[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Notices]
[Pages 47575-47592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19458]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86870; File No. SR-NYSEArca-2019-63]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Make Permanent Rule 7.44-E

September 4, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on September 4, 2019 NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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 make permanent Rule 7.44-E, which sets 
forth the Exchange's pilot Retail Liquidity Program. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make permanent Rule 7.44-E, which sets 
forth the Exchange's pilot Retail Liquidity Program (the ``Program''). 
In support of the proposal to make the pilot Program permanent, the 
Exchange believes it is appropriate to provide background on the 
Program and an analysis of the economic benefits for retail investors 
and the marketplace flowing from operation of the Program.
Background
    In December 2013, the Commission approved the Program on a pilot 
basis.\4\ The purpose of the pilot was to analyze data and assess the 
impact of the Program on the marketplace. The pilot period was 
originally scheduled to end on April 14, 2015. The Exchange filed to 
extend the operation of the pilot on several occasions in order to 
prepare this rule filing. The pilot is currently set to expire on 
September 30, 2019.\5\
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    \4\ See Securities Exchange Act Release No. 71176 (December 23, 
2013), 78 FR 79524 (December 30, 2013) (SR-NYSEArca-2013-107) (``RLP 
Approval Order''). In addition to approving the Program on a pilot 
basis, the Commission granted the Exchange's request for exemptive 
relief from Rule 612 of Regulation NMS, 17 CFR 242.612 (``Sub-Penny 
Rule''), which among other things prohibits a national securities 
exchange from accepting or ranking orders priced greater than $1.00 
per share in an increment smaller than $0.01. See id.
     In 2013, the Program's rules were set forth in NYSE Arca 
Equities Rule 7.44. In connection with the Exchange's implantation 
of Pillar, an integrated trading technology platform designed to use 
a single specification for connecting to the equities and options 
markets operated by NYSE Arca and its affiliates, New York Stock 
Exchange LLC and NYSE American LLC, NYSE Arca Equities Rule 7.44 was 
replaced by NYSE Arca Equities Rule 7.44P. See Securities Exchange 
Act Release No. 76267 (October 26, 2015), 80 FR 66951 (October 30, 
2015) (SR-NYSEArca-2015-56) (order approving equity trading rules 
relating to the implementation of Pillar, including, among others, 
NYSE Arca Equities Rule 7.44P); Securities Exchange Act Release No. 
79078 (October 11, 2016), 81 FR 71559 (October 17, 2016) (SR-
NYSEArca-2015-135) (deleting obsolete rules following migration to 
Pillar, including NYSE Arca Equities 7.44, and removing ``P'' 
modifier in NYSE Arca Equities Rule 7.44P). At the time, NYSE Arca 
Equities was a wholly owned subsidiary of the Exchange. In 2017, 
NYSE Arca Equities was merged with and into the Exchange and the 
NYSE Arca Equities rules were integrated into the NYSE Arca rules in 
order to create a single rulebook. The Program's rules were 
accordingly relocated to NYSE Arca Rule 7.44-E. See Securities 
Exchange Act Release No. 81419 (August 17, 2017), 82 FR 40044 
(August 23, 2017) (SR-NYSEArca-2017-40) (Approval Order).
    \5\ See Securities Exchange Act Release No. 86198 (June 26, 
2019), 84 FR 31648 (July 2, 2019) (SR-NYSEArca-2019-45) (extending 
pilot to September 30, 2019). See also Securities Exchange Act 
Release No. 84773 (December 10, 2018), 83 FR 64419 (December 14, 
2018) (SR-NYSEArca-2018-89) (extending pilot to June 30, 2019); 
Securities Exchange Act Release No. 83538 (June 28, 2018), 83 FR 
31210 (July 3, 2018) (SR-NYSEArca-2018-46) (extending pilot to 
December 31, 2018); Securities Exchange Act Release No. 82289 
(December 11, 2017), 82 FR 59677 (December 15, 2017) (SR-NYSEArca-
2017-137) (extending pilot to June 30, 2018); Securities Exchange 
Act Release No. 80851 (June 2, 2017), 82 FR 26722 (June 8, 2017) 
(SR-NYSEArca-2017-63) (extending pilot to December 31, 2017); 
Securities Exchange Act Release No. 79495 (December 7, 2016), 81 FR 
90033 (December 13, 2016) (SR-NYSEArca-2016-157) (extending pilot to 
June 30, 2017); Securities Exchange Act Release No. 78601 (August 
17, 2016), 81 FR 57632 (August 23, 2016) (SR-NYSEArca-2016-113) 
(extending pilot to December 31, 2016) as corrected by Securities 
Exchange Act Release No. 78601 (August 17, 2016), 81 FR 63243 
(September 14, 2016) (SR-NYSEArca-2016-113); Securities Exchange Act 
Release No. 77424 (March 23, 2016), 81 FR 17523 (March 29, 2016) 
(SR-NYSEArca-2016-47) (extending pilot to August 31, 2016); 
Securities Exchange Act Release No. 75994 (September 28, 2015), 80 
FR 59834 (October 2, 2015) (SR-NYSEArca-2015-84) (extending pilot to 
March 31, 2016); and Securities Exchange Act Release No. 74572 
(March 24, 2015), 80 FR 16705 (March 30, 2015) (SR-NYSEArca-2015-22) 
(extending pilot to September 30, 2015).
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    The Exchange established the Program to attract retail order flow 
to the Exchange, and allow such order flow to receive potential price 
improvement.\6\ The Program is currently limited to trades occurring at 
prices equal to or greater than $1.00 a share.

[[Page 47576]]

