[Federal Register Volume 84, Number 188 (Friday, September 27, 2019)]
[Notices]
[Pages 51205-51210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20969]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87056; File No. SR-NYSE-2019-34]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, a 
Proposed Rule Change To Amend Exchange Rule 104 To Specify Designated 
Market Maker Requirements for Exchange Traded Products Listed on the 
Exchange

September 23, 2019.

I. Introduction

    On June 7, 2019, New York Stock Exchange LLC (``Exchange'' or 
``NYSE'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Exchange Rule 104 to specify Designated 
Market Maker (``DMM'') requirements for Exchange Traded Products 
(``ETPs'') listed on the Exchange pursuant to Exchange Rules 5P and 8P. 
The proposed rule change was published for comment in the Federal 
Register on June 25, 2019.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86151 (June 19, 
2019), 84 FR 29908 (June 25, 2019) (``Notice'').
---------------------------------------------------------------------------

    On July 24, 2019, the Commission extended to September 23, 2019, 
the time period in which to approve the proposal, disapprove the 
proposal, or institute proceedings to determine whether to approve or 
disapprove the proposal.\4\ The Commission has received one comment on 
the proposal.\5\ On September 18, 2019, the Exchange filed Amendment 
No. 1 to the proposal, which supersedes the original filing in its 
entirety. The Commission is publishing this notice to solicit comments 
on Amendment No. 1 from interested persons, and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 86460 (July 24, 
2019), 84 FR 36983 (July 30, 2019).
    \5\ See Letter from Bernard B. Fudim, to Secretary, Commission 
(June 19, 2019).
---------------------------------------------------------------------------

II. Self-Regulatory Organization's Description of the Proposal, as 
Modified by Amendment No. 1

    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 amend Rule 104 (Dealings and 
Responsibilities of DMMs) to specify DMM requirements for ETPs listed 
on the Exchange pursuant to Rules 5P and 8P.
Background
    Currently, the Exchange trades securities, including ETPs, on its 
Pillar trading platform on an unlisted trading privileges (``UTP'') 
basis, subject to Pillar Platform Rules 1P-13P.\6\ In the next phase of 
Pillar, the Exchange proposes to transition trading of Exchange-listed 
securities to the Pillar trading platform, which means that DMMs would 
be trading on Pillar in their assigned securities.\7\ Once transitioned 
to Pillar, such securities will also be subject to the Pillar Platform 
Rules 1P-13P.
---------------------------------------------------------------------------

    \6\ ``UTP Security'' is defined as a security that is listed on 
a national securities exchange other than the Exchange and that 
trades on the Exchange pursuant to unlisted trading privileges. See 
Rule 1.1.
    \7\ The Exchange has announced that, subject to rule approvals, 
the Exchange will begin transitioning Exchange-listed securities to 
Pillar on August 5, 2019, available here: https://www.nyse.com/publicdocs/nyse/markets/nyse/Revised_Pillar_Migration_Timeline.pdf. 
The Exchange will publish by separate Trader Update a complete 
symbol migration schedule.
---------------------------------------------------------------------------

    Rules 5P (Securities Traded) and 8P (Trading of Certain Exchange 
Traded Products) provide for the listing of certain ETPs \8\ on the 
Exchange that (1)

[[Page 51206]]

meet the applicable requirements set forth in those rules, and (2) do 
not have any component NMS Stock \9\ that is listed on the Exchange or 
is based on, or represents an interest in, an underlying index or 
reference asset that includes an NMS Stock listed on the Exchange. ETPs 
listed under Rules 5P and 8P are ``Tape A'' listings and would be 
traded pursuant to the rules applicable to NYSE-listed securities.
---------------------------------------------------------------------------

    \8\ Rule 1.1P(k) defines ``Exchange Traded Product'' as a 
security that meets the definition of ``derivative securities 
product'' in Rule 19b-4(e) under the Act.
    \9\ NMS Stock is defined in Rule 600 of Regulation NMS, 17 CFR 
242.600(b)(47).
---------------------------------------------------------------------------

