
[Federal Register Volume 80, Number 128 (Monday, July 6, 2015)]
[Notices]
[Pages 38483-38485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16413]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75323; File No. SR-NYSEArca-2015-17]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving 
Proposed Rule Change Amending Rule 6.35 to Modify the Appointment 
Process Utilized by the Exchange

June 29, 2015.

I. Introduction

    On March 20, 2015, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the Market Maker appointment and 
withdrawal process used by the Exchange. The proposed rule change was 
published for comment in the Federal Register on April 8, 2015.\3\ On 
May 21, 2015, pursuant to section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change.\5\ The Commission received no comment letters on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74635 (April 2, 
2015), 80 FR 18909 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 75032, 80 FR 30511 
(May 28, 2015).
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.35 to modify the options 
Market Maker appointment and withdrawal process used by the Exchange. 
Under the proposal, once an option trading permit (``OTP'') holder has 
been approved as a Market Maker under Exchange Rule 6.33,\6\ the Market 
Maker would, subject to certain conditions, be permitted to register 
rather than apply for an appointment in one or more option classes, and 
would be permitted to select or withdraw option issues included in its 
appointment using an Exchange-approved electronic interface. The 
Exchange also proposes to include a Market Maker's available financial 
resources and operational capability as considerations in its periodic 
evaluation of Market Maker performance, which factors currently are 
considered when a Market Maker applies for an appointment.
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    \6\ See Rule 6.33 (``Registration of Market Makers''). See also 
Rule 6.32(a) (defining ``Market Maker''). The Exchange is not 
proposing any changes to Rule 6.33.
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A. Background

    Currently, a registered Market Maker may seek an appointment in one 
or more option classes pursuant to Rule 6.35. Specifically, Rule 
6.35(a) provides that ``[o]n a form or forms prescribed by the 
Exchange, a Market Maker must apply for an appointment in one or more 
classes of option contracts.'' \7\ In addition to having the authority 
to appoint one Lead Market Maker (``LMM'') per option class,\8\ Rule 
6.35(b) provides that ``[t]he Exchange may appoint an unlimited number 
of Market Makers in each class unless the number of Market Makers 
appointed to a particular option class should be limited'' based on the 
Exchange's judgment.\9\ Further, current Rule 6.35(c) provides that 
``Market Makers may select from among any option issues traded on the 
Exchange for inclusion in their appointment, subject to the approval of 
the Exchange.'' \10\ In considering the approval of the appointment of 
a Market Maker in each security, ``the Exchange will consider the 
Market Maker's preference; the financial resources available to the 
Market Maker; the Market Maker's experience, expertise and past 
performance in making markets, including the Market Maker's performance 
in other securities; the Market Maker's operational capability; and the 
maintenance and enhancement of competition among Market Makers in each 
security in which they are appointed.'' \11\ Current Rule 6.35 also 
sets forth the number of OTPs that the Market Maker must have in order 
to have a specified number of option issues included in the Market 
Maker's appointment.\12\
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    \7\ See Notice, supra note 3, at 18909.
    \8\ See Rule 6.82(a)(1) (defining ``LMM''). Any OTP Holder or 
OTP Firm registered as a Market Maker with the Exchange is eligible 
to be qualified as an LMM. Id. The Exchange is not proposing to 
change Rule 6.82.
    \9\ See Notice, supra note 3, at 18909.
    \10\ See id.
    \11\ See id.
    \12\ See id. For example, 1 OTP affords a Market Maker up to 100 
option issues included in their appointment, whereas 4 OTPS would 
enable a Market Maker to have all option issues traded on the 
Exchange included in their appointment. See id.
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    Under current Rule 6.35, ``Market Makers may change the option 
issues in their appointment, subject to the approval of the Exchange,'' 
provided such requests are ``made in a form and

