
[Federal Register Volume 81, Number 115 (Wednesday, June 15, 2016)]
[Notices]
[Pages 39089-39092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14086]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78029; File No. SR-NYSEMKT-2016-45]


Self-Regulatory Organizations; NYSE MKT LLC; Suspension of and 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Modify the NYSE Amex Options Fee 
Schedule With Respect to Fees, Rebates, and Credits for Transactions in 
the Customer Best Execution Auction

June 9, 2016.

I. Introduction

    On April 11, 2016, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT'') 
filed with the Securities and Exchange Commission (the ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
(File No. SR-NYSEMKT-2016-45) to modify the NYSE Amex Options Fee 
Schedule with respect to fees, rebates, and credits relating to the 
Exchange's Customer Best Execution Auction (``CUBE Auction''),\3\ and 
to increase credits available under the Exchange's Amex Customer 
Engagement Program (``ACE Program'').\4\ The proposed rule change was 
immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.\5\ Notice of filing of the proposed 
rule change was published in the Federal Register on April 26, 2016.\6\ 
Under Section 19(b)(3)(C) of the Act,\7\ the Commission is (1) hereby 
temporarily suspending File No. SR-NYSEMKT-2016-45, and (2) instituting 
proceedings to determine whether to approve or disapprove File No. SR-
NYSEMKT-2016-45.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The CUBE Auction is a mechanism in which an Exchange ATP 
Holder submits an agency order on behalf of a customer for price 
improvement, paired with a contra-side order guaranteeing execution 
of the agency order at or better than the National Best Bid or Offer 
(``NBBO'') depending on the circumstances. The contra-side order 
could be for the account of the ATP Holder that initiated the CUBE 
Auction (``Initiating Participant''), or an order solicited from 
another participant. The agency order is exposed for a random period 
of time between 500 and 750 milliseconds in which other ATP Holders 
submit competing interest at the same price as the initial price or 
better (``RFR Responses''). The Initiating Participant is guaranteed 
at least 40% of any remainder of the order (after public customers 
and better-priced RFR Responses) at the final price for the CUBE 
order. See NYSE MKT Rule 971.1NY.
    \4\ Under the ACE Program, credits are available to ATP Holders 
that bring customer orders to the Exchange based on the percentage 
(by tier) of national industry customer volume those customer orders 
comprise. See NYSE Amex Options Fee Schedule Section I.E.
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ See Securities Exchange Act Release No. 77658 (April 20, 
2016), 81 FR 24674 (``Notice'').
    \7\ 15 U.S.C. 78s(b)(3)(C).
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II. Summary of the Proposed Rule Change

    The Exchange's proposal amended certain fees, rebates, and credits 
relating to executions through its CUBE Auction. First, the proposal 
increased the fees assessed by the Exchange for RFR Responses (i.e., 
orders and quotes submitted during a CUBE Auction that are executed 
against the agency order).\8\ Specifically, the Exchange increased RFR 
Response fees for Non-Customers (including Market Makers) from $0.12 to 
$0.70 for classes subject to the Penny Pilot \9\ (``Penny classes'') 
and from $0.12 to $1.05 for classes not subject to the Penny Pilot 
(``Non-Penny classes'').
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    \8\ See supra note 3 and NYSE Amex Options Fee Schedule, Section 
I.G.
    \9\ See Commentary .02 to NYSE MKT Rule 960NY. See also 
Securities Exchange Act Release No. 75281 (June 24, 2015), 80 FR 
37338 (June 30, 2015) (SR-NYSEMKT-2015-43) (extending the Penny 
Pilot through June 30, 2016).
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    Further, the proposal increased a rebate available to Initiating 
Participants in CUBE Auctions (i.e., ATP Holders that initiate such 
auctions) \10\ under the Exchange's ACE Program. Specifically, the 
proposal increased the rebate paid to Initiating Participants that meet 
certain tiers of the ACE Program from $0.05 to $0.18 (the ``ACE 
Initiating Participant Rebate'') for each of the first 5,000 Customer 
contracts of an agency order executed in a CUBE Auction.\11\
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    \10\ See supra note 3.
    \11\ See NYSE Amex Options Fee Schedule, Section I.G.
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    Finally, the proposal increased the credit paid by the Exchange to 
Initiating Participants (the ``break-up credit'') for each contract in 
the contra-side order that is paired with the agency order that does 
not trade with the agency order because it is replaced in the auction. 
Prior to the proposal, the credit granted was $0.05 per contract in all 
classes. The proposal raised it to $0.35 for Penny classes and $0.70 
for Non-Penny classes.\12\
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    \12\ See id. Separate from its proposed changes to CUBE Auction 
fees and credits, the Exchange's proposal also increased certain 
credits available through its ACE Program with respect to non-CUBE 
transactions. See Notice, supra note 6, at 24674-75. See also NYSE 
Amex Options Fee Schedule, Section I.E.
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    In its filing, the Exchange stated that the changes to the CUBE 
Auction transaction fees are reasonable, equitable and not unfairly 
discriminatory ``because they apply equally to all ATP Holders that 
choose to participate in the CUBE, and access to the Exchange is 
offered on terms that