    The Exchange does not currently list any ETPs and anticipates that 
it would not do so until Exchange-listed securities transition to 
Pillar. Once an ETP is listed, it will be assigned to a DMM pursuant to 
Rule 103B. The DMMs' role with respect to ETPs assigned to them will be 
subject to the same DMM rules governing all other listed securities, 
including Rules 36, 98, and 104. For example, DMMs will be responsible 
for facilitating the opening, reopening, and close of trading for 
assigned ETPs as required by Rule 104(a)(2) and (3). To facilitate DMM 
trading of Exchange-listed ETPs pursuant to Rules 5P and 8P, with this 
proposed change, the Exchange proposes to amend Rule 104 relating 
specified DMM requirements.
Current Rule 104
    Rule 104 sets forth the obligations of Exchange DMMs. Under Rule 
104(a), DMMs registered in one or more securities traded on the 
Exchange are required to engage in a course of dealings for their own 
account to assist in the maintenance of a fair and orderly market 
insofar as reasonably practicable. Rule 104(a) also enumerates the 
specific responsibilities and duties of a DMM, including: (1) 
Maintenance of a continuous two-sided quote, which mandates that each 
DMM maintain a bid or an offer at the National Best Bid (``NBB'') and 
National Best Offer (``NBO'') (together, the ``NBBO'' or ``inside'') at 
least 15% of the trading day for securities with a consolidated average 
daily volume of less than one million shares, and at least 10% for 
securities with a consolidated average daily volume equal to or greater 
than one million shares,\10\ and (2) the facilitation of, among other 
things, openings, re-openings, and the close of trading for the DMM's 
assigned securities, all of which may include supplying liquidity as 
needed.\11\
---------------------------------------------------------------------------

    \10\ See Rule 104(a)(1)(A).
    \11\ See Rule 104(a)(2)-(3). Rule 104(e) further provides that 
DMM units must provide contra-side liquidity as needed for the 
execution of odd-lot quantities eligible to be executed as part of 
the opening, reopening, and closing transactions but that remain 
unpaired after the DMM has paired all other eligible round lot sized 
interest.
---------------------------------------------------------------------------

    Rule 104(f) imposes an affirmative obligation on DMMs to maintain, 
insofar as reasonably practicable, a fair and orderly market on the 
Exchange in assigned securities, including maintaining price continuity 
with reasonable depth and trading for the DMM's own account when lack 
of price continuity, lack of depth, or disparity between supply and 
demand exists or is reasonably to be anticipated. The Exchange supplies 
DMMs with suggested Depth Guidelines for each security in which a DMM 
is registered, and DMMs are expected to quote and trade with reference 
to the Depth Guidelines.\12\
---------------------------------------------------------------------------

    \12\ See Rule 104(f)(3).
---------------------------------------------------------------------------

    Rule 104(g) provides that transactions on the Exchange by a DMM for 
the DMM's account must be effected in a reasonable and orderly manner 
in relation to the condition of the general market and the market in 
the particular stock. Rule 104(g)(1) also describes certain 
transactions on the Exchange by a DMM for the DMM's account must be 
effected in a reasonable and orderly manner in relation to the 
condition of the general market and the market in the particular stock. 
In addition, if a DMM unit engages in an ``Aggressing Transaction,'' 
i.e., a transaction that (i) is a purchase (sale) that reaches across 
the market to trade as the contra-side to the Exchange published offer 
(bid); and (ii) is priced above (below) the last-differently priced 
trade on the Exchange and above (below) the last differently-priced 
published offer (bid) on the Exchange, such DMM is subject to specified 
requirements to re-enter on the opposite side of the Aggressing 
Transaction. Rule 104(g) also sets forth the re-entry obligations for 
DMM transactions. Specifically, Rule 104(g)(2) provides that a DMM 
unit's obligation to maintain a fair and orderly market may require re-
entry on the opposite side of the market after effecting one or more 
transactions and that such re-entry should be commensurate with the 
size of the transaction(s) and the immediate and anticipated needs of 
the market.
    Rules 104(g)(2)(A) and (B) specify the re-entry obligations for 
Aggressing Transactions. Following an Aggressing Transaction, Rule 
104(g)(2)(A) requires the DMM unit to re-enter the opposite side of the 
market at or before the applicable PPP for that security commensurate 
with the size of the Aggressing Transaction. Under Rule 104(g)(2)(B), 
immediate re-entry on the opposite side of the market at or before the 
applicable PPP for the security commensurate with the size of the 
Aggressing Transaction is required if the Aggressing Transaction (i) is 
10,000 shares or more or has a market value of $200,000 or more, and 
(ii) exceeds 50% of the published offer (bid) size.
Proposed Rule Change
    To reflect the differences in how ETPs trade and the unique role of 
exchange market makers in the trading of ETPs, in order to facilitate 
DMM trading of Exchange-listed ETPs pursuant to Rules 5P and 8P, the 
Exchange proposes certain amendments to Rule 104.
    Unlike operating company securities listed on the Exchange, the 
value of ETPs are derived from the underlying assets owned. The end-of-
day net asset value (``NAV'') of an ETP is a daily calculation based 
off the most recent closing prices of the underlying assets and an 
accounting of the ETP's total cash position at the time of calculation. 
The NAV generally is calculated by taking the sum of fund assets, 
including any securities and cash, subtracting liabilities, and 
dividing by the number of outstanding shares. Additionally, ETPs are 
generally subject to a creation and redemption mechanism to ensure that 
the ETP's price does not fluctuate too far away from NAV, which 
mechanisms mitigate the potential for exchange trading to impact the 
price of an ETP.
    Moreover, each business day, ETPs make publicly available a 
creation and redemption ``basket'' which may, for example, be in the 
form of a portfolio composition file (i.e., a specific list of names 
and quantities of securities or other assets designed to track the 
performance of the portfolio as a whole). ETP shares are created when 
an Authorized Participant, typically a market maker or other large 
institutional investor, deposits the daily creation basket or cash with 
the issuer. In return for the creation basket or cash (or both), a 
``creation unit'' is issued to the Authorized Participant that consists 
of a specified number of ETF shares.\13\
---------------------------------------------------------------------------

