[Federal Register Volume 82, Number 16 (Thursday, January 26, 2017)]
[Notices]
[Pages 8548-8551]
[FR Doc No: 2017-01718]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79846; File No. SR-NYSEArca-2016-130]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change, as Modified by Amendment No. 1,
Amending NYSE Arca Equities Rules 7.35 (Auctions), 7.10 (Clearly
Erroneous Executions), 7.31 (Orders and Modifiers), and 7.11 (Limit
Up--Limit Down Plan and Trading Pauses in Individual Securities Due to
Extraordinary Market Volatility)

January 19, 2017.

I. Introduction

    On October 4, 2016, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
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 NYSE Arca Equities Rules 7.35 (Auctions), 7.10 (Clearly Erroneous
Executions), 7.31 (Orders and Modifiers), and 7.11 (Limit Up--Limit
Down Plan and Trading Pauses in Individual Securities Due to
Extraordinary Market Volatility). The proposed rule change was
published for comment in the Federal Register on October 24, 2016.\3\
On December 6, 2016, the Commission extended the time period within
which to approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change to January 22, 2017.\4\ On January 18, 2017, the
Exchange filed Amendment No. 1 to the proposed rule change.\5\ The
Commission received no comments on the proposed rule change. This order
approves the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79107 (October 18,
2016), 81 FR 73159 (``Notice'').
    \4\ See Securities Exchange Act Release No. 79480, 81 FR 89525
(December 12, 2016).
    \5\ In Amendment No. 1, the Exchange stated that it anticipates
that it will implement the proposed rule change in the third quarter
of 2017. Because Amendment No. 1 does not materially alter the
substance of the proposed rule change or raise unique or novel
regulatory issues, Amendment No. 1 is not subject to notice and
comment. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2016-130/nysearca2016130-1507307-130821.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1

    In conjunction with the Twelfth Amendment to the National Market
System Plan to Address Extraordinary Market Volatility (``Plan''),\6\
the Exchange proposes to revise its Trading Halt Auction procedures and
to make related changes.
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    \6\ See Securities Exchange Act Release No. 79845 (January 19,
2017) (File No. 4-631).
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Auction Reference Price and Auction Collar for Trading Halt Auctions

    The Exchange proposes to revise the Auction Reference Price and the
Auction Collar for Trading Halt Auctions. Currently, the upper (lower)
boundary of the Auction Collar for a Trading Halt Auction is the
Auction Reference Price increased (decreased) by the price collar
threshold.\7\ The price collar threshold for a Trading Halt Auction is
10% for securities with an Auction Reference Price of $25.00 or less,
5% for securities with an Auction Reference Price greater than $25.00
and less than or equal to $50.00, or 3% for securities with an Auction
Reference Price greater than $50.00.\8\ The Auction Reference Price for
a Trading Halt Auction is the last consolidated round-lot price of that
trading day, and if none, the prior day's Official Closing Price.\9\
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    \7\ See NYSE Arca Equities Rule 7.35(a)(10)(A).
    \8\ See id. NYSE Arca Equities Rule 7.35(a)(10)(A) also
specifies a sunset date for the price collar thresholds for Trading
Halt Auctions.
    \9\ See NYSE Arca Equities Rule 7.35(a)(8)(A).
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    Under the proposal, for a Trading Halt Auction following a trading
pause under NYSE Arca Equities Rule 7.11 (``Trading Pause''), if the
Limit State that preceded the Trading Pause was at the Lower (Upper)
Price Band, the Auction Reference Price would be the Lower (Upper)
Price Band.\10\ Moreover, for securities with an Auction Reference
Price above $3.00, the Price Collar Threshold for the Trading Halt
Auction would be the Auction Reference Price multiplied by 5 percent.
For securities with an Auction Reference Price of $3.00 and below, the
Price Collar Threshold would be $0.15.\11\
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    \10\ The proposed definition of Auction Reference Price for a
Trading Pause is designed to be consistent across listing exchanges.
For all other Trading Halt Auctions, the Auction Reference Price
would continue to be as specified in NYSE Arca Equities Rule
7.35(a)(8). See proposed NYSE Arca Equities Rule 7.35(e)(7)(A). The
Exchange also proposes to make a conforming change to NYSE Arca
Equities Rule 7.35(a)(8)(A) to add the clause ``except as provided
for in Rule 7.35(e)(7)(A),'' which would clarify that the Auction
Reference Price for a Trading Halt Auction following a Trading Pause
would be determined pursuant to NYSE Arca Equities Rule
7.35(e)(7)(A).
    \11\ See proposed NYSE Arca Equities Rule 7.35(e)(7). These
proposed Price Collar Thresholds are designed to be consistent
across listing exchanges. The Exchange also proposes to make
conforming changes to NYSE Arca Equities Rule 7.35(a)(10)(A) to
delete the reference to Trading Halt Auctions and to delete language
that specifies the sunset date for the current price collar
thresholds applicable to Trading Halt Auctions.
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    As proposed, for a Trading Halt Auction following a Trading Pause,
if the Auction Reference Price is the Lower (Upper) Price Band, the
Lower (Upper) Auction Collar would be the Auction Reference Price
decreased (increased) by the Price Collar Threshold, rounded down to
the nearest MPV, and the Upper (Lower) Auction Collar would be the
Upper (Lower) Price Band.\12\ For a Trading Halt Auction following a
trading halt due to extraordinary market volatility under NYSE Arca
Equities Rule 7.12 (``MWCB Halt'') or a regulatory halt, the Lower
(Upper) Auction Collar would be the Auction Reference Price decreased
(increased) by the Price Collar Threshold, rounded down to the nearest
MPV.\13\
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    \12\ See proposed NYSE Arca Equities Rule 7.35(e)(7)(B)(i). The
proposed Auction Collars for a Trading Pause are designed to be
consistent across listing exchanges.
    \13\ See proposed NYSE Arca Equities Rule 7.35(e)(7)(B)(ii).
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Extension of Re-Opening Time and Expansion of Auction Collars for
Trading Halt Auctions

