Notice2022-16483
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, To Amend Rules 5P, 5.2(j)(8)(e), 8P, and 98
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 2, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 147 (Tuesday, August 2, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 147 (Tuesday, August 2, 2022)]
[Notices]
[Pages 47259-47271]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-16483]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95378; File No. SR-NYSE-2022-04]
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, To
Amend Rules 5P, 5.2(j)(8)(e), 8P, and 98
July 27, 2022.
I. Introduction
On January 14, 2022, 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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit the listing and trading
of certain exchange-traded products (``ETPs'') that overlie one or more
stocks listed on the Exchange. The proposed rule change was published
for comment in the Federal Register on January 31, 2022.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 94053 (Jan. 25,
2022), 87 FR 4982 (``Notice''). The Commission has received one
comment letter, which does not relate to the substance of the
proposed rule change. The comment letter is available at <a href="https://www.sec.gov/comments/sr-nyse-2022-04/srnyse202204-288838.htm">https://www.sec.gov/comments/sr-nyse-2022-04/srnyse202204-288838.htm</a>.
---------------------------------------------------------------------------
On March 9, 2022, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer 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.\5\ On April 28, 2022, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Exchange Act \6\ to determine whether
to approve or disapprove the proposed rule change.\7\ On June 30, 2022,
the Exchange filed Amendment No. 1 to the proposed rule change, which
amended and superseded the proposed rule change as originally filed.\8\
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\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 94392, 87 FR 14592
(Mar. 15, 2022). The Commission designated May 1, 2022 as the date
by which it should approve or disapprove, or institute proceedings
to determine whether to disapprove, the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 94814, 87 FR 26378
(May 4, 2022).
\8\ Amendment No. 1 can be can be found on the Commission's
website at: <a href="https://www.sec.gov/comments/sr-nyse-2022-04/srnyse202204-20133423-303642.pdf">https://www.sec.gov/comments/sr-nyse-2022-04/srnyse202204-20133423-303642.pdf</a>.
---------------------------------------------------------------------------
II. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment No. 1
Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rules 5P, 8P, 5.2(j)(8)(e) and 98 to
permit the listing of certain Exchange Traded Products (``ETPs'') \9\
that have a component NMS Stock listed on the Exchange or that are
based on, or represent an interest in, an underlying index or reference
asset that includes an NMS Stock listed on the Exchange (an ``NYSE
Component Security'' or, collectively, ``NYSE Component Securities'').
The amendments would also permit the trading of those ETPs on the NYSE
Trading Floor (``Trading Floor'' or ``Floor'').\10\
---------------------------------------------------------------------------
\9\ Rule 1.1(l) defines ``Exchange Traded Product'' as a
security that meets the definition of ``derivative securities
product'' in Rule 19b-4(e) under the Securities and Exchange Act of
1934 (the ``Act''). ETPs include, for example, securities listed and
traded on the Exchange pursuant to the following Exchange rules:
Rule 5.2(j)(3) (Investment Company Units); Rule 5.2(j)(5) (Equity
Gold Shares); Rule 5.2 (j)(6)(Equity Index-Linked Securities); Rule
8.100 (Portfolio Depositary Receipts); Rule 8.200 (Trust Issued
Receipts) (``TIR'')); Rule 8.201 (Commodity-Based Trust Shares);
Rule 8.202 (Currency Trust Shares); Rule 8.203 (Commodity Index
Trust Shares); Rule 8.204 (Commodity Futures Trust Shares); Rule
8.600 (Managed Fund Shares); and Rule 8.700 (Managed Trust
Securities).
\10\ The term ``Trading Floor'' is defined in Rule 6A to mean
the restricted-access physical areas designated by the Exchange for
the trading of securities, commonly known as the ``Main Room'' and
the ``Buttonwood Room.''
---------------------------------------------------------------------------
[[Page 47260]]
Currently, Exchange rules do not permit the listing of an ETP that
has underlying NYSE Component Securities. The proposed changes would
permit the listing of ETPs that satisfy the composition and
concentration requirements for equity-based products set forth in the
listing criteria of (1) current Rules 5.2(j)(3) (Investment Company
Units), 5.2(j)(6) (Equity Index-Linked Securities), 8.100 (Portfolio
Depositary Receipts), 8.600 (Managed Fund Shares), and (2) Rule
5.2(j)(8) as proposed to be amended to include requirements to ensure
diversification, non-concentration, liquidity, and capitalization.
Accordingly, these ETPs would not be covered by the restrictions
associated with the listing of ETPs that have an NYSE Component
Security.
Background
Current Listing Rules
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.\11\ ETPs traded on a
UTP basis on the Exchange are not assigned to a Designated Market Maker
(``DMM'') and are available for Floor brokers to trade in Floor-based
crossing transactions.\12\ The Exchange does not have any restrictions
on which ETPs may trade on a UTP basis on the Exchange.
---------------------------------------------------------------------------
\11\ ``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.
\12\ See Securities Exchange Act Release No. 82945 (March 26,
2018), 83 FR 13553, 13568 (March 29, 2018) (SR-NYSE-2017-36)
(approving Exchange rules to trade securities on a UTP basis on the
Pillar trading platform).
---------------------------------------------------------------------------
The Exchange's rules permit it to list ETPs under Rules 5P and 8P.
Specifically, Rules 5P (Securities Traded) and 8P (Trading of Certain
Exchange Traded Products) provide for the listing of certain ETPs on
the Exchange that (1) meet the applicable requirements set forth in
those rules, and (2) do not hold NYSE Component Securities.\13\ ETPs
listed under Rules 5P and 8P are ``Tape A'' listings and are traded
pursuant to the rules applicable to NYSE-listed securities.
Accordingly, once an ETP is listed, it is assigned to a DMM pursuant to
Rule 103B and the assigned DMM has obligations vis-[agrave]-vis such
securities as specified in Rule 104, including facilitating the
opening, reopening, and closing of, and trading in, such
securities.\14\
---------------------------------------------------------------------------
\13\ ETPs listed under NYSE Rules 8.601 (Active Proxy Portfolio
Shares) and 8.900 (Managed Portfolio Shares) are not subject to the
prohibition in the preamble to Rule 8P. See Securities Exchange Act
Release No. 90091 (October 5, 2020), 85 FR 64194, 64211 (October 9,
2020) (SR-NYSE-2020-77) (Notice); Securities Exchange Act Release
No. 90526 (November 27, 2020), 85 FR 78157 (December 3, 2020) (SR-
NYSE-2020-77) (Notice of Deemed Approval).
\14\ See Securities Exchange Act Release No. 87056 (September
23, 2019), 84 FR 51205 (September 27, 2019) (SR-NYSE-2019-34) (order
approving amendments to Rule 104 to specify DMM requirements for
ETPs listed on the Exchange pursuant to Rules 5P and 8P).
---------------------------------------------------------------------------
The Exchange recently adopted a new Rule 5.2(j)(8) \15\
establishing generic listing standards allowing the Exchange to list
and trade Exchange-Traded Fund Shares.\16\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 91029 (February 1,
2021), 86 FR 8420 (February 5, 2021) (SR-NYSE-2020-86) (approval
order).
\16\ See Release Nos. 33-10695; IC-33646; File No. S7-15-18
(ETFs) (September 25, 2019), 84 FR 57162 (October 24, 2019) (the
``Rule 6c-11 Release'').
---------------------------------------------------------------------------
Relevant Commission Precedent
While the trading of an equity security and its related derivative
product at the same physical location (``side-by-side trading'') \17\
and the practice of the same person or firm making markets in an equity
security and its related option (``integrated market making'' \18\) has
generally not been permitted, the Commission has approved integrated
market making and side-by-side trading for ``broad-based'' exchange
traded funds (``ETF'') and Trust-Issued Receipts (``TIR'') and related
options.\19\ The test for whether a product is ``broad-based,'' and
therefore not readily susceptible to manipulation, is whether the
individual components of the ETP are sufficiently liquid and well-
capitalized and the product is not over-concentrated.\20\ When these
criteria are met, and the product can therefore can be considered
``broad-based,'' the Commission has explicitly permitted integrated
market making and side-by-side trading in both the ETP and related
options, with no additional requirement for information barriers or
physical or organizational separation. In making these determinations,
the Commission balanced the potential improvements in the quality of
the markets for the securities and their related options against the
competitive, regulatory, and surveillance concerns.\21\
---------------------------------------------------------------------------
\17\ ``Side-by-side trading'' refers to the trading of an equity
security and its related derivative product at the same physical
location, though ``not necessarily by the same specialist or
specialist firm.'' See Securities Exchange Act Release No. 46213
(July 16, 2002), 67 FR 48232, 48233 (July 23, 2002) (SR-Amex-2002-
21) (``Release No. 46213'') (order approving side-by-side trading
and integrated market making of broad index-based ETFs and related
options); see also Securities Exchange Act Release No. 45454
(February 15, 2002), 67 FR 8567, 8568 n. 7 (February 25, 2002) (SR-
NYSE-2001-43) (``Release No. 45454'') (order approving approved
person of a specialist to act as a specialist or primary market
maker with respect to an option on a stock in which the NYSE
specialist is registered on the Exchange).
\18\ ``Integrated market making'' refers to the practice of the
same person or firm making markets in an equity security and its
related option. See Release No. 45454, 67 FR at 8568 n. 7.
\19\ See Release No. 46213, 67 FR at 48232 (approving side-by-
side trading and integrated market making for certain ETFs and TIRs
and related options); see also Securities Exchange Act Release No.
62479 (July 9, 2010), 75 FR 41264 (July 15, 2010) (SR-Amex-2010-31)
(``Release No. 62479'') (order approving side-by-side trading and
integrated market making in the QQQ ETF and certain of its component
securities where the QQQs met the composition and concentration
measures to be classified as a broad-based ETF).