    \13\ For example, assume a given ETP is designed to track the 
performance of a specific index. An Authorized Participant will 
generally purchase certain of the constituent securities of that 
index, then deliver those shares to the issuer. In exchange, the 
issuer gives the Authorized Participant a block of equally valued 
ETP shares, on a one-for-one fair value basis. This process also 
works in reverse. A redemption is achieved when the Authorized 
Participant accumulates a sufficient number of shares to constitute 
a creation unit and then exchanges these shares with the issuer, 
thereby decreasing the supply of ETP shares in the marketplace.
---------------------------------------------------------------------------

    The principal, and perhaps most important, feature of ETPs is their

[[Page 51207]]

reliance on an ``arbitrage function'' performed by market participants 
that influences the supply and demand of shares and, thus, trading 
prices relative to NAV. As noted above, new ETP shares can be created 
and existing shares redeemed based on investor demand; thus, ETP supply 
is generally open-ended. As the Commission has acknowledged, the 
arbitrage function helps to keep an ETP's price in line with the value 
of its underlying portfolio, i.e., it minimizes deviation from NAV.\14\ 
Generally, the higher the liquidity and trading volume of an ETP, the 
more likely the ETP's price will not deviate from the value of its 
underlying portfolio. Market makers registered in ETPs play a key role 
in this arbitrage function and DMMs, along with other market 
participants, would perform this role for ETPs listed on the Exchange. 
In short, the Exchange believes that the arbitrage mechanism is 
generally an effective and efficient means of ensuring that intraday 
pricing in ETPs closely tracks the value of the underlying portfolio or 
reference assets.
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 75165, 80 FR 34729, 
34733 (June 17, 2015) (S7-11-15) (arbitrage ``generally helps to 
prevent the market price of ETP Securities from diverging 
significantly from the value of the ETP's underlying or reference 
assets''). See also generally id., 80 FR at 34739 (``In the 
Commission's experience, the deviation between the daily closing 
price of ETP Securities and their NAV, averaged across broad 
categories of ETP investment strategies and over time periods of 
several months, has been relatively small[,]'' although it had been 
``somewhat higher'' in the case of ETPs based on international 
indices.).
---------------------------------------------------------------------------

