[Federal Register Volume 83, Number 51 (Thursday, March 15, 2018)]
[Notices]
[Pages 11576-11578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05209]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82851; File No. SR-NYSEArca-2018-16]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 5.3-O

March 9, 2018.
    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 March 6, 2018, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Rule 5.3-O (Criteria for Underlying 
Securities). The proposed rule change is available on the Exchange's 
website 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, of the most 
significant parts of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend Rule 5.3-O to 
modify the criteria for listing options on an underlying security as 
defined in Section 18(b)(1)(A) of the Securities Act of 1933 (each a 
``covered security''; collectively, ``covered securities''). In 
particular, the Exchange proposes to modify Rule 5.3-(a)(4)(A), which 
currently requires that to list an option, the underlying covered 
security has to have a market price of at least $3.00 per share for the 
previous five consecutive business days preceding the date on which the 
Exchange submits a certificate to the Options Clearing Corporation 
(``OCC'') for listing and trading. The proposal would shorten the 
current ``look back'' period of five consecutive business days to three 
consecutive business days.\4\ The Exchange does not intend to amend any 
other criteria in Rule 5.3-O. This proposed rule change is 
substantively identical to a recently-approved rule change by Nasdaq 
PHLX LLC (``Phlx''),\5\ and would align Exchange listing rules with 
those of other options markets.
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    \4\ See proposed Rule 5.3-O(a)(4)(A) (providing that the market 
price per share of an covered security is ``at least $3.00 for the 
previous three consecutive business days preceding the date on which 
the Exchange submits a certificate to [the OCC] for listing and 
trading, as measured by the closing price reported in the primary 
market in which the underlying security is traded'').
    \5\ See Securities Exchange Act Release No. 82474 (January 9, 
2018), 83 FR 2240 (January 16, 2018) (SR-Phlx-2017-75) (Order 
approving amendment to Rule 1009 to modify the criteria for listing 
an option on an underlying covered security).
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    The Exchange acknowledges that the Options Listing Procedures Plan 
(``OLPP'') \6\ requires that the listing certificate be provided to OCC 
no earlier than 12:01 a.m. and no later than 11:00 a.m. (Chicago time) 
on the trading day prior to the day on which trading is to begin.\7\ 
The proposed amendment would still comport with that requirement. For 
example, if an initial public offering (``IPO'') occurs at 11 a.m. on 
Monday, the earliest date the Exchange could submit its listing 
certificate to OCC would be on Thursday by 12:01 a.m. (Chicago time), 
with the market price determined by the closing price over the three-
day period from Monday through Wednesday. The option on the IPO would 
then be eligible for trading on the Exchange on Friday. The proposed 
amendment would essentially enable options trading within four business 
days of an IPO becoming available instead of six business days (five 
consecutive days, plus the day the listing certificate is submitted to 
OCC).
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    \6\ The OLPP (a/k/a the Plan for the Purpose of Developing and 
Implementing Procedures Designed to Facilitate the Listing and 
Trading of Standardized Options Submitted Pursuant to Section 
11a(2)(3)(B) of the Securities Exchange Act of 1934) is a national 
market system plan that, among other things, sets forth procedures 
governing the listing of new options series. See Securities Exchange 
Act Release No. 44521 (July 6, 2001), 66 FR 36809 (July 13, 2001) 
(Order approving OLPP). The sponsors of OLPP include the Exchange; 
OCC; BATS Exchange, Inc.; BOX Options Exchange LLC; C2 Options 
Exchange, Inc.; Chicago Board Options Exchange, Inc.; EDGX Exchange, 
Inc.; Miami International Securities Exchange, LLC; MIAX PEARL, LLC; 
Phlx; Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq 
MRX, LLC; and NYSE American LLC.
    \7\ See OLPP at page 3.
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    At the time the options industry adopted the ``look back'' period 
of five consecutive business days, it was determined that the five-day 
period was sufficient to protect against attempts to manipulate the 
market price of the underlying security and would provide a reliable 
test for stability.\8\ Surveillance technologies and procedures 
concerning manipulation have evolved since then to provide adequate 
prevention or detection of rule or securities law violations within the 
proposed time frame, and the Exchange represents that its existing 
trading surveillances are adequate to monitor the trading in the 
underlying security and subsequent trading of options on the 
Exchange.\9\
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    \8\ See Securities Exchange Act Release Nos. 47190 (January 15, 
2003), 68 FR 3072 (January 22, 2003) (SR-CBOE-2002-62); 47352 
(February 11, 2003), 68 FR 8319 (February 20, 2003) (SR-PCX-2003-
06); 47483 (March 11, 2003), 68 FR 13352 (March 19, 2003) (SR-ISE-
2003-04); 47613 (April 1, 2003), 68 FR 17120 (April 8, 2003) (SR-
Amex-2003-19); and 47794 (May 5, 2003), 68 FR 25076 (May 9, 2003) 
(SR-Phlx-2003-27).
    \9\ Such surveillance procedures generally focus on detecting 
securities trading subject to opening price manipulation, closing 
price manipulation, layering, spoofing or other unlawful activity 
impacting an underlying security, the option, or both. As it relates 
to IPOs, the Exchange has price movement alerts, unusual market 
activity and order book alerts active for all trading symbols. These 
real-time patterns are active for the new security as soon as the 
IPO begins trading. The NYSE Regulation group, which provides such 
real-time surveillance on the Exchange and its affiliated markets, 
monitors trading activity in IPOs to see whether the new issue moves 
substantially above or below the public offering price in the first 
day or several days of trading.