    Currently, NYSE Arca Equities Rule 7.35(e)(2) provides that, after
trading in a security has been halted or paused, the NYSE Arca
Marketplace will disseminate the estimated time at which trading in
that security will re-open (``Re-Opening Time''). The Exchange proposes
to add to this rule that the initial Re-Opening Time for a Trading Halt
Auction following a Trading Pause or MWCB Halt would be at the
scheduled end of the Trading Pause or MWCB Halt.
    Under the proposal, the Exchange would extend the Re-Opening Time
for a Trading Halt Auction under certain circumstances. Specifically, a
Trading Halt Auction would not be conducted if the Indicative Match
Price,\14\ before being adjusted based on Auction Collars,\15\ is below
(above) the Lower (Upper) Auction Collar or if there is a sell (buy)
Market Imbalance,\16\ either of

which would be defined as an ``Impermissible Price.'' \17\ As proposed,
if there is an Impermissible Price at the initial Re-Opening Time, the
pause or halt would be extended an additional five minutes and a new
Re-Opening Time would be disseminated (``First Extension'').\18\ If
there is an Impermissible Price at the end of the First Extension, the
pause or halt would be extended an additional five minutes and a new
Re-Opening Time would be disseminated (``Subsequent Extension'').\19\
The trading pause or halt would continue to be extended if there is an
Impermissible Price at the Re-Opening Time for a Subsequent
Extension.\20\
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    \14\ NYSE Arca Equities Rule 7.35(a)(8) defines ``Indicative
Match Price'' to mean the best price at which the maximum volume of
shares, including the non-displayed quantity of Reserve Orders, is
tradable in the applicable auction, subject to Auction Collars. The
Exchange states that for purposes of proposed NYSE Arca Equities
Rule 7.35(e)(5), the Indicative Match Price would not be calculated
subject to Auction Collars. See Notice, supra note 3, at 73160.
    \15\ NYSE Arca Equities Rule 7.35(a)(10) defines ``Auction
Collar'' to mean the price collar thresholds for the Indicative
Match Price for the Core Open Auction, Trading Halt Auction, or
Closing Auction.
    \16\ NYSE Arca Equities Rule 7.35(a)(7)(B) defines ``Market
Imbalance'' to mean the imbalance of any remaining buy (sell) Market
Orders that are not matched for trading in the applicable auction.
    \17\ See proposed NYSE Arca Equities Rule 7.35(e)(5). The
Exchange also proposes to make conforming changes in NYSE Arca
Equities Rule 7.11(b).
    \18\ See proposed NYSE Arca Equities Rule 7.35(e)(6)(A). The
Exchange would not conduct a Trading Halt Auction before the Re-
Opening Time for the First Extension. See id.
    \19\ See proposed NYSE Arca Equities Rule 7.35(e)(6)(B). The
Exchange would conduct a Trading Halt Auction before the Re-Opening
Time for a Subsequent Extension if the Indicative Match Price,
before being adjusted based on Auction Collars, is within the
applicable Auction Collars and there is no Market Imbalance. See id.
    \20\ See proposed NYSE Arca Equities Rule 7.35(e)(6)(C).
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    Under the proposal, the Auction Collar on the side of the
Impermissible price would be widened for each Extension, and the
Auction Collar on the opposite side of the Impermissible Price would
remain the same as the last-calculated Auction Collar on that side.\21\
Specifically, if the Impermissible Price is on the side of the Lower
(Upper) Auction Collar, the last-calculated Lower (Upper) Auction
Collar would be decreased (increased) by a Price Collar Threshold and
the Upper (Lower) Auction Collar would stay the same.\22\ If the side
of the Impermissible Price changes from the Lower (Upper) Auction
Collar to the Upper (Lower) Auction Collar, the last-calculated Upper
(Lower) Auction Collar would be widened for that Extension and the
last-calculated Lower (Upper) Auction Collar would remain the same.\23\
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    \21\ See proposed NYSE Arca Equities Rule 7.35(e)(7)(C).
    \22\ See proposed NYSE Arca Equities Rule 7.35(e)(7)(C)(i).
    \23\ See proposed NYSE Arca Equities Rule 7.35(e)(7)(C)(ii). The
proposed extensions and widening of the Auction Collars are designed
to be consistent across listing exchanges.
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    As proposed, if the Re-Opening Time for a Trading Halt Auction
would be in the last ten minutes of trading before the end of Core
Trading Hours, the Exchange would not conduct a Trading Halt Auction in
that security and would not transition to continuous trading. Instead,
the Exchange would remain paused and would conduct a Closing Auction in
such security as provided for in NYSE Arca Equities Rule 7.35(d).\24\
In such circumstances, Market-on-Open (``MOO'') Orders, Limit-on-Open
(``LOO'') Orders, and IO Orders (as defined below) entered during the
pause or halt would not participate in the Closing Auction and would
expire at the end of the Core Trading Session.\25\ Additionally, the
Auction Collars for the Closing Auction for such security would be the
most recently widened Auction Collars for the Trading Halt Auction that
did not occur.\26\
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    \24\ See proposed NYSE Arca Equities Rule 7.35(e)(10). The
concept of holding a closing auction instead of a re-opening auction
if a Trading Pause exists in the last ten minutes of trading is
designed to be consistent across listing exchanges and to reflect
the Twelfth Amendment to the Plan.
    \25\ See proposed NYSE Arca Equities Rule 7.35(e)(10)(A).
    \26\ See proposed NYSE Arca Equities Rule 7.35(e)(10)(B). The
Exchange proposes to make a conforming change to NYSE Arca Equities
Rule 7.35(a)(10)(A) to make clear that the price collar thresholds
for a Closing Auction are defined in NYSE Arca Equites Rule
7.35(a)(10)(A), except as provided for in proposed NYSE Arca
Equities Rule 7.35(e)(10)(B).
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Other Changes to the Trading Halt Auction