    To reflect the role of market makers--including DMMs--in the 
trading of ETPs, the Exchange proposes to amend Rule 104 in several 
respects. First, the Exchange proposes to exclude ETPs from the re-
entry obligations for Aggressing Transactions in Rule 104(g)(2) (Re-
Entry Obligations). The Exchange believes that because of the unique 
characteristics of ETPs--in particular, that ETPs trade at intra-day 
market prices rather than at NAV and the existence of arbitrage pricing 
mechanisms that are designed to help ensure that secondary market 
prices of ETP shares do not vary substantially from the NAV--the re-
entry obligations set forth in Rule 104(g)(2) not only are not 
necessary, but also could impede the ability of a DMM to effectively 
make markets in ETPs. For example, a market maker engaging in the 
arbitrage function may need to update the quote for an ETP to bring the 
price of the security in line with the underlying assets. If updating 
the quote consistent with that arbitrage function were to require the 
DMM to first to engage in an Aggressing Transaction (i.e., to trade 
with the existing BBO in order to post a new quote), the Exchange 
believes that the current re-entry obligations for Aggressing 
Transactions would defeat the purpose of the DMM engaging in such 
Aggressing Transaction to update the quote in the first place. More 
specifically, the re-entry obligation could be inconsistent with the 
new quote that the DMM is seeking to post as part of the arbitrage 
function. Indeed, the Exchange believes that without the proposed 
changes, DMMs assigned to ETPs would be at a competitive disadvantage 
vis-[agrave]-vis registered market makers in the same ETP on competing 
exchanges as well as other market participants on the NYSE and would be 
impeded in their ability to effectively make competitive markets in 
their assigned ETP securities.
    To maintain the balance between DMM benefits and obligations under 
Rule 104, the Exchange proposes to amend Rule 104 to require heightened 
DMM quoting obligations for Exchange-listed ETPs. As proposed, for 
listed ETPs, DMMs would be required to maintain a bid or offer at the 
NBB and NBO at least 25% of the trading day. Time at the inside for 
ETPs would be calculated in the same way as other securities in which 
DMM units are registered as the average of the percentage of time the 
DMM unit has a bid or offer at the inside. In other words, this would 
be a portfolio-based quoting requirement. Orders entered by the DMM in 
ETPs that are not displayed would not be included in the inside quote 
calculation as is also currently the case for other securities in which 
DMM units are registered. Reserve or other non-displayed orders entered 
by the DMM in their assigned ETP would not be included in the inside 
quote calculations.
    To effectuate this change, Rule 104(a)(1)(A) would be amended as 
follows:
     The phrase ``for securities in which the DMM unit is 
registered'' would be added following the first sentence in Rule 
104(a)(1)(A) and the comma following that initial sentence would be 
removed;
     New subsections (i), (ii) and (iii) would be created;
     The phrase ``that are not ETPs'' would be added following 
``at least 15% of the trading day for securities'' in new subsection 
(i) and ``in which the DMM unit is registered'' would be deleted;
     The phrase ``of the trading day'' \15\ would added after 
``at least 10%'' and ``that are not ETPs'' would be added after ``for 
securities'' in new subsection (ii). The phrase ``in which the DMM unit 
is registered'' would be deleted since it would appear in the first 
sentence of the amended rule;
---------------------------------------------------------------------------

    \15\ This is a non-substantive conforming change that would 
mirror the current rule text for the 15% requirement.
---------------------------------------------------------------------------

     New subdivision (iii) providing that DMM units must 
maintain a bid or an offer at the inside ``at least 25% of the trading 
day for ETPs'' would be added;
     The phrase ``respective percentage'' would replace ``15% 
and 10%'' in the next to last sentence of Rule 104(a)(1)(A) and ``non-
displayed'' would replace ``hidden'' in the last sentence of the rule; 
and
     The phrase ``other than Aggressing Transactions involving 
an ETP'' would be added to Rule 104(g)(2)(A) and (B) following 
``Following an Aggressing Transaction.''
    The Exchange also proposes non-substantive amendments to replace 
the terms ``stock'' and ``stocks'' in Rule 104(f)(2) (Function of DMMs) 
with the terms ``security'' and ``securities,'' respectively, and to 
replace the term ``stock'' in Rule 104(g)(1) with ``security.'' The 
Exchange would also add a new subsection (5) to Rule 104(f) providing 
that, for those ETPs in which they are registered, DMM units will be 
responsible for the affirmative obligation of maintaining a fair and 
orderly market, including maintaining price continuity with reasonable 
depth for their registered ETPs in accordance with Depth Guidelines 
published by the Exchange. To provide the Exchange time to collect 
trading data adequate to calculate appropriate Depth Guidelines for 
listed ETPs, the Exchange proposes that these provisions would not be 
operative until 18 weeks after the approval of the proposed rule change 
by the Commission.\16\
---------------------------------------------------------------------------