[[Page 39090]]

are not unfairly discriminatory.'' \13\ The Exchange also took the 
position, with regard specifically to the ACE Initiating Participant 
Credit, that the change is reasonable, equitable, and not unfairly 
discriminatory because it is ``designed to attract more volume and 
liquidity to the Exchange generally, and to CUBE Auctions 
specifically,'' which, according to the Exchange, ``would benefit all 
market participants . . . through increased opportunities to trade at 
potentially improved prices as well as enhancing price discovery.'' 
\14\ The Exchange believes that its proposal is reasonable because it 
is similar to the fee and credit structures previously applied to the 
CUBE Auction and to fees charged for similar auctions on other 
exchanges.\15\ The Exchange further stated that the proposal ``would 
improve the Exchange's overall competitiveness and strengthen its 
market quality for all market participants.'' \16\ Finally, the 
Exchange does not believe the proposal would impose any unnecessary or 
inappropriate burden on competition because it is ``pro-competitive'' 
and ``designed to incent increases in the number of CUBE Auctions 
brought to the Exchange,'' thereby ``benefit[ting] all Exchange 
participants through increased opportunities to trade as well as 
enhancing price discovery.'' \17\
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    \13\ See Notice, supra note 6, at 24675.
    \14\ See id. at 24675-76.
    \15\ See id. at 24675 & n.10.
    \16\ See id. at 24676. The Exchange stated that the CUBE fee and 
credit adjustments established by the instant proposal are 
consistent with the fees and credits that were in place for the same 
items in its Fee Schedule prior to February 2016. See id. at 24675 
n.6.
    \17\ See id. at 24676. The Exchange also noted that it operates 
in a highly-competitive market. See id.
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    The Commission has received no comment letters on the Exchange's 
proposed rule change.

III. Suspension of SR-NYSEMKT-2016-45

    Pursuant to Section 19(b)(3)(C) of the Act,\18\ at any time within 
60 days of the date of filing a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\19\ the Commission summarily may 
temporarily suspend the change in the rules of a self-regulatory 
organization if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \18\ 15 U.S.C. 78s(b)(3)(C).
    \19\ 15 U.S.C. 78s(b)(1).
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    The Commission is concerned about the potential effect the proposal 
may have on the operation of the CUBE Auction and its potential to 
provide price improvement to customers, as well as on competition among 
participants initiating CUBE Auctions and those responding to them. The 
Commission notes that the proposal raised the RFR Response fee for Non-
Customer auction responders to $0.70 per executed contract in Penny 
classes ($1.05 in Non-Penny classes) while leaving the fee for the 
Initiating Participant at $0.05 per executed contract, the same as it 
was prior to the proposed rule change.\20\ In temporarily suspending 
the proposal, the Commission intends to further assess whether the new 
RFR Response fees for Non-Customers are consistent with the statutory 
requirements applicable to a national securities exchange under the 
Act. In addition, the Commission intends to further assess whether the 
differential between the new RFR Response fees and the net fees or 
rebates applicable to Initiating Participants are consistent with the 
statutory requirements applicable to a national securities exchange 
under the Act. In particular, the Commission will assess, among other 
things, whether the proposal satisfies the statutory provisions that 
require exchange rules to: (1) Provide for the equitable allocation of 
reasonable fees among members, issuers, and other persons using its 
facilities; \21\ (2) perfect the mechanism of a free and open market 
and a national market system, protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers; \22\ and (3) not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\23\
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    \20\ See Notice, supra note 6, at 24675. The amended fees thus 
create a fee differential between the Initiating Participant and 
certain auction responders of $0.65 in Penny classes and $1.00 in 
Non-Penny classes. Taking into consideration that the ACE rebate 
that may be available to an Initiating Participant submitting the 
agency order into the CUBE Auction is increased to $0.18 (see text 
accompanying supra notes 10-11), this fee differential may be 
widened further. For example, under the proposal, an Initiating 
Participant that executes 100% of the agency order in a Penny class 
is charged a $0.05 per contract transaction fee and, if applicable, 
receives a $0.18 per contract rebate (subject to a 5,000 contract 
cap). This results potentially in a net fee that awards a $0.13 per 
contract rebate to an Initiating Participant that executes 100% of 
its customer's order. In contrast, an auction responder in a Penny 
class is charged a $0.70 per contract transaction fee, also its net 
fee. Comparing the net fees charged to the Initiating Participant 
and Non-Customer auction responders, the potential disparity in 
Penny classes is $0.83 per contract.
    \21\ 15 U.S.C. 78f(b)(4).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78f(b)(8).
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule change.

IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEMKT-2016-45

    The Commission is instituting proceedings pursuant to Sections 
19(b)(3)(C) \24\ and 19(b)(2) of the Act \25\ to determine whether the 
proposed rule change should be approved or disapproved. Institution of 
proceedings is appropriate at this time in view of the significant 
legal and policy issues raised by the proposal as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
disapprove the proposed rule change.
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    \24\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \25\ 15 U.S.C. 78s(b)(2).
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    Pursuant to Section 19(b)(2)(B) of the Act,\26\ the Commission is 
providing notice of the following grounds for disapproval that are 
under consideration:
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    \26\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to approve or 
disapprove a proposed rule change must be concluded within 180 days 
of the date of publication of notice of the filing of the proposed 
rule change. Id. The time for conclusion of the proceedings may be 
extended for up to 60 days if the Commission finds good cause for 
such extension and publishes its reasons for so finding. Id.
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     Section 6(b)(4) of the Act, which requires that the rules 
of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities,'' \27\
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    \27\ 15 U.S.C. 78f(b)(4).
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     Section 6(b)(5) of the Act, which requires, among other 
things, that the rules of a national securities exchange be ``designed 
to perfect the operation of a free and open market and a national 
market system'' and ``protect investors and the public interest,'' and 
not be ``designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers,'' \28\ and
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    \28\ 15 U.S.C. 78f(b)(5).
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     Section 6(b)(8) of the Act, which requires that the rules 
of a national securities exchange ``not impose any burden on 
competition not necessary or

[[Page 39091]]