    The Exchange proposes to adopt an Imbalance Offset Order (``IO
Order''), which would be a Limit Order to buy (sell) that is to be
traded only in a Trading Halt Auction.\27\ An IO Order would be
accepted only during a halt or pause, including any extensions.\28\ It
would participate in a Trading Halt Auction only if: (i) There is an
imbalance in the security on the opposite side of the market from the
IO Order after taking into account all other orders eligible to trade
at the Indicative Match Price; and (ii) the limit price of the IO Order
to buy (sell) is at or above (below) the Indicative Match Price.\29\
The working price of an IO Order to buy (sell) would be adjusted to be
equal to the Indicative Match Price, provided that the working price of
the IO Order would not be higher (lower) than its limit price.\30\ An
IO Order that participates in a Trading Halt Auction would be ranked in
time priority among IO Orders after all other orders eligible to
participate in the auction have been allocated.\31\
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    \27\ See proposed NYSE Arca Equities Rule 7.31(c)(5).
    \28\ See proposed NYSE Arca Equities Rule 7.31(c)(5)(A).
    \29\ See proposed NYSE Arca Equities Rule 7.31(c)(5)(B).
    \30\ See proposed NYSE Arca Equities Rule 7.31(c)(5)(C).
    \31\ See proposed NYSE Arca Equities Rule 7.31(c)(5)(D).
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    The Exchange also proposes to add an Auction Imbalance Freeze
before a Trading Halt Auction.\32\ As proposed, the Trading Halt
Auction Imbalance Freeze would begin five seconds before the Re-Opening
Time, including the Re-Opening Time for each Extension.\33\ If a pause
or halt is extended, the Trading Halt Auction Imbalance Freeze for the
prior period would end, new orders and order instructions received
during the prior period's Trading Halt Auction Imbalance Freeze would
be processed, and the Exchange would accept order entry and
cancellation as provided for in NYSE Arca Equities Rule 7.18(c) until
the next Trading Halt Auction Imbalance Freeze.\34\ During the Trading
Halt Auction Imbalance Freeze, order entry and cancellation would be
processed as follows:
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    \32\ See proposed NYSE Arca Equities Rule 7.35(e)(8). See also
proposed changes to NYSE Arca Equities Rule 7.35(a)(3).
    \33\ See proposed NYSE Arca Equities Rule 7.35(e)(8).
    \34\ See id.
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     MOO Orders and LOO Orders that are on the same side of the
Imbalance, would flip the Imbalance, or would create a new Imbalance
would be rejected.\35\
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    \35\ See proposed NYSE Arca Equities Rule 7.35(e)(8)(A).
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     Market Orders (other than MOO Orders) and Limit Orders
would be accepted but would not be included in the calculation of the
Indicative Match Price or the Trading Halt Auction Imbalance
Information.\36\ Such orders would participate in the Trading Halt
Auction only to offset the Imbalance that is remaining after all orders
entered before the Trading Halt Auction Imbalance Freeze, including the
non-display quantity of Reserve Orders, are allocated in the Trading
Halt Auction, and would be allocated in price-time priority under NYSE
Arca Equities Rules 7.36(c)-(g) consistent with the priority ranking
associated with each order and ahead of any IO Orders.\37\
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    \36\ See proposed NYSE Arca Equities Rule 7.35(e)(8)(B).
    \37\ See id.
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     Requests to cancel and requests to cancel and replace
Market Orders, LOO Orders, Limit Orders, and IO Orders would be
accepted but not processed until after the Trading Halt Auction
concludes, as provided for in NYSE Arca Equities Rule 7.35(h).\38\
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    \38\ See proposed NYSE Arca Equities Rule 7.35(e)(8)(C).

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     All other order instructions would be accepted.\39\
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    \39\ See proposed NYSE Arca Equities Rule 7.35(e)(8)(D).
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    The Exchange also proposes to specify that Limit Orders that were
eligible to participate in the Trading Halt Auction but did not
participate would transition to continuous trading as provided for in
NYSE Arca Equities Rule 7.35(h).\40\
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    \40\ See proposed NYSE Arca Equities Rule 7.35(e)(9).
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    The Exchange proposes to amend NYSE Arca Equities Rule 7.10(a) to
provide that executions as a result of a Trading Halt Auction are not
eligible for a request to review as clearly erroneous under NYSE Arca
Equities Rule 7.10(b).\41\
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    \41\ The proposal to exclude re-opening auction trades from the
clearly erroneous execution rule is designed to be consistent across
listing exchanges.
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Trading Halt Auction Imbalance Information