    \16\ See, e.g., Securities Exchange Act Release Nos. 62479 (July 
9, 2010), 75 FR 41264, 41265 (July 15, 2010) (SR-NYSEAmex-2010-31) 
(providing for a delayed implementation of Depth Guidelines to 
enable the collection of trading data adequate to calculate the 
guidelines in connection with the Floor-based DMM trading of Nasdaq 
securities on a UTP basis). Such an approach is necessary so that 
appropriate Depth Guidelines may be calculated based on actual 
trading data on the Exchange. Accordingly, following implementation 
and roll-out of the pilot program, the Exchange proposes to collect 
60 trading days of trade data before implementing Depth Guidelines 
for trading ETPs securities on the Exchange within 30 calendar days 
of the collection of the trade data. See generally id., 75 FR at 
41267 & n. 19.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of 
Sections 6(b)(5) of the

[[Page 51208]]

Act,\18\ in particular, because 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 regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to, and perfect the mechanisms of, a 
free and open market and a national market system and, in general, to 
protect investors and the public interest and because it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes that proposed requirements for 
DMM trading of ETPs would remove impediments to and perfect the 
mechanism of a free and open market and a national market system by 
facilitating market making by DMMs in listed ETPs and maintaining the 
Exchange's current structure to trade listed securities. The Exchange 
believes that the proposed exclusion of listed ETPs from the 
requirements of Rule 104(g)(2) would not be inconsistent with the 
public interest and the protection of investors because the unique 
characteristics of ETPs, including that ETPs trade at intra-day market 
prices rather than end-of-day NAV and are constrained by arbitrage 
pricing mechanisms that are designed to ensure that secondary market 
prices of ETP shares do not vary substantially from the NAV, render 
those obligations unnecessary or potentially even harmful. As discussed 
above, the Exchange also believes the DMM obligations set forth in Rule 
104(g)(2) could impede the ability of a DMM to effectively make markets 
in ETPs.
    The Exchange believes that the proposed heightened quoting 
obligations for DMMs in listed ETPs requiring maintenance of a bid or 
offer at the inside of at least 25% of the trading day would maintain 
the balance of benefits and obligations under Rule 104 because 
exclusion of listed ETPs from the re-entry requirements for Aggressing 
Transactions under Rule 104(g)(2) would be offset by the heightened DMM 
quoting obligations for listed ETPs. DMMs would also be required to 
facilitate the opening, reopening, and closing of listed ETPs assigned 
to them, as required by Rule 104(a)(2) and (3), which is an obligation 
unique to the Exchange. As noted, listed ETPs would also be subject to 
the requirement that DMM transactions be effected in a reasonable and 
orderly manner in relation to the condition of the general market and 
the market in the particular stock. These safeguards are designed to 
ensure that DMM transactions in listed ETPs bear a reasonable 
relationship to overall market conditions and that DMMs cannot 
destabilize, inappropriately influence or manipulate a security. For 
the same reasons, the proposal would not alter or disrupt the balance 
between DMM benefits and obligations of being an Exchange DMM.
    The proposed heightened quoting obligation for listed ETPs assigned 
to a DMM would also encourage additional stable displayed liquidity on 
the Exchange in listed securities, thereby promoting price discovery 
and transparency. The Exchange further believes that by establishing 
distinct requirements for DMMs, the proposal is also designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade.
    The Exchange believes that the proposal would not be inconsistent 
with the public interest and the protection of investors. As noted, the 
proposal would subject DMMs to the Exchange's current structure for 
trading listed securities and the responsibilities and duties of DMMs 
set forth in Rule 104, including facilitating openings, reopenings, and 
closings and adding a heightened quoting obligation at the inside. In 
addition, the proposed rule would subject listed ETPs to the 
requirement that all DMM transactions be effected in a reasonable and 
orderly manner in relation to the condition of the general market and 
the market in the particular stock. Although the implementation of 
Depth Guidelines will be delayed, DMM units will still have the 
obligation once ETPs are listed and begin trading to maintain a fair 
and orderly market. The Exchange believes that the delayed 
implementation of Depth Guidelines will allow it to develop guidelines 
that are appropriately tailored for how ETPs will trade on the 
Exchange, which should improve the DMM units' ability to maintain a 
fair and orderly market and also the broader market for those 
securities here on the Exchange and on other markets.\19\
---------------------------------------------------------------------------

    \19\ See note 16, supra.
---------------------------------------------------------------------------

    For the foregoing reasons, the Exchange believes that the proposal 
is consistent with the Act.