\20\ See Release No. 62479, 75 FR at 41272. The Commission has
expressed its belief ``that, when the securities underlying an ETF
consist of a number of liquid and well-capitalized stocks, the
likelihood that a market participant will be able to manipulate the
price of the ETF is reduced.'' See id. See generally Securities
Exchange Act Release Nos. 56633 (October 9, 2007), 72 FR 58696
(October 16, 2007) (SR-ISE-2007-60) (order approving generic listing
standards for ETFs based on both U.S. and international indices,
noting they are ``sufficiently broad-based in scope to minimize
potential manipulation.''); 55621 (April 12, 2007), 72 FR 19571
(April 18, 2007) (SR-NYSEArca-2006-86) (same); 54739 (November 9,
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (same);
57365 (February 21, 2008), 73 FR 10839 (February 28, 2008) (SR-CBOE-
2007-109) (order approving generic listing standards for ETFs based
on international indices, noting they are ``sufficiently broad-based
in scope to minimize potential manipulation.''); 56049 (July 11,
2007), 72 FR 39121 (July 17, 2007) (SR-Phlx-2007-20) (same); 55113
(January 17, 2007), 72 FR 3179 (January 24, 2007) (SR-NYSE-2006-101)
(same); and 55269 (February 9, 2007), 72 FR 7490 (February 15, 2007)
(SR-Nasdaq-2006-50) (same). Although the relevant Commission
precedents involved 1940 Act investment products, the underlying
rationale applies with equal force to non-1940 Act products. Whether
a product is sufficiently broad-based such that the product is not
readily susceptible to manipulation should follow from an assessment
of whether the listing criteria are designed to ensure the
underlying individual components are sufficiently liquid and well-
capitalized and not over-concentrated. Whether or not a product is
issued by an investment company as defined by the 1940 Act is not
relevant to this analysis.
\21\ See Release No. 46213, 67 FR at 48234. In this regard, the
Commission noted that it must consider whether a side-by-side
trading or integrated market making proposal would permit market
participants to possess ``undetectable, material non-public market
information'' that could give certain market participants a trading
advantage over other market participants. See id.
---------------------------------------------------------------------------
In making a determination of whether an ETP is broad-based, the
Commission has relied on an exchange's listing standards. For instance,
in permitting integrated market making and side-by-side trading for two
types of ETPs and their related options, the Commission looked to the
then-American Stock Exchange LLC's listing standards that, as described
below, are very similar to
[[Page 47261]]
the Exchange's current listing standards.\22\
---------------------------------------------------------------------------
\22\ The American Stock Exchange LLC is now NYSE American, LLC.
---------------------------------------------------------------------------
In particular, the Commission observed that the ETPs at issue, an
ETF and a TIR, were securities based on ``groups of stocks'' whose
prices were based on the prices of their component securities. As such,
the Commission was of the view that a market participant's ability to
manipulate the price of the ETPs or the related options would be
``limited.'' \23\ Moreover, the Commission noted that the listing
standards required (1) each product to have a minimum of 13 securities
in the underlying portfolio, (2) that the most heavily weighted
component securities could not exceed 25% of the weight of the
portfolio, and (3) that the five most heavily weighted component
securities could not exceed 65% of the weight of the portfolio. As the
Commission concluded,
---------------------------------------------------------------------------
\23\ Release No. 46213, 67 FR at 48235.
[b]y limiting the proposal to broad-based ETFs and TIRs, concerns
regarding informational advantages about individual securities are
lessened.\24\
---------------------------------------------------------------------------
\24\ Id.
Finally, the Commission noted that the capitalization and liquidity
requirements imposed by the listing standards--for example, the
component securities that in the aggregate account for at least 90% of
the weight of the portfolio must have a minimum market value of at
least $75 million and the component securities representing 90% of the
weight of the portfolio each must have a minimum trading volume during
each of the last six month of at least 250,000 shares--``should reduce
the likelihood that any market participant has an unfair information
advantage about the ETF, TIR, its related options, or its component
securities, or that a market participant would not be able to
manipulate the prices of the ETFs, TIRs, or their related options.''
\25\
---------------------------------------------------------------------------
\25\ Id.
---------------------------------------------------------------------------
Proposed Rule Change
Because listed securities are assigned to DMMs, trading is on the
Floor of the Exchange and thus a listed ETP with one or more underlying
NYSE Component Securities could be assigned to a DMM that is also
assigned one or more NYSE Component Securities forming part of the
underlying ETP index or portfolio. The Exchange believes that it would
be consistent with the Act and with prior Commission actions with
respect to both integrated market making and side-by-side trading for
the Exchange to list certain ETPs that include NYSE Component
Securities based on the broad-based listing criteria contained in the
relevant listing rules.
Specifically, the Exchange proposes to permit the listing and
trading of five types of ETPs that include one or more underlying NYSE
Component Securities as long as the ETP independently satisfies the
quantitative generic listing criteria set forth in the listing rules
for those products. As discussed more fully below, four of the proposed
ETPs would rely on existing listing criteria. For ETPs that have
underlying NYSE Component Securities and that otherwise meet the
criteria for listing of Rule 5.2(j)(8), the Exchange proposes
additional broad-based listing criteria that must be satisfied in order
for the ETP to be listed and traded on the Exchange. To accomplish this
change, the Exchange proposes to specifically exclude these five types
of ETPs from the current prohibition on listing products with
underlying NYSE Component Securities in the preambles to Rules 5P and
Rule 8P, respectively. The Exchange would also amend Rule 5P to provide
that the Exchange may submit a rule filing pursuant to Section 19(b) of
the Act to permit the listing and trading of an ETP that does not
otherwise meet the specified listing standards. Finally, the Exchange
proposes to amend Rule 98(b)(7) to exclude from the definition of
``related products'' the five types of ETPs that are excluded from the
listing prohibition set forth in the preamble to Rule 5P or to Rule 8P.
Current Generic Listing Standards
The Exchange believes that four of its existing listing rules,
together with proposed additional criteria for ETPs that meet the
criteria for listing under Rule 5.2(j)(8), incorporate salient
composition and concentration criteria designed to ensure that listed
ETPs that have an NYSE Component Security would be sufficiently broad-
based to address potential manipulation concerns. Specifically, the
Exchange believes that ETPs that have underlying NYSE Component
Securities and that would otherwise qualify for listing under the
current criteria in Rule 5.2(j)(3), Supplementary Material .01(a), Rule
5.2(j)(6)(B)(I), Rule 8.100, Supplementary Material .01(a)(A), and Rule
8.600, Supplementary Material .01(a), could, by virtue of meeting the
listing criteria, list and trade on the Exchange with no additional
requirement for information barriers or physical or organizational
separation based on the broad-based nature of the current listing
criteria.
As discussed more fully below, the current listing standards for
each product incorporate composition and concentration criteria that
includes market cap, volume, weighting and minimum number of components
requirements, as follows.
Rule 5.2(j)(3), Supplementary Material .01(a)--Investment Company Units
(``Units'')
Units listed under Rule 5.2(j)(3), Supplementary Material .01(a)(A)
based on an index or portfolio of only US Component Stocks \26\ or US
Component Stocks and cash underlying a series of listed Units must meet
the following criteria on an initial and continued listing basis:
---------------------------------------------------------------------------
\26\ For purposes of Rule 5.2(j)(3), ``US Component Stock''
means an equity security that is registered under Sections 12(b) or
12(g) of the Act or an American Depositary Receipt (``ADR''), the
underlying equity security of which is registered under Sections
12(b) or 12(g) of the Act. See NYSE Rule 5.2(j)(3).
---------------------------------------------------------------------------
<bullet> The index or portfolio include a minimum of 13 component
stocks; \27\
---------------------------------------------------------------------------
\27\ See Rule 5.2(j)(3).01(a)(A)(4). The rule provides that
there shall be no minimum number of component stocks if (a) one or
more series of Units or Portfolio Depositary Receipts (as defined in
Section 2 of Rule 8P) constitute, at least in part, components
underlying a series of Units, or (b) one or more series of ETPs
account for 100% of the US Component Stocks portion of the weight of
the index or portfolio.
---------------------------------------------------------------------------
<bullet> Component stocks (excluding Units and securities defined
in Section 2 of Rule 8P) that in the aggregate account for at least 90%
of the weight of the US Component Stocks portion of the index or
portfolio (excluding such Units and securities defined in Section 2 of
Rule 8P) each will have a minimum market value of at least $75 million;
\28\
---------------------------------------------------------------------------
\28\ See Rule 5.2(j)(3).01(a)(A)(1).
---------------------------------------------------------------------------
<bullet> Component stocks (excluding Units and securities defined
in Section 2 of Rule 8P) that in the aggregate account for at least 70%
of the US Component Stocks portion of the weight of the index or
portfolio (excluding such Exchange Traded Products) each will have a
minimum monthly trading volume of 250,000 shares, or minimum notional
volume traded per month of $25,000,000, averaged over the last six
months; \29\ and
---------------------------------------------------------------------------
\29\ See Rule 5.2(j)(3).01(a)(A)(2).
---------------------------------------------------------------------------
<bullet> The most heavily weighted component stock component
(excluding Units and securities defined in Section 2 of Rule 8P) will
not exceed 30% of the US Component Stocks portion of the weight of the
index or portfolio, and, to the extent applicable, the five most
heavily weighted component stocks (excluding Exchange Traded Products)
will not exceed 65% of the US Component Stocks portion of the weight of
the index or portfolio.\30\
---------------------------------------------------------------------------
\30\ See Rule 5.2(j)(3).01(a)(A)(3).
---------------------------------------------------------------------------
[[Page 47262]]
Similarly, Units listed under Rule 5.2(j)(3), Supplementary
Material .01(a)(B) based on an index or portfolio of both US Component
Stocks and Non-US Component Stocks \31\ or US Component Stocks, Non-US
Component Stocks and cash, must meet the following criteria on an
initial and continued listing basis:
---------------------------------------------------------------------------
\31\ The term ``Non-U.S. Component Stock'' means an equity
security that is not registered under Sections 12(b) or 12(g) of the
Act and that is issued by an entity that (a) is not organized,
domiciled or incorporated in the United States, and (b) is an
operating company (including Real Estate Investment Trusts (REITS)
and income trusts, but excluding investment trusts, unit trusts,
mutual funds, and derivatives). See Rule 5.2(j)(3).