    NYSE Arca Equities Rule 7.35(a)(4) currently defines ``Auction
Imbalance Information'' to mean the information that is disseminated by
the Exchange for an auction and includes, if applicable, the Total
Imbalance, Market Imbalance, Indicative Match Price, and Matched
Volume.\42\ The Exchange now proposes to add the following to Auction
Imbalance Information: Auction Reference Price, Auction Collar, Book
Clearing Price,\43\ Far Clearing Price,\44\ Imbalance Freeze
Indicator,\45\ and Auction Indicator.\46\
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    \42\ See NYSE Arca Equities Rules 7.35(a)(7) (defining ``Total
Imbalance'' and ``Market Imbalance''); 7.35(a)(8) (defining
``Indicative Match Price''); and 7.35(a)(9) (defining ``Matched
Volume'').
    \43\ The Exchange proposes to define ``Book Clearing Price'' to
mean the price at which all interest eligible to participate in an
auction could be traded if not subject to the Auction Collar. The
Book Clearing Price would be zero if a sell (buy) imbalance cannot
be filled by any buy (sell) orders. See proposed NYSE Arca Equities
Rule 7.35(a)(11).
    \44\ The Exchange proposes to define ``Far Clearing Price'' to
mean the price at which Auction-Only Orders could be traded within
the Auction Collar. See proposed NYSE Arca Equities Rule
7.35(a)(12).
    \45\ The Exchange proposes to define ``Imbalance Freeze
Indicator'' to mean an indicator of whether a security is currently
in an Auction Imbalance Freeze. See proposed NYSE Arca Equities Rule
7.35(a)(14).
    \46\ The Exchange proposes to define ``Auction Indicator'' to
mean an indicator of whether an auction could be conducted, based on
the applicable Auction Collar and Imbalance. See proposed NYSE Arca
Equities Rule 7.35(a)(13).
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Other Changes Relating to Trading Pauses

    The Exchange proposes various changes to NYSE Arca Equities Rule
7.11. Specifically, the Exchange proposes to state that if a primary
listing market issues a Trading Pause, the Exchange would resume
trading as provided for in NYSE Arca Equities Rule 7.18(a).\47\ NYSE
Arca Equities Rule 7.18(a) provides that, if a UTP Listing Market
declares a UTP Regulatory Halt for a security, during Core Trading
Hours, the Exchange will halt trading until it receives the first Price
Band in the halted security. The Exchange also proposes to state that
if the Exchange is unable to re-open trading at the end of the Trading
Pause due to a systems or technology issue, it would immediately notify
the single plan processor responsible for consolidation of information
for the security pursuant to Rule 603 of Regulation NMS.\48\ In
addition, the Exchange proposes to delete obsolete rule text that
governed Trading Pauses before the Plan was fully implemented.\49\
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    \47\ See proposed NYSE Arca Equities Rule 7.11(b)(2). This
change is designed to be consistent across listing exchanges and to
reflect the Twelfth Amendment to the Plan. Relatedly, the Exchange
proposes to delete the rule text that currently states that if a
primary listing market issues a Trading Pause, the Exchange would
pause trading in that security until trading has resumed on the
primary listing market or notice has been received from the primary
listing market that trading may resume, and that if the primary
listing market does not re-open the security within 10 minutes of
notification of a Trading Pause, the Exchange may resume trading in
the security. See id.
    \48\ See proposed NYSE Arca Equities Rule 7.11(b)(1). This
change is designed to be consistent across listing exchanges and to
reflect the Twelfth Amendment to the Plan.
    \49\ See proposed changes to NYSE Arca Equities Rule 7.11(b).
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    The Exchange represents that it will announce the implementation
date of the proposed rule change via Trader Update to be issued after
this proposed rule change is approved. The Exchange anticipates that
this implementation will occur in the third quarter of 2017.\50\
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    \50\ See Amendment No. 1, supra note 5. For a more detailed
description of the proposed rule change, see Notice, supra note 3.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\51\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\52\ 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
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. As noted
above, the Commission received no comment letters regarding the
proposed rule change.
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    \51\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \52\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change is designed,
together with the Twelfth Amendment to the Plan,\53\ to address the
issues experienced on August 24, 2015 by reducing the number of repeat
Trading Pauses in a single NMS Stock.\54\ The Commission notes that the
proposed rule change is also designed to further the goal of
establishing a standardized approach for how Primary Listing Exchanges
would conduct certain aspects of an automated re-opening following a
Trading Pause, which should provide certainty for market participants
regarding how a security would re-open following a Trading Pause,
regardless of the listing exchange.\55\
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    \53\ See supra note 6.
    \54\ See Notice, supra note 3, at 73165.
    \55\ See id.
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    With respect to the proposed Auction Reference Price and Auction
Collars, the Commission finds reasonable the Exchange's belief that the
price of the limit state that preceded the Trading Pause (i.e., either
the Lower or Upper Price Band price) would better reflect the most
recent price of the security, and therefore should be used as the
Auction Reference Price.\56\ Moreover, the Commission believes that the
proposed method for calculating the initial Auction Collars (i.e., the
Auction Collar on the opposite side of the trading pressure would be
the Price Band in place before the Trading Pause was triggered) would
address the concept of mean reversion, as well as avoid a security from
trading outside of a price that it would have been permitted to trade
before the Trading Pause.\57\
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    \56\ See id.
    \57\ See Notice, supra note 3, at 73161-62, 73165. As noted
above, for MWCB Halts and regulatory halts, the Price Collar
Threshold would continue to be applied on both sides of the Auction
Reference Price. See supra note 13 and accompanying text.
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    The Commission believes that extending the Trading Pause and
widening Auction Collars on the side of the Impermissible Price would
be a measured approach to provide additional time to attract offsetting
interest, to help to address an imbalance that may not be resolved
within the prior Auction Collars, and to reduce the

