Self-Regulatory Organizations; New York Stock Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Make Permanent the Retail Liquidity Program Pilot, Which Is Set To Expire on December 31, 2018

I. Introduction

On June 4, 2018, New York Stock Exchange LLC (“Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 19b-4 thereunder, a proposed rule change to make permanent the Exchange's Retail Liquidity Program Pilot (the “Program”). The proposed rule change was published for comment in the Federal Register on June 21, 2018. On July 31, 2018, 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. The Commission received no comment letters on the proposed rule change. This order institutes proceedings under Section 19(b)(2)(B) of the Exchange Act to determine whether to approve or disapprove the proposed rule change.

II. Description of the Proposed Rule Change

The Exchange proposes to make permanent Exchange Rule 107C, which sets forth the rules and procedures governing the Program. The Program was adopted to create a new class of market participants called Retail Liquidity Providers (“RLPs”) that would be able to provide potential price improvement to retail order flow. To do so, an RLP submits a Retail Price Improvement Order (“RPI”), which is a non-displayed order that is priced at least $0.001 better than the best protected bid (“PBB”) or best protected offer (“PBO”) (“PBBO”), as such terms are defined in Regulation NMS, and that is identified as such. After an RPI is submitted, the Exchange disseminates an indicator through its proprietary data feeds or through the Consolidation Quotation System, known as the Retail Liquidity Identifier, indicating that such interest exists. The Retail Liquidity Identifier reflects the symbol for the particular security and the side (buy or sell) of the RPI interest, but does not include the price or size of the RPI interest. In response to the Retail Liquidity Identifier, another class of market participants created under the Program, known as Retail Member Organizations (“RMOs”), may submit a Retail Order to interact with available contra-side RPIs.

To qualify as an RMO, a member organization must conduct a retail business or route retail orders on behalf of another broker-dealer. A member organization must submit the following to the Exchange for approval: (i) An application form, (ii) supporting documentation, and (iii) an attestation that substantially all orders sumibtted as retail orders will qualify as such. The Program provides for an appeal process for a disapproved applicant, and a withdraw process for RMOs. RMOs must have written policies and procedures reasonably designed to assure that they will only designate orders as Retail Orders if all requirements of a Retail Order are met.

To qualify as an RLP, a member organization must submit an application form and supporting documentation to the Exchange for approval. A disapproved applicant may appeal or reapply 90 days after the disapproval notice. RLPs may only enter RPI orders electronically and directly into Exchange systems. In each of its assigned securities, RLPs must maintain certain requirements to have RPI Orders that are better than the PBB or PBO at least five percent of the trading day. RLPs may enter RPI Orders in non-assigned securities without regard to the five percent requirement.

RMOs could be disqualified if they submit Retail Orders that do not meet the requirements of Retail Orders. If disqualified, RMOs may appeal and reapply. RLPs could lose their assigned securities or be disqualified if they do not meet the five percent requirement for three consecutive months. If disqualified, the RLP could appeal or reapply. The Exchange has set up a Program Panel to review disapproval or disqualification.

Under the Program, there are three types of Retail Orders. A Type 1 Retail Order will interact only with available contra-side RPI Orders and Mid-Point Liquidity Orders (“MPL Orders”). A Type 1 Retail Order will not interact with other available contra-side interst or route to away markets. The unexecuted portion of a Type 1 Retail Order will be immediately cancelled. A Type 2 Retail Order will interact first with available contra-side RPI Orders and MPL Orders. Any remaining portion will be executed as a Regulation NMS-compliant immediate-or-cancel order. A Type 3 Retail Order will interact first with contra-side RPI Orders and MPL Orders. Any remaining portion will be executed as an NYSE immediate-or-cancel order.

The Program provides that RPI Orders will be ranked and allocated according to price-time priority. The Program considers all eligible RPI Orders and MPL Orders to determine the price to execute a Retail Order. If there are only RPI Orders, then execution occurs at the price level that completes the incoming order's execution. If there are only MPL Orders, then a Retail Order will executes at the mid-point of the PBBO. If both RPI and MPL Orders are present, the Exchange will evaluate at the price level at which an incoming Retail Order will execute in full (“clean up price”). If the clean up price is equal to the mid-point of the PBBO, RPI Orders will receive priority over MPL Orders, and Retail Orders will execute against both RPI and Mid-Point Liquidity Orders at the midpoint. If the clean up price is worse than the mid-point of the PBBO, a Retail Order will execute first with the MPL Orders at the midpoint of the PBBO, and any remaining Retail Orders will execute with the RPI Orders at the clean up price. If the clean up price is better than the mid-point of the PBBO, then a Retail Order will execute against RPI Orders at the clean up price and will ignore the MPL Orders.

A more detailed description of how the Program operates, including, but not limited to, how a member organization may qualify and apply to become a RMO; the requirements of RLPs; different types of Retail Orders; and prioriy and order allocation of RPI orders is more fully set forth in the Notice.