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

    In accordance with Section 6(b)(8) of the Act,\20\ the Exchange 
believes that the proposed rule change would not 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 change 
would promote competition by facilitating the listing and trading of 
ETPs on the Exchange. The Exchange believes that without this proposed 
change, DMMs assigned to ETPs would be at a competitive disadvantage 
vis-[agrave]-vis registered market makers in the same ETP on competing 
exchanges or other market participants on the NYSE because if they were 
required to comply with the re-entry requirements for Aggressing 
Transactions in Rule 104(g)(2), they would be impeded in their ability 
to effectively make markets in their assigned ETP securities. The 
Exchange believes that the proposed heightened DMM quoting obligations 
in listed ETPs would promote competition by promoting the display of 
liquidity on an exchange, which would benefit all market participants. 
These proposed rule changes would facilitate the trading of Exchange-
listed ETPs by DMMs on Pillar, which would enable the Exchange to 
further compete with unaffiliated exchange competitors that also trade 
ETPs.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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. Discussion and Commission Findings

    After careful review of the proposal, as modified by Amendment No. 
1, and the comments received, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\21\ In particular, the 
Commission finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act,\22\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the

[[Page 51209]]

mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest; and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Commission also finds that the proposed rule 
change, as amended, is consistent with Section 6(b)(8) of the Act, 
which provides that the rules of a national securities exchange must 
not ``impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of'' the Act.\23\
---------------------------------------------------------------------------

    \21\ In approving this proposed rule change, the Commission has 
considered the propose rule's impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Exchange has proposed to alter certain requirements of NYSE 
Rule 104 (Dealings and Responsibilities of DMMs) with respect to ETPs. 
Currently, under NYSE Rule 104(g)(1), DMMs are prohibited from engaging 
in Aggressing Transactions in the last ten minutes prior to the 
scheduled close of trading that would result in a new high (low) price 
for a security on the Exchange for the day at the time of the DMM's 
transaction (``Prohibited Transactions''). Furthermore, DMMs are 
subject to certain quote re-entry obligations, following an Aggressing 
Transaction, under NYSE Rule 104(g)(2).
    In its original proposal, the Exchange proposed to exclude DMM 
transactions in ETPs from the definition of ``Aggressing Transactions'' 
in NYSE Rule 104(g)(1) and, by extension, to exempt DMM transactions in 
ETPs from the rule on Prohibited Transactions. The Exchange also 
proposed to exclude Aggressing Transactions in ETPs from the DMM re-
entry obligations in NYSE Rule 104(g)(2). The Exchange also proposed to 
require DMMs in ETPs to meet heightened quoting obligations for listed 
ETPs, requiring DMMs to maintain a quote at the national best bid or 
offer at least 25% of the trading day for ETPs (rather than the current 
requirement of 15% of the trading day for non-ETPs).
    In Amendment No. 1, the Exchange amended its original proposal 
significantly to no longer seek to exclude DMM transactions in ETPs 
from definition of Aggressing Transactions and thereby no longer seek 
to exempt DMM transactions in ETPs from the rule on Prohibited 
Transactions.\24\ As amended, the proposal would make two main 
substantive changes: (1) Exclude Aggressing Transactions in ETPs from 
the quote re-entry obligations in NYSE Rule 104(g)(2), and (2) require 
DMMs to meet heightened quoting obligations for ETPs during the trading 
day (maintaining bids or offers at the inside at least 25% of the 
trading day, instead of 15% of the trading day as required for non-
ETPs).\25\
---------------------------------------------------------------------------

    \24\ In the one comment letter received on the proposed rule 
change, the commenter states that ``any rule changes that might 
negatively affect the ability of the designated market manager to 
maintain the best interests of the investing public should not be 
impaired [sic].'' See supra note 5. As noted above, the Commission 
believes that Amendment No. 1 to the proposed rule change is 
consistent with the protection of investors and the public interest.
    \25\ As in the original proposal, the Exchange further proposes 
to apply the requirements pertaining to the function of DMMs in NYSE 
Rule 104(f)(2) and (3) to DMMs in ETPs on a delayed basis--upon 
implementation of the Depth Guidelines, but in no event later than 
eighteen weeks after the approval of this proposed rule change by 
the Commission. Similarly, the Exchange also proposes certain non-
substantive changes to the rule text of NYSE Rule 104 (e.g., 
replacing the term ``stock'' with ``security'') to accommodate the 
listing of ETPs.
---------------------------------------------------------------------------