The Program includes NYSE Arca-listed securities and securities traded 
pursuant to unlisted trading privileges (``UTP''), but excluding NYSE-
listed (Tape A) securities.
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    \6\ RLP Approval Order, 78 FR at 79525.
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    As described in greater detail below, under Rule 7.44-E, a new 
class of market participant called Retail Liquidity Providers 
(``RLPs'') \7\ and non-RLP Equity Trading Permit (``ETP'') Holders \8\ 
are able to provide potential price improvement to retail investor 
orders in the form of a non-displayed order that is priced better than 
the best protected bid or offer (``PBBO''), called a Retail Price 
Improvement Order (``RPI''). When there is an RPI in a particular 
security, the Exchange disseminates an indicator, known as the Retail 
Liquidity Identifier (``RLI''), that such interest exists. Retail 
Member Organizations (``RMOs'') can submit a Retail Order to the 
Exchange, which interacts, to the extent possible, with available 
contra-side RPI and then may interact with other liquidity on the 
Exchange or elsewhere, depending on the Retail Order's instructions. 
The segmentation in the Program allows retail order flow to receive 
potential price improvement as a result of their order flow being 
deemed more desirable by liquidity providers.\9\
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    \7\ The Program also allows for RLPs to register with the 
Exchange. However, any firm can enter RPI orders into the system. 
Currently, no ETP Holders are registered as an RLP.
    \8\ NYSE Arca refers to its members as ETP Holders. See RLP 
Approval Order, 78 FR at 79525, n.9.
    \9\ RLP Approval Order, 78 FR at 79528.
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    In approving the pilot, the Commission concluded that the Program 
was reasonably designed to benefit retail investors by providing price 
improvement opportunities to retail order flow. Further, while the 
Commission noted that the Program would treat retail order flow 
differently from order flow submitted by other market participants, 
such segmentation would not be inconsistent with Section 6(b)(5) of the 
Act,\10\ which requires that the rules of an exchange are not designed 
to permit unfair discrimination. As the Commission recognized, retail 
order segmentation was designed to create additional competition for 
retail order flow, leading to additional retail order flow to the 
exchange environment and ensuring that retail investors benefit from 
the better price that liquidity providers are willing to give their 
orders.\11\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ RLP Approval Order, 78 FR at 79528.
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    As discussed below, the Exchange believes that the Program data 
supports these conclusions and that it is therefore appropriate to make 
the pilot Program permanent.\12\ The Exchange notes that the Commission 
recently approved on a permanent basis the substantially similar retail 
liquidity programs operated on a pilot basis by New York Stock Exchange 
LLC (``NYSE'') and Nasdaq BX, Inc. (``Nasdaq BX'').\13\ The Commission 
also recently approved a third exchange's retail liquidity program that 
had not been previously approved on a pilot basis.\14\
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    \12\ See note 4, supra. Rule 7.44-E has been amended several 
additional times. See Securities Exchange Act Release No. 71780 
(March 24, 2014), 79 FR 17623 (March 28, 2014) (SR-NYSEArca-2014-21) 
(amending rule to provide that odd-lot interest priced between the 
PBBO will trade together with other undisplayed interest according 
to price-time priority); Securities Exchange Act Release No. 73329 
(October 9, 2014), 79 FR 62227 (October 16, 2014) (SR-NYSEArca-2014-
115) (amending rule to provide that RPI that are not priced better 
than the PBB or PBBO will not be rejected upon entry); Securities 
Exchange Act Release No. 73529 (November 5, 2014), 79 FR 67210 
(November 12, 2014) (SR-NYSEArca-2014-128) (amending rule to delete 
reference to proprietary data feed in Rule 7.44E(j)); Securities 
Exchange Act Release No. 76549 (December 3, 2015), 80 FR 76595 
(December 9, 2015) (SR-NYSEArca-2015-115) (``Release No. 76549'') 
(amending rule to distinguish between orders routed on behalf of 
other broker-dealers and orders routed on behalf of introduced 
retail accounts that are carried on a fully disclosed basis); 
Securities Exchange Act Release No. 77236 (February 25, 2016), 81 FR 
10943 (March 2, 2016) (SR-NYSEArca-2016-30) (amending rule to 
clarify that Retail Orders may not be designated with a minimum 
trade size).
    \13\ See Securities Exchange Act Release No. 85160 (February 15, 
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28) (``Release 
No. 85160'') (approving the New York Stock Exchange's Retail 
Liquidity Program on a permanent basis and granting a limited 
exemption to the Sub-Penny Rule); Securities Exchange Act Release 
No. 86194 (June 25, 2019), 84 FR 31385 (July 1, 2019) (SR-NYSEArca-
2019-11) (approving Nasdaq BX's Retail Price Improvement Program on 
a permanent basis and granting a limited exemption to the Sub-Penny 
Rule).
    \14\ See Securities Exchange Act Release No. 86619 (August 9, 
2019), 84 FR 41769 (August 15, 2019) (SR-IEX-2019-05).
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Description of Pilot Rule 7.44-E That Would Become Permanent
Definitions
    Rule 7.44-E(a) contains the following definitions:
     First, the term ``Retail Liquidity Provider'' (``RLP'') is 
defined as a ETP Holder that is approved by the Exchange under the Rule 
to act as such and to submit Retail Price Improvement Orders in 
accordance with the Rule.\15\
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    \15\ See Rule 7.44-E(a)(1).
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     Second, the term ``Retail Member Organization'' (``RMO'') 
is defined as an ETP Holder that has been approved by the Exchange to 
submit Retail Orders.\16\
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    \16\ Id. at (a)(2).
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     Third, the term ``Retail Order'' means an agency order or 
a riskless principal order meeting the criteria of FINRA Rule 5320.03 
that originates from a natural person and is submitted to the Exchange 
by an RMO, provided that no change is made to the terms of the order 
with respect to price or side of market and the order does not 
originate from a trading algorithm or any other computerized 
methodology. A Retail Order may be an odd lot, round lot, or mixed 
lot.\17\
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    \17\ Id. at (a)(3).
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     Finally, the term ``Retail Price Improvement Order'' means 
non-displayed interest in NYSE Arca-listed securities and UTP 
Securities, excluding NYSE-listed (Tape A) securities, that would trade 
at prices better than the best protected bid (``PBB'') or best 
protected offer (``PBO'') by at least $0.001 and that is identified as 
a Retail Price Improvement Order in a manner prescribed by the 
Exchange.\18\ The price of an RPI would be determined by an ETP 
Holder's entry of RPI buy or sell interest into Exchange systems. RPIs 
would remain undisplayed. An RPI that was not priced within the PBBO 
would be rejected upon entry. A previously entered RPI that became 
priced at or inferior to the PBBO would not be eligible to interact 
with incoming Retail Orders, and such an RPI would cancel if a Retail 
Order executed against all displayed interest ranked ahead of the RPI 
and then attempted to execute against the RPI. If not cancelled, an RPI 
that was no longer priced at or inferior to the PBBO would again be 
eligible to interact with incoming Retail Orders. An RPI must be 
designated as either a PL or MPL Order, and an order so

[[Page 47577]]

