[Federal Register Volume 84, Number 247 (Thursday, December 26, 2019)]
[Notices]
[Pages 71039-71042]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27728]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87789; File No. SR-NYSEArca-2019-90]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the NYSE
Arca Options Fee Schedule Relating to the MM FAANG Credit
December 18, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 9, 2019, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the NYSE Arca Options Fee Schedule
(``Fee Schedule'') relating to the MM FAANG Credit. The Exchange
proposes to implement the fee change effective December 9, 2019. The
proposed rule change is available on the Exchange's website at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to modify an incentive program
(described below), which is designed to encourage Market Makers to
provide more competitive prices and deeper liquidity in options on the
NYSE FANG+ Index (``NYSE FANG+''), which trades under the symbol FAANG.
FAANG is an acronym for the market's five most popular and best-
performing tech stocks, namely Facebook, Apple, Amazon, Netflix and
Alphabet's Google.
Currently, the Exchange offers a $5,000 credit to Market Maker
organizations--specifically, NYSE Arca Options Market Makers or Lead
Market Makers--that execute at least 500 total monthly contract sides
that open a position in FAANG on the Exchange (the ``MM FAANG Credit''
or ``Credit''). The Credit, which is applied against all Exchange fees
charged to a Market Maker, is currently capped at $50,000, so if more
than ten Market Maker organizations qualify for a MM FAANG Credit in a
calendar month, the MM FAANG Credit for each qualifying firm will be a
pro rata share of $50,000.\3\
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\3\ See Fee Schedule, NYSE Arca OPTIONS: TRADE-RELATED CHARGES
FOR STANDARD OPTIONS, MM FAANG Credit, available here: https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf.
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The Exchange proposes to continue to provide $50,000 in Credits to
encourage Market Maker organizations to provide liquidity in FAANG, but
provide for two different qualifying levels with different monthly
credits. As proposed, the Exchange proposes to add an alternative,
higher monthly credit of $10,000 for Market Maker Organizations that
execute at least 2,000 total monthly contract sides that open a
position in FAANG on the Exchange. This credit would be capped at
$25,000. Accordingly, if more than two firms qualify, they must share
$25,000 pro rata. The Exchange also proposes to reduce the total
credits available for firms that qualify for the current Credit from
$50,000 to $25,000, and similarly reduce the fewest number of
qualifying firms that would be entitled to the full Credit from eleven
to six. The Exchange believes that the proposed change would incent
firms that have historically qualified for the Credit to
[[Page 71040]]
trade greater volume to earn the higher (proposed) Credit. And,
believes that the lower (existing) volume threshold should still
attract firms (including those that have never achieved the Credit) to
trade the requisite volume in FAANG to earn the Credit.
The Exchange proposes to implement the fee change effective
December 9, 2019.
Background
The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. In Regulation NMS,
the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.''\4\
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\4\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (S7-10-04) (``Reg NMS
Adopting Release'').
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There are currently 16 registered options exchanges competing for
order flow. Based on publicly-available information, and excluding
index-based options, no single exchange has more than 16% of the market
share of executed volume of multiply-listed equity and ETF options
trades.\5\ Therefore, no exchange possesses significant pricing power
in the execution of multiply-listed equity & ETF options order flow.
More specifically, in the first quarter of 2019, the Exchange had less
than 10% market share of executed volume of multiply-listed equity &
ETF options trades.\6\
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\5\ The OCC publishes options and futures volume in a variety of
formats, including daily and monthly volume by exchange, available
here: https://www.theocc.com/market-data/volume/default.jsp.
\6\ Based on OCC data, see id., the Exchange's market share in
equity-based options declined from 9.57% for the month of January to
9.23% for the month of September.
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With respect to FAANG, this index is listed and traded only on the
Exchange and NYSE American LLC (``NYSE American''). However, this index
product competes with market participants that choose to create their
own synthetic index product by trading in the basket of securities that
comprise the FAANG index. This proposed fee change is designed to
increase liquidity for market participants that would like to trade
FAANG by encouraging Market Maker organizations to open more positions
in FAANG on the Exchange.