    While the Exchange proposes to relieve DMMs in ETPs from the quote 
re-entry obligations in NYSE Rule 104(g)(2), the Exchange has argued 
that such an exclusion is necessary because DMMs engaging in an 
arbitrage function to keep an ETP's share price in line with the value 
of the ETP's underlying assets may need to update their quotes to align 
the price of the ETP and the value of the underlying assets, and may 
need to engage in Aggressing Transactions in the process. Therefore, 
the Exchange argues that requiring a DMM to re-enter a quote on the 
opposite side of the Aggressing Transaction would defeat the purpose of 
entering into the Aggressing Transaction to update its quote as part of 
the arbitrage function.\26\ Although the Exchange proposes to ease 
these DMM quoting obligations, it also proposes to strengthen other DMM 
quoting obligations in ETPs (i.e., increasing the inside quoting 
obligation from 15% to 25%).
---------------------------------------------------------------------------

    \26\ The Exchange also asserts that, without this proposed 
change, DMMs assigned to ETPs would be at a competitive disadvantage 
as compared to registered market makers in the same ETP on competing 
exchanges on the Exchange and would be impeded in their ability to 
effectively make competitive markets in their assigned ETP 
securities.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's amended proposal with 
respect to DMMs in ETPs is consistent with the Act. In 2015, when the 
Commission approved the NYSE's proposal to make the New Market Model 
permanent,\27\ the Commission noted the Prohibited Transactions 
rule,\28\ among other aspects of the New Market Model, and reiterated 
that the pilot program had been conducted, among other reasons, to seek 
``further evidence that the benefits proposed for DMMs are not 
disproportionate to their obligations.'' \29\ Given that the Exchange 
has proposed to offset relief from one quoting obligation with another 
heightened quoting obligation, and in light of the other requirements 
of NYSE Rule 104 that would continue to apply to DMM transactions in 
ETPs--particularly the requirements that DMMs assist in the maintenance 
of fair and orderly markets and that transactions by DMMs be effected 
in a reasonable and orderly manner in relation to the condition of the 
general market and the market of a particular security \30\--the 
Commission believes that the proposal would not substantially alter the 
balance of DMM benefits and obligations previously approved by the 
Commission.\31\
---------------------------------------------------------------------------

    \27\ See Securities Exchange Act Release No. 75578 (July 31, 
2015), 80 FR 47008 (Aug. 6, 2015) (SR-NYSE-2015-26) (``NMM Approval 
Order'').
    \28\ See NMM Approval Order, 80 FR at 47010.
    \29\ See id. at 47013.
    \30\ See NYSE Rule 104(a) and (g), respectively.
    \31\ The proposal would delay the operation of NYSE Rule 
104(f)(2) and (3) to DMMs in ETPs until the implementation of Depth 
Guidelines by the Exchange (but in no event later than eighteen 
weeks after the approval of this proposed rule change by the 
Commission). The Exchange represents that this delay is necessary to 
provide the Exchange time to collect trading data adequate to 
calculate the appropriate Depth Guidelines for listed ETPs. The 
Commission notes that this aspect of the proposal is consistent with 
a previous proposal approved by the Commission. See Securities 
Exchange Act Release Nos. 62479 (July 9, 2010), 75 FR 41264, 41265 
(July 15, 2010) (SR-NYSEAmex-2010-31).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with 
Sections 6(b)(5) and 6(b)(8) of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.

VI. Accelerated Approval of Proposed Rule Change, as Modified By 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. As discussed above, Amendment No. 1 
substantially modifies the original proposed rule change with respect 
to excluding ETPs Rule from the requirements in Rule 104(g) relating to 
Aggressing Transactions, narrowing the proposed rule change 
significantly so that the only substantive change to the existing rule 
would be to exclude Aggressing Transactions by DMMs in ETPs from the 
quote re-entry obligations and to increase the requirements for DMM 
quoting at the inside market in ETPs. As noted above, the Commission 
does not believe that the proposal substantially alters the balance of 
DMM benefits and obligations previously approved by the

[[Page 51210]]

Commission.\32\ Amendment No. 1 made no other substantive changes to 
proposal as published in the original Notice.\33\
---------------------------------------------------------------------------

    \32\ See supra note 31 and accompanying text.
    \33\ See Notice, supra note 3.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\34\ to approve the proposed rule change, SR-NYSE-
2018-34, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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-NYSE-2019-34 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-NYSE-2019-34. 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 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-NYSE-2019-34 and should be submitted on 
or before October 18, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20969 Filed 9-26-19; 8:45 am]
 BILLING CODE 8011-01-P