---------------------------------------------------------------------------
<bullet> The index or portfolio include a minimum of 20 component
stocks; \32\
---------------------------------------------------------------------------
\32\ See Rule 5.2(j)(3).01(a)(B)(4). The rule provides that
there shall be no minimum number of component stocks if (a) one or
more series of Units or Portfolio Depositary Receipts constitute, at
least in part, components underlying a series of Units, or (b) one
or more series of Exchange Traded Products account for 100% of the
weight of the combined US and Non-US Component Stocks portions of
the index or portfolio.
---------------------------------------------------------------------------
<bullet> Component stocks (similarly excluding Units and securities
defined in Section 2 of Rule 8P) that in the aggregate account for at
least 90% of the weight of the combined US and Non-US Component Stocks
portions of the index or portfolio (excluding such Units and securities
defined in Section 2 of Rule 8P) each will have a minimum market value
of at least $100 million; \33\
---------------------------------------------------------------------------
\33\ See Rule 5.2(j)(3).01(a)(B)(1).
---------------------------------------------------------------------------
<bullet> Component stocks (excluding Units and securities defined
in Section 2 of Rule 8P) that in the aggregate account for at least 70%
of the combined US and Non-US Component Stocks portions of the weight
of the index or portfolio (excluding such Exchange Traded Products)
each will have a minimum global monthly trading volume of 250,000
shares, or minimum global notional volume traded per month of
$25,000,000, averaged over the last six months; \34\ and
---------------------------------------------------------------------------
\34\ See Rule 5.2(j)(3).01(a)(B)(2).
---------------------------------------------------------------------------
<bullet> The most heavily weighted component stock component
(excluding Units and securities defined in Section 2 of Rule 8P) will
not exceed 25% of the combined US and Non-US Component Stocks portions
of the weight of the index or portfolio, and, to the extent applicable,
the five most heavily weighted component stocks (excluding Exchange
Traded Products) will not exceed 60% of the combined US and Non-US
Component Stocks portions of the weight of the index or portfolio.\35\
---------------------------------------------------------------------------
\35\ See Rule 5.2(j)(3).01(a)(B)(3).
---------------------------------------------------------------------------
These listing requirements for Units are generally comparable to
the listing requirements described above in the relevant precedents for
assessing whether a product is sufficiently broad-based to address
potential manipulation concerns.
First, the index or portfolio underlying Units must have the same
minimum number (13) of component stocks. For an index or portfolio
underlying Units listed under Rule 5.2(j)(3), Supplementary Material
.01(a)(B), based on an index or portfolio of both US Component Stocks
and Non-US Component Stocks or US Component Stocks, Non-US Component
Stocks and cash, the minimum component requirement is even stricter (20
component stocks).\36\
---------------------------------------------------------------------------
\36\ See Rule 5.2(j)(3).01(a)(B)(4).
---------------------------------------------------------------------------
Second, the component stocks in an index or portfolio underlying
Units must meet comparable capitalization and liquidity requirements,
i.e., at least 90% of the weight of the US Component Stocks portion of
the index or portfolio each must have a minimum market value of at
least $75 million. For an index or portfolio underlying Units listed
under Rule 5.2(j)(3), Supplementary Material .01(a)(B), the minimum
market value requirement is $100 million.
Third, the component stocks in an index or portfolio underlying
Units must also meet comparable minimum trading volume requirements,
i.e., component stocks in an index or portfolio accounting for at least
70% of the US Component Stocks portion of the weight of the index or
portfolio each must have a minimum monthly trading volume of 250,000
shares, or minimum notional volume traded per month of $25,000,000,
averaged over the last six months. Although the Exchange's listing
standard does not require 90% of the of the weight of the index or
portfolio to each have the same minimum monthly trading volume of
250,000 shares, the Exchange believes that the 70% requirement is still
significant enough to reduce the likelihood that any market participant
would be able to engage in price manipulation. The Exchange notes that
in approving the current listing requirements, the Commission was
satisfied that the these standards met the statutory requirements of
the Act and were designed, among other things, to prevent manipulation.
Moreover, the Exchange believes that the current requirements, coupled
with the Exchange's rigorous regulation and surveillance of trading
activity by DMMs and other Floor-based market participants discussed
below, are also sufficient to prevent potential manipulation.
Finally, the concentration requirements for Units are also
generally comparable. Indeed, for Units based on an index or portfolio
of only US Component Stocks or US Component Stocks and cash, the
requirement that the most heavily weighted component stock not exceed
30% of the US Component Stocks portion of the weight of the index or
portfolio is arguably stricter.
In the case of Units based on an index or portfolio of both US
Component Stocks and Non-US Component Stocks or US Component Stocks,
Non-US Component Stocks and cash, the requirement that the most heavily
weighted component stock not exceed 25% of the combined US and Non-US
Component Stocks portion of the weight of the index or portfolio is
also arguably comparable. The Exchange believes that the difference
between this requirement and the 30% standard set forth in the relevant
precedents is not sufficiently material to warrant the conclusion that
the Exchange's current standard would be insufficient to deter
potential manipulation, especially when considered in combination with
the other current requirements for Units, some of which are arguably
stricter. The requirement that the five most heavily weighted component
stocks (excluding Units and securities defined in Section 2 of Rule 8P)
not exceed 60% of the combined US and Non-US Component Stocks portions
of the weight of the index or portfolio is slightly less than the
relevant precedent, the Exchange believes the difference would not be
material given that the index or portfolio could also contain non-
Exchange listed US Component Stocks as well as Non-US Component Stocks.
As noted, in approving the current listing requirements, the Commission
was satisfied that the these standards met the statutory requirements
of the Act and were designed, among other things, to prevent
manipulation. Moreover, the Exchange believes that the current
requirements, coupled with the Exchange's rigorous regulation and
surveillance of trading activity by DMMs and other Floor-based market
participants discussed below, are also sufficient to prevent potential
manipulation.
Based on the foregoing, the Exchange believes Units with an NYSE
Component Security listing under the existing listing criteria would be
sufficiently broad-based to address potential manipulation concerns and
could thus list without additional requirements for information
barriers or physical or organizational separation.
[[Page 47263]]
Rule 5.2(j)(6)(B)(I)--Equity Index-Linked Securities
Equity Index-Linked Securities (``ETN'') based on an index or
indexes of, among other things, equity securities listed under Rule
5.2(j)(6)(B)(I) must meet the following initial listing criteria:
<bullet> Each underlying index has at least ten (10) component
securities; \37\
---------------------------------------------------------------------------
\37\ See Rule 5.2(j)(6)(B)(I)(1)(a). The rule provides that
there shall be no minimum of component securities if one or more
issues of Derivative Securities Products (i.e., Investment Company
Units (as described in Rule 5.2(j)(3)) and securities described in
Section 2 of Rule 8P) or Index-Linked Securities (as described in
Rule 5.2(j)(6)), constitute, at least in part, component securities
underlying an issue of Equity Index-Linked Securities.
---------------------------------------------------------------------------
<bullet> Each component security (excluding Derivative Securities
Products and Index-Linked Securities) has a minimum market value of at
least $75 million; \38\
---------------------------------------------------------------------------
\38\ See Rule 5.2(j)(6)(B)(I)(1)(b)(i). For each of the lowest
dollar weighted component securities in the index that in the
aggregate account for no more than 10% of the dollar weight of the
index (excluding Derivative Securities Products and Index-Linked
Securities), the rule provides that the market value can be at least
$50 million.
---------------------------------------------------------------------------
<bullet> Component stocks (excluding Derivative Securities Products
and Index-Linked Securities) that in the aggregate account for at least
90% of the weight of the index (excluding Derivative Securities
Products and Index-Linked Securities) each must have a minimum global
monthly trading volume of 1,000,000 shares, or minimum global notional
volume traded per month of $25,000,000, averaged over the last six
months; \39\
---------------------------------------------------------------------------
\39\ See Rule 5.2(j)(6)(B)(I)(1)(b)(ii).
---------------------------------------------------------------------------
<bullet> No underlying component security (excluding Derivative
Securities Products and Index-Linked Securities) will represent more
than 25% of the dollar weight of the index, and, to the extent
applicable, the five highest dollar weighted component securities in
the index (excluding Derivative Securities Products and Index-Linked
Securities) will not in the aggregate account for more than 50% of the
dollar weight of the index (60% for an index consisting of fewer than
25 component securities); \40\ and
---------------------------------------------------------------------------
\40\ See Rule 5.2(j)(6)(B)(I)(1)(b)(iii).
---------------------------------------------------------------------------
<bullet> 90% of the index's numerical value (excluding Derivative
Securities Products and Index-Linked Securities) and at least 80% of
the total number of component securities (excluding Derivative
Securities Products and Index-Linked Securities) will meet the then
current criteria for standardized option trading set forth in NYSE Arca
Rule 5.3-O.\41\
---------------------------------------------------------------------------
\41\ See Rule 5.2(j)(6)(B)(I)(1)(b)(iv). The ETN listing
requirements also contain two requirements that did not figure in
the SEC's analysis of the hallmarks of a broad-based ETP. First, 90%
of the index's numerical value (excluding Derivative Securities
Products and Index-Linked Securities) and at least 80% of the total
number of component securities (excluding Derivative Securities
Products and Index-Linked Securities) will meet the then current
criteria for standardized option trading set forth in NYSE Arca Rule
5.3-O. See Rule 5.2(j)(6)(B)(I)(1)(b)(iv). An index will not be
subject to this requirement if (a) no underlying component security
represents more than 10% of the dollar weight of the index
(excluding Derivative Securities Products and Index-Linked
Securities) and (b) the index has a minimum of 20 components
(excluding Derivative Securities Products and Index-Linked
Securities). See id. In addition, all component securities must be,
among others, securities (other than foreign country securities and
ADRs) that are issued by a reporting company under the Act or by an
investment company registered under the 1940 Act, which in each case
is listed on a national securities exchange, and an ``NMS stock''
(as defined in Rule 600 of Regulation NMS). See Rule
5.2(j)(6)(B)(I)(1)(b)(v).