potential for triggering another Trading Pause.\58\ Also, as the
Exchange noted, widening Auction Collars only in the direction of the
imbalance would address issues relating to the concept of mean
reversion.\59\ Moreover, the Commission notes that the proposal to
conduct a Closing Auction if a security is in a Trading Pause during
the last ten minutes of trading before the end of Regular Trading Hours
(instead of a Trading Halt Auction) would be consistent with the
Twelfth Amendment to the Plan.\60\
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    \58\ See Notice, supra note 3, at 73165. The Exchange notes that
applying specific aspects of the proposed changes to Trading Halt
Auctions following a MWCB Halt or regulatory halt would promote
consistency in how the Exchange conducts its Trading Halt Auctions,
thus reducing complexity in the marketplace. See id.
    \59\ See id.
    \60\ As the Exchange noted, the proposed changes related to the
treatment of MOO Orders, LOO Orders, and IO Orders under these
circumstances would provide transparency regarding how orders that
are designated to participate in a Trading Halt Auction only would
be handled. See Notice, supra note 3, at 73162. Also, as the
Exchange noted, if the Exchange goes directly from an unresolved
Trading Pause, MWCB Halt, or regulatory halt to a Closing Auction,
the existing narrower price collar thresholds applicable to the
Closing Auction could result in Auction Collars that do not
correlate to the trading condition for the stock. See id.
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    The Commission believes that precluding ETP Holders from requesting
a review of a Trading Halt Auction as a clearly erroneous execution is
appropriate. As the Exchange noted, the proposed re-opening procedures
would allow for widened collars, which may result in a re-opening price
that would be away from prior trading prices, but the re-opening price
would be the result of a measured and transparent process that reduces
the potential that such trade would be considered erroneous.\61\
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    \61\ See Notice, supra note 3, at 73165.
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    With respect to the proposed IO Order, as the Exchange noted, the
IO Order is designed to attract offsetting interest for Trading Halt
Auctions and would provide an option for market participants that are
willing to participate in an auction to offset an imbalance, but do not
want such orders to participate in continuous trading.\62\
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    \62\ See id. The Exchange notes that the proposed IO Order is
based in part on the Closing Offset Order offered by the New York
Stock Exchange LLC. See id.
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    The Commission notes that, according to the Exchange, the proposed
Trading Halt Auction Imbalance Freeze would provide market participants
with a brief period to assess the imbalance going into a Trading Halt
Auction.\63\ Moreover, during the Trading Halt Imbalance Freeze, order
entry and cancellation would be revised in a manner designed to reduce
imbalance.\64\ Further, the Exchange represents that allowing Limit
Orders that do not participate in a Trading Halt Auction, but have a
limit price within the applicable Auction Collars, to roll into
continuous trading likely would not impact the pricing of post-auction
trading and trigger another Trading Pause because the limit price of
such orders would have been within the same price range that trading
would have been permitted.\65\
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    \63\ See Notice, supra note 3, at 73165-66.
    \64\ See Notice, supra note 3, at 73166. Currently, the Exchange
provides an Auction Imbalance Freeze for the Early Open Auction,
Core Open Auction, and Closing Auction. See NYSE Arca Equities Rule
7.35(a)(3).
    \65\ See Notice, supra note 3, at 73166.
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    In addition, the Commission believes that the proposed enhancements
to the Auction Imbalance Information would further promote transparency
around Trading Halt Auctions.\66\
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    \66\ See id.
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    Finally, the Exchange represents that the proposed amendments to
NYSE Arca Equities Rule 7.11 would remove obsolete rule text and amend
the remaining rule text to conform to the Twelfth Amendment to the
Plan.\67\
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    \67\ See Notice, supra note 3, at 73165.
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    Based on the Exchange's representations mentioned above and in the
Notice, and for the foregoing reasons, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act \68\ and the rules and regulations
thereunder applicable to a national securities exchange.
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    \68\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\69\ that the proposed rule change (SR-NYSEArca-2016-130), as
modified by Amendment No. 1, be, and hereby is, approved.
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    \69\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\70\
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    \70\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01718 Filed 1-25-17; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 79, Number 62 (Tuesday, April 1, 2014)]
[Notices]
[Pages 18365-18367]
[FR Doc No: 2014-07188]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71805]

Order Granting a Limited Exemption From Rule 102 of Regulation M
Concerning the NYSE Arca, Inc.'s Crowd Participant Program Pilot

