the pilot period, the 
Exchange would determine whether to continue or discontinue the CP 
Program or make it permanent and submit a rule filing as necessary. If 
the Exchange determined to change the terms of the CP Program while it 
was ongoing, it would submit a proposed rule change with the 
Commission.
    During the CP 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 CP Program and whether it is 
achieving its goals,\36\ as well as market quality data such as, for 
all ETPs listed as of the date of implementation of the CP Program and 
listed during the pilot period (for comparative purposes, including 
comparable ETPs that are listed on the Exchange but not participating 
in the CP Program), volume (CADV and NYSE Arca ADV), NBBO bid/ask 
spread differentials, CP participation rates, NYSE Arca market share, 
CP time spent at the Inside, CP time spent within $0.03 of the Inside, 
percentage of time NYSE Arca had the best price with the best size, CP 
quoted spread, CP quoted depth, and Rule 605 statistics (one-month 
delay) as agreed upon by the Exchange and the Commission staff. These 
reports would also compare, to the extent practicable, ETPs before and 
after they are in the CP Program, and would further provide data and 
analysis about the market quality of ETPs that exceed the two-million-
share CADV threshold and ``graduate,'' or are otherwise withdrawn or 
terminated from, the CP Program. These reports would also compare, to 
the extent practicable, the CP Program against the ETP Incentive 
Program, including with respect to the potential impact that one 
program may have on the other and how the analysis described above with 
respect to the CP Program compares to the Exchange's similar analysis 
with respect to the ETP Incentive Program. In connection with this 
proposal, the Exchange would provide other data and information related 
to the CP 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.\37\ The Exchange 
believes that this information will help the Commission, the Exchange, 
and other interested persons to evaluate whether the CP Program has 
resulted in the intended benefits it is designed to achieve, any 
unintended consequences resulting from the CP Program, and the extent 
to which the CP Program alleviates or aggravates any potential concerns 
related to the CP Program, including relating to issuer payments to 
market makers.
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    \36\ The Exchange believes that an initial indicator of the 
success of the CP Program will be the extent to which issuers elect 
to have their ETPs participate therein, as well as the number of 
Market Makers that choose to act as CPs.
    \37\ 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-symbol basis over a flexible time frame. They can also take 
advantage of predefined, accurate and up-to-date symbol sets based 
on type of ETP or issuer. Users can also create their own symbol 
lists. ArcaVision will allow an ETP issuer to see additional 
information specific to its CPs and other Market Makers in each ETP 
via the ``ArcaVision Market Maker Summary'' reporting mechanism.
---------------------------------------------------------------------------

Benefits and Risks of the CP Program
    The proposed CP Payment is designed to encourage Market Makers to 
pursue assignments as CPs and thereby support the provision of 
consistent liquidity in ETPs listed on the Exchange. The Exchange 
believes that providing a CP Payment would create an equitable system 
of incentives for Market Makers. The Exchange would administer all 
aspects of the CP Payments, which, as noted above, would be paid by the 
Exchange to CPs out of the Exchange's general revenues. The Exchange 
believes that the CP Program would increase the supply of Market Makers 
seeking to take on ETP assignments, ultimately leading to improved 
market quality for long-term investors in ETPs, which would lead to 
multiple benefits.
    Despite such anticipated benefits that the CP Program may bring to 
the market for ETPs, there are also potential risks that may be 
attendant with an ETP's participation in the CP Program, including with 
respect to the potential impact on price and liquidity of an ETP 
resulting from an ETP's entry into and exit from the CP Program. For 
example, while the impact of participation in or exit from the CP 
Program, which is optional, could not be fully understood until 
objective observations could be made in the context of the CP 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.
Relief From FINRA Rule 5250
    FINRA has filed an immediately effective rule change with the 
Commission indicating FINRA's view that, where a market maker payment 
is provided for under the rules of an exchange that are effective after 
being filed with, or filed with and approved by, the Commission 
pursuant to the requirements of the Act, comity should be afforded to 
such exchange rulemaking and the payment should not

[[Page 78432]]

be prohibited under FINRA Rule 5250.\38\ Accordingly, the Exchange 
believes that the CP Program would be within the scope of the carveout 
from the prohibitions of Rule 5250 that is provided therein.\39\
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    \38\ See Securities Exchange Act Release No. 69398 (April 18, 
2013), 78 FR 24261 (April 24, 2013) (SR-FINRA-2013-020).
    \39\ The Exchange also notes that 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.
---------------------------------------------------------------------------