---------------------------------------------------------------------------
These listing requirements for ETNs are comparable to the
requirements described above in the relevant precedents for assessing
whether a product is sufficiently broad-based to address potential
manipulation concerns.
First, indexes underlying ETNs must have a minimum of 10 component
securities. Although the precedents discussed above cited a minimum of
13 components, the Exchange does not believe the small difference
translates into less meaningful diversification to obviate potential
manipulation concerns, especially when considered in light of the
heightened market value and volume requirements for listed ETNs,
discussed below.
Second, each component security of the ETN's underlying index must
have a minimum market value of at least $75 million, which is stricter
than the requirement that only component securities that in the
aggregate account for at least 90% of the weight of the portfolio have
such a minimum market value.
Third, ETN component stocks that in the aggregate account for at
least 90% of the weight of the index must each have a minimum global
monthly trading volume of 1,000,000 shares, or minimum global notional
volume traded per month of $25,000,000, averaged over the last six
months, far in excess of the 250,000 shares noted in the Commission
precedents.
Fourth, no underlying component security can represent more than
25% of the dollar weight of the index, which is comparable, although
the five highest dollar weighted component securities in the index
cannot in the aggregate account for more than 50% of the dollar weight
of the index (60% for an index consisting of fewer than 25 component
securities), which is less than the 65% of the weight of the portfolio
noted in the Commission precedents. The Exchange believes that the
lower weighting for the five highest dollar weighted component
securities does not significantly dilute the requirement since the
weighting still comprises half of an index with 25 or more component
securities and 60% for an index composed of 25 or few securities. As
with the minimum component requirement, the Exchange believes that the
stricter market capitalization and volume requirements for listed ETNs
along with the other current requirements would mean that the
securities underlying the index would be larger and more liquid, and
therefore generally more difficult to manipulate.
Based on the foregoing, the Exchange believes ETNs that have an
NYSE Component Security and that list under the existing listing
criteria would be sufficiently broad-based to address potential
manipulation concerns and could thus list without additional
requirements for information barriers or physical or organizational
separation.
8.100, Supplementary Material .01(a)(A)--Portfolio Depositary Receipts
Rule 8.100, Supplementary Material 01(a)(A) provides that the
components of an index or portfolio of only US Component Stocks \42\
underlying a series of Portfolio Depositary Receipts must meet the
following criteria on an initial and continued listing basis:
---------------------------------------------------------------------------
\42\ For purposes of Rule 8.100, the term ``US Component Stock''
means an equity security that is registered under Sections 12(b) or
12(g) of the Act or an ADR, the underlying equity security of which
is registered under Sections 12(b) or 12(g) of the Act. See Rule
8.100(a)(3).
---------------------------------------------------------------------------
<bullet> Component stocks that in the aggregate account for at
least 90% of the weight of the index or portfolio each will have a
minimum market value of at least $75 million;
<bullet> Component stocks that in the aggregate account for at
least 90% of the weight of the index or portfolio each will have a
minimum monthly trading volume during each of the last six months of at
least 250,000 shares;
<bullet> The most heavily weighted component stock will not exceed
25% of the weight of the index or portfolio, and the five most heavily
weighted component stocks will not exceed 65% of the weight of the
index or portfolio;
<bullet> The index or portfolio will include a minimum of 13
component stocks; and
<bullet> All securities in the index or portfolio will be US
Component Stocks listed on a national securities exchange and will be
NMS Stocks as defined in
[[Page 47264]]
Rule 600 of Regulation NMS under the Act.
These listing requirements for Portfolio Depositary Receipts are
the same as the listing requirements described above in the relevant
precedents for assessing whether a product is sufficiently broad-based
to address potential manipulation concerns.
First, the index or portfolio for Portfolio Depositary Receipts
must have the same minimum number (13) of component stocks.
Second, the component stocks of Portfolio Depositary Receipts must
have the same capitalization and liquidity requirements, i.e., at least
90% of the weight of the US Component Stocks portion of the index or
portfolio each will have a minimum market value of at least $75
million.
Third, component stocks of Portfolio Depositary Receipts must also
have the same minimum trading volume, i.e., must in the aggregate
account for at least 90% of the US Component Stocks portion of the
weight of the index or portfolio each will have a minimum monthly
trading volume of 250,000 shares, during the last six months.
Finally, the concentration requirements are also comparable,
requiring heavily weighted component stocks to not exceed 25% of the US
Component Stocks portion of the weight of the index or portfolio, and,
to the extent applicable, the five most heavily weighted component
stocks not to exceed 65%.
Based on the foregoing, the Exchange believes Portfolio Depositary
Receipts that have an NYSE Component Security and that list under the
existing listing criteria would be sufficiently broad-based to address
potential manipulation concerns and could thus list without additional
requirements for information barriers or physical or organizational
separation.
Rule 8.600, Supplementary Material .01(a)--Managed Fund Shares
Supplementary Material .01(a) of Rule 8.600 provides that the
component stocks of the equity portion of a portfolio of Managed Fund
Shares that are U.S. Component Stocks \43\ shall meet the following
criteria initially and on a continuing basis:
---------------------------------------------------------------------------
\43\ Rule 8.600, Supp. Material .01(a) notes that ``U.S.
Component Stocks'' are the same as described in Rule 5.2(j)(3). See
note 20 [sic], supra.
---------------------------------------------------------------------------
<bullet> Component stocks (excluding Derivative Securities Products
and Index-Linked Securities) that in the aggregate account for at least
90% of the equity weight of the portfolio (excluding such Derivative
Securities Products and Index-Linked Securities) each shall have a
minimum market value of at least $75 million;
<bullet> Component stocks (excluding Derivative Securities Products
and Index-Linked Securities) that in the aggregate account for at least
70% of the equity weight of the portfolio (excluding such Derivative
Securities Products and Index-Linked Securities) each shall have a
minimum monthly trading volume of 250,000 shares, or minimum notional
volume traded per month of $25,000,000, averaged over the last six
months;
<bullet> The most heavily weighted component stock (excluding
Derivative Securities Products and Index-Linked Securities) shall not
exceed 30% of the equity weight of the portfolio, and, to the extent
applicable, the five most heavily weighted component stocks (excluding
Derivative Securities Products and Index-Linked Securities) shall not
exceed 65% of the equity weight of the portfolio;
<bullet> Where the equity portion of the portfolio does not include
Non-U.S. Component Stocks,\44\ the equity portion of the portfolio
shall include a minimum of 13 component stocks; \45\
---------------------------------------------------------------------------
\44\ See note 26, supra.
\45\ See Rule 8.600, Supp. Material .01(a)(1)(D). The rule
provides that there shall be no minimum number of component stocks
if (1) one or more series of Exchange Traded Products or Index-
Linked Securities constitute, at least in part, components
underlying a series of Managed Fund Shares, or (2) one or more
series of Derivative Securities Products or Index-Linked Securities
account for 100% of the equity weight of the portfolio of a series
of Managed Fund Shares.
---------------------------------------------------------------------------
<bullet> Except as provided in the Rule, equity securities in the
portfolio shall be U.S. Component Stocks listed on a national
securities exchange and shall be NMS Stocks as defined in Rule 600 of
Regulation NMS under the Act; and
<bullet> ADRs in a portfolio may be exchange-traded or non-
exchange-traded. However, no more than 10% of the equity weight of a
portfolio shall consist of non-exchange-traded ADRs.
These listing requirements for Managed Fund Shares are either the
same as or generally comparable to the listing requirements described
above in the relevant precedents for assessing whether a product is
sufficiently broad-based to address potential manipulation concerns.
First, the portfolio for Managed Fund Shares where the equity
portion of the portfolio does not include Non-U.S. Component Stocks
must include the same minimum number (13) of component stocks. Where
the equity portion of a portfolio of Managed Fund Shares includes Non-
U.S. Component Stocks, the equity portion of the portfolio must include
a minimum of 20 component stocks, which is a stricter requirement.
Second, the component stocks of Managed Fund Shares must meet the
same capitalization and liquidity requirements, i.e., at least 90% of
the weight of the US Component Stocks portion of the index or portfolio
each must have a minimum market value of at least $75 million.
Third, component stocks of Managed Fund Shares must also meet
comparable minimum trading volume requirements, i.e., must in the
aggregate account for at least 70% of the US Component Stocks portion
of the weight of the index or portfolio each will have a minimum
monthly trading volume of 250,000 shares, during the last six months.
Once again, although the Exchange's listing standard does not require
90% of the weight of the index or portfolio to each have the same
minimum monthly trading volume of 250,000 shares, the Exchange believes
that the 70% requirement is significant enough to meaningfully reduce
the likelihood that any market participant would be able to engage in
price manipulation. The Exchange notes that in approving the current
listing requirements, the Commission was satisfied that the these
standards met the statutory requirements of the Act and were designed,
among other things, to prevent manipulation. Moreover, the Exchange
believes that the 70% requirement, coupled with the Exchange's rigorous
regulation and surveillance of trading activity by DMMs and other
Floor-based market participants discussed below, is also sufficient to
prevent potential manipulation.
Finally, the concentration requirements are somewhat stricter,
requiring heavily weighted component stocks to not exceed 30% (not 25%)
of the US Component Stocks portion of the weight of the index or
portfolio, and, to the extent applicable, the five most heavily
weighted component stocks must not exceed 65%.
Based on the foregoing, the Exchange believes Managed Fund Shares
that have an NYSE Component Security and that list under the existing
listing criteria would be sufficiently broad-based to address potential
manipulation concerns and could thus list without additional
requirements for information barriers or physical or organizational
separation.