designated would interact with only Retail Orders.
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    \18\ Id. at (a)(4). An RPI remains non-displayed in its 
entirety, is ranked Priority 3--Non-Display Orders. See id.at 
(a)(4)(A). Exchange systems will monitor whether RPI buy or sell 
interest is eligible to trade with incoming Retail Orders. An RPI to 
buy (sell) with a limit price at or below (above) the PBB (PBO) or 
at or above (below) the PBO (PBB) will not be eligible to trade with 
incoming Retail Orders to sell (buy), and such an RPI will cancel if 
a Retail Order to sell (buy) trades with all displayed liquidity at 
the PBB (PBO) and then attempts to trade with the RPI. If not 
cancelled, an RPI to buy (sell) with a limit price that is no longer 
at or below (above) the PBB (PBO) or at or above (below) the PBO 
(PBB) will again be eligible to trade with incoming Retail Orders. 
See id. at (a)(4)(B). For securities to which it is assigned, an RLP 
may only enter an RPI in its RLP capacity. An RLP is permitted, but 
not required, to submit RPIs for securities to which it is not 
assigned, and will be treated as a non-RLP ETP Holder for those 
particular securities. Additionally, ETP Holders other than RLPs are 
permitted, but not required, to submit RPIs. See id. at (a)(4)(C). 
Finally, an RPI may be an odd lot, round lot, or mixed lot. An RPI 
must be designated as either a Limit Non-Displayed Order or MPL 
Order, and an order so designated will interact with incoming Retail 
Orders only and will not interact with either a Type 2--Retail Order 
Day or Type 2--Retail Order Market that is resting on the NYSE Arca 
Book. See id. at (a)(4)(D).
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    RLPs and other liquidity providers\19\ and RMOs could enter odd 
lots, round lots or mixed lots as RPIs and as Retail Orders, 
respectively. As discussed below, RPIs would be ranked and allocated 
according to price and time of entry into Exchange systems and 
therefore without regard to whether the size entered was an odd lot, 
round lot or mixed lot. Similarly, Retail Orders would interact with 
RPIs according to the priority and allocation rules of the Program and 
without regard to whether they were odd lots, round lots or mixed lots. 
Finally, Retail Orders could be designated as Type 1 or Type 2 without 
regard to the size of the lot. RPIs would interact with Retail Orders 
as follows; a more detailed priority and order allocation discussion is 
below. An RPI would interact with Retail Orders at the level at which 
the RPI was priced as long as the minimum required price improvement 
was produced. Accordingly, if RPI sell interest was entered with a 
$10.098 offer while the PBO was $10.11, the RPI could interact with the 
Retail Order at $10.098, producing $0.012 of price improvement.
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    \19\ A Market Maker (``MM'') or Lead Market Maker (``LMM'') 
would be permitted to enter RPIs for securities in which they were 
not registered as an MM or LMM; however, the MM or LMM would not be 
eligible for execution fees that are lower than non-RLP rates for 
such securities.
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RMO Qualifications and Application Process
    Under Rule 7.44-E(b), any ETP Holder\20\ can qualify as an RMO if 
it conducts a retail business or routes\21\ retail orders on behalf of 
another broker-dealer. For purposes of Rule 7.44-E(b), conducting a 
retail business includes carrying retail customer accounts on a fully 
disclosed basis. To become an RMO, an ETP Holder must submit: (1) An 
application form; (2) supporting documentation sufficient to 
demonstrate the retail nature and characteristics of the applicant's 
order flow;\22\ and (3) an attestation, in a form prescribed by the 
Exchange, that any order submitted by the member organization as a 
Retail Order would meet the qualifications for such orders under Rule 
7.44-E.\23\
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    \20\ An RLP may also act as an RMO for securities to which it is 
not assigned, subject to the qualification and approval process 
established by the proposed rule.
    \21\ See Release No. 76549, 80 FR at 76595.
    \22\ The supporting documentation may include sample marketing 
literature, website screenshots, other publicly disclosed materials 
describing the member organization's retail order flow, and any 
other documentation and information requested by the Exchange in 
order to confirm that the applicant's order flow would meet the 
requirements of the Retail Order definition. See Rule 7.44-
E(b)(2)(B).
    \23\ See id. at (b)(2)(A)-(C).
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    An RMO must have written policies and procedures reasonably 
designed to assure that it will only designate orders as Retail Orders 
if all requirements of a Retail Order are met. Such written policies 
and procedures must require the ETP Holder to (i) exercise due 
diligence before entering a Retail Order to assure that entry as a 
Retail Order is in compliance with the requirements of Rule 7.44-E, and 
(ii) monitor whether orders entered as Retail Orders meet the 
applicable requirements. If the RMO represents Retail Orders from 
another broker-dealer customer, the RMO's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order. The RMO must (i) obtain an annual written 
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders 
that entry of such orders as Retail Orders will be in compliance with 
the requirements of this rule, and (ii) monitor whether its broker-
dealer customer's Retail Order flow continues to meet the applicable 
requirements.\24\
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    \24\ Id. at (b)(6).
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    Following submission of the required materials, the Exchange 
provides written notice of its decision to the member organization.\25\ 
A disapproved applicant can appeal the disapproval by the Exchange as 
provided in Rule 7.44-E(i), and/or reapply for RMO status 90 days after 
the disapproval notice is issued by the Exchange. An RMO can also 
voluntarily withdraw from such status at any time by giving written 
notice to the Exchange.\26\
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    \25\ Id. at (b)(3).
    \26\ Id. at (b)(5).
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RLP Qualifications
    To qualify as an RLP under Rule 7.44-E(c), an ETP Holder must: (1) 
Already be registered as a MM or LMM; (2) demonstrate an ability to 
meet the requirements of an RLP; (3) have the ability to accommodate 
Exchange-supplied designations that identify to the Exchange RLP 
trading activity in assigned RLP securities; and (4) have adequate 
trading infrastructure and technology to support electronic 
trading.\27\
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    \27\ Id. at (c)(1)--(4). Because an RLP would only be permitted 
to trade electronically, an ETP Holder's technology must be fully 
automated to accommodate the Exchange's trading and reporting 
systems that are relevant to operating as an RLP. If an ETP Holder 
was unable to support the relevant electronic trading and reporting 
systems of the Exchange for RLP trading activity, it would not 
qualify as an RLP. An RLP may not use the Exchange supplied 
designations for non-RLP trading activity at the Exchange. 
Additionally, an ETP Holder will not receive credit for its RLP 
trading activity for which it does not use its designation.
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RLP Application
    Under Rule 7.44-E(d), to become an RLP, an ETP Holder must submit 
an RLP application form with all supporting documentation to the 
Exchange. The Exchange would determine whether an applicant was 
qualified to become an RLP as set forth above.\28\ After an applicant 
submitted an RLP application to the Exchange with supporting 
documentation, the Exchange would notify the applicant ETP Holder of 
its decision. The Exchange could approve one or more ETP Holders to act 
as an RLP for a particular security. The Exchange could also approve a 
particular ETP Holder to act as an RLP for one or more securities. 
Approved RLPs would be assigned securities according to requests made 
to, and approved by, the Exchange.\29\
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    \28\ Id. at (d)(1).
    \29\ Id. at (d)(2).
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    If an applicant was approved by the Exchange to act as an RLP, the 
applicant would be required to establish connectivity with relevant 
Exchange systems before the applicant would be permitted to trade as an 
RLP on the Exchange.\30\ If the Exchange disapproves the application, 
the Exchange would provide a written notice to the ETP Holder. The 
disapproved applicant could appeal the disapproval by the Exchange as 
provided in Rule 7.44-E(i) and/or reapply for RLP status 90 days after 
the disapproval notice was issued by the Exchange.\31\
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    \30\ Id. at (d)(3).
    \31\ Id. at (d)(4).
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Voluntary Withdrawal of RLP Status
    An RLP would be permitted to withdraw its status as an RLP by 
giving notice to the Exchange under Rule 7.44-E(e). The withdrawal 
would become effective when those securities assigned to the 
withdrawing RLP were reassigned to another RLP. After the Exchange 
received the notice of withdrawal from the withdrawing RLP, the 
Exchange would reassign such securities as soon as practicable, but no 
later than 30 days after the date the notice was received by the 
Exchange. If the reassignment of securities took longer than the 30-day 
period, the withdrawing RLP would have no further obligations and would 
not be held responsible for any matters