Relief From 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.\40\ The payment of the optional CP Program Fee 
by the issuer (or sponsor on behalf of the issuer) for the purpose of 
incentivizing Market Makers to become CPs in an issuer's security could 
constitute an attempt by the issuer to induce a bid for a purchase of a 
``covered security'' during a restricted period.\41\ As a result, 
absent exemptive relief, participation in the CP Program by an issuer 
(or sponsor on behalf of the issuer) could violate Rule 102 of 
Regulation M. For the reasons discussed below, the Exchange believes 
that exemptive relief from Rule 102 should be granted for the CP 
Program.
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    \40\ 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.
    \41\ The Commission previously granted a limited exemption from 
Rule 102 of Regulation M solely to permit the payment of the ETP 
Incentive Program Optional Incentive Fee during its pilot period, 
subject to certain conditions. See Securities Exchange Act Release 
No. 69707 (June 6, 2013), 78 FR 35330 (June 12, 2013) (Order 
Granting a Limited Exemption from Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Exchange Traded Product Incentive 
Program Pilot Pursuant to Regulation M Rule 102(e)). The Commission 
previously stated its belief that the payment of the ETP Incentive 
Program Optional Incentive Fee by an issuer (or a sponsor on behalf 
of the issuer) for the purpose of incentivizing market makers to 
become LMMs in the issuer's securities would constitute an indirect 
attempt by the issuer to induce a bid for or a purchase of a covered 
security during a restricted period, which would violate Rule 102. 
See id. at 35331.
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    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.\42\ 
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 net asset value (``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.'' \43\ 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 
CP 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 CP 
Program. In this regard, most ETPs that would be eligible to 
participate in the CP Program would have previously been granted relief 
from Rule 102. Moreover, and as noted above, an ETP that liquidated or 
suspended the redemption of shares would be automatically withdrawn 
from the CP Program as of the ETP liquidation or suspension date.
---------------------------------------------------------------------------

    \42\ 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).
    \43\ See Rydex Specialized Products LLC, SEC No-Action Letter 
(June 21, 2006).
---------------------------------------------------------------------------

    Second, the CP Program requires, among other things, that a CP 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 CPs 
would quote outside of the normal quoting ranges for these products as 
a result of the CP Payment, but rather would quote within their normal 
ranges as determined by market factors. Indeed, the CP Program would 
not create any incentive for a CP to quote outside such ranges. In this 
regard, the Exchange believes that the secondary market price for 
shares of the ETPs participating in the CP Program would not vary 
substantially from the NAV of such ETP shares during the duration of 
the ETP's participation in the CP Program because participating ETPs 
would likely have a pricing mechanism that would be expected to keep 
the price of the ETP shares tracking the NAV of the ETP shares, which 
should make the shares less susceptible to price manipulation.\44\ The 
Exchange anticipates monitoring the secondary market price for shares 
of an ETP during its participation in the CP Program compared to the 
NAV of such ETP. If the Exchange were to identify any unusual movements 
in share prices or variances between secondary market prices and NAVs, 
and it was determined that such unusual movements or variances resulted 
from the ETP's participation in the CP Program, the Exchange would 
consider amending the CP Program in a manner designed to contribute to 
preventing such unusual movements or variances from occurring in the 
future.
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    \44\ The transparent nature of an ETP's portfolio composition, 
as well as its accessibility and the elasticity of shares 
outstanding, contributes to an arbitrage process that will lead to 
executions of orders priced at or near 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 
the intrinsic value of an ETP, an arbitrage opportunity can arise, 
and market participants will arbitrage such spread until price 
equilibrium is restored.
---------------------------------------------------------------------------

    Third, the CP Program includes significant disclosure provisions, 
which the Exchange believes will help to alert and educate potential 
and existing investors in the ETPs participating in the CP Program, as 
well as other market participants, about the CP Program, including 
regarding which ETPs are participating in the CP Program, which CPs are 
assigned to each ETP, the amount of CP Program Fee an issuer will incur 
as a result of participating in the CP Program, the maximum amount of 
CP Payments a CP could potentially receive from the Exchange under the 
CP Program, and the potential benefits and risks of the CP Program. The 
Exchange believes that the disclosures that are built into the CP 
Program would contribute to minimizing concerns regarding a particular 
ETP's participation in the CP Program.
    Finally, the staff of the Exchange, which is a self-regulatory 
organization, would be interposed between the issuer