March 26, 2014.
    The Securities and Exchange Commission (``Commission'') approved a
proposed rule change of the NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') to add new NYSE Arca Equities Rule 7.25 (``New Rule 7.25'')
which establishes the Crowd Participant (``CP'') Program (``CP
Program'' or ``Program'') effective for one year on a pilot basis. The
CP Program permits certain market makers to become CPs, a new class of
equity trading permit holders.\1\ The Exchange states that the CP
Program is designed to incentivize quoting and trading volume in
certain low-volume exchange-traded products (``ETPs'') by providing
credit to CPs for certain market making activity that is funded by
participating issuers and credited to CPs from the Exchange's general
revenues.\2\ Participating issuers (or sponsors on behalf of the
issuer) fund the Program by paying non-refundable ``CP Program Fees,''
which are then credited to the Exchange's general revenues.\3\ The
Commission believes that payment of the CP Program Fee by the issuer
(or a sponsor on behalf of the issuer) for the purpose of incentivizing
market makers to participate as a CP in the issuer's securities would
constitute an indirect attempt by the issuer to induce a bid for or a
purchase of a covered security during a restricted period.\4\ As a
result, absent exemptive relief, participation in the CP Program by an
issuer (or sponsor on behalf of the issuer) would violate Rule 102 of
Regulation M.\5\ This order grants a limited exemption from Rule 102 of
Regulation M solely to permit issuers and sponsors to participate in
the Program during the pilot, subject to certain conditions described
below.
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    \1\ See New Rule 7.25(a) (establishing the requirements to be a
CP); see also NYSE Arca Equities Rule 1.1(m) and (n) (defining
equity trading permits/ETPs and ETP holders) and Securities Exchange
Act Release No. 71804 (March 26, 2014) (NYSE Arca 2013-141)
(``Approval Order'') (providing more details regarding the Program).
    \2\ See Approval Order. The Approval Order contains a detailed
description of the Program. The proposed rule change was published
for comment in the Federal Register on December 26, 2013. Securities
Exchange Act Release No. 71146 (Dec. 19, 2013), 78 FR 78426 (Dec.
26, 2013). The Approval Order grants approval of the proposed rule
change, as modified by Amendment No. 2.
    \3\ The program is similar to other programs, such as NYSE
Arca's ``ETP Incentive Program'' and NASDAQ Stock Market LLC's
``Market Quality Program,'' designed to permit ETP issuers to pay
incentives to those who make markets in their ETPs. See Securities
Exchange Act Release No. 69706 (June 6, 2013); 78 FR 35340 (June 12,
2013) (NYSEArca 2013-34) and Securities Exchange Act Release No.
69195 (Mar. 20, 2013); 78 FR 18393 (Mar. 26, 2013) (NASDAQ 2012-
137); see also Securities Exchange Act Release No. 69707 (June 6,
2013); 78 FR 35330 (June 12, 2013) (approving a limited exception
from Rule 102 of Regulation M concerning NYSE Arca's ETP Incentive
Program pilot) and Securities Exchange Act Release No. 69196 (Mar.
20, 2013); 78 FR 18410 (Mar. 26, 2013) (approving a limited
exception from Rule 102 of Regulation M concerning NASDAQ Stock
Market LLC's Market Quality Program pilot).
    \4\ See Securities Exchange Act Release No. 67411 (July 11,
2012), 77 FR 42052 (July 17, 2012) (stating that ``[t]he Commission
believes that issuer payments made under the [similar ETP Incentive
and Market Quality Programs] would constitute an indirect attempt by
the issuer of a covered security to induce a purchase or bid in a
covered security during a restricted period in violation of Rule
102'' and that ``[u]nder the [similar ETP Incentive Program], the
purpose of the Program is `to create [an incentive program] for
issuers of certain ETPs listed' on NYSE Arca, which . . . could
induce bids or purchases for the issuer's security during a
restricted period''). Similarly, the issuer pays for the CP Program
for the stated purpose of incentivizing market makers to quote and
trade in certain low-volume ETPs, which also could induce bids or
purchases for the issuer's security during a restricted period. See
Approval Order.
    \5\ 17 CFR 242.102.
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    NYSE Arca stated that the CP Program is designed to incentivize
market makers to quote and trade in certain low-volume ETPs.\6\ In
addition, the Exchange states that the Program is designed to add
competition among existing qualified Market Makers on the Exchange.\7\
The Exchange states that the CP Program will offer an alternative to
the existing Lead Market Maker program on the Exchange and the ETP
Incentive Program (under NYSE Arca Equities Rule 8.800) for issuers to
consider when determining where to list their securities.\8\
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    \6\ See Approval Order.
    \7\ Id.
    \8\ Id.
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    An issuer of an ETP that participates in the CP Program would elect
to pay a ``CP Program Fee'' to NYSE Arca in an amount ranging from
$50,000 to $100,000 per year, with the actual amount to be determined
by the issuer.\9\ The CP Program Fee is in addition to the current
listing and annual fees applicable to the ETP and is paid by the issuer
to the Exchange's general revenues.\10\ Subject to the requirements set
forth in New Rule 7.25, a CP participating in the CP Program would
receive a payment monthly from NYSE Arca (``CP Payment'') in an amount
not to exceed the CP Program Fee, less a 5% NYSE Arca administration
fee, divided by the number of trading days in the calendar year.\11\
The payment structure of the CP Payment is specified in the Trading Fee
Schedule and tied to the performance of the CP.\12\ If no CP is
eligible to receive a CP Payment because the CP Program performance
standards were not met by any CP, no CP would receive a CP Payment.\13\
The voluntary Program established by New Rule 7.25 will be effective
for one year on a pilot basis.\14\
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    \9\ Id.
    \10\ Id.
    \11\ Id.
    \12\ Id.
    \13\ Id.
    \14\ Preamble to New Rule 7.25.
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    Under New Rule 7.25, NYSE Arca will be required to provide
notification on its Web site regarding: (i) The ETPs participating in
the CP Program, (ii) the date a particular ETP begins participating in
the CP Program, (iii) the date the Exchange receives written notice of
an issuer's intent to withdraw its ETP from the CP Program, and the
intended withdrawal date, if provided, (iv) the date a particular ETP
ceases participating in the CP Program, (v) the CPs assigned to each
ETP participating in the CP Program, (vi) the date the Exchange
receives written notice of a CP's intent to withdraw from its ETP
assignment(s) in the CP Program, and the intended withdrawal date, if
provided, and (vii) the amount of the CP Program Fee for each ETP.\15\
This page would also include a fair and balanced description of the CP
Program, including (i) a description of the CP Program's operation as a
pilot, including the effective date thereof, (ii) the potential
benefits that may be realized by an ETP's participation in the CP
Program, (iii) the potential risks that may be attendant with an ETP's
participation in the CP Program, (iv) the potential impact resulting
from an ETP's entry into and exit from the CP Program, and (v) how
interested parties can request additional information regarding the CP
Program and/or the ETPs participating therein.\16\ Furthermore, an
issuer that is approved to participate in the CP Program shall issue a
press release to the public, in a form and manner prescribed by the
Exchange, when it commences participation or ceases to participate in
the CP Program.\17\ Such press release would be issued, if practicable,
at least two days before the ETP commences or ceases participation in
the CP Program.\18\ The issuer also will be required to dedicate space
on its Web site, or, if it does not