[[Page 47578]]

concerning its previously assigned RLP securities.\32\
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    \32\ See id. at (e).
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RLP Requirements
    Under Rule 7.44-E(f), an RLP would only be permitted to enter RPIs 
electronically and directly into Exchange systems and facilities 
designated for this purpose and could only submit RPIs in their role as 
an RLP for the securities to which it is assigned as RLP. An RLP 
entering Retail Price Improvement Orders in securities to which it is 
not assigned is not required to satisfy these requirements.\33\ In 
order to be eligible for execution fees that are lower than non-RLP 
rates, an RLP would be required to maintain (1) an RPI that was better 
than the PBB at least five percent of the trading day for each assigned 
security; and (2) an RPI that was better than the PBO at least five 
percent of the trading day for each assigned security.\34\
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    \33\ Id. at (f)(1).
    \34\ An ETP Holder acting as an RLP for a security entering RPIs 
into Exchange systems and facilities for securities to which it was 
not assigned would not be eligible for execution fees that are lower 
than non-RLP rates for securities to which it was not assigned.
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    An RLP's five-percent requirements would be calculated by 
determining the average percentage of time the RLP maintained an RPI in 
each of its RLP securities during the regular trading day, on a daily 
and monthly basis.\35\ The Exchange would determine whether an RLP met 
this requirement by calculating the following:
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    \35\ Id. at (f)(2).
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     The ``Daily Bid Percentage,'' calculated by determining 
the percentage of time an RLP maintains a Retail Price Improvement 
Order with respect to the PBB during each trading day for a calendar 
month;
     The ``Daily Offer Percentage,'' calculated by determining 
the percentage of time an RLP maintains a Retail Price Improvement 
Order with respect to the PBO during each trading day for a calendar 
month;
     The ``Monthly Average Bid Percentage,'' calculated for 
each RLP security by summing the security's ``Daily Bid Percentages'' 
for each trading day in a calendar month then dividing the resulting 
sum by the total number of trading days in such calendar month; and
     The ``Monthly Average Offer Percentage,'' calculated for 
each RLP security by summing the security's ``Daily Offer Percentage'' 
for each trading day in a calendar month and then dividing the 
resulting sum by the total number of trading days in such calendar 
month.
    Finally, only RPIs would be used when calculating whether an RLP is 
in compliance with its five-percent requirements.\36\
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    \36\ Id. at (f)(2)(A)-(E).
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    The five-percent requirement is not applicable in the first two 
calendar months a member organization operates as an RLP and takes 
effect on the first day of the third consecutive calendar month the 
member organization operates as an RLP.\37\
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    \37\ Id. at (f)(3).
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Failure of RLP To Meet Requirements
    Rule 7.44-E(g) addresses the consequences of an RLP's failure to 
meet its requirements. If, after the first two months an RLP acted as 
an RLP, an RLP fails to meet any of the requirements set forth in Rule 
7.44-E(f) for an assigned RLP security for three consecutive months, 
the Exchange could, in its discretion, take one or more of the 
following actions:
     Revoke the assignment of any or all of the affected 
securities from the RLP;
     revoke the assignment of unaffected securities from the 
RLP; or
     disqualify the member organization from its status as an 
RLP.\38\
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    \38\ Id. at (g)(1)(A)-(C).
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    The Exchange will determine if and when an ETP Holder is 
disqualified from its status as an RLP. One calendar month prior to any 
such determination, the Exchange notifies an RLP of such impending 
disqualification in writing. When disqualification determinations are 
made, the Exchange provides a written disqualification notice to the 
member organization.\39\ A disqualified RLP could appeal the 
disqualification as provided in proposed Rule 7.44-E(i) and/or reapply 
for RLP status 90 days after the disqualification notice is issued by 
the Exchange.\40\
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    \39\ Id. at (2).
    \40\ Id. at (3).
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Failure of RMO To Abide by Retail Order Requirements
    Rule 7.44-E(h) addresses an RMO's failure to abide by Retail Order 
requirements. If an RMO designates orders submitted to the Exchange as 
Retail Orders and the Exchange determines, in its sole discretion, that 
those orders fail to meet any of the requirements of Retail Orders, the 
Exchange may disqualify a member organization from its status as an 
RMO.\41\ When disqualification determinations are made, the Exchange 
will provide a written disqualification notice to the ETP Holder.\42\ A 
disqualified RMO could appeal the disqualification as provided in 
proposed Rule 7.44-E(i) and/or reapply for RMO status 90 days after the 
disqualification notice is issued by the Exchange.\43\
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    \41\ Id. at (h)(1).
    \42\ Id. at (2).
    \43\ Id. at (3).
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Appeal of Disapproval or Disqualification
    Rule 7.44-E(i) describes the appeal rights of ETP Holders. An ETP 
Holder that disputes the Exchange's decision to disapprove it under 
Rule 7.44-E(b) or (d) or disqualify it under Rule 7.44-E(g) or (h) may 
request, within five business days after notice of the decision is 
issued by the Exchange, that a Retail Liquidity Program Panel (``RLP 
Panel'') review the decision to determine if it was correct.\44\ The 
RLP Panel would consist of the Chief Regulatory Officer (``CRO''), or a 
designee of the CRO, and qualified Exchange employees.\45\ The RLP 
Panel will review the facts and render a decision within the time frame 
prescribed by the Exchange.\46\ The RLP Panel may overturn or modify an 
action taken by the Exchange under the Rule. A determination by the RLP 
Panel would constitute final action by the Exchange on the matter at 
issue.\47\
---------------------------------------------------------------------------

    \44\ Id. at (i)(1). In the event a member organization is 
disqualified from its status as an RLP pursuant to proposed Rule 
107C(g), the Exchange would not reassign the appellant's securities 
to a different RLP until the RLP Panel has informed the appellant of 
its ruling. Id. at (i)(1)(A).
    \45\ Id. at (i)(2).
    \46\ Id. at (3).
    \47\ Id. at (4).
---------------------------------------------------------------------------

Retail Liquidity Identifier
    Under Rule 7.44-E(j), the Exchange disseminates an identifier 
through the Consolidated Quotation System or the UTP Quote Data Feed, 
as applicable, when RPI interest priced at least $0.001 better than the 
PBB or PBO for a particular security is available in Exchange systems 
(``Retail Liquidity Identifier''). The Retail Liquidity Identifier 
shall reflect the symbol for the particular security and the side (buy 
or sell) of the RPI interest, but shall not include the price or size 
of the RPI interest.\48\
---------------------------------------------------------------------------

    \48\ Id. at (j).
---------------------------------------------------------------------------

Retail Order Designations
    Under Rule 7.44-E(k), a Retail Order may not be designated with a 
``No Midpoint Execution'' Modifier or with a minimum trade size. Under 
subsection (k), an RMO can designate how a Retail Order would interact 
with available contra-side interest as follows:
     A Type 1--Retail Order to buy (sell) is a Limit IOC Order 
that will trade only

[[Page 47579]]

with available Retail Price Improvement Orders to sell (buy) and all 
other orders to sell (buy) with a working price below (above) the PBO 
(PBB) on the NYSE Arca Book and will not route. The quantity of a Type 
1--Retail Order to buy (sell) that does not trade with eligible orders 
to sell (buy) will be immediately and automatically cancelled. A Type-1 
designated Retail Order will be rejected on arrival if the PBBO is 
locked or crossed.\49\
---------------------------------------------------------------------------

    \49\ Id. at (k)(1).
---------------------------------------------------------------------------