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[[Page 11577]]

    Furthermore, the Exchange notes that the regulatory program 
operated by and overseen by NYSE Regulation includes cross-market 
surveillances designed to identify manipulative and other improper 
trading that may occur on the Exchange and other markets. In 
particular, the Financial Industry Regulatory Authority (``FINRA''), 
pursuant to a regulatory services agreement and other arrangements, 
operates a range of cross-market equity and options surveillance 
patterns on behalf of the Exchange to identify a variety of potentially 
manipulative trading activities. These cross-market patterns 
incorporate relevant data from the Exchange, its affiliates (including 
the New York Stock Exchange), and markets not affiliated with the 
Exchange.
    In addition, NYSE Regulation operates an array of surveillances to 
identify potentially manipulative trading of options on the Exchange 
and its affiliated markets. That surveillance coverage is initiated 
once options begin trading on the Exchange or an options exchange 
affiliated with the Exchange. Accordingly, the Exchange believes that 
the cross-market surveillance performed by FINRA on behalf of the 
Exchange and NYSE Regulation's own monitoring for violative activity on 
the Exchange and its affiliated markets comprise a comprehensive 
surveillance program that is adequate to monitor for manipulation of 
options and their underlying equity securities that could occur during 
the proposed three-day look back period.
    Furthermore, the Exchange notes that the proposed listing criteria 
would still require that the underlying security be listed on NYSE, the 
American Stock Exchange (now known as NYSE American), or the Nasdaq 
Global Market (collectively, the ``Named Markets''), as provided for in 
the definition of ``covered security'' from Section 18(b)(1)(A) of the 
1933 Act.\10\ Accordingly, the Exchange believes that the proposed rule 
change would still ensure that the underlying security meets the high 
listing standards of a Named Market, and would also ensure that the 
underlying is covered by the regulatory protections (including market 
surveillance, investigation and enforcement) offered by these exchanges 
for trading in covered securities conducted on their facilities.
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    \10\ See 15 U.S.C. 77r(b)(1)(A).
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    The Exchange also believes that the proposed look back period can 
be implemented in connection with the other initial listing criteria 
for underlying covered securities. In particular, the Exchange 
recognizes that it may be difficult to verify the number of 
shareholders in the days immediately following an IPO due to the fact 
that stock trades generally clear within two business days (T+2) of 
their trade date and therefore the shareholder count would generally 
not be known until T+2.\11\ The Exchange notes that the current T+2 
settlement cycle was recently reduced from T+3 on September 5, 2017 in 
connection with the Commission's amendments to Exchange Rule 15c6-1(a) 
to adopt the shortened settlement cycle,\12\ and the look back period 
of three consecutive business days proposed herein reflects this 
shortened T+2 settlement period. As proposed, stock trades would clear 
within T+2 of their trade date (i.e., within three business days) and 
therefore the number of shareholders could be verified within three 
business days, thereby enabling options trading within four business 
days of an IPO (three consecutive business days, plus the day the 
listing certificate is submitted to OCC).
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    \11\ The number of shareholders of record can be verified from 
large clearing agencies such as The Depository Trust and Clearing 
Corporation (``DTCC'') upon the settlement date (i.e., T+2).
    \12\ See Securities Exchange Act Release No. 80295 (March 22, 
2017), 82 FR 15564 (March 29, 2017) (release adopting amendment to 
securities transaction settlement cycle) (File No. S7-22-16). See 
also Exchange Act Release No. 78962 (Sep. 28, 2016), 81 FR 69240 
(Oct. 5, 2016) (release proposing amendment to securities 
transaction settlement cycle) (File No. S7-22-16).
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    Furthermore, the Exchange notes that it can verify the shareholder 
count with various brokerage firms that have a large retail customer 
clientele. Such firms can confirm the number of individual customers 
who have a position in the new issue. The earliest that these firms can 
provide confirmation is usually the day after the first day of trading 
(T+1) on an unsettled basis, while others can confirm on the third day 
of trading (T+2). The Exchange has confirmed with some of these 
brokerage firms who provide shareholder numbers to the Exchange that 
they are able to provide these numbers within T+2 after an IPO. For the 
foregoing reasons, the Exchange believes that basing the proposed three 
business day look back period on the T+2 settlement cycle would allow 
for sufficient verification of the number of shareholders.
    The proposed rule change would apply to all covered securities that 
meet the relevant criteria in Rule 5.3-O. Pursuant to Rule 5.3-O(a), 
the Exchange establishes guidelines to be considered in evaluating the 
potential underlying securities for Exchange options transactions.\13\ 
However, the fact that a particular security may meet the standards 
established by the Exchange does not necessarily mean that it will be 
selected as an underlying security.\14\ As part of the established 
criteria, the issuer must be in compliance with any applicable 
requirements of the Act.\15\ The Exchange believes that these measures, 
together with its existing surveillance procedures, provide adequate 
safeguards in the review of any covered security that may meet the 
proposed criteria for consideration of the option within the timeframe 
contained in this proposal.
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    \13\ See Rule 5.3-O(a)(1)-(6).
    \14\ Id.
    \15\ See Rule 5.3-O(a)(5).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\17\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes to its listing 
standards for covered securities would allow the Exchange to more 
quickly list options on a qualifying covered security that has met the 
$3.00 eligibility price without sacrificing investor protection. As 
discussed above, the Exchange believes that its existing trading 
surveillances provide a sufficient measure of protection against 
potential price manipulation within the proposed three consecutive 
business day timeframe. Furthermore, the established guidelines to be 
considered by the Exchange in evaluating the potential underlying 
securities for Exchange option transactions,\18\ together with existing 
trading surveillances, provide adequate safeguards in the review of any 
covered security that may meet the proposed

