[Federal Register Volume 83, Number 180 (Monday, September 17, 2018)]
[Notices]
[Pages 46981-46983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20073]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84079; File No. SR-NYSEArca-2018-63]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Amend NYSE Arca Rule 1.1 Official Closing 
Price To Exclude From the TWAP Calculation a Midpoint That Is Based on 
an NBBO That Is Not Reflective of the Security's True and Current Value

September 11, 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 August 29, 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, II, 
and III 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 amend NYSE Arca Rule 1.1(ll) (``Official 
Closing Price''). The proposed 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange recently amended Rule 1.1(ll) to establish how the 
Official Closing Price is determined for an Exchange-listed security 
that is a Derivative Securities Product \4\ if the Exchange does not 
conduct a Closing Auction or if a Closing Auction trade is less than a 
round lot.\5\ The purpose of the OCP Filing was to adopt a method for 
deriving the Official Closing Price that would be more indicative of 
the actual value of the securities that are subject to the rule, in 
particular for listed securities that are thinly traded or generally 
illiquid. Prior to the recent rule change, the Official Closing Price 
for such securities would have been based on a last-sale trade that may 
have been hours, days, or even months old and therefore not necessarily 
indicative of their true and current value. The OCP Filing adopted a 
revised calculation to derive the value for securities that have a 
stale last-price. Specifically, for such securities, the Official 
Closing Price would be derived by adding a percentage of the time-
weighted average price (``TWAP'') of the NBBO midpoint measured over 
the last five minutes before the end of Core Trading Hours and a 
percentage of the last consolidated last-sale eligible trade before the 
end of Core Trading Hours on that trading day.\6\
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    \4\ With respect to equities traded on the Exchange, the term 
``Derivative Securities Product'' means a security that meets the 
definition of ``derivative securities product'' in Rule 19b-4(e) 
under the Securities Exchange Act of 1934. See NYSE Arca Rule 
1.1(k). For purposes of Rule 19b-4(e), a ``derivative securities 
product'' means any type of option, warrant, hybrid securities 
product or any other security, other than a single equity option or 
a security futures product, whose value is based, in whole or in 
part, upon the performance of, or interest in, an underlying 
instrument. 17 CFR 240.19b-4(e).
    \5\ See Securities Exchange Act Release No. 82907 (March 20, 
2018), 83 FR 12980 (March 26, 2018) (SR-NYSEArca-2018-08) (Approval 
Order) (the ``OCP Filing'').
    \6\ See Rule 1.1(ll)(1)(B)(i)-(vi).
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    The Exchange proposes to further refine Rule 1.1(ll)(1)(B) to 
exclude from the TWAP calculation a midpoint that is based on an NBBO 
that is not reflective of the security's true and current value. As 
proposed, the Exchange would exclude a NBBO midpoint from the 
calculation of the Official Closing Price if that midpoint, when 
multiplied by ten percent (10%), is less than the spread of that NBBO. 
The Exchange would also exclude a crossed NBBO from the calculation.
    The proposed amendment to adopt a NBBO midpoint check is designed 
to validate whether an NBBO used in the calculation of the Official 
Closing Price bears a relation to the value of the underlying security. 
Under the proposal, the Exchange would calculate the midpoint of the 
NBBO and then multiply the midpoint by ten percent (10%) and compare 
this value to the spread of the NBBO. If the value of the midpoint when 
multiplied by ten percent (10%) is less than the spread of that NBBO, 
the Exchange would exclude the NBBO midpoint from the calculation. The 
Exchange believes that if the NBBO spread is greater than the value of 
the midpoint when multiplied by ten percent (10%), it would indicate 
that the spread is too wide, and therefore not representative of the 
value of the security. For example, assume the percentage for purposes 
of the NBBO midpoint calculation is set at 10%. Assume further that the 
NBBO is $9.00 x $11.00. The NBBO spread is therefore $2.00, the 
midpoint of the NBBO is $10.00, and the value of the midpoint is $1.00 
(10% of $10.00). Given that the spread of the NBBO ($2.00) is greater 
than the value of the NBBO midpoint ($1.00), the $9.00 x $11.00 NBBO 
would be excluded from the calculation. Conversely, assume the NBBO is 
$9.51 x $10.49. The NBBO spread is therefore $0.98, the midpoint of the 
NBBO is $10.00, and the value of the midpoint is $1.00 (10% of 10.00). 
Given that the spread of the NBBO ($0.98) is less than the value of the 
NBBO midpoint ($1.00),