have a Web site, on the Web site of the adviser or sponsor of the ETP,
to (i) include any such press releases and (ii) provide a hyperlink to
the dedicated page on NYSE Arca's Web site that describes the
Program.\19\
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    \15\ New Rule 7.25(c)(4).
    \16\ Id.
    \17\ New Rule 7.25(c)(5).
    \18\ Id.
    \19\ Id.
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    The Commission received no comments on the proposal.\20\ However,
certain commenters expressed concerns about similar ETP Incentive and
Market Quality Programs,\21\ including the departure from rules
precluding market makers from directly or indirectly accepting payment
from an issuer of a security for acting as a market maker.\22\ In
particular, commenters to those similar proposals discussed the
potential distortive impact on the natural market forces of supply and
demand.\23\ Commenters to those proposals also discussed what they
viewed as the failure of those programs, as originally conceived, to
adequately mitigate their potential negative impacts.\24\
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    \20\ See Approval Order.
    \21\ See note 2, supra.
    \22\ See, e.g., Letter from Gus Sauter, Managing Director and
Chief Investment Officer, Vanguard, dated June 7, 2012 (citing to
his comment letter regarding the similar NASDAQ Market Quality
Program, in which he stated, ``The additional factor of payments by
an issuer to a market maker would probably be viewed as a conflict
of interest since it would undoubtedly influence, to some degree, a
firm's decision to make a market and thereafter, perhaps, the prices
it would quote. Hence, what might appear to be independent trading
activity may well be illusory.''). In addition, another commenter
noted ``that market maker incentive programs, such as the [then-
proposed Program], represent a departure from the current rules
precluding market makers from accepting payment from an issuer of a
security for acting as a market marker'' yet supported the concept
of market maker incentive programs on a pilot basis. Letter from Ari
Burstein, Investment Company Institute (``ICI''), dated June 7,
2012. In a subsequent letter, however, the same commenter noted that
certain of its members opposed the Program as originally proposed
and stated that it ``could create a `pay-to-play' environment.''
Letter from Ari Burstein, ICI, dated Aug. 16, 2012. The Approval
Order also notes that a number of aspects of the Program mitigate
the concerns that the rule in question, FINRA Rule 5250 (Payments
for Market Making), were designed to address.
    \23\ See, e.g., Letter from F. William McNabb, Chairman and
Chief Executive Officer, Vanguard, dated Aug. 16, 2012.
    \24\ See, e.g., Letter from Gus Sauter, Managing Director and
Chief Investment Officer, Vanguard, dated June 7, 2012.
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    One commenter stated that ``[i]ssuer payments to market makers have
the potential to distort market forces, resulting in spreads and prices
that do not reflect actual supply and demand.'' \25\ One commenter
questioned whether any safeguards could alleviate their concerns
regarding issuer payments to market makers.\26\ Another commenter
questioned whether information relating to the similar Market Quality
Program posted to that exchange's Web site in a similar manner as
required in New Rule 7.25(c)(4) by NYSE Arca would adequately address
investor protection and market integrity concerns because investors may
not search an exchange Web site for important information about a
particular ETP.\27\
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    \25\ Letter from F. William McNabb, Chairman and Chief Executive
Officer, Vanguard, dated Aug. 16, 2012.
    \26\ Letter from Ari Burstein, ICI, dated Aug. 16, 2012 (stating
that ``ICI members who oppose the Programs believe any fixes to the
proposed parameters will be insufficient to address their overall
concerns with market maker incentive programs'').
    \27\ Letter from Gus Sauter, Managing Director and Chief
Investment Officer, Vanguard, dated (May 3, 2012) (asking whether it
is likely that investors would consult NASDAQ's Web site for
information about which ETFs and market makers are participating in
the NASDAQ Market Quality Program given what is known about investor
behavior and, if not, asserting that ``most investors would not be
able to distinguish quotations that reflect true market forces from
quotations that have been influenced by issuer payments'').
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Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security
holders, or any affiliated purchaser of such persons, directly or
indirectly, from bidding for, purchasing, or attempting to induce any
person to bid for or purchase a covered security \28\ during the
applicable restricted period in connection with a distribution of
securities effected by or on behalf of an issuer or selling security
holder, except as specifically permitted in the rule.\29\ As mentioned
above, the Commission believes that the payment of the CP Program Fee
would constitute an indirect attempt to induce a bid for or purchase of
a covered security during the applicable restricted period.\30\ As a
result, absent exemptive relief, participation in the Program by a
sponsor or issuer would violate Rule 102.
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    \28\ Covered security is defined as any security that is the
subject of a distribution, or any reference security. 17 CFR
242.100(b).
    \29\ 17 CFR 242.102(a).
    \30\ See note 3, supra.
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    On the basis of the conditions set out below and the requirements
set forth in New Rule 7.25, which in general are designed to help
inform investors about the potential impact of the Program, the
Commission finds that it is appropriate in the public interest, and is
consistent with the protection of investors, to grant a limited
exemption from Rule 102 of Regulation M solely to permit the payment of
the CP Program Fee as set forth in New Rule 7.25 during the pilot.\31\
This limited exemption is conditioned on a requirement that the
security participating in the Program is an ETP and the secondary
market price for shares of the ETP must not vary substantially from the
net asset value of such ETP shares during the duration of the ETP's
participation in the Program. This condition is designed to limit the
Program to ETPs that have a pricing mechanism that is expected to keep
the price of the ETP shares tracking the net asset value of the ETP
shares, which should make the shares less susceptible to price
manipulation.
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    \31\ Rule 102(e) allows the Commission to grant an exemption
from the provision of Rule 102, either unconditionally or on
specified terms and conditions, to any transaction or class of
transactions, or to any security or class of securities.
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    This limited exemption is further conditioned on disclosure
requirements, as set forth below, which are designed to alert potential
investors that the trading market for the otherwise less liquid
securities in the Program may be affected by participation in the
Program. By making it easier for investors to be able to distinguish
which quotations may have been influenced by the CP Program Fee from
those that have not, and by requiring the issuers and sponsors to
provide information on the potential effect of Program participation on
the price and liquidity of a security participating in the Program, the
required enhanced disclosure requirements are designed to inform
potential investors about the potential distortive impact of the CP
Program Fee on the natural market forces of supply and demand. The
general disclosures required by New Rule 7.25, while helpful, may not
be sufficient to obtain this result.\32\ The required enhanced
disclosures are expected to promote greater investor protection by
helping to ensure that investors will have easier access to important
information about a particular ETP.\33\
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    \32\ New Rule 7.25(c)(5) does not contain any specific content
requirements for issuer or sponsor disclosure, other than a ``press
release'' when entering or leaving the Program and a hyperlink on a
dedicated issuer, advisor, or sponsor's Web page to the Exchange's
Web site that contains a number of specific disclosures about the
program. As outlined below, the enhanced disclosures required of the
issuer or sponsor as conditions to this order require that the
issuer's or sponsor's press release and Web page directly contain a
number of helpful disclosures for investors, including risks of the
program.
    \33\ The required Web site and press release disclosures should
be less burdensome than other methods of notifying investors of a
security's participation in the Program, such as requiring a ticker
symbol identifier or flagging participating CP quotes and trades.
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    As a practical matter, these requirements are not intended to be
duplicative with the issuer disclosures required by New Rule 7.25.
These requirements can be satisfied via the press release and dedicated
Web page