Proposed Fee Change
The Exchange proposes to modify the existing Credit and add an
alternative that offers a higher credit for firms that execute a higher
number of total monthly contract sides that open a position in FAANG on
the Exchange, as set forth in more detail below. With this proposed
change, the total amount available under the Credit would not be
changing. Rather, the Exchange would make available a higher per-firm
credit for firms that provide more liquidity in FAANG. The Exchange
believes the proposed modifications would further the Exchange's goal
of encouraging Market Makers to make a market in these (relatively) new
products, which would in turn, benefit market participants that are
interested in trading FAANG.
To effect this change, the Exchange proposes to modify the Credit
to reduce the cap on the credits available for the existing
qualification from $50,000 to $25,000. With this change, if more than
five (as opposed to more than ten) firms execute at least 500 total
monthly FAANG contract sides in a calendar month, the Credit for each
qualifying firm would be a pro rata share of $25,000 (down from
$50,000).\7\ The Exchange also proposes to make clear that the
limitation of five firms qualifying for the MM FAANG Credit applies to
the $5,000 credit.\8\
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\7\ See proposed Fee Schedule, NYSE Arca OPTIONS: TRADE-RELATED
CHARGES FOR STANDARD OPTIONS, MM FAANG Credit.
\8\ See id. In light of the proposed changes, to make the Fee
Schedule easier to navigate, the Exchange also proposes to describe
each alternative credit in bullet points, with typographical edits
to the current rule text for clarity, and to remove reference to
``$5,000'' where it appears in the current rule and to add the
concept of a ``specified minimum number'' of ``eligible contract
sides.'' See id.
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The Exchange also proposes to add an alternative Credit to the same
Market Maker organizations described above. As proposed, any such firm
that executes at least 2,000 total monthly contract sides that open a
position in FAANG on the Exchange would qualify for a credit of
$10,000; provided, however, that if more than two firms qualify for the
proposed (higher) FAANG Credit in a calendar month, the MM FAANG Credit
for each qualifying firm would be a pro rata share of $25,000.\9\ As
further proposed, a Market Maker firm that qualified for both Credits
would be eligible for only one of the two alternatives (i.e., the
higher). As proposed, the Exchange's maximum exposure under the Credit
would continue to be $50,000, but this cap would be split between the
two different qualifying rates.
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\9\ See id. As with the current Credit, only those FAANG
transactions marked as ``open'' would be eligible to be counted
towards the MM FAANG Credit. To add clarity and transparency to the
Fee Schedule, the Exchange also proposes to add the word ``FAANG''
prior to the word contracts to make clear that this MM FAANG Credits
applies only to such contracts. See id.
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The Exchange believes the proposed modified MM FAANG Credit would
further the Exchange's goal of encouraging trading in this (relatively)
new index product, in particular by encouraging Market Makers to
provide increased liquidity in tighter markets, which would in turn,
benefit all market participants through more opportunities to trade.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\10\ in general, and furthers the
objectives of Sections 6(b)(4) and (5) of the Act,\11\ in particular,
because it provides for the equitable allocation of reasonable dues,
fees, and other charges among its members, issuers and other persons
using its facilities and does not unfairly discriminate between
customers, issuers, brokers or dealers.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposed Rule Change Is Reasonable
The Exchange operates in a highly competitive market. The
Commission has repeatedly expressed its preference for competition over
regulatory intervention in determining prices, products, and services
in the securities markets. In Regulation NMS, the Commission
highlighted the importance of market forces in determining prices and
SRO revenues and, also, recognized that current regulation of the
market system ``has been remarkably successful in promoting market
competition in its broader forms that are most important to investors
and listed companies.'' \12\
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\12\ See Reg NMS Adopting Release, supra note 4, at 37499.
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There are currently 16 registered options exchanges competing for
order flow. Based on publicly-available information, and excluding
index-based options, no single exchange has more than 16% of the market
share of executed volume of multiply-listed equity and ETF options
trades.\13\ Therefore, no exchange possesses significant pricing power
in the execution of multiply-listed equity & ETF options order flow.