     A Type 2--Retail Order may be a Limit Order designated IOC 
or Day or a Market Order, and will function as follows:
    [cir] A Type 2--Retail Order IOC to buy (sell) is a Limit IOC Order 
that will trade first with available Retail Price Improvement Orders to 
sell (buy) and all other orders to sell (buy) with a working price 
below (above) the PBO (PBB) on the NYSE Arca Book. Any remaining 
quantity of the Retail Order will trade with orders to sell (buy) on 
the NYSE Arca Book at prices equal to or above (below) the PBO (PBB) 
and will be traded as a Limit IOC Order and will not route.\50\
---------------------------------------------------------------------------

    \50\ Id. at (k)(2)(A).
---------------------------------------------------------------------------

    [cir] A Type 2--Retail Order Day to buy (sell) is a Limit Order 
that will trade first with available Retail Price Improvement Orders to 
sell (buy) and all other orders to sell (buy) with a working price 
below (above) the PBO (PBB) on the NYSE Arca Book. Any remaining 
quantity of the Retail Order, if marketable, will trade with orders to 
sell (buy) on the NYSE Arca Book or route, and if non-marketable, will 
be ranked in the NYSE Arca Book as a Limit Order.\51\
---------------------------------------------------------------------------

    \51\ Id. at (k)(2)(B).
---------------------------------------------------------------------------

    [cir] A Type 2--Retail Order Market to buy (sell) is a Market Order 
that will trade first with available Retail Price Improvement Orders to 
sell (buy) and all other orders to sell (buy) with a working price 
below (above) the NBO (NBB). Any remaining quantity of the Retail Order 
will function as a Market Order.\52\
---------------------------------------------------------------------------

    \52\ Id. at (k)(2)(C).
---------------------------------------------------------------------------

Priority and Order Allocation
    Under Rule 7.44-E(l), RPI in the same security will be ranked 
together with all other interest ranked as Priority 3--Non-Display 
Orders. Odd-lot orders ranked as Priority 2--Display Orders will have 
priority over orders ranked Priority 3--Non-Display Orders at each 
price. Any remaining unexecuted RPI interest will remain available to 
trade with other incoming Retail Orders. Any remaining unfilled 
quantity of the Retail Order will cancel, execute, or post to the NYSE 
Arca Book in accordance with Rule 7.44-E(k).
    Examples of priority and order allocation are as follows:
    PBBO for security ABC is $10.00-$10.05.
    RLP 1 enters a Retail Price Improvement Order to buy ABC at $10.01 
for 500.
    RLP 2 then enters a Retail Price Improvement Order to buy ABC at 
$10.02 for 50.
    RLP 3 then enters a Retail Price Improvement Order to buy ABC at 
$10.03 for 500.
    An incoming Type 1--Retail Order to sell ABC for 1,000 would trade 
first with RLP 3's bid for 500 at $10.03, because it is the best-priced 
bid, then with RLP 2's bid for 500 at $10.02, because it is the next 
best-priced bid. RLP 1 would not be filled because the entire size of 
the Retail Order to sell 1,000 would be depleted. The Retail Order 
trades with RPI Orders in price/time priority.
    However, assume the same facts above, except that RLP 2's Retail 
Price Improvement Order to buy ABC at $10.02 was for 100. The incoming 
Retail Order to sell 1,000 would trade first with RLP 3's bid for 500 
at $10.03, because it is the best-priced bid, then with RLP 2's bid for 
100 at $10.02, because it is the next best-priced bid. RLP 1 would then 
receive an execution for 400 of its bid for 500 at $10.01, at which 
point the entire size of the Retail Order to sell 1,000 would be 
depleted.
    Assume the same facts as above, except that RLP 3's order was not 
an RPI Order to buy ABC at $10.03, but rather, a non-displayed order to 
buy ABC at $10.03. The result will be similar to the result immediately 
above, in that the incoming Retail Order to sell 1,000 trades first 
with RLP 3's non-displayed bid for 500 at $10.03, because it is the 
best-priced bid, then with RLP 2's bid for 100 at $10.02, because it is 
the next best-priced bid. RLP 1 then receives an execution for 400 of 
its bid for 500 at $10.01, at which point the entire size of the Retail 
Order to sell 1,000 is depleted.
    As a final example, assume the original facts, except that LMT 1 
enters a displayed odd lot limit order to buy ABC at $10.02 for 60. The 
incoming Retail Order to sell for 1,000 trades first with RLP 3's bid 
for 500 at $10.03, because it is the best-priced bid, then with LMT 1's 
bid for 60 at $10.02 because it is the next best-priced bid and is 
ranked Priority 2--Display Orders and has priority over same-priced 
RPIs. The incoming Retail Order would then trade 440 shares with RLP 
2's bid for 500 at $10.02 because it is the next priority category at 
that price, at which point the entire size of the Retail Order to sell 
1,000 is depleted. The balance of RLP 2's bid would remain on the NYSE 
Arca Book and be eligible to trade with the next incoming Retail Order 
to sell.
    To demonstrate how the different types of Retail Orders would trade 
with available Exchange interest, assume the following facts:
    PBBO for security DEF is $19.99-$20.01 (100 x 100).
    LMT 1 enters a Limit Order to buy DEF at $20.00 for 100.
    RLP 1 then enters a Retail Price Improvement Order to buy DEF at 
$20.003 for 100.
    MPL 1 then enters a Midpoint Passive Liquidity Order to buy DEF at 
$21.00 for 100.
    An incoming Type 2--Retail Order IOC to sell DEF for 300 at $20.00 
would trade first with MPL 1's bid for 100 at $20.005, because it is 
the best-priced bid, then with RLP 1's bid for 100 at $20.003, because 
it is the next best-priced bid, and then with LMT 1's bid for 100 at 
$20.00 because it is the next best-priced bid, at which point the 
entire size of the Retail Order to sell 300 is depleted.
    Assume the same facts as above except the incoming order is a Type 
2--Retail Order Day to sell DEF for 500 at $20.00. The Retail Order 
would trade first with MPL 1's bid for 100 at $20.005, because it is 
the best-priced bid, then with RLP 1's bid for 100 at $20.003, because 
it is the next best-priced bid, and then with LMT 1's bid for 100 at 
$20.00 because it is the next best-priced bid. The remaining balance of 
the Retail Order is displayed on the NYSE Arca Book at $20.00 as a 
Limit Order, resulting in a PBBO of $19.99-$20.00 (100 x 200).
    Assume the same facts as above except the incoming order is a Type 
1--Retail Order to sell DEF for 300. The Retail Order would trade first 
with MPL 1's bid for 100 at $20.005, because it is the best-priced bid, 
and then with RLP 1's bid for 100 at $20.003. The remaining balance of 
the Retail Order would be cancelled and not trade with LMT 1 because 
Type 1-designated Retail Orders do not trade with interest on the NYSE 
Arca Book other than non-displayed orders and odd-lot orders priced 
better than the PBBO on the opposite side of the Retail Order.
    Finally, to demonstrate the priority of displayed interest over 
Retail Price Improvement Orders, assume the following facts:
    PBBO for security GHI is $30.00-$30.05.