[[Page 38484]]

manner prescribed by the Exchange.''\13\ In addition, ``Market Makers 
may withdraw from trading an option issue that is within their 
appointment by providing the Exchange with three business days' written 
notice of such withdrawal.'' \14\ If a Market Maker fails to provide 
the required notice, the Market Maker ``may be subject to formal 
disciplinary action pursuant to Rule 10.'' \15\ Moreover, the Exchange 
``may suspend or terminate any appointment of a Market Maker in one or 
more option issues under this Rule whenever, in the Exchanges' 
judgment, the interests of a fair and orderly market are best served by 
such action.'' \16\ A Market Maker may seek review of any action taken 
by the Exchange.\17\
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    \13\ See id. In considering the change request, the Exchange 
will consider the factors set forth in Rule 6.35(c). See id. at 
18909, n.11.
    \14\ See Notice, supra note 3, at 18909.
    \15\ See Notice, supra note 3, at 18909-10.
    \16\ See id. at 18910.
    \17\ See id. Per Rule 6.35(i), Market Makers are also subject to 
a trading requirement, such that ``[a]t least 75% of the trading 
activity of a Market Maker (measured in terms of contract volume per 
quarter) must be in classes within the Market Maker's appointment. A 
failure to comply with the 75% contract volume requirement may 
result in a fine pursuant to Rule 10.12; however, if aggravating 
circumstances are present, formal disciplinary action may be taken 
pursuant to Rule 10.4.'' The Exchange is not proposing any changes 
to Rule 6.35(i).
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    The Exchange periodically evaluates whether Market Makers have 
fulfilled performance standards, relating to, among other things, 
quality of markets, competition of Market Makers, observance of ethical 
standards and administrative factors.\18\ If the Exchange finds that a 
Market Maker has not met the performance standards, the Exchange may 
take action, including suspending, terminating or restricting a Market 
Maker's appointment or registration, after providing the Market Maker 
an opportunity to be heard.\19\
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    \18\ See Notice, supra note 3, at 18911, n.34.
    \19\ See Notice, supra note 3, at 18910, n.17 (describing 
current Rule 6.35(j)). If a Market Maker's appointment in an option 
issue or issues has been terminated pursuant to Rule 6.35(j), the 
Market Maker may not be re-appointed as a Market Maker in that 
option issue or issues for a period not to exceed 6 months. See id. 
at 18910, n.17.
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B. Proposed Modifications