* * * * *
As the foregoing discussion demonstrates, by virtue of the
[[Page 47265]]
composition and concentration requirements in the Exchange's generic
listing standards for equities-based products relating to market cap,
trading volume, and diversity requirements, among others, that the
underlying components must meet to list on the Exchange, the generic
listing standards are, among other things,
intended to reduce the potential for manipulation by assuring that
the ETP is sufficiently broad-based, and that the components of an
index or portfolio underlying an ETP are adequately capitalized,
sufficiently liquid, and that no one stock dominates the index.\46\
---------------------------------------------------------------------------
\46\ See Securities Exchange Act Release No. 80189 (March 9,
2017), 82 FR 13889, 13892 (March 15, 2017) (SR-NYSEArca-2017-01)
(order approving amendment of NYSE Arca Rule 5 and 8 Series to add
specific continued listing standards for ETPs and to specify the
delisting procedures for these products). See generally id. n. 28 &
authorities cited therein.
Accordingly, the Exchange believes that ETPs meeting these existing
listing criteria would be sufficiently broad-based to allow integrated
market making and side-by-side trading in both the ETP and the NYSE
Component Securities without more, and therefore should be excluded
from the preambles to Rules 5P and 8P.
Proposed Broad-Based Generic Listing Standards for Exchange Traded Fund
Shares
The Exchange further believes that Exchange Traded Fund Shares
eligible to list under Rule 5.2(j)(8) that have underlying NYSE
Component Securities should be eligible to list and trade on the
Exchange if such Exchange Traded Fund Shares meet similar broad-based
requirements as those specified in Rules 5.2(j)(3), 5.2(j)(6), 8.100,
and 8.600 described above. To allow for listing of Exchange Traded Fund
Shares with NYSE Component Securities, the Exchange proposes to add a
new subsection e.1.B. to Rule 5.2(j)(8) to provide for additional
listing requirements for such Exchange Traded Fund Shares. As with the
ETPs discussed above, Exchange-Traded Fund Shares with NYSE Component
Securities meeting the proposed composition and concentration measures
proposed in Rule 5.2(j)(8)(e)(1)(B) would be permitted to list with no
additional requirement for information barriers or physical or
organizational separation, and would be excluded from the preamble to
Rule 5P.
As proposed, Rule 5.2(j)(8)(e)(1)(B) would provide that if a
portfolio of an actively managed series of Exchange-Traded Fund Shares
or the index underlying a series of index-based Exchange-Traded Fund
Shares has NYSE Component Securities, the component securities of the
equity portion of such portfolio or index must satisfy specified
requirements upon initial listing and on a continuing basis that would
be designed to ensure that broad-based Exchange Traded Fund Shares with
underlying NYSE Component Securities would be listed and traded on the
Exchange.
First, proposed Rule 5.2(j)(8)(e)(1)(B)(1) would provide that the
portfolio or index must include a minimum of 13 equity component
securities. This proposed requirement is substantively the same as
listing rules for ETPs that similarly require a minimum of 13 equity
component securities. For example, as set forth in Supplementary
Material .01 of Rule 5.2(j)(3) and discussed above, the index
components underlying Units consisting solely of US Component Stocks
\47\ or US Component Stocks and cash--i.e., where the equity portion of
the portfolio does not include Non-US Component Stocks--must include a
minimum of 13 component stocks.\48\ In addition, Portfolio Depositary
Receipts and Rule 8.100 and Managed Fund Shares under Rule 8.600 also
require a minimum of 13 component securities if the equity portion of
the portfolio does not include Non-U.S. Component Stocks.\49\ The
Exchange believes that the proposed 13 equity component requirement for
a series of Exchange Traded Fund Shares with an NYSE Component
Securities would similarly ensure significant portfolio breadth such
that the potential for manipulation or coordinated trading is
significantly attenuated.
---------------------------------------------------------------------------
\47\ See Rule 5.2(j)(3) & note 19, infra.
\48\ See Rule 5.2(j)(3), Supp. Material .01(a)(A)(4). As
previously noted, there is no minimum number of component stocks if
(a) one or more series of Units or Portfolio Depositary Receipts (as
defined in Section 2 of Rule 8P) constitute, at least in part,
components underlying a series of Managed Fund Units, or (b) one or
more series of such ETPs account for 100% of the US Component Stocks
portion of the weight of the index or portfolio. See id.
\49\ See Rule 8.100, Supp. Material .01(a)(A)(4) & Rule 8.600,
Supp. Material .01(a)(1)(D).
---------------------------------------------------------------------------
Second, proposed Rule 5.2(j)(8)(e)(1)(B)(2) provides that no one
single component security may exceed 30% of the equity weight of the
portfolio or index. Third, proposed Rule 5.2(j)(8)(e)(1)(B)(3) would
provide that the five most heavily weighted component securities may
not exceed 65% of the equity weight of the portfolio or index. Both of
these proposed requirements are substantively identical to current
generic listing requirements for Investment Company Units under
Supplementary Material .01 of Rule 5.2(j)(3), which provides that the
most heavily weighted component stock (excluding Investment Company
Units and securities defined in Section 2 of Rule 8P) cannot exceed 30%
of the equity weight of the portfolio, and, to the extent applicable,
the five most heavily weighted component stocks (excluding Units and
securities defined in Section 2 of Rule 8P) cannot exceed 65% of the
equity weight of the portfolio.\50\ Portfolio Depositary Receipts and
Managed Fund Shares have similar requirements.\51\
---------------------------------------------------------------------------
\50\ See Rule 8.100, Supp. Material .01(a)(A)(3).
\51\ See Rule 8.100, Supp. Material .01(a)(A)(1)-(3) & Rule
8.600, Supp. Material .01 (a)(1)(A)-(C).
---------------------------------------------------------------------------
Third, proposed Rule 5.2(j)(8)(e)(1)(B)(4) provides that component
securities that in the aggregate account for at least 90% of the equity
weight of the portfolio or index each must have a minimum market value
of at least $75 million. The proposed requirements are substantively
similar to the current generic listing requirements for Units under
Supplementary Material .01 of Rule 5.2(j)(3), which provides that
component stocks in the aggregate account for at least 90% of the
weight of the US Component Stocks portion of the index or portfolio
(excluding Units and securities defined in Section 2 of Rule 8P) each
shall have a minimum market value of at least $75 million.\52\
---------------------------------------------------------------------------
\52\ See Rule 5.2(j)(3), Supp. Material .01(a)(A)(1). As
proposed, Rule 5.2(j)(8)(e)(1)(B) would not, unlike Rule 5.3(j)(3),
Supp. Material .01(a)(A)(1)-(3), exclude Units and securities
defined in Section 2 of Rule 8P when calculating the weight of the
portfolio, thereby ensuring a stricter percentage requirement for
indices or portfolios containing NYSE Component Securities.
---------------------------------------------------------------------------
Finally, proposed Rule 5.2(j)(8)(e)(1)(B)(5) would provide that
component securities that in the aggregate account for at least 70% of
the equity weight of the index or portfolio each must have a minimum
monthly trading volume of 250,000 shares, or minimum notional volume
traded per month of $25,000,000, averaged over the last six months. The
proposed requirement is also substantively identical to Supplementary
Material .01 of Rule 5.2(j)(3), which provides that component stocks
(excluding Units and securities defined in Section 2 of Rule 8P) that
in the aggregate account for at least 70% of the US Component Stocks
portion of the weight of the index or portfolio (excluding Derivative
Securities Products) each shall have a minimum monthly trading volume
of 250,000 shares, or minimum notional volume traded per month of
$25,000,000, averaged over the last six
[[Page 47266]]
months.\53\ Although the Exchange's proposed listing standard does not
require 90% of the of the weight of the index or portfolio to each have
the same minimum monthly trading volume of 250,000 shares, the Exchange
believes that the 70% requirement is still significant enough to reduce
the likelihood that any market participant would be able to engage in
price manipulation. The Exchange believes that the current
requirements, coupled with the Exchange's rigorous regulation and
surveillance of trading activity by DMMs and other Floor-based market
participants discussed below, are also sufficient to prevent potential
manipulation. Moreover, the Exchange notes that the alternative minimum
notional volume traded per month of $25,000,000, averaged over the last
six months, is the same as that in current Exchange listing standards
that also incorporate a 70% and not a 90% weight requirement, such as
that for Units, and that the Commission was satisfied that the
Exchange's current listing standards met the statutory requirements of
the Act and were designed, among other things, to prevent manipulation.
---------------------------------------------------------------------------
\53\ See Rule 5.2(j)(3), Supp. Material .01(a)(A)(2).
---------------------------------------------------------------------------
The Exchange believes that these proposed additional initial and
continued listed requirements for a series of Exchange Traded Fund
Shares with one or more NYSE Component Securities mirror existing
generic listing standards for equities-based products and are
consistent with the listing requirements described above that the
Commission determined were sufficiently broad-based to address
potential manipulation concerns. Accordingly, the Exchange believes
that the proposed requirements would ensure that a portfolio of a
series of Exchange Traded Fund Shares listed under Rule 5.2(j)(8) with
one or more NYSE Component Securities would not be unduly concentrated.
The Exchange believes that requiring Exchange Traded Fund Shares
with underlying NYSE Component Securities to meet enhanced criteria is
designed to ensure that the Exchange Traded Fund Shares listed on the
Exchange would be broad-based and would mitigate potential issues
raised by the trading of Exchange Traded Fund Shares on the same
physical trading floor as one or more component securities.
Proposed Changes to Rules 5P and 8P
To effect the above-described changes, the Exchange proposes to
amend the preambles following both Rule 5P and Rule 8P.
For Rule 5P, the Exchange proposes to add ``Listed and'' before
``Traded'' in the heading. The Exchange also proposes to add the
defined term ``NYSE Component Securities,'' which would mean the
existing Rule 5P definition of ``any component NMS Stock that is listed
on the Exchange or that is based on, or represents an interest in, an
underlying index or reference asset that includes an NMS Stock listed
on the Exchange.'' The Exchange further proposes to amend Rule 5P to
exclude from the listing prohibition an Exchange Traded Product listed
under NYSE Rules 5.2(j)(3), Supplementary Material .01(a);
5.2(j)(6)(B)(I); or 5.2(j)(8) (e)(1)(B). Finally, for the avoidance of
doubt, the Exchange proposes to add text to the heading of Rule 5P
providing that the Exchange may submit a rule filing pursuant to
Section 19(b) of the Securities Exchange Act of 1934 to permit the
listing and trading of an ETP that does not otherwise meet the above
standards.