[[Page 78433]]

and the CPs, administering a rules-based program with numerous 
structural safeguards described in the previous section. Specifically, 
both CPs and issuers would be required to apply to participate in the 
program and to meet certain standards. The Exchange would collect the 
CP Program Fees from issuers and credit them to the Exchange's general 
revenues. A CP would be eligible to receive a CP Payment, again from 
the Exchange's general revenues, only after it met the proposed CP 
quoting requirements set and monitored by the Exchange. Application to, 
continuation in, and withdrawal from the CP Program would be governed 
by published Exchange rules and policies, and there would be extensive 
public notice regarding the CP 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 CP 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 CP Program because, for example, (1) the 
CP Program would not create any incentive for a CP to quote outside of 
the normal quoting ranges for the ETPs included therein and the 
secondary market price for shares of the ETPs participating in the CP 
Program would not vary substantially from the NAV of such ETP shares 
during the duration of the ETP's participation in the CP Program; (2) 
the CP Program has numerous structural safeguards, such as the 
application process for issuers and CPs, the interpositioning of the 
Exchange between issuers and CPs, and significant public disclosure 
surrounding the CP Program, which in general is designed to help inform 
investors about the potential impact of the CP Program; (3) the CP 
Program includes significant disclosure provisions, which the Exchange 
believes will help to alert and educate potential and existing 
investors in the ETPs participating in the CP Program; and (4) the CP 
Program does not alter the basis on which Existing Relief is based and, 
furthermore, most ETPs that would be eligible to participate in the CP 
Program would have previously been granted relief from Rule 102.\45\
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    \45\ The Exchange notes that the Commission granted a limited 
exemption from Rule 102 of Regulation M to the Exchange related to 
the ETP Incentive Program as well as to NASDAQ related to its MQP, 
which is similar to the Exchange's ETP Incentive Program. See 
Securities Exchange Act Release No. 69707 (June 6, 2013) (Order 
Granting a Limited Exemption from Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Exchange-Traded Product Incentive 
Program Pilot Pursuant to Regulation M Rule 102(e)). See also 
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)). These exemptions 
include certain conditions related to, among other things, notices 
to the public. The Exchange notes that if the Commission were to 
provide exemptive relief from Rule 102 of Regulation M for the CP 
Program it may include similar conditions.
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Surveillance
    The Exchange believes that its surveillance procedures would be 
adequate to properly monitor the trading of CP 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.\46\ The Exchange may 
obtain information via the Intermarket Surveillance Group (``ISG'') 
from other exchanges that are members or affiliates of the ISG,\47\ and 
from issuers and public and non-public data sources such as, for 
example, Bloomberg.
---------------------------------------------------------------------------

    \46\ See supra note 38 [sic].
    \47\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

    The Exchange notes that the proposed change is not otherwise 
intended to address any other issues and that the Exchange is not aware 
of any problems that Equity Trading Permit Holders or issuers would 
have in complying with the proposed change.
    The Exchange believes that it is subject to significant competitive 
forces in setting the proposed fees, as described below in the 
Exchange's statement regarding the burden on competition.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\48\ in general, and 
Sections 6(b)(4) and 6(b)(5) of the Act,\49\ 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.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b).
    \49\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Exchange believes that the CP 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 CP Program ETPs 
would help raise investors' confidence in the fairness of the market 
generally and their transactions in particular. As such, the CP 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. The Exchange also believes that the CP Program would offer an 
alternative to the existing LMM program on the Exchange, as well as an 
alternative to the ETP Incentive Program, for issuers to consider when 
determining where to list their securities, which would contribute to 
removing impediments to and perfecting the mechanism of a free and open 
market and a national market system.
    The Exchange believes that these three programs can exist 
concurrently. The Exchange believes that an initial indicator of the 
success of the CP Program will be the extent to which issuers elect to 
have their ETPs participate therein, as well as the number of Market 
Makers that choose to act as CPs. The Exchange believes that offering 
three programs with different structures and incentives will allow 
issuers and Market Makers to choose an alternative that makes the most 
sense for their business models and allow the Exchange and Commission 
to compare the features of, participation in, and performance of the 
programs over time before determining whether to convert either of the 
pilot programs to permanent status. Additionally, and as described 
above, to the extent an issuer's ETP is participating in, for example, 
the ETP Incentive Program, but decides that the CP Program may actually 
be better tailored for the ETP, the issuer would be able to withdraw 
the ETP from the ETP Incentive Program at the end of a calendar quarter 
and apply for the ETP to participate in the CP Program. This would also 
be true for issuers that choose to withdraw their ETPs from the CP 
Program and instead have their ETPs participate in the ETP Incentive 
Program. After participating in either the CP Program or the ETP 
Incentive Program, an issuer could also decide that the traditional LMM 
program is the best program under which to list its ETP.