appropriate in furtherance of the purposes of [the Act].'' \29\
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    \29\ 15 U.S.C. 78f(b)(8).
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    As discussed above, the proposal, among other things, increased the 
RFR Response fee for Non-Customer auction responders from $0.12 to 
$0.70 for Penny classes, and from $0.12 to $1.05 for Non-Penny classes, 
while leaving the fee for Initiating Participants unchanged at $0.05 
per executed contract. At the same time, the proposal increased the 
rebate available to an Initiating Participant from $0.05 to $0.18 per 
executed contract so that, when it qualifies for this rebate, the 
Initiating Participant receives a net payment of $0.13 per contract to 
participate in the CUBE Auction.\30\ Accordingly, the fee differential 
between Non-Customer auction responders and Initiating Participants can 
be $0.83 per executed contract for Penny classes, and $1.18 per 
contract for Non-Penny classes. Further, the Exchange increased the 
break-up credit payable to an Initiating Participant that does not 
execute all of the agency order it brings to a CUBE Auction, due to the 
participation of an auction responder, from $0.05 to $0.35 in Penny 
classes, and from $0.05 to $0.70 in Non-Penny classes, for each 
contract not executed.
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    \30\ See supra note 20 and accompanying text.
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    The Exchange justifies the proposal on the grounds that it would 
create incentives for Initiating Participants to bring customer orders 
to the Exchange, and thereby benefit all members by providing more 
trading opportunities, potential price improvement, tighter spreads, 
and enhanced market quality. The Commission acknowledges that 
increasing the rebates and break-up credits provided to Initiating 
Participants likely would strengthen their incentives to bring customer 
orders to the Exchange. On the other hand, substantially increasing the 
fees paid by Non-Customer auction responders would appear to deter them 
from participating in CUBE Auctions. In Penny classes, for example, the 
fee charged Non-Customer auction responders would exceed one-half the 
minimum trading increment, and the economic differential between such 
auction responders and the Initiating Participants with whom they are 
competing would be even more. Accordingly, the Commission believes 
questions are raised as to whether the proposal would in fact provide 
the additional trading opportunities for non-Initiating Participants 
and other market quality benefits suggested by the Exchange.
    As to the specific statutory standards, the Exchange takes the 
position that its proposed fee changes are reasonable, equitable, and 
not unfairly discriminatory because they apply to all members that 
choose to participate in the CUBE Auction, and that access to the 
Exchange is offered on terms that are not unfairly discriminatory. The 
Exchange's justification, however, does not address a key aspect of its 
proposal, namely the fact that it would substantially exacerbate the 
differences in the fees assessed by the Exchange on Initiating 
Participants and non-Initiating Participants, raising issues, among 
other things, as to whether the proposal is equitable and not unfairly 
discriminatory among Exchange members. While the Exchange states that 
the proposal also would provide all members additional trading 
opportunities and other market quality benefits, as discussed above, 
the reasoning behind this assertion is not clear and the Exchange has 
offered no supporting data. Furthermore, the Exchange does not address 
in any detail the increases in the break-up credit payable to 
Initiating Participants for not executing transactions on the Exchange, 
and why that payment is reasonable, equitable, and not unfairly 
discriminatory.
    With respect to the statutory requirement that the proposal not 
impose any unnecessary or inappropriate burden on competition, the 
Exchange makes similar arguments, asserting that its proposal is pro-
competitive because it would incent Initiating Participants to bring 
customer orders to the Exchange, provide more trading opportunities, 
and improve market quality, all within the competitive environment in 
which the Exchange does business. The Exchange's justification, 
however, does not address the potential burden on competition that its 
proposed fee changes would have on competition between Initiating 
Participants and non-Initiating Participants, and the prospect that, by 
substantially increasing the auction response fees paid by non-
Initiating Participants, competition in CUBE Auctions could be 
impaired.
    The Commission believes that the concerns discussed herein raise 
questions as to whether the proposed fees are consistent with the Act, 
and specifically, with its requirements that exchange fees be 
reasonable and equitably allocated; be designed to perfect the 
mechanism of a free and open market and the national market system, 
protect investors and the public interest, and not be unfairly 
discriminatory; or not impose an unnecessary or inappropriate burden on 
competition.\31\
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    \31\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by July 5, 2016. Rebuttal 
comments should be submitted by July 19, 2016. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\32\
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    \32\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Report of the 
Senate Committee on Banking, Housing and Urban Affairs to Accompany 
S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change. In particular, the Commission seeks comment and 
data on the following:
     The impact of the proposed fee changes on incentives for 
non-Initiating Participants to respond in the CUBE Auction;
     The impact of the proposed fee changes on incentives for 
non-Initiating Participants that respond in the CUBE Auction to offer 
price improvement;
     The impact of the proposed fee changes on incentives for 
Initiating Participants to submit Customer orders in the CUBE Auction;
     The impact of the proposed fee changes on the prices at 
which Initiating Participants submit Customer orders in the CUBE 
Auction;
     The impact of the proposed fee changes on the quoting 
behavior of market makers on the Exchange;
     The impact of the proposed fee changes on Exchange market 
quality;
     Whether the Commission should undertake a broader review 
of the fee structures applied by the options exchanges to their price 
improvement auctions;
     Whether the Commission should view a specific auction 
response fee level for Penny classes, such as an amount exceeding half 
the minimum trading increment, as presumptively

[[Page 39092]]

unreasonable, unfairly discriminatory, imposing an unnecessary or 
inappropriate burden on competition, or otherwise inconsistent with the 
Act;
     Whether transaction fees that exceed half of the minimum 
trading increment in Penny classes make participation uneconomical for 
potential auction responders, given that they may not be able to 
compete with the Initiating Participant at the same trading increment 
due to the impact of such fees;
     Whether there should be a specific auction response fee 
level that, for Non-Penny classes, should be viewed as presumptively 
inconsistent with the Act and, if so, what that fee level should be;
     Whether the Commission should view a specific differential 
in the net fees imposed by an exchange on Initiating Participants and 
potential auction responders as presumptively inconsistent with the Act 
and, if so, what that differential should be; and
     Whether the Commission should view break-up credits, which 
are paid to Initiating Participants for not executing a transaction, as 
presumptively inconsistent with the Act.
    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, 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-NYSEMKT-2016-45 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2016-45. 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-NYSEMKT-2016-45 and should 
be submitted on or before July 5, 2016. Rebuttal comments should be 
submitted by July 19, 2016.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\33\ that File No. SR-NYSEMKT-2016-45 be and hereby is, temporarily 
suspended. In addition, the Commission is instituting proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \33\ 15 U.S.C. 78s(b)(3)(C).
    \34\ 17 CFR 200.30-3(a)(57) and (58).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14086 Filed 6-14-16; 8:45 am]
BILLING CODE 8011-01-P