The Exchange similarly proposes to amend the heading of Rule 8P to
add ``Listing and'' before ``Trading.'' The Exchange also proposes to
replace the text ``component NMS Stock that is listed on the Exchange
or that is based on, or represents an interest in, an underlying index
or reference asset that includes an NMS Stock listed on the Exchange''
with the proposed newly defined term of ``NYSE Component Securities.''
Use of this new defined term would not make any substantive changes to
the Rule and is designed to streamline the rule text. Finally, the
Exchange would amend Rule 8P to add language similar to that proposed
for Rule 5P that would exclude from the listing prohibition an Exchange
Traded Product listed under Rules 8.100, Supplementary Material
.01(a)(A) or 8.600, Supplementary Material .01(a).
Proposed Changes to Rule 98
Rule 98 governs the operation of DMM units and imposes certain
restrictions on DMM trading. With respect to integrated market making,
the Commission has approved changes to Rule 98 that permit a DMM unit
to engage in integrated market making with off-Floor market making
units in related products.\54\ Rule 98(c)(6) prohibits DMM units from
operating as a specialist or market maker on the Exchange in related
products, unless specifically permitted in Exchange rules. Rule
98(b)(7) defines ``related products'' as ``any derivative instrument
that is related to a DMM security.'' \55\ Accordingly, consistent with
the proposal, the Exchange proposes to amend Rule 98(b)(7) to
specifically exclude from the definition of ``related products'' the
ETPs that are excluded from the listing prohibition set forth in the
preamble to Rule 5P or to Rule 8P.
---------------------------------------------------------------------------
\54\ See Securities Exchange Act Release No. 58328 (August 7,
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45) (order
approving amendments to Rule 98 that permit specialist firms to
integrate with off-Trading Floor trading desks that trade in
``related products,'' as that term is defined in Rule 98).
\55\ Under Rule 98(b)(7), derivative instruments include
options, warrants, hybrid securities, single-stock futures,
security-based swap agreement, a forward contract, or ``any other
instrument that is exercisable into or whose price is based upon or
derived from a security traded at the Exchange.''
---------------------------------------------------------------------------
With the proposed changes above, the Exchange would be able to list
ETPs that include NYSE Component Securities and are listed under Rules
5.2(j)(3), Supplementary Material .01(a); 5.2(j)(6)(B)(I);
5.2(j)(8)(e)(1)(B); 8.100, Supplementary Material .01(a)(A); or 8.600
Supplementary Material .01(a). The proposed change would also provide
that ETPs listed under these rules would be excluded from the Rule 98
definition of ``related products.'' In addition, this proposed change
would clarify that ETPs listed under Rules 8.601 (Active Proxy
Portfolio Shares) and 8.900 (Managed Portfolio Shares), which are
currently excluded from the preamble to Rule 8P, would also be excluded
from the Rule 98 definition of ``related products.'' \56\
---------------------------------------------------------------------------
\56\ See note 8, supra.
---------------------------------------------------------------------------
As discussed above, for each of the ETPs proposed to be excluded
from the definition of ``related security,'' integrated market making
and side-by-side trading in both the ETP and any underlying NYSE
Component Securities would be appropriate with no additional
requirement for information barriers or physical or organizational
separation.
Safeguards Against Informational Advantages
In addition to the reasons why specific products present a reduced
risk of manipulation, the Exchange believes that there are significant
structural and regulatory safeguards in place that both minimize the
amount of material nonpublic information available to DMMs and prevent
the potential misuse of that information by DMMs to give themselves a
competitive or trading advantage over other market participants.\57\ As
discussed below, the evolution of NYSE trading away from Floor-based
manual executions toward an electronic market has made trading on the
Exchange more transparent. In addition, the increasingly automated
[[Page 47267]]
logic for executions--including for interest entered by both Floor
brokers and DMMs--has severely circumscribed the amount of non-public
information that is only available to DMMs. Moreover, Rule 98 requires
and enforces procedures that are designed to restrict trading by DMMs
when in possession of material non-public information, thereby
minimizing the potential for manipulative and improper trading conduct
by DMMs when trading the proposed specific products with underlying
NYSE Component Securities.\58\
---------------------------------------------------------------------------
\57\ See, e.g., Release No. 46213, 67 FR at 48234.
\58\ See id., 67 FR at 48235.
---------------------------------------------------------------------------
Market Structure Evolution
Over the years, the Exchange has enhanced the transparency of its
marketplace and significantly reduced the amount of material, non-
public information available to DMMs.
One of the most significant evolutions has been in the technology
and the manner in which DMMs close securities. Since 2014, DMMs have
had the ability to close securities manually or electronically.\59\
When this functionality was introduced, to close a security
electronically, a DMM needed to be physically present on the Trading
Floor. With the transition to the Pillar trading platform, a DMM can
now close a security electronically even when not present on the
Trading Floor. Further, since 2015, the Exchange has had the ability to
facilitate the close of trading for one or more securities when the DMM
is unable to do so.\60\ As a result, DMMs can efficiently and
effectively algorithmically close their assigned securities without
being physically present on the Floor.
---------------------------------------------------------------------------
\59\ See Securities Exchange Act Release No. 71086 (December 16,
2013), 78 FR 77186 (December 20, 2013) (SR-NYSE-2013-79) (Notice of
filing and immediate effectiveness of proposed rule change amending
Rules 104 and 123C to specify that closings may be effectuated
manually or electronically).
\60\ See Securities Exchange Act Release No. 74006 (January 6,
2015), 80 FR 1567 (January 12, 2015) (SR-NYSE-2014-73) (Notice of
filing and immediate effectiveness of proposed rule change amending
Rule 123C to specify that Exchange systems may close one or more
securities electronically).
---------------------------------------------------------------------------
In addition, the Exchange has significantly enhanced the
transparency of its marketplace. For instance, the Exchange
disseminates Closing Auction Imbalance Information beginning 10 minutes
before the scheduled end of Core Trading Hours, which provides updated
imbalance information and indicative closing prices. In 2019, in
connection with the transition to the Pillar trading platform, the
Exchange amended its rules to provide that Floor Broker Interest (i.e.,
interest verbalized in the trading crowd by a Floor Broker) would be
included in Closing Auction Imbalance Information. Further, beginning
in 2020, the Exchange temporarily suspended the availability of Floor
Broker Interest to be eligible to participate in the Closing Auction,
as defined in Rule 7.35. In 2021, the Exchange permanently excluded
Floor Broker Interest from the Closing Auction and requires all Floor
brokers to enter orders for the Closing Auction electronically during
Core Trading Hours.\61\ Because of the absence of Floor Broker Interest
in the Closing Auction, any remaining information advantage that DMMs
might have had with respect to orders from Floor brokers--even after
such interest was included in the Closing Auction Imbalance
Information--was eliminated.
---------------------------------------------------------------------------
\61\ See Securities Exchange Act Release No. 92480 (July 23,
2021), 86 FR 40885 (July 29, 2021) (SR-NYSE-2020-95) (Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
Proposed Rule Change, as Modified by Amendment No. 2, To Make
Permanent Commentaries to Rule 7.35A and Commentaries to Rule 7.35B
and To Make Related Changes to Rules 7.32, 7.35C, 46B, and 47).
---------------------------------------------------------------------------
Given their unique role to facilitate the close of trading, DMMs at
the point of sale continue to have display-only access to aggregated
buying and selling interest that is eligible to participate in the
Closing Auction at each price point.\62\ DMM unit algorithms, however,
are not provided access to such non-public information until after the
end of Core Trading Hours, and only in connection with messaging for
the DMM to electronically facilitate the close of trading. Moreover,
pursuant to Rule 104(h)(iii), Floor brokers may request that a DMM
provide them with the information that is available to the DMM at the
post, including such aggregated buying and selling interest for the
Closing Auction. Moreover, pursuant to current Rule 104(h)(ii), a DMM
may not use any information provided by Exchange systems in a manner
that would violate Exchange rules or federal securities laws or
regulations.
---------------------------------------------------------------------------
\62\ See Rules 104(a)(3) and 104(b)(3). The information
available at each price point is not available in the Auction
Imbalance Information. However, such information is used to
calculate the Continuous Book Clearing Price, which is disseminated
via Auction Imbalance Information.
---------------------------------------------------------------------------
The Exchange believes that as a result of the cumulative effect of
these changes, the non-public interest available to Floor participants
has been meaningfully and materially reduced such that no market
participant on the Trading Floor has an unfair competitive advantage
over any other market participant on the Trading Floor.
Rule 98 Restrictions
In addition to the prohibitions contained in Rule 104(h), Rule 98
contains narrowly tailored restrictions to address the fact that DMMs
while on the Floor may have access to certain Floor-based non-public
information and requires DMM units to maintain procedures and controls
to prevent the misuse of material, non-public information that are
effective and appropriate for that member organization.
Specifically, under Rule 98(c)(2), a member organization seeking
approval to operate a DMM unit pursuant to Rule 98 must maintain and
enforce written policies and procedures reasonably designed, taking
into consideration the nature of such member organization's business,
(1) to prevent the misuse of material, non-public information by such
member organizations or persons associated with such member
organization, and (2) to ensure compliance with applicable federal laws
and regulations and with Exchange rules.\63\ Further, Rule 98(c)(3)(A)
provides that a member organization shall protect against the misuse of
Floor-based non-public order information and that only the Trading
Floor-based employees of the DMM unit and individuals responsible for
the direct supervision of the DMM unit's Floor-based operations may
have access (as permitted pursuant to Rule 104) to Floor-based non-
public order information. Rule 98(c)(3)(B) specifies the restrictions
applicable to employees of the DMM unit while on the Trading Floor.