[[Page 78434]]

    The Exchange believes that the proposal is designed to prevent 
fraudulent and manipulative acts and practices because it imposes 
objective criteria that CPs must satisfy in order to qualify for the 
proposed CP Payment and to remain qualified as CPs. The Exchange 
further believes that the proposal will promote just and equitable 
principles of trade because it will impose the same requirements on all 
CPs. Additionally, the Exchange believes that the proposal will remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system because it will incentivize competitive 
quoting and trading by Market Makers qualified with the Exchange as 
CPs. Accordingly, this will contribute to the protection of investors 
and the public interest because it may provide a better trading 
environment for investors in ETPs included in the CP Program and, 
generally, encourage greater competition between markets. The Exchange 
believes that the proposal is not unfairly discriminatory due to the 
fact that qualification as an Exchange Market Maker, and, in turn, as a 
CP, is equally available to all Equity Trading Permit Holders that 
satisfy the requirements of proposed Rule 7.25. The Exchange further 
believes that the proposal is not unfairly discriminatory because of 
the quoting requirements applicable to CPs in order to become eligible 
for the CP Payment.
    The Exchange believes that designating ETPs as the products 
eligible for inclusion in the CP Program is reasonable because it would 
incentivize Market Makers to undertake CP assignments in ETPs. The 
Exchange also believes that it is reasonable for an ETP that is 
participating in the ETP Incentive Program under NYSE Arca Equities 
Rule 8.800 or has an LMM assigned, to not be eligible to participate in 
the CP Program. This is because there are existing incentives provided 
by these other programs (i.e., the ``LMM Payment'' under Rule 8.800 
and, under the LMM program, the incrementally higher transaction 
credits and incrementally lower transaction fees for LMMs as compared 
to standard liquidity maker-taker rates for non-LMMs) to incent 
competitive quoting and trading volume in ETPs listed on the Exchange. 
This is also equitable and not unfairly discriminatory because it would 
apply to each ETP that is participating in the CP Program.
    The Exchange believes that the proposed rule change will not 
significantly affect the protection of investors or the public interest 
because the CP Program will incentivize competitive quoting by Market 
Makers qualified with the Exchange, provide a better trading 
environment for investors and, generally, encourage greater competition 
between markets. Additionally, the Exchange believes that the proposed 
change will not impose any significant burden on competition because 
the CP Program is designed to encourage the additional utilization of, 
and interaction with, the Exchange and provide customers with a premier 
venue for price discovery, liquidity, competitive quotes and price 
improvement. Additionally, permitting CP orders and quotes to be for 
the account of the CP in either a proprietary capacity or a principal 
capacity on behalf of an affiliated or unaffiliated person is identical 
to the manner in which Supplemental Liquidity Providers (``SLPs'') on 
the New York Stock Exchange (``NYSE'') that are also qualified as 
Market Makers are able to enter orders for their own accounts, in 
either a proprietary capacity or a principal capacity on behalf of an 
affiliated or unaffiliated person.
    The Exchange believes that the proposed rule change is consistent 
with the Act, including with respect to the proposed two-million-share 
CADV threshold. The Exchange does not believe that this would unfairly 
discriminate between issuers of ETPs with a CADV of two million shares 
or more, as compared to issuers of ETPs with a CADV of less than two 
million shares, because the process for ETPs to ``graduate'' from the 
CP Program would provide an objective measurement for evaluating the 
effectiveness of the CP Program, such that the Exchange and the 
Commission could compare the quality of the market for ETPs, both 
during their participation in the CP Program and after their 
``graduation'' from the CP Program. The Exchange believes that this is 
consistent with its proposal to operate the CP Program as a one-year 
pilot program, which would allow for the assessment of whether the CP 
Program is achieving its intended goal. Additionally, the two-million-
share CADV ``graduation,'' combined with the operation of the CP 
Program on a pilot basis, would allow for the assessment, prior to any 
proposal or determination to make the CP Program permanent, of whether 
the CP Program has any unintended impact on the participating ETPs, 
securities not participating in the program, or the market or market 
participants generally.
    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 CP 
Program Fee for ETPs is reasonable, given the additional costs to the 
Exchange of providing the CP 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 would incur related to 
the CP Program. These costs would include, but not be limited to, 
administration of the proposed CP Payments, including new technology 
processes and infrastructure surrounding such payments and the 
monitoring related thereto. As such, the Exchange believes that it is 
reasonable for it to retain an administration fee to recover the costs 
of administering the CP Program.
    The Exchange believes that the CP Program Fee is reasonable, 
equitably allocated, and not unreasonably discriminatory because it is 
entirely voluntary on an issuer's part to join the CP Program. The fee 
of $50,000 would be the same for all issuers participating in the CP 
Program and credited to the Exchange's general revenues. Only issuers 
that voluntarily join the CP 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 CP Program. Additionally, it is reasonable 
for an issuer to receive a credit from the Exchange following the end 
of a quarter if no CPs were assigned to the ETP during the entire such 
quarter because the ETP would not have had any CP quoting and trading 
activity during such quarter.
    The Exchange believes that the CP Payment is equitable and not 
unfairly discriminatory in that any Market Maker could seek to 
participate in the CP Program as a CP. The Exchange further believes 
that the CP Payment, which would be paid from the Exchange's general 
revenues, is fair and equitable in light of the CP's quoting 
requirements, which would be higher than the standards for Market 
Makers not participating in the CP Program.