More specifically, in the third quarter of 2019, the Exchange had less
than 10% market
[[Page 71041]]
share of executed volume of multiply-listed equity & ETF options
trades.\14\
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\13\ See supra note 5.
\14\ Based on OCC data, see supra note 6, in 2019, the
Exchange's market share in equity-based options declined from 9.57%
for the month of January to 9.23% for the month of September.
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The Exchange believes that the ever-shifting market share among the
exchanges from month to month demonstrates that market participants can
shift order flow, or discontinue or reduce use of certain categories of
products, in response to fee changes. Accordingly, competitive forces
constrain options exchange transaction fees. Stated otherwise, changes
to exchange transaction fees can have a direct effect on the ability of
an exchange to compete for order flow.
While FAANG lists and trades only on the Exchange and NYSE
American, this index product competes with market participants that
choose to create their own synthetic index product by trading in the
basket of securities that comprise the FAANG index. This proposed fee
change is designed to increase liquidity for market participants that
would like to trade FAANG by encouraging Market Maker organizations to
open more positions in FAANG on the Exchange.
More specifically, the Exchange believes that the proposed
modification to the MM FAANG Credit is designed to generate additional
order flow to the Exchange by creating incentives to transact in FAANG,
which increased liquidity would benefit all market participants,
including non-Market Makers that are interested in trading FAANG. The
Exchange believes that the proposed change would incent firms that have
historically qualified for the Credit to trade greater volume to earn
the higher (proposed) Credit. And, believes that the lower (existing)
volume threshold should still attract firms (including those that have
never achieved the Credit) to trade the requisite volume in FAANG to
earn the Credit. To the extent that the proposed change attracts more
FAANG transactions to the Exchange, this increased order flow would
continue to make the Exchange a more competitive venue for order
execution, which, in turn, promotes just and equitable principles of
trade and removes impediments to and perfects the mechanism of a free
and open market and a national market system.
To the extent the proposed change continues to attract greater
volume and liquidity (to the Floor or otherwise), the Exchange believes
the proposed change would improve the Exchange's overall
competitiveness and strengthen its market quality for all market
participants. In the backdrop of the competitive environment in which
the Exchange operates, the proposed rule change is a reasonable attempt
by the Exchange to increase the depth of its market and improve trading
opportunities to better compete with other exchange offerings.
The Exchange cannot predict with certainty whether any firms would
avail themselves of this proposed fee change, as historically, whether
or when a firm qualifies for the MM FAANG Credit has varied month to
month. Assuming historical behavior can be predictive of future
behavior, the Exchange cannot predict the number of firms that may
qualify for the alternative MM FAANG Credit, but believes that firms
would be encouraged to take advantage of the modified Credit.
Finally, the Exchange believes that the technical changes to the
rule text (i.e., clarifying ``FAANG contract sides'' and including
concept of a specified minimum number of ``eligible contract sides'')
is reasonable as it would streamline the Fee Schedule, adding clarity
and transparency, thereby making the Fee Schedule easier for market
participants to navigate.\15\
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\15\ See supra notes 8, 9.
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The Proposed Rule Change Is an Equitable Allocation of Credits and Fees
The Exchange believes the proposed rule change is an equitable
allocation of its fees and credits. The proposal is based on the amount
and type of business transacted on the Exchange and Market Makers can
opt to avail themselves of the MM FAANG Credit or not. To the extent
that the proposed change attracts more FAANG transactions to the
Exchange, this increased order flow would continue to make the Exchange
a more competitive venue for, among other things, order execution.
Thus, the Exchange believes the proposed rule change would improve
market quality for all market participants on the Exchange and, as a
consequence, attract more order flow to the Exchange thereby improving
market-wide quality and price discovery.
The Proposed Rule Change Is Not Unfairly Discriminatory
The Exchange believes it is not unfairly discriminatory to modify
the MM FAANG Credit because the proposed modification would be
available to all similarly-situated market participants on an equal and
non-discriminatory basis.