[[Page 46982]]

the $9.51 x $10.49 NBBO would be included in the calculation.
    The proposed amendment is similar to, and based on, the term 
``Auction NBBO'' as defined in Rule 7.35-E(a)(5).\7\ The Exchange 
currently uses the Auction NBBO as a basis for determining the Auction 
Reference Price for the Core Open Auction.\8\ If there is no Auction 
NBBO, then the Exchange uses the prior trading day's Official Closing 
Price. To qualify as an Auction NBBO for the Core Open Auction, there 
must be both a bid and an offer that is not zero, the NBBO cannot be 
crossed, and the midpoint of the NBBO when multiplied by a designated 
percentage, cannot be greater than or equal to the spread of the 
NBBO.\9\ Although Rule 7.35-E(a)(5) currently specifies that the 
designated percentage used for determining the Auction NBBO for the 
Core Open Auction would be determined by the Exchange upon prior notice 
to ETP Holders, the Exchange proposes to codify within the proposed 
amendment to Rule 1.1(ll)(1)(B) the percentage used in the TWAP 
calculation for the Official Closing Price at ten percent (10%).
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    \7\ See Rule 7.35-E(a)(5). The term ``Auction NBBO'' means an 
NBBO that is used for purposes of pricing an auction.
    \8\ The Exchange also uses the Auction NBBO for determining the 
Indicative Match Price in specified situations for the Closing 
Auction. See Rule 7.35-E(a)(8)(C).
    \9\ See Rule 7.35-E(a)(5).
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    The Exchange believes that the proposed NBBO midpoint check, which 
uses the same methodology as determining an Auction NBBO for the Core 
Open Auction, achieves the same purpose as the Auction NBBO because it 
would eliminate use of an NBBO that does not reflect the true value of 
a security. For the same reasons that the Exchange would not use an 
NBBO that does not pass the Auction NBBO test as an Auction Reference 
Price, the Exchange similarly proposes that if an NBBO fails that same 
test, it would not be used for determining the TWAP calculation for the 
Official Closing Price of a security.
    The Exchange also proposes a non-substantive clarifying change to 
Rule 1.1(ll). Under Rule 1.1(ll), if the Official Closing Price cannot 
be determined under paragraph (A) of Rule 1.1(ll), then the procedure 
under paragraph (B) would be utilized. If the Official Closing Price 
cannot be determined under paragraphs (A) and (B) of Rule 1.1(ll), then 
the procedure under paragraph (C) would be utilized. And lastly, if the 
Official Closing Price cannot be determined under paragraphs (A), (B), 
or (C) of Rule 1.1(ll) then the procedure under paragraph (D) would be 
utilized. To reflect this decision tree methodology, the Exchange 
proposes to adopt rule text to reflect that the process under paragraph 
(D) of Rule 1.1(ll)(1) would be utilized if the Official Closing Price 
cannot be determined under paragraphs (1)(A), (B) or (C) of the Rule. 
The Exchange is not proposing any substantive change to paragraph (D) 
of Rule 1.1(ll)(1). The Exchange believes that the proposed rule change 
would provide additional clarity in the Rules and reflect current 
practice for the purpose of determining the Official Closing Price.
    Because of the technology changes associated with this proposed 
rule change, the Exchange will announce the implementation date of this 
proposed rule change by Trader Update. The Exchange anticipates that 
the implementation date will be in the first quarter of 2019.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\11\ in particular, 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.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because creating a process to validate the 
NBBO midpoint to determine the Official Closing Price by comparing the 
midpoint value to the spread of the NBBO, and if the NBBO midpoint is 
not valid, to exclude it from the calculation, would ensure that the 
NBBO is sufficiently tight to guarantee that the midpoint of the NBBO 
would be a meaningful and accurate basis for determining the Official 
Closing Price. The Exchange also believes the proposed refined 
methodology for determining the Official Closing Price would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it would provide for a more up-to-date 
indication of the value of the underlying security if there have not 
been any last-sale eligible trades leading in to the close of trading. 
The Exchange believes the proposed NBBO midpoint check for purposes of 
determining the Official Closing Price would also provide a closing 
price that more accurately reflects the most recent and reliable market 
information possible. As noted above, the Exchange already uses this 
methodology for determining whether an NBBO can be used as an Auction 
Reference Price for the Core Open Auction.
    The Exchange further believes that the proposed TWAP calculation 
would remove impediments to and perfect the mechanism of a free and 
open market and a national market system because it would provide for a 
more robust mechanism to determine the value of an affected security 
for purposes of determining an Official Closing Price. By calculating 
the midpoint of the NBBO and then multiplying the midpoint by ten 
percent (10%) and comparing this value to the spread of the NBBO, the 
Exchange believes that the proposed methodology would result in the 
price of a security that is even more reflective of the true and 
current value of such security than the methodology in place today.
    The Exchange believes the proposed non-substantive amendment to 
current Rule 1.1(ll)(1)(D) is intended to provide additional clarity 
and detail and will eliminate confusion among market participants, 
which is in the interests of all investors and the general public.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will not impose any burden on competition 
because the proposal would simply provide for a more efficient manner 
to determine the Official Closing Price for a Derivative Securities 
Product.

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 up to 90 days (i) as the

[[Page 46983]]

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 [email protected] . Please include 
File NumberSR-NYSEArca-2018-63 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-NYSEArca-2018-63. 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 a.m. and 3 
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. 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-2018-63 and should be submitted 
on or before October 9, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-20073 Filed 9-14-18; 8:45 am]
BILLING CODE 8011-01-P