In July 2012, the Commission approved the Program on a pilot basis (“RLP Approval Order”). As set forth in the RLP Approval Order, the Commission approved the Program on a pilot basis to allow the Exchange and market participants to gain valuable practical experience with the Program during the pilot period, and to allow the Commission to determine whether modifications to the Program were necessary or appropriate prior to any Commission decision to approve the Program on a permanent basis. Indeed, the Exchange has modified aspects of Exchange Rule 107C on several occasions during the pilot period. Additionally, as part of the RLP Approval Order, the Exchange agreed to provide the Commission with a significant amount of data to assist the Commission's evaluation of the Program. Specifically, the Exchange represented that it would “produce data throughout the pilot, which will include statistics about participation, the frequency and level of price improvement provided by the Program, and any effects on the broader market structure.” The Commission expected the Exchange to monitor the scope and operation of the Program and study the data produced during that time with respect to such issues.

Although the pilot period was originally scheduled to end on July 31, 2013, the Exchange filed to extend the operation of the pilot on several occasions, with the most recent extension being to provide more time for the Exchange to prepare this proposed rule change. The pilot is currently set to expire on December 31, 2018.

The Exchange represents that as part of its assessment of the Program's potential impact, it has posted core weekly and daily summary data on its website for public investors to review, and that it has provided additional data to the Commission regarding potential investor benefits, including the level of price improvement provided by the Program. In addition, the Notice includes statistics about participation, frequency and level of price improvement and effective and realized spreads, upon which the Exchange relies to summarize its overall assessment of the Program. As more fully set forth in the Notice, the Exchange concludes that the Program has achieved its goal of attracting retail order flow and allowing such order flow to receive potential price improvement. Additionally, the Exchange concludes that the data relating to the Program “demonstrates that the Program had an overall negligible impact on broader market structure.”

III. Proceedings To Determine Whether To Approve or Disapprove SR-NYSE-2018-28 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change.

Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change's consistency with Sections 6(b)(5) and 6(b)(8) of the Exchange Act. Section 6(b)(5) of the Exchange Act requires that the rules of a national securities exchange be designed, among other things, 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, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. Section 6(b)(8) of the Exchange Act requires that the rules of a national securities exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.

The Commission received numerous comment letters expressing concerns with respect to the Program when it was first proposed and eventually approved on a pilot basis. The Program was intended to create additional price improvement opportunities for retail investors by segmenting retail order flow on the Exchange. When the Commission initially approved the Program on a pilot basis, it explained that it would monitor the Program throughout the pilot period for its potential effects on public price discovery and on the broader market structure. The Commission expressed its view that the Program should not cause a major shift in market structure, but instead, it would closely replicate the trading dynamics that exist in the over-the-counter markets to present another competitive venue for retail order flow execution. As explained above, the Exchange provides an analysis of what it considers to be the economic benefits for retail investors and the marketplace flowing from operation of the Program. The Exchange also concludes, among other things, that the Program had an overall negligible impact on the broader market structure.

Under the Commission's Rules of Practice, the “burden to demonstrate that a proposed rule change is consistent with the [Act] and the rules and regulations issued thereunder . . . is on the [SRO] that proposed the rule change.” The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding, and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Act and the applicable rules and regulations. Moreover, “unquestioning reliance” on an SRO's representations in a proposed rule change would not be sufficient to justify Commission approval of a proposed rule change.

The Commission questions whether the information and analysis provided by the Exchange in the Notice support the Exchange's conclusions that the Program has achieved its goals, including whether the Program has had an overall negligible impact on broader market structure. The Commission seeks additional information and analysis concerning the Program's impact on the broader market; for example, additional information to support the view that the Program has not had a material adverse impact on market quality, and consideration of any effects that fees and rebates may have had on the operation of the Program. The Commission believes it is appropriate to institute proceedings to allow for additional consideration and comment on the issues raised herein, any potential response to comments or supplemental information provided by the Exchange, and any additional independent analysis by the Commission. The Commission believes that these issues raise questions as to whether the the Exchange has met its burden to demonstrate, based on the data and analysis provided, that permanent approval of the Program is consistent with the Act, and specifically, with its requirements that the Program be designed to perfect the mechanism of a free and open market and the national market system, protect investors and the public interest, and not be unfairly discriminatory; or not impose an unnecessary or inappropriate burden on competition.

IV. Procedure: Request for Written Comments

The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposal is consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of the Exchange Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.

Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by October 15, 2018. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by October 29, 2018.

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number SR-NYSE-2018-28 on the subject line.

Paper Comments

• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Numbers SR-NYSE-2018-28. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of these filings 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-2018-28 and should be submitted on or before October 15, 2018. Rebuttal comments should be submitted by October 29, 2018.