[[Page 47580]]

    RLP 1 enters a Retail Price Improvement Order to buy GHI at $30.02 
for 100.
    LMT 1 then enters a Limit Order to buy GHI at $30.02 for 100.
    New PBBO of $30.02-$30.05.
    RLP 2 then enters a Retail Price Improvement Order at $30.03 for 
100.
    An incoming Type 2--Retail Order IOC to sell GHI for 300 at $30.01 
would trade first with RLP 2's bid for 100 at $30.03, because it is the 
best-priced bid, then with LMT 1 for 100 at $30.02 because it is the 
next best-priced bid. The Retail Order would then attempt to trade with 
RLP 1, but because RLP 1 was priced at the PBBO and no longer price 
improving, RLP 1 will cancel. At that point, the remaining balance of 
the Retail Order will cancel because there are no remaining orders 
within its limit price.
    Assume the same facts as above except the incoming Retail Order is 
for 200. The Retail Order would trade with RLP 2's bid for 100 at 
$30.03, because it is the best-priced bid, then with LMT 1 for 100 at 
$30.02 because it is the next best-priced bid. RLP 1 does not cancel 
because the incoming Retail Order was depleted before attempting to 
trade with RLP 1. RLP 1 would be eligible to trade with another 
incoming Retail Order because it would be priced better than the 
PBBO.\53\
---------------------------------------------------------------------------

    \53\ Id. at (l).
---------------------------------------------------------------------------

Rationale for Making Pilot Permanent
    In approving the Program on a pilot basis, the Commission required 
the Exchange to ``monitor the scope and operation of the Program and 
study the data produced during that time with respect to such issues, 
and will propose any modifications to the Program that may be necessary 
or appropriate.'' \54\ As part of its assessment of the Program's 
potential impact, the Exchange posted core weekly and daily summary 
data on the Exchanges' website for public investors to review,\55\ and 
provided additional data to the Commission regarding potential investor 
benefits, including the level of price improvement provided by the 
Program. This data included statistics about participation, frequency 
and level of price improvement.
---------------------------------------------------------------------------

    \54\ RLP Approval Order, 78 FR at 79529.
    \55\ See https://www.nyse.com/markets/liquidity-programs#nyse-nyse-mkt-rlp.
---------------------------------------------------------------------------

    In the RLP Approval Order, the Commission observed that the Program 
could promote competition for retail order flow among execution venues, 
and that this could benefit retail investors by creating additional 
price improvement opportunities for marketable retail order flow, most 
of which is currently executed in the Over-the-Counter (``OTC'') 
markets without ever reaching a public exchange.\56\ The Exchange 
sought, and believes it has achieved, the Program's goal of attracting 
retail order flow to the Exchange, and allowing such order flow to 
receive potential price improvement. As the Exchange's analysis of the 
Program data below demonstrates, the Program provided tangible price 
improvement to retail investors through a competitive pricing process. 
The data also demonstrates that the Program had an overall negligible 
impact on broader market structure.\57\
---------------------------------------------------------------------------

    \56\ RLP Approval Order, 78 FR at 79528.
    \57\ See id. at 79529.
---------------------------------------------------------------------------

    NYSE Arca launched the Program during April 2014. Between June and 
November 2014, the Program received orders totaling 4.3 billion shares, 
providing retail investors with price improvement of $1.6 million. As 
Table 1 below shows, during 2017, an average of 3.5 million shares were 
executed in the Program each day. During 2018, this number rose to 8.9 
million shares per day but has since dropped to 3.6 million shares per 
day for the period May-July 2019. Price improvement has been highly 
dependent on the mix of securities and volume sent into the Program. 
During the 2017-2018 period, price improvement was as low as $0.0015 
and as high as $0.0055 per share. There are several high-priced 
securities with spreads greater than $0.01, which often received price 
improvement of a penny or more. Overall, fill rates have largely been 
in the low-to-mid 20% range, although there have been periods of fill 
rates north of 30% from September-November 2017, when there was a 
smaller share of very large orders.
BILLING CODE 8011-01-P

[[Page 47581]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.000

    Table 2 shows the frequency of order sizes entered by RMOs. The 
largest plurality of order types were round lot or smaller, ranging 
between 35% in early 2017 to more than 50% of all RMO orders entered 
during the summer of 2018. Very large orders (greater than 15,000 
shares) accounted for less than 1% of all orders since September 2017. 
However, as shown in Table 3, these typically accounted for 20-25% of 
shares placed into the Program, and ranged above 50% of all orders in 
early 2017. The composition of shares executed (Table 4) was more 
evenly distributed and fill rates (Table 5) were much lower for the 
largest order sizes.

[[Page 47582]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.001

    Table 5 highlights that while the Exchange indicates when there is 
price improving liquidity available on CQS, UTP and proprietary feeds, 
not all customers necessarily read that flag. Beginning in December 
2017, the Exchange believes that one customer began sending orders 
without checking the flag, resulting in poor fill rates, even for 
orders less than or equal to 100 shares. This is clearly evidenced by 
the sharp drop in fill rates for orders of one round lot or less.

[[Page 47583]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.002

    Table 6 details the development of order sizes received in the 
Program over time. Program orders taking liquidity sent to the Exchange 
averaged around 1,000 shares for the Program's recent history, with 
median order size mostly around 400 shares. Liquidity providing orders 
tend to be smaller, and mostly average well below 1,000 shares, with 
the median below 200 shares most months. Since any firm can enter a 
liquidity providing order, there may be multiple providers offering 
liquidity inside the quote, allowing for high fill rates.

[[Page 47584]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.003


[[Page 47585]]


[GRAPHIC] [TIFF OMITTED] TN10SE19.004

[GRAPHIC] [TIFF OMITTED] TN10SE19.005


[[Page 47586]]


    Table 7 shows that during the two most recent years, no security 
maintained more than 5% of total volume in the program, and nearly two-
thirds of all securities that had executions in the program averaged 
less than 0.25% share of consolidated trading. The Exchange notes that 
these statistics largely overstate the total size of the Program, since 
many securities rarely or never receive an order in the Program.
    Although the Program provides the opportunity to achieve 
significant price improvement, the Program has not generated 
significant activity, relative to the overall market. The Program 
competes with wholesalers and similar programs offered by, among 
others, Cboe BYX Exchange, Inc. (``Cboe BYX''), and Nasdaq BX, the 
latter of which has been approved on a permanent basis.\58\
---------------------------------------------------------------------------

    \58\ See note 13, supra. See also Securities Exchange Act 
Release No. 86742 (August 23, 2019), 84 FR 45575 (August 29, 2019) 
(SR-CboeBYX-2019-014) (filing to make permanent Cboe BYX Rule 11.24, 
which sets forth that exchange's pilot Retail Price Improvement 
Program).
---------------------------------------------------------------------------