    The Exchange proposes to modify the current appointment and 
withdrawal process. Specifically, the Exchange proposes to modify Rule 
6.35 to provide that, rather than apply for an appointment, ``a Market 
Maker may register for an appointment in one or more classes of option 
contracts,'' in a form and manner prescribed the Exchange.\20\ The 
Exchange would continue to have authority to appoint one LMM per option 
class.\21\ Similarly, an unlimited number of Market Makers could 
continue to be appointed to an options class, unless the Exchange 
restricts such appointments following Commission review and 
approval.\22\ The Exchange would retain the ability to suspend or 
terminate any appointment of a Market Maker if necessary to maintain a 
fair and orderly market.\23\
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    \20\ See proposed Rule 6.35(a). As discussed above, a Market 
Maker must have the designated number of OTPs set forth in Rule 
6.35(d) in order to have a trading appointment on the Exchange. See 
proposed Rule 6.35(d).
    \21\ See proposed Rule 6.35(b).
    \22\ The Exchange is proposing a conforming change to the text 
in Rule 6.35(b) to reflect the proposed changes in Rule 6.35(a), to 
provide that ``[a]n unlimited number of Market Makers may register 
in each class,'' subject to any limits imposed by the Exchange. See 
proposed Rule 6.35(b).
    \23\ See Rule 6.35(g).
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    In addition, the Exchange proposes to modify Rule 6.35(c) to 
provide that ``[a] Market Maker may select or withdraw option issues 
included in their appointment by submitting a request via an Exchange-
approved electronic interface with the Exchange on a day when the 
Exchange is open for business.'' \24\ The modified rule would provide 
that a Market Maker's requested appointment would become effective by 
no later than the following business day, whereas a Market Maker's 
request to withdraw option issues from its appointment would not become 
effective until the following business day.\25\ Thus, a Market Maker 
could be appointed to an option issue on the same day it submits a 
request to the Exchange, depending on the availability of Exchange 
resources to process the request that day, but such request, if 
properly made and received, would be effective no later than the 
following business day. A Market Maker, however, would not be able to 
withdraw an option issue from its appointment on the same day that it 
submits the request; instead, the Exchange would only process such 
requests on an overnight basis for effectiveness on the following 
business day. Also, before any changes to a Market Maker's appointment 
would become effective, the Exchange would be required to confirm that 
the Market Maker's appointment would not exceed that permitted under 
paragraph (d) of the rule, pertaining to the number of OTPs a Market 
Maker would be required to have,\26\ and also confirm receipt of the 
Market Maker's request.\27\ According to the Exchange, the confirmation 
requirement, applicable to requests for additions, changes, and 
withdrawals, is designed to ensure that the request was properly made 
and also successfully transmitted to the Exchange.\28\ Market Makers 
would be able to select issues in their appointment or make changes 
thereto pursuant to proposed Rule 6.35(c) by submitting an email to the 
Exchange, which is currently ``the Exchange-approved electronic 
interface.'' \29\
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    \24\ See proposed Rule 6.35(c).
    \25\ Id.
    \26\ Id.
    \27\ See id.
    \28\ See Notice, supra note 3, at 18910.
    \29\ The Exchange will announce by Trader Update the email 
address that Market Makers should utilize to make selections in, or 
changes to, their appointment pursuant to this Rule. See Notice, 
supra note 3, at 18910, n.24.
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    As noted above, paragraph (d) of current Rule 6.35 sets forth the 
number of OTPs a Market Maker must have in order to have a specified 
number of option issues included in the Market Maker's appointment. The 
Exchange recently amended its fee schedule to include this information 
on its Fee Schedule and therefore is proposing to delete the detailed 
information set forth in Rule 6.35(d) and instead state that ``[a] 
Market Maker must have the number of OTPs required under the Fee 
Schedule for its appointment as a Market Maker in option issues.'' \30\
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    \30\ See proposed Rule 6.35(d).
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    Proposed Rule 6.35(h) would provide that a Market Maker may seek 
review of any action taken by the Exchange under Rule 6.35.\31\
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    \31\ See Notice, supra note 3, at 18911.
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    Pursuant to current Rule 6.35(j), the Exchange conducts periodic 
evaluations of Market Makers to determine whether they have fulfilled 
performance standards. The Exchange proposes to modify Rule 6.35(j)(1) 
to specify two additional factors it may consider in evaluating whether 
a Market Maker has fulfilled performance standards pursuant to Rule 
6.35(j): (1) The financial resources available to the Market Maker and 
(2) the Market Maker's operational capability.\32\ These factors are 
currently among the factors the Exchange considers when determining 
whether to approve a Market Maker's appointment.\33\ In connection with 
the other proposed changes to the Market Maker appointment process, the 
Exchange proposes that these factors instead be considered as part of 
the Exchange's periodic evaluation of a Market Maker.
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    \32\ See proposed Rule 6.35(j).
    \33\ See Notice, supra note 3, at 18911.
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    Further, the Exchange proposes to modify Rule 6.35(j)(2) to reflect 
the proposed changes to the Market Maker appointment process. 
Specifically, the Exchange proposes to change the reference to a Market 
Maker being ``re-

[[Page 38485]]