Rule 98(c)(3)(C) also provides that a Floor-based employee of a DMM
unit who moves to a location off the Trading Floor, or any person who
provides risk management oversight or supervision of the Floor-based
operations of the DMM unit and becomes aware of Floor-based non-public
order information, shall not (1) make such information available to
customers, (2) make such information available to individuals or
systems responsible for making trading decisions in DMM securities in
away markets or
[[Page 47268]]
related products, or (3) use any such information in connection with
making trading decisions in DMM securities in away markets or related
products. The rule covers an individual that leaves the Floor, as well
as a manager providing oversight or supervision of the Floor-based
operations of the DMM unit. Submission and approval of a DMM unit's
written policies and procedures addressing the requirements of Rule 98
is a prerequisite to operating a DMM unit on the Floor. The Exchange
notes that all member organizations currently operating DMM units
already have in place written policies and procedures to comply with
Rule 98.
---------------------------------------------------------------------------
\63\ Rule 98(c)(2) provides examples of conduct that would
constitute the misuse of material, non-public information,
including, but not limited to: (1) trading in any securities issued
by a corporation, or in any related product, while in possession of
material-non-public information concerning the issuer; or (2)
trading in a security or related product, while in possession of
material non-public information concerning imminent transactions in
the security or related product; or (3) disclosing to another person
or entity any material, non-public information involving a
corporation whose shares are publicly traded or an imminent
transaction in an underlying security or related product for the
purpose of facilitating the possible misuse of such material, non-
public information. See Rule 98(c)(2)(A)-(C).
---------------------------------------------------------------------------
Regulation and Surveillance of Floor Trading
Trading on the Exchange is subject to a comprehensive regulatory
program that includes a suite of surveillances that review trading by
DMMs and other market participants on the Floor, including
surveillances designed to monitor for trading ahead and manipulative
activity. To assist Exchange surveillance of DMM trading activity, a
member organization operating a DMM unit must daily provide the
Exchange with net position information in DMM securities by the DMM
unit and any independent trading unit of which it is part for such
times and in the manner prescribed by the Exchange pursuant to Rule
98(c)(5). Moreover, DMM units and individual DMMs must produce trading
and other records relating to ETP trading (including books and records
with respect to which such DMM unit or DMM has access and control) to
the Exchange on demand and can be subject to disciplinary action for
failing to do so.\64\ In addition, routine examinations are conducted
consistent with the current exam-based regulatory program associated
with Rule 98 that reviews member organizations operating DMM units for
compliance with the above-described policies and procedures to protect
against the misuse of material nonpublic information. On a day-to-day
basis, the physical activity at DMM posts is also under visual
surveillance by Floor-based regulatory staff.
---------------------------------------------------------------------------
\64\ See, e.g., Rule 8210 & 476(a)(11).
---------------------------------------------------------------------------
In today's marketplace, the Exchange believes that primarily
electronic DMM market-making activity is not materially different from
market-making on other exchanges. DMMs, who have not been agents for
the Exchange's limit order book for many years and whose trading
activity on the Exchange is limited to proprietary trading, do not have
a unique ability to direct or influence trading or control intra-day
prices. In addition, no single exchange has more than 20% of the
market, and the Exchange's share of executed volume of equity trades in
Tapes A, B and C securities is less than 12%.\65\ Based on the
foregoing, the Exchange believes that DMMs have no unique opportunities
to engage in improper conduct trading ETPs with underlying NYSE
Component Securities that would create unfair advantages for DMMs and
would be ``hard, if not impossible'' for the Exchange to surveil.\66\
The Exchange accordingly believes that its existing programs are
reasonably designed to address any regulatory issues that may be raised
by the trading of the specified listed ETPs.
---------------------------------------------------------------------------
\65\ See Cboe Global Markets U.S. Equities Market Volume
Summary, available at <a href="http://markets.cboe.com/us/equities/market_share/">http://markets.cboe.com/us/equities/market_share/</a>.
\66\ See, e.g., Release No. 45454, 67 FR at 8568. See also note
16, supra.
---------------------------------------------------------------------------
Finally, the Exchange believes that the proposal would provide
benefits to the marketplace.\67\ Like other securities traded on the
Exchange, ETPs with underlying NYSE Component Securities would benefit
from a market model featuring an assigned DMM that has unique
responsibilities to actively make markets (i.e., quote bids and offers)
throughout the trading day, both at inside market prices and throughout
the order book, that adds significantly to the quality of markets made
in those assigned securities. Because DMMs are also responsible for
executing the NYSE opening and closing auctions and are obligated to
ensure all marketable auction orders receive an execution, obligations
that other markets do not apply to market makers, the Exchange believes
that the quality of auctions in these products would also be enhanced,
to the benefit of all market participants. Given reduced potential for
manipulation and improper trading conduct for the reasons described
above, the Exchange believes that the potential improvements to
liquidity and quality of the markets outweigh the potential regulatory
concerns.\68\
---------------------------------------------------------------------------
\67\ See id., 67 FR at 8569.
\68\ See, e.g., id., 67 FR at 8569.
---------------------------------------------------------------------------
For all of the reasons stated above, the proposal is therefore
consistent with the requirements of the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\69\ in general, and furthers the objectives of
Sections 6(b)(5) of the Act,\70\ 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.
---------------------------------------------------------------------------
\69\ 15 U.S.C. 78f(b).
\70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Specifically, the Exchange believes that listing and trading ETPs
that have underlying NYSE Component Securities and that also meet the
composition and concentration requirements set forth in the listing
criteria of Rules 5.2(j)(3), Supplementary Material .01(a);
5.2(j)(6)(B)(I); 8.100, Supplementary Material .01(a)(A); and 8.600,
Supplementary Material .01(a) as well as those proposed under Rule
5.2(j)(8)(e)(1)(B), would remove impediments to and perfect the
mechanism of a free and open market and a national market system by
facilitating the listing and trading of a broader range of ETPs
consistent with the Exchange's current structure to trade listed
securities. The Exchange believes that permitting [sic] the ETPs that
have underlying NYSE Component Securities and that meet the criteria of
the specified listing rules (including as amended) would meet the type
of listing criteria previously identified by the Commission as
sufficiently broad-based and well-diversified to protect against
potential manipulation. The Exchange believes that these safeguards
would continue to serve to prevent fraudulent and manipulative acts and
practices, as well as to protect investors and the public interest from
concerns that may be associated with integrated market making and any
possible misuse of non-public information. In addition to the reasons
why these specific products present a reduced risk of manipulation, the
Exchange believes that there are significant structural and regulatory
safeguards in place that both minimize the amount of material nonpublic
information available to DMMs and prevent the potential misuse of that
information by DMMs to give themselves a competitive or trading
advantage over other market participants. Taken together, the Exchange
believes these factors sufficiently minimize the risk of potential
manipulation and improper trading conduct. Moreover, as also discussed
above, the Exchange believes
[[Page 47269]]
there would be potential improvements in the quality of the markets for
the ETPs with underlying NYSE Component Securities traded on the
Exchange. The Exchange accordingly believes that these benefits
outweigh the reduced regulatory risks and that integrated market making
and side-by-side trading in both the listed ETP and underlying listed
NMS stock components is appropriate with no additional requirement for
information barriers or physical or organizational separation.
The Exchange believes that the proposed changes to Rule 98 to
exclude any ETPs listed on the Exchange from the definition of
``related products'' would remove impediments to and perfect the
mechanism of a free and open market and a national market system
because it would facilitate the assignment of listed ETPs, which would
include ETPs that have underlying NYSE Component Securities and that
meet the specified listing rules in Rules 5P and 8P, to DMMs and permit
DMMs to trade such listed ETPs consistent with existing Rules governing
DMM trading, including, for example, Rule 104.
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,\71\ 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. Instead, the Exchange believes that the proposed
rule change would facilitate the listing of additional ETPs on the
Exchange by allowing such securities to trade no differently than other
securities listed on the Exchange, including assigning such securities
to a DMM, which would enable the Exchange to further compete with
unaffiliated exchange competitors that also list and trade ETPs. The
proposed rule changes would also provide issuers with greater choice in
potential listing venues for their ETP products to include an exchange
model that includes a DMM assigned to their security and related
benefits to an issuer as a result of the Exchange's high-touch trading
model. The Exchange accordingly believes that the proposed change would
promote competition by facilitating the listing and trading of a
broader range of ETPs on the Exchange.
---------------------------------------------------------------------------
\71\ 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, the Commission finds that the
Exchange's proposal is consistent with the requirements of the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act,\72\ 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 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.
---------------------------------------------------------------------------
\72\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Background
Currently, NYSE Rules 5P and 8P generally prohibit the Exchange
from listing shares of an ETP that has any component NMS Stock that is
listed on the Exchange or that is based on, or represents an interest
in, an underlying index or reference asset that includes an NMS Stock
listed on the Exchange.\73\ Additionally, current NYSE Rule 98(c)(6)
prohibits DMM units from operating as a specialist or market maker on
the Exchange in ``related products'' unless specifically permitted in
Exchange rules. NYSE assigns each of securities it lists to a DMM, and
trading is on the floor of the Exchange. Integrated market making could
be implicated if NYSE starts listing ETPs with an underlying NYSE
Component Security because each ETP would be assigned to a DMM and that
DMM may be assigned one or more NYSE Component Securities that underlie
the ETP's underlying index or portfolio.
---------------------------------------------------------------------------
\73\ A NMS Stock is defined in Rule 600 of Regulation NMS, 17
CFR 242.600(b)(48), as ``any NMS security other than an option.'' A
``NMS Security'' is any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.'' 17 CFR 242.600(b)(47). ``NMS Security'' refers to
``exchange-listed equity securities and standardized options, but
does not include exchange-listed debt securities, securities
futures, or open-end mutual funds, which are not currently reported
pursuant to an effective transaction reporting plan.'' See Question
1.1 in the ``Responses to Frequently Asked Questions Concerning
Large Trader Reporting,'' available at: <a href="https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm">https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm</a>.