Difference in Differences Analysis
    The Exchange also analyzed market quality and market share impact 
by using the difference in differences statistical technique. 
Difference in differences (``DID'') requires studying the differential 
effect of data measured between a treatment group and a control group. 
The two groups are measured during two or more different time periods, 
usually a period before ``treatment'' and at least one time period 
after ``treatment'', that is, a time period after which the treatment 
group is impacted but the control group is not. The assumption is that 
the control group and the treatment group are otherwise impacted 
equally by extraneous factors, i.e., that the other impacts are 
parallel. For example, when measuring average quoted spreads, if 
spreads increase by ten basis points in the control group, and 12 basis 
points in the test group, the assumption would be that the two basis 
point differential was caused by the treatment.
    Because all Tape B and Tape C securities (all securities not listed 
on the NYSE) are eligible to participate in the Program, a natural 
control group does not exist for the securities participating in the 
Program. Hence, there is a possibility that the lack of activity in the 
Program could have been the result of factors that DID cannot measure. 
Nonetheless, to produce a control group, the Exchange identified the 50 
most active ticker securities in the Program as measured by share of 
consolidated volume following launch of the Program. The Exchange then 
determined a matched sample, without replacement, using consolidated 
volume, volume weighted average price, and consolidated quoted spread 
in basis points. The matched sample compared the 50 most active ticker 
securities in the Program with all securities that had very low Program 
volume. The matching criteria minimized the sum of the squares of the 
percent difference between the top 50 active ticker securities and 
potential matches. The best 25 matches were then selected.
    The Exchange executed two DID analyses:
    1. Six months prior to launch of the Program (November 2013-April 
2014) compared to six months following launch, excluding the first 
month of the Program (June 2014-November 2014) for securities with a 
consolidated average daily volume (``CADV'') of at least 500,000 during 
the pre-treatment and treatment periods. Note that the program launched 
during April 2014, but there were only six retail taking orders entered 
during that month.
    2. Six months prior to launch of the Program (November 2013-April 
2014) compared to all of 2017 and 2018 for securities with a CADV of at 
least 500,000 during the pre-treatment and treatment periods.
    Because there was no natural control group, the Exchange employed 
flexible matching criteria. In addition to the CADV restrictions, the 
Exchange utilized a control versus treatment CADV ratio of 3:1, a 
volume weighted average price (``VWAP'') of 2:1, and a spread of 2:1. 
The Exchange also required potential control group stocks to have a 
share of Program trading less than 1/10th of the lowest of the top 50 
securities for the first trading period. The Exchange excluded 
securities that were in the test groups of the Tick Size Pilot Program 
\59\ from consideration in matching securities for the DID analysis of 
the 2017-2018 period. Preferred stocks, warrants and rights were 
excluded from the DID analysis for both periods. Finally, because the 
Program is only valid for stocks trading at or above $1.00, any 
security with a low price during the pre-treatment or the treatment 
period below $1.00 was also excluded. Securities could not be listed on 
the NYSE during the pre-treatment period or during the treatment 
period.
---------------------------------------------------------------------------

    \59\ The Tick Size Pilot Program is a National Market System 
(``NMS'') plan designed to allow the Commission, market participants 
and the public to assess the impact of wider minimum quoting and 
trading increments--or tick sizes--on the liquidity and trading of 
the common stocks of certain small capitalization companies.
---------------------------------------------------------------------------

    The Exchange selected the top 25 securities by minimum differences 
as described above.
DID Results for Period Around Program Launch
    As noted above, the Program launched in April 2014. Only six orders 
RMO orders were entered during the month. The Exchange selected 
November 2013-April 2014 to represent the pre-launch period. To allow 
for Program adoption, the Exchange excluded May 2014 and chose June 
2014-November 2014 to represent the post-launch period. Tables 8A and 
8B show key attributes for the securities selected for the first 
matched sample.

[[Page 47587]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.006

[GRAPHIC] [TIFF OMITTED] TN10SE19.007

    For the period 2017-2018 matched sample, we excluded securities 
that were part of the Tick Size Pilot Program. Inclusion of those 
securities could have resulted in exogenous influences skewing the 
analyses.

[[Page 47588]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.008


[[Page 47589]]


[GRAPHIC] [TIFF OMITTED] TN10SE19.009

    The Exchange's DID analysis utilized the 25 treated and 25 control 
securities noted above for the following statistics:
     Time-weighted NYSE Arca quoted spreads in basis points.
     Time-weighted NYSE Arca quoted spreads in dollars and 
cents.
     Time-weighted consolidated quoted spreads in basis points.
     Time-weighted consolidated quoted spreads in dollars and 
cents.
     Trade Reporting Facility (``TRF'') share of volume during 
regular trading hours, excluding auctions.
     TRF share of volume, full day, including auctions.
     NYSE Arca share of volume during regular trading hours, 
excluding auctions.
     NYSE Arca share of volume, full day, including auctions.
     Trade-to-trade price change in basis points.
    The Exchange calculated the DID regression for each of these 
statistics using the following formula:

Yit = B0 + B1T + B2I + 
B3IT

where T equals zero during the pre-period and equals one during the 
treatment period, and where I is the Intervention.
    As Table 10 shows, only one statistic showed any significance, and 
that at the weak 90% level. NYSE Arca market share during regular hours 
trading, excluding auctions, increased during the early comparison 
period.

[[Page 47590]]

[GRAPHIC] [TIFF OMITTED] TN10SE19.010

[GRAPHIC] [TIFF OMITTED] TN10SE19.011

BILLING CODE 8011-01-C
    Table 11 details results for the DID analysis comparing the pre-
Program period during 2013-2014 with trading in 2017 and 2018. NYSE 
Arca spreads showed a drop in basis points with 90% significance and in 
dollars and cents at the 95% level. Consolidated dollar spreads also 
showed a drop, at the 90% significance level. NYSE Arca regular hours 
share showed an increase in share at the 99.9% confidence level. This 
is not surprising since, as noted earlier, the Program achieved about 
8% share of NYSE Arca trading during 2017. As discussed below, the more 
significant drops in dollar-based spreads were expected as the nature 
of our matching effort, resulting in the selection of stocks that saw 
price decreases, impacted the spread calculations, and also may have 
impacted the NYSE Arca regular hours share.
    As Table 12 shows, lower priced stocks tend to more likely trade on 
the TRF as well as in the Program. Even with the large share increase 
in NYSE Arca, TRF share also rose, highlighting the impact of the out-
of-sample matching criteria. Spreads in basis points fell with 90% 
confidence on NYSE Arca, while spreads in cents fell with 95% 
confidence on NYSE Arca, and 90% confidence on a consolidated basis. As 
noted in the analysis of the NYSE Retail Program, the matching criteria 
used tends to focus on stocks with price drops, so the Exchange 
expected to see a fall in currency-based spreads.\60\ Unlike the NYSE's 
experience, however, the price differences were more muted from this 
matching exercise, which allowed for a small regression-calculated drop 
in in basis points spreads as well. Average spreads in basis points did 
increase slightly, both for treatment and control securities.
---------------------------------------------------------------------------

    \60\ See Release No. 85160, 84 FR at 5768.
---------------------------------------------------------------------------

    All Tape B and Tape C Exchange-traded securities were eligible to 
participate in the program when it launched in 2014. Because of this 
factor,