required by New Rule 7.25(c)(5), however. These materials must contain
all the required disclosures outlined below, and be in the manner
stated in the condition, in addition to any requirements of the
Exchange. Issuers or sponsors of products that are not registered under
the Investment Company Act of 1940, as amended (``1940 Act''), may also
meet the press release requirements of these enhanced disclosures in a
manner compliant with Regulation FD (other than Web site only
disclosure).\34\ We also note that, to the extent that information
about participation in the Program is material, disclosure of this kind
may already be required by the federal securities laws and rules.
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    \34\ See condition (4), infra.
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Conclusion

    It is therefore ordered, that issuers or sponsors who pay a CP
Program Fee are hereby exempted from Rule 102 of Regulation M solely to
permit the payment of the CP Program Fee as set forth in New Rule 7.25
in connection with a security participating in the Program during the
pilot, subject to the conditions contained in this order and compliance
with the requirements of New Rule 7.25.
    This exemption is subject to the following conditions:
    1. The security participating in the Program is an ETP and the
secondary market price for shares of the ETP must not vary
substantially from the net asset value of such ETP shares during the
duration of the security's participation in the Program;
    2. The issuer of the participating ETP, or sponsor on behalf of the
issuer, must provide prompt notice to the public by broadly
disseminating a press release prior to entry (or upon re-entry) into
the Program. This press release must disclose:
    a. The payment of a CP Program Fee is intended to generate more
quotes and trading than might otherwise exist absent this payment, and
that the security leaving the Program may adversely impact a
purchaser's subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (5) below;
    3. The issuer of the participating ETP, or sponsor on behalf of the
issuer, must provide prompt notice to the public by broadly
disseminating a press release prior to a security leaving the Program
for any reason, including termination of the Program. This press
release must disclose:
    a. The date that the security is leaving the Program and that
leaving the Program may have a negative impact on the price and
liquidity of the security which could adversely impact a purchaser's
subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (5) below;
    4. In place of the press releases required by conditions (2) and
(3) above, an issuer of a participating ETP that is not registered
under the 1940 Act, or sponsor on behalf of the issuer, may provide
prompt notice to the public through the use of such other written
Regulation FD compliant methods (other than Web site disclosure only)
that is designed to provide broad public dissemination as provided in
17 CFR 243.101(e), provided, however, that such other methods must
contain all the information required to be disclosed by conditions (2)
and (3) above;
    5. The issuer of the participating ETP, or sponsor on behalf of the
issuer, must provide prompt, prominent and continuous disclosure on its
Web site in the location generally used to communicate information to
investors about a particular security participating in the Program, and
for a security that has a separate Web site, the security's Web site
of:
    a. The security participating in the Program and ticker, date of
entry into the Program, and the amount of the CP Program Fee;
    b. Risk factors investors should consider when making an investment
decision, including that participation in the Program may have
potential impacts on the price and liquidity of the security; and
    c. Termination date of the pilot, anticipated date (if any) of the
security leaving the Program for any reason, date of actual exit (if
applicable), and that the security leaving the Program could adversely
impact a purchaser's subsequent sale of the security; and
    6. The Web site disclosure in condition (5) above must be promptly
updated if a material change occurs with respect to any information
contained in the disclosure.
    This exemptive relief expires when the pilot terminates, and is
subject to modification or revocation at any time the Commission
determines that such action is necessary or appropriate in furtherance
of the purposes of the Exchange Act. This exemptive relief is limited
solely to the payment of the CP Program Fee as set forth in New Rule
7.25 for a security that is an ETP participating in the Program,\35\
and does not extend to any other activities, any other security of the
trust related to the participating ETP, or any other issuers.\36\ In
addition, persons relying on this exemption are directed to the anti-
fraud and anti-manipulation provisions of the Exchange Act,
particularly Sections 9(a) and 10(b), and Rule 10b-5 thereunder.
Responsibility for compliance with these and any other applicable
provisions of the federal securities laws must rest with the persons
relying on this exemption. This order does not represent Commission
views with respect to any other question that the proposed activities
may raise, including, but not limited to the adequacy of the disclosure
required by federal securities laws and rules, and the applicability of
other federal or state laws and rules to, the proposed activities.
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    \35\ All ETPs that are allowed to participate in the Program
have a pool of underlying assets. See New Rule 7.25(b)(2). Should
the program be modified to include other ETPs, such as exchange-
traded notes, that do not have a pool of underlying assets, the
Commission would consider this a material change and outside the
scope of this exemptive relief.
    \36\ Other activities, such as ETP redemptions, are not covered
by this exemptive relief.
    \37\ 17 CFR 200.30-3(a)(6).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07188 Filed 3-31-14; 8:45 am]
BILLING CODE 8011-01-P