---------------------------------------------------------------------------
Previously, the Commission explained that the concerns raised by
side-by-side trading and integrated market making are that such
practices could result in the unfair use of non-public market
information by and an unfair competitive advantage for market
participants that engage in such practices because of their access to
and ability to use non-public market information.\74\ More recently
however, finding that informational advantage concerns about individual
securities are lessened for ``broad based'' ETFs and TIRs,\75\ the
Commission approved integrated market making and side-by-side trading
for ``broad-based'' ETFs and TIRs and related options.\76\ In
determining whether a product is broad based, the Commission analyzed
the listing criteria for each product. Specifically, the Commission
considered the diversification, capitalization, and liquidity
requirements in evaluating the likelihood that a market participant
would be able to manipulate the prices of the ETFs, TIRs, or their
related options. In approving these practices, the Commission also
stated that the listing exchange's surveillance procedures should be
adequate ``to ensure that market participants do not engage in
manipulative or improper trading practices.'' \77\
---------------------------------------------------------------------------
\74\ Release No. 46213, supra note 17, 67 FR at 48234. As an
example, the Commission explained how ``in a side-by-side trading
environment or integrated market making environment on a single
exchange floor, floor members, by virtue of their positions on the
floor of an exchange, are able to react instantaneously to market
information by executing orders before the information is publicly
disseminated.'' Id.
\75\ Id. at 48235.
\76\ See id. at 48236; see also Release No. 62479, supra note
19.
\77\ Release No. 46213, supra note 17, 67 FR at 48235.
---------------------------------------------------------------------------
B. Discussion of the Proposal
The Exchange proposes to amend its rules regarding side-by-side
trading. Specifically, the Exchange proposes to exclude from its
listing prohibitions in NYSE Rules 5P and 8P shares of an ETP that
independently satisfies the quantitative generic listing criteria set
forth in NYSE Rules 5.2(j)(3), Supplementary Material .01(a), NYSE Rule
5.2(j)(6)(B)(I); or proposed Rule 5.2(j)(8)(e)(1)(B), as well as shares
of an ETP that independently satisfies the generic listing criteria set
forth in NYSE Rules 8.100, Supplementary Material
[[Page 47270]]
.01(a)(A) or 8.600, Supplementary Material .01(a) (collectively,
``Specified ETP Listing Rules'').\78\ The Exchange seeks to list and
trade shares of these types of ETPs with no additional requirement for
information barriers or physical or organizational separation because
the current listing criteria provide that they overlie a sufficiently
broad-based underlying portfolio or reference asset (as applicable).
---------------------------------------------------------------------------
\78\ Shares of Active Proxy Portfolio Shares and Managed
Portfolio Shares, which are issued by funds whose portfolios are not
fully transparent, already are exempted from the general
prohibition. See NYSE Rule 8P.
---------------------------------------------------------------------------
The Exchange also proposes to amend its rule regarding integrated
market making. The Exchange proposes to narrow the definition of
``related products'' to exclude derivative instruments that overlie
ETPs listed under NYSE Rule 8.900, which governs the listing and
trading of Managed Portfolio Shares on the Exchange,\79\ or that
satisfy the generic listing criteria of one of the Specified ETP
Listing Rules.
---------------------------------------------------------------------------
\79\ A defining characteristic of Managed Portfolio Shares is
that their portfolio holdings are disclosed within at least 60 days
following the end of every fiscal quarter. See NYSE Rule
8.900(c)(1). Instead of disclosing its portfolio on a daily basis,
each issue of Managed Portfolio Shares disseminates to all market
participants at the same time a Verified Intraday Indicative Value
in one-second intervals during the Core Trading Session. See NYSE
Rule 8.900(d)(2)(A). Unlike DMMs for transparent ETPs, a DMM for an
issue of Managed Portfolio Shares does not know whether any
component NMS Stock that is listed on the Exchange is a component of
the fund's portfolio. Therefore, the concern underlying the
historical prohibitions against side-by-side trading and integrated
market making is not implicated with respect to DMMs for Managed
Portfolio Shares (i.e., they do not have any informational
advantage).
---------------------------------------------------------------------------
1. The Listing Criteria for the ETPs
The Exchange proposes to exclude from its listing prohibitions in
NYSE Rules 5P and 8P shares of an ETP that independently satisfies the
quantitative generic listing criteria set forth in the Specified ETP
Listing Rules.
The Commission believes that the proposed rule change permitting
side-by-side trading and integrated market making of shares of the
specified types of ETPs and their related options is consistent with
section 6(b)(5) of the Exchange Act because the quantitative generic
listing criteria set forth in the Specified ETP Listing Rules reduce
the susceptibility to manipulation of such shares and correspondingly
their related options. The Commission previously, has found the
quantitative generic listing criteria included in the Specified ETP
Listing Rules to be consistent with section 6(b)(5) of the Exchange Act
and to be designed to prevent manipulation of the price of the ETP
shares.\80\ Additionally, the quantitative generic listing criteria
included in the Specified ETP Listing Rules are generally consistent
with the Amex listing requirements that the Commission found to be
broad-based.\81\ Although the minimum trading volume criterion for
Portfolio Depositary Receipts is lower than the threshold in Amex's
rules, the Commission has found that the generic listing criteria for
Portfolio Depositary Receipts are consistent with Section 6(b)(5) of
the Exchange Act and are designed to prevent the manipulation of
generically listed Portfolio Depositary Receipts.\82\ Coupled with the
Exchange's surveillance procedures and the requirements applicable to
DMMs described below, the Commission believes that the quantitative
generic listing criteria applicable to Portfolio Depositary Receipts
are adequate to prevent manipulation in the context of side-by-side
trading and integrated market making by DMMs on the Exchange.
---------------------------------------------------------------------------
\80\ The Commission approved NYSE's adoption of the Specified
ETP Listing Rules, which are substantively identical to the rules of
other exchanges, as consistent with Section 6(b)(5) of the Exchange
Act. See Securities Exchange Act Release Nos. 80214 (March 10,
2017), 82 FR 14050, 14052-53 (March 16, 2017) (SR-NYSE-2016-44) and
91029, supra note 15, 86 FR at 8423-24. In approving the
substantively identical rules of other exchanges, the Commission
found that the generic listing criteria, including the quantitative
requirements that must be satisfied to permit side-by-side trading
and integrated market, are designed to prevent manipulation. See,
e.g., Securities Exchange Act Release No. 78397 (July 22, 2016), 81
FR 49320, 49327 (July 27, 2016) (finding that the generic listing
criteria for Managed Fund Shares should promote the listing only of
Managed Fund Shares that are not susceptible to manipulation).
\81\ See Release No. 46213, supra note 17.
\82\ See Securities Exchange Act Release No. 54739, supra note
20.
---------------------------------------------------------------------------
2. DMMs and the Exchange's Surveillance Procedures
The primary risk posed by integrated market making and side-by-side
trading is that a DMM might improperly utilize its informational
advantage. The DMMs' historical informational advantage over other
market participants has been decreased through a series of rule changes
by the Exchange. For example, the evolution of the Exchange's trading
floor from a floor-based model to a primarily electronic market has
increased the transparency of trading on the Exchange, automated logic
for executions has circumscribed the amount of non-public information
available to DMMs, and DMM units have been required to implement
policies and procedures to prevent the misuse of material non-public
information.
To ensure that DMMs do not improperly use any remaining
informational advantage, the Exchange utilizes a regulatory program
that reviews trading by DMMs and other market participants on the
Floor, including surveillances designed to monitor for trading ahead
and manipulative activity. Additionally, a member organization
operating a DMM unit must daily provide the Exchange with net position
information in DMM securities by the DMM unit and any independent
trading unit of which it is part for such times and in the manner
prescribed by the Exchange pursuant to Rule 98(c)(5). The Exchange also
requires DMM units and individual DMMs to produce trading and other
records relating to ETP trading (including books and records with
respect to which such DMM unit or DMM has access and control) to the
Exchange on demand, and DMM units and individuals can be subject to
disciplinary action for failing to do so.\83\ In addition, the Exchange
conducts routine examinations, consistent with the current exam-based
regulatory program associated with Rule 98, to review member
organizations operating DMM units for compliance with the above-
described policies and procedures to protect against the misuse of
material nonpublic information. Lastly, the Exchange states that Floor-
based regulatory staff visually monitor DMM physical activity daily.
The Commission believes that the Exchange's regulation and surveillance
of DMM trading activity, and its examination procedures regarding DMMs,
adequately mitigate the risk that DMMs might engage in manipulative or
improper trading practices in connection with side-by-side trading and
integrated market making for ETPs under the Specified ETP Listing
Rules.
---------------------------------------------------------------------------
\83\ See, e.g., Exchange Rules 8210 & 476(a)(11).
---------------------------------------------------------------------------
3. Conclusion
For the reasons discussed above, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the Exchange Act \84\ and the rules and regulations thereunder
applicable to a national securities exchange.
---------------------------------------------------------------------------
\84\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written views, data, and
arguments concerning whether Amendment No. 1 is consistent with the
Exchange Act. Comments may be
[[Page 47271]]
submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ff8d8a939ad29c9092929a918b8cbf8c9a9cd1989089"><span class="__cf_email__" data-cfemail="acded9c0c981cfc3c1c1c9c2d8dfecdfc9cf82cbc3da">[email protected]</span></a>. Please include
File Number SR-NYSE-2022-04 on the subject line.
Paper Comments
<bullet> 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-2022-04. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-2022-04 and should be submitted on
or before August 23, 2022.
V. Accelerated Approval of the 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. In Amendment No. 1, the Exchange (among
other things) clarified its proposed rule text and supplemented its
discussion of why its proposal is consistent with the Exchange Act.
Specifically, the Exchange analyzed the requirements of the Specified
ETP Listing Rules that address the potential for manipulation and its
DMM surveillance regime. This additional information in Amendment No. 1
assisted the Commission in evaluating the Exchange's proposal and in
determining that it is consistent with the Exchange Act. Amendment No.
1 does not raise any novel legal issue. Accordingly, the Commission
finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,\85\
to approve the proposed rule change, as modified by Amendment No. 1 on
an accelerated basis.
---------------------------------------------------------------------------
\85\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\86\ that the proposed rule change (SR-NYSE-2022-04), as
modified by Amendment No. 1, be, and it hereby is, approved on an
accelerated basis.
---------------------------------------------------------------------------
\86\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
---------------------------------------------------------------------------
\87\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-16483 Filed 8-1-22; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on August 2, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.