[[Page 47591]]

there was not a true control group for the Exchange to employ in its 
DID analysis. Instead, for purposes of making the Program permanent, 
the Exchange created an artificial control group and treatment group by 
identifying a matched sample based on the securities with the highest 
share of consolidated volume in the Program and matching these 
securities based on volume weighted average price, time-weighted quoted 
spread and CADV during the pre-treatment period (subject to the 
criteria noted above). By necessity, however, the percentage of 
activity in the Program itself had to be based on the post-treatment 
period.
    This methodology provided several insights and permitted the 
Exchange to offer a more thorough analysis of the Program's impact. 
However, the Exchange believes that selection of securities with the 
highest share of consolidated volume in the Program for the treatment 
group created a biased treatment group. Securities with lower prices 
tend to trade more actively in the TRF as well as in the Program (Table 
12). The percentage value of on low-price stocks provides greater 
savings to investors. For example, $0.0010 price improvement per share 
for a $5.00 stock saves an investor $2.00 per $10,000 invested. The 
same per share price improvement on a $50 stock is worth just $0.20. 
Table 12 shows this relationship for the 2017-2018 treatment period 
used in the analysis for securities eligible for the Program.
    Tables 13 and 14 provide details of the changes in VWAPs, dollar-
based and basis points-based spreads for both the early comparison 
period and the late comparison period. As shown by the last two columns 
in Table 13, there was virtually no difference in spreads or VWAPs both 
pre- and post-treatment during the early comparison period. However, in 
the case of the treated 2017-2018 study, when compared to November 
2013-April 2014 pre-treatment period, there was an average price 
increase in control securities of 42%, compared to a drop of 14% for 
the treated stocks. This resulted in a small drop in dollar spreads and 
an increase in spreads in basis points for the treated stocks, while 
control stocks saw a small increase in percentage spreads and a larger 
rise in dollar spreads. Additionally, several of the treatment 
securities had average spreads during the pre-period near $0.01, the 
minimum, meaning a price drop was reflected solely in the spreads 
calculated in basis points and these stocks were tick-constrained.
    In conclusion, the Exchange believes that the Program was a 
positive experiment in attracting retail order flow to a public 
exchange. The order flow the Program attracted to the Exchange provided 
tangible price improvement to retail investors through a competitive 
pricing process unavailable in non-exchange venues. As such, despite 
the low volumes, the Exchange believes that the Program satisfied the 
twin goals of attracting retail order flow to the Exchange and allowing 
such order flow to receive potential price improvement. Moreover, the 
Exchange believes that the data collected during the Program supports 
the conclusion that the Program's overall impact on market quality and 
structure was not negative. Although the results of the Program 
highlight the substantial advantages that broker-dealers retain when 
managing the benefits of retail order flow, the Exchange believes that 
the level of price improvement guaranteed by the Program justifies 
making the Program permanent. The Exchange accordingly believes that 
the pilot Program's rules, as amended, should be made permanent.
    The Exchange notes that the proposed change is not otherwise 
intended to address any other issues and the Exchange is not aware of 
any problems that member organizations would have in complying with the 
proposed rule change.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\61\ in general, and 
Section 6(b)(5) of the Act,\62\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f(b).
    \62\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the proposal is consistent with these 
principles because it seeks to make permanent a pilot and associated 
rule changes that were previously approved by the Commission as a pilot 
for which the Exchange has subsequently provided data and analysis to 
the Commission, and that this data and analysis, as well as the further 
analysis in this filing, shows that the Program has operated as 
intended and is consistent with the Act. The Exchange also believes 
that the proposed rule change is consistent with these principles 
because it would increase competition among execution venues, encourage 
additional liquidity, and offer the potential for price improvement to 
retail investors. Furthermore, as noted, similar programs instituted by 
NYSE and Nasdaq BX have recently been approved by the Commission to 
operate on a permanent basis.\63\ The Exchange believes that its 
analysis, as well as the analysis conducted by NYSE and Nasdaq BX in 
their proposals for permanent approval, show that retail price 
improvement programs do not negatively impact market structure, and can 
therefore provide benefits to retail investors without negatively 
impacting the broader market.
---------------------------------------------------------------------------

    \63\ See note 13, supra. As also noted above, the Commission 
also recently approved a third exchange's retail liquidity program 
that had not been previously approved on a pilot basis. See note 14, 
supra.
---------------------------------------------------------------------------

    The Exchange also believes the proposed rule change is designed to 
facilitate transactions in securities and to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system because making the Program permanent would attract retail order 
flow to a public exchange and allow such order flow to receive 
potential price improvement. The data provided by the Exchange to the 
Commission staff demonstrates that the Program provided tangible price 
improvement to retail investors through a competitive pricing process 
unavailable in non-exchange venues and otherwise had an insignificant 
impact on the marketplace. The Exchange believes that making the 
Program permanent would encourage the additional utilization of, and 
interaction with, the NYSE and provide retail customers with an 
additional venue for price discovery, liquidity, competitive quotes, 
and price improvement. For the same reasons, the Exchange believes that 
making the Program permanent would promote just and equitable 
principles of trade and remove impediments to and perfect the mechanism 
of a free and open market.
    Additionally, the Exchange believes the proposed rule change is 
designed to facilitate transactions in securities and to remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system because the competition promoted by the 
Program facilitates the price discovery process and potentially 
generates additional investor interest in trading securities. Making 
the Program permanent will allow the Exchange to continue to provide 
the Program's benefits to retail investors on a

[[Page 47592]]

permanent basis and maintain the improvements to public price discovery 
and the broader market structure. The data provided to the Commission 
demonstrates that the Program provided tangible price improvement and 
transparency to retail investors through a competitive pricing process.
    For the reasons stated above, the Exchange believes that making the 
Program permanent would promote just and equitable principles of trade 
and remove impediments to and perfect the mechanism of a free and open 
market.
    Finally, as described further below in the Exchange's statement 
regarding the burden on competition, the Exchange also believes that it 
is subject to significant competitive forces and it would increase 
competition among execution venues, encourage additional liquidity, and 
offer the potential for price improvement to retail investors.
    For all of these reasons, the Exchange believes that the proposal 
is consistent with the Act.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
believes that making the Program permanent would continue to promote 
competition for retail order flow among execution venues. The Exchange 
also believes that making the Program permanent will promote 
competition between execution venues operating their own retail 
liquidity programs, including competition between the Program and 
similar programs currently operated by NYSE and Nasdaq BX on a 
permanent basis pursuant to a recently approved rule changes. Such 
competition will lead to innovation within the marketplace, thereby 
increasing the quality of the national market system and allowing 
national securities exchanges to compete both with each other and with 
off-exchange venues for order flow. Such competition ultimately 
benefits investors, and in this case specifically retail investors by 
providing multiple potential trading venues for the execution of their 
order flow, consistent with the principles of Regulation NMS, which was 
premised on promoting fair competition among markets. Finally, the 
Exchange notes that it operates in a highly competitive market in which 
market participants can easily direct their orders to competing venues, 
including off-exchange venues. In such an environment, the Exchange 
must continually review, and consider adjusting the services it offers 
and the requirements it imposes to remain competitive with other U.S. 
equity exchanges.
    For the reasons described above, the Exchange believes that the 
proposed rule change reflects this competitive environment.

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 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-2019-63 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-2019-63. 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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal offices 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-2019-63, and should be 
submitted on or before October 1, 2019.
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    \64\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\64\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19458 Filed 9-9-19; 8:45 am]
 BILLING CODE 8011-01-P