appointed'' by the Exchange if an option issue or issues has been 
terminated pursuant to this subsection (j), and to instead provide that 
``the Exchange may restrict the Market Maker's registration as a Market 
Maker in that option issue or issues for a period not to exceed 6 
months.'' \34\ The Exchange would retain the discretion to suspend that 
Market Maker's appointment in the affected option issue(s) for a full 
six months, or to allow that Market Maker to resume that appointment 
earlier than the prescribed six-month period, based on the Exchange's 
evaluation of the facts and circumstances.\35\
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    \34\ See proposed Rule 6.35(j)(2) (``If a Market Maker's 
appointment in an option issue or issues has been terminated 
pursuant to this subsection (j), the Exchange may restrict the 
Market Maker's registration as a Market Maker in that option issue 
or issues for a period not to exceed 6 months.'').
    \35\ See Notice, supra note 3, at 18911.
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    Finally, the Exchange proposes certain clarifying technical changes 
to Rule 6.35 as well as certain conforming changes so that there is 
consistency throughout the rule text.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act \36\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\37\ In particular, the Commission finds that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\38\ which 
requires, among other things, that the Exchange's rules be 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, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \36\ 15 U.S.C. 78f.
    \37\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \38\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal to permit an OTP holder 
approved as a registered Market Maker pursuant to Exchange Rule 6.33 to 
register for and withdraw from options appointments, subject to the 
proposed conditions and in accordance with the other provisions of Rule 
6.35, is reasonably 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, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The Exchange states that the proposed changes regarding how Market 
Makers select and modify their appointments would provide Market Makers 
with more efficient access to the securities in which they want to make 
markets, enabling them to quickly begin disseminating competitive 
quotations in those securities which would provide additional liquidity 
and enhanced competition in those securities on the Exchange.\39\ The 
Exchange notes that the proposed rule change would enable Market Makers 
to manage their appointments with more flexibility and in a timelier 
manner, but that Market Makers still will be required to comply with 
certain obligations to maintain their status as a Market Maker, 
including that they provide continuous, two-sided quotations in their 
appointed securities.\40\ The Exchange also believes that preventing 
Market Makers from being able to withdraw an option issue from its 
appointment on the same day that it submits the request (as such 
requests, if properly made and received, are processed on an overnight 
basis for effectiveness the following business day) will serve to 
promote just and equitable principles of trade and benefit investors 
and the public interest.\41\ Further, before any changes to a Market 
Maker's appointment become effective, the Exchange will be required to 
confirm that the Market Maker's appointment will not exceed the number 
of OTPs a Market Maker is required to have and also will be required to 
confirm receipt of the Market Maker's request.\42\
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    \39\ See Notice, supra note 3, at 18910. In addition, the 
Exchange notes that other options exchanges permit market makers to 
select their appointments in a similar manner via exchange-approved 
electronic interfaces. See Notice, supra note 3, at 18911, n.28 
(citing BATS Exchange, Inc. Rule 22.3(b) (``An Options Market Maker 
may become registered in a series by entering a registration request 
via an Exchange approved electronic interface with the Exchange's 
systems by 9:00 a.m. Eastern time. Registration shall become 
effective on the day the registration request is entered''); and 
NASDAQ Options Market, Chapter VII, Section 3(b) (``An Options 
Market Maker may become registered in an option by entering a 
registration request via a Nasdaq approved electronic interface with 
Nasdaq's systems. Registration shall become effective on the day the 
registration request is entered.'').
    \40\ See Notice, supra note 3, at 18910.
    \41\ See id. at 18912.
    \42\ See text accompanying notes 26-27 supra.
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    The Commission notes that the Exchange has proposed to add a Market 
Maker's available financial resources and operational capability as 
factors the Exchange may consider during its periodic evaluation of a 
Market Maker's performance, stating that these factors are important 
considerations in evaluating a Market Maker's performance, and that 
continued consideration of these factors would remove impediments to 
and perfect the mechanism of a free and open market and would benefit 
investors and the public interest.\43\ The Commission further notes 
that the Exchange will continue to have authority to suspend or 
terminate any appointment of a Market Maker in one or more options 
issues whenever, in the Exchange's judgment, the interests of a fair 
and orderly market are best served by such action.\44\ The Exchange 
will also retain the ability to restrict a Market Maker's registration 
in option issues for up to six months if a Market Maker's appointment 
in that option issue or issues has been terminated under the rule, and 
Rule 6.35 will continue to give the Exchange discretion to allow the 
Market Maker to resume that appointment earlier than the prescribed 
six-month period or to maintain the suspension for the entire period. 
Finally, the Exchange is not proposing changes to the disciplinary and 
appeals process for Market Makers that do not meet minimum performance 
standards.\45\
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    \43\ See Notice, supra note 3, at 18912.
    \44\ See Rule 6.35(g). See also Notice, supra note 3, at 18912, 
n.40 and Rule 6.33 (regarding the Exchange's ability to suspend or 
terminate a Market Maker's registration based on ``a determination 
of any substantial or continued failure by such Market Maker to 
engage in dealings in accordance with Rules 6.37, 6.37A or 6.37B,'' 
which outline the obligations of Market Makers).
    \45\ See Notice, supra note 3, at 18912.
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    Based on the foregoing, the Commission finds the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\46\ that the proposed rule change (SR-NYSEArca-2015-17) be, and 
hereby is, approved.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-16413 Filed 7-2-15; 8:45 am]
 BILLING CODE 8011-01-P