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

    In accordance with Section 6(b)(8) of the Act,\50\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on competition that is not necessary or appropriate in

[[Page 78435]]

furtherance of the purposes of the Act. To the contrary, the Exchange 
believes that the CP Program, which is entirely voluntary, would 
encourage competition among markets for issuers' listings and among 
Market Makers for CP assignments.
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    \50\ 15 U.S.C. 78f(b)(8).
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    The CP Program is designed to improve the quality of market for 
ETPs, thereby incentivizing them to list on the Exchange. The 
competition for listings among the exchanges is fierce. The Exchange 
notes that, in addition to the similarities described above between the 
proposed CP Program and the Exchange's ETP Incentive Program, BATS and 
NASDAQ have already implemented and received approval for, 
respectively, programs similar to the Exchange's proposed CP 
Program.\51\ Additionally, the aspect of the proposed CP Program 
related to the capacity in which CPs may enter orders and quotes (i.e., 
permitting CP orders and quotes to be for the account of the CP in 
either a proprietary capacity or a principal capacity on behalf of an 
affiliated or unaffiliated person) is also substantially similar to the 
NYSE SLP program.\52\
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    \51\ See Interpretation and Policy .02 of BATS Rule 11.8 and 
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). See also 
NASDAQ Rule 5950 and Securities Exchange Act Release No. 69195 
(March 20, 2013), 78 FR 18393 (March 26, 2013) (SR-NASDAQ-2012-137).
    \52\ See Securities Exchange Act Release No. 58877 (October 29, 
2008), 73 FR 65904 (November 5, 2008) (SR-NYSE-2008-108). See also 
Securities Exchange Act Release No. 67154 (June 7, 2012), 77 FR 
35455 (June 13, 2012) (SR-NYSE-2012-10).
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    In addition, the Exchange believes that the CP Program will 
properly promote competition among Market Makers to seek assignment as 
CPs for eligible ETPs. The Exchange believes that market quality would 
be significantly enhanced for ETPs with CPs assigned as compared to 
ETPs without a CP or LMM. The Exchange believes that market quality 
would be even further enhanced as a result of the quoting requirements 
that the Exchange would impose on CPs in the CP Program. The Exchange 
anticipates that the increased activity of these CPs 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 up to 90 days after 
publication (i) as the Commission may designate 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 email to rule-comments@sec.gov. Please 
include File Number SR-NYSEArca-2013-141 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-2013-141. 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 Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 
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-2013-141 and should 
be submitted on or before January 16, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30767 Filed 12-24-13; 8:45 am]
BILLING CODE 8011-01-P