The proposal is based on the amount and type of business transacted
on the Exchange and Market Maker organizations are not obligated to try
to achieve the MM FAANG Credit. In addition, Market Maker organizations
have increased obligations with respect to trading on the Exchange, and
the Exchange believes that making this this Credit available to Market
Maker organizations would more likely result in increased liquidity in
FAANG on the Exchange. To the extent that the proposed change attracts
a variety of transactions to the Exchange, this increased order flow
would continue to make the Exchange a more competitive venue for, among
other things, order execution. Thus, the Exchange believes the proposed
rule change would improve market quality for all market participants on
the Exchange and, as a consequence, attract more order flow to the
Exchange thereby improving market-wide quality and price discovery. The
resulting increased volume and liquidity would provide more trading
opportunities and tighter spreads to all market participants and thus
would promote just and equitable principles of trade, 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.
Finally, the Exchange believes that it is subject to significant
competitive forces, as described below in the Exchange's statement
regarding the burden on competition.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act, the Exchange does
not believe that the proposed rule change would impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. Instead, as discussed above, the Exchange believes
that the proposed changes would encourage the submission of additional
liquidity to a public exchange, thereby promoting market depth, price
discovery and transparency and enhancing order execution opportunities
for all market participants. As a result, the Exchange believes that
the proposed change furthers the Commission's goal in adopting
Regulation NMS of fostering integrated competition among orders, which
promotes ``more efficient pricing of individual stocks for all types of
orders, large and small.'' \16\
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\16\ See Reg NMS Adopting Release, supra note 4, at 37499.
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Intramarket Competition. The proposed change is designed to attract
additional order flow to the Exchange
[[Page 71042]]
by improving quote quality. The Exchange also believes the proposed
Credit, as modified, is procompetitive as it would further the
Exchange's goal of introducing (relatively) new products to the
marketplace and encouraging Market Makers to provide liquidity in these
products, which would in turn, benefit all market participants. Market
participants that do not wish to trade in FAANG are not obliged to do
so. To the extent that there is an additional competitive burden on
market participants that are not eligible for the modified MM FAANG
Credit (i.e., non-Market Maker organizations), the Exchange believes
that this is appropriate because the proposal would incent Market
Makers to transact in FAANG, which would enhance the quality of the
Exchange's markets and increases the volume of contracts traded here.
To the extent that this purpose is achieved, all of the Exchange's
market participants should benefit from the improved market liquidity.
Enhanced market quality and increased transaction volume that results
from the anticipated increase in order flow directed to the Exchange
will benefit all market participants and improve competition on the
Exchange. Further, the proposed Credit would be applied to all
similarly situated participants (i.e., Market Maker organizations),
and, as such, the proposed change would not impose a disparate burden
on competition either among or between classes of market participants.
Finally, the Exchange believes that the technical changes to the
rule text (i.e., clarifying ``FAANG contract sides'' and including
concept of a specified minimum number of ``eligible contract sides'')
do not impose an undue burden on competition. Instead, the proposed
changes would add clarity and transparency making the Fee Schedule
easier for market participants to navigate.\17\
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\17\ See supra notes 8, 9.
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Intermarket Competition. While there is limited intermarket
competition with respect to FAANG, as it lists and trades only on the
Exchange and NYSE American, this index product competes with market
participants that choose to create their own synthetic index product by
trading in the basket of securities that comprise the FAANG index on
other exchanges. This proposed fee change would therefore promote
intermarket competition because it is designed to increase liquidity
for market participants that would like to trade FAANG by encouraging
Market Maker organizations to open more positions in FAANG on the
Exchange. The Exchange believes that the proposed change could promote
competition between the Exchange and other execution venues, by
encouraging additional orders to be sent to the Exchange for execution.
The Exchange does not believe that the proposed change will impair the
ability of any market participants or competing order execution venues
to maintain their competitive standing in the financial markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A)\18\ of the Act and subparagraph (f)(2) of Rule 19b-
4\19\ thereunder, because it establishes a due, fee, or other charge
imposed by the Exchange.
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \20\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\20\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-90 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2019-90. 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-NYSEArca-2019-90, and should be
submitted on or before January 16, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27728 Filed 12-23-19; 8:45 am]
BILLING CODE 8011-01-P