[[Page 11578]]

criteria for consideration of the option within the proposed timeframe.
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    \18\ See supra notes 13-15.
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    In addition, the Exchange believes that basing the proposed 
timeframe on the T+2 settlement cycle adequately addresses the 
potential difficulties in confirming the number of shareholders of the 
underlying covered security. Having some of the largest brokerage firms 
that provide these shareholder counts to the Exchange confirm that they 
are able to provide these numbers within T+2 further demonstrates that 
the 2,000 shareholder requirement can be sufficiently verified within 
the proposed timeframe. For the foregoing reasons, the Exchange 
believes that the proposed amendments will remove and perfect the 
mechanism of a free and open market and a national market system by 
providing an avenue for investors to swiftly hedge their investment in 
the stock in a shorter amount of time than what is currently in 
place.\19\
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    \19\ This proposed rule change does not alter any obligations of 
issuers or other investors of an IPO that may be subject to a lock-
up or other restrictions on trading related securities.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change 
reduces the number of days to list options on an underlying security, 
and is intended to bring new options listings to the marketplace 
quicker.

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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \22\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposed rule change may become effective and operative upon 
filing. The Exchange states that waiver of the operative delay would be 
consistent with the protection of investors and the public interest 
because it would allow the Exchange to implement the modified rule, 
which aligns with the rules of other options exchanges,\24\ without 
delay. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest. 
Accordingly, the Commission hereby waives the operative delay and 
designates the proposal as operative upon filing.\25\
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    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ See supra note 5.
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 [email protected]. Please include 
File Number SR-NYSEArca-2018-16 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2018-16. 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 website (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 website 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 such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2018-16, and should be 
submitted on or before April 5, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05209 Filed 3-14-18; 8:45 am]
 BILLING CODE 8011-01-P


