[Federal Register Volume 85, Number 112 (Wednesday, June 10, 2020)]
[Notices]
[Pages 35488-35490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12521]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89016; File No. SR-CboeEDGA-2020-005]
Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; 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 the
Rule Relating to MidPoint Discretionary Orders To Allow Optional Offset
or Quote Depletion Protection Instructions
June 4, 2020.
I. Introduction
On February 28, 2020, Cboe EDGA Exchange, Inc. (the ``Exchange'' or
``EDGA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend EDGA Rule 11.8(e), which describes the
handling of MidPoint Discretionary Orders entered on the Exchange. The
proposed rule change was published for comment in the Federal Register
on March 10, 2020.\3\ On April 16, 2020, 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 May 20, 2020, the Exchange filed Amendment
No. 1 to the proposed rule change, which replaced and superseded the
proposed rule change as originally filed.\6\ The Commission received no
comment letters on the proposal. 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 88323 (March 5,
2020), 85 FR 13957.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 88664, 85 FR 22465
(April 22, 2020). The Commission designated June 8, 2020 as the date
by which the Commission shall approve or disapprove, or institute
proceedings to determine whether to disapprove, the proposed rule
change.
\6\ In Amendment No. 1, the Exchange revised the proposal to:
(1) Modify the circumstances that would enable or refresh a QDP
active period (see infra note 15); (2) set the QDP active period as
2 milliseconds; (3) include additional justification in support of
the proposed rule change, including data in support of the QDP
functionality; and (4) make technical and conforming changes.
Amendment No. 1 is available at https://www.sec.gov/comments/sr-cboeedga-2020-005/srcboeedga2020005-7240760-217168.pdf.
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II. Description of the Proposal, as Modified by Amendment No. 1
A MidPoint Discretionary Order (``MDO'') is a limit order to buy
that is pegged to the national best bid (``NBB''), with discretion to
execute at prices up to and including the midpoint of the national best
bid or offer (``NBBO''), or a limit order to sell that is pegged to the
national best offer (``NBO''), with discretion to execute at prices
down to and including the midpoint of the NBBO.\7\ The Exchange
proposes to amend EDGA Rule 11.8(e) to introduce two optional
instructions that Users \8\ would be able to include on MDOs entered on
the Exchange. First, the Exchange would allow Users to enter MDOs with
an offset to the NBBO, similar to orders entered with a Primary Peg
Instruction today.\9\ Second, the Exchange would allow Users to enter
MDOs that include a Quote Depletion Protection (``QDP'') instruction
that would disable discretion (i.e., the order's ability to execute at
a more aggressive price than its ranked price) for a limited period in
certain circumstances where the best bid or offer displayed on the EDGA
Book \10\ is executed below one round lot.
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\7\ See EDGA Rule 11.8(e).
\8\ A ``User'' is any member or sponsored participant who is
authorized to obtain access to the Exchange's trading system. See
EDGA Rule 1.5(ee).
\9\ See EDGA Rule 11.6(j)(2).
\10\ The ``EDGA Book'' is the electronic file of orders for the
Exchange's trading system. See EDGA Rule 1.5(d).
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Offset Instruction
As proposed, MDOs entered with an offset would function in the same
manner as currently implemented for Primary Peg orders entered with an
offset pursuant to Rule 11.6(j)(2). First, a User entering an MDO would
be able to select an offset equal to or greater than one minimum price
variation (``MPV'') above or below the NBB or NBO to which the order is
pegged (``Offset Amount''). Second, the Offset Amount for an MDO that
is to be displayed on the EDGA Book would
[[Page 35489]]
need to result in the price of such order being inferior to or equal to
the inside quote on the same side of the market.\11\ The offset
functionality would be an optional feature that Users could include
when entering an MDO for trading on the Exchange.
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\11\ An MDO defaults to a displayed instruction unless the User
includes a non-displayed instruction on the order. See EDGA Rule
11.8(e)(4). Similar to the current handling of orders entered with a
Primary Peg instruction, the Exchange is not proposing to accept
displayed MDOs with an aggressive offset at this time. See Amendment
1, supra note 6, at 5 n.6.
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In addition, the Exchange proposes to make conforming changes to
EDGA Rule 11.8(e) to account for the offset functionality.
Specifically, the Exchange proposes to amend language in the
introductory paragraph to Rule 11.8(e) and subparagraphs (e)(6) and
(8).\12\ According to the Exchange, these changes reflect the proposed
operation of MDOs entered with an offset and would not otherwise impact
the handling of MDOs entered on the Exchange.\13\
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\12\ For a detailed description of these proposed changes, see
Amendment 1, supra note 6, at 6-7.
\13\ See Amendment 1, supra note 6, at 7.
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Quote Depletion Protection
The Exchange also proposes to introduce QDP, an optional
instruction that Users could enable on an MDO to limit the order's
ability to exercise discretion in certain circumstances.\14\ The QDP
feature would do this by tracking significant executions of orders that
constitute the best bid or offer on EDGA.\15\ As proposed, a ``QDP
Active Period'' would be enabled or refreshed for buy (sell) MDOs if
the best bid (offer) displayed on the EDGA Book is executed below one
round lot.\16\ When a QDP Active Period is initially enabled, or
refreshed by a subsequent execution of the best bid (offer) then
displayed on the EDGA Book, it would remain enabled for two
milliseconds.\17\ During this QDP Active Period, an MDO entered with a
QDP instruction would not exercise discretion. Instead, such an order
would be only be executable at its ranked price.\18\ The ranked price
is always executable unless the User cancels the order from the book.
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\14\ Proposed changes related to the introduction of the QDP
instruction are reflected in proposed subparagraph (10) under EDGA
Rule 11.8(e).
\15\ The Exchange initially proposed that the QDP Active Period
also could be enabled or refreshed in certain circumstances by
significant cancellations. Amendment No. 1 removed this aspect of
the proposal.
\16\ Rule 611 of Regulation NMS generally limits executions to
prices that are at or better than the protected best bid or offer.
However, there are circumstances, such as the use of intermarket
sweep orders, where an order may be executed at an inferior price.
In these circumstances, an execution of the EDGA BBO below one round
lot would trigger a QDP Active Period even though that quotation is
inferior to the NBBO. See Amendment 1, supra note 6, at 8 n.10.
\17\ The QDP Active Period would always last for at least two
milliseconds. If the QDP Active Period is refreshed by a subsequent
execution, such execution would result in a new two millisecond
timer being started. Although the MDO would not exercise discretion
during the QDP Active Period, its priority would not be impacted,
and any applicable priority at its pegged price would be retained
when QDP is enabled. See Amendment 1, supra note 6, at 8 n.12.
\18\ An MDO's ranked price is the order's displayed or non-
displayed pegged price, which may or may not include an offset, as
proposed, or the order's limit price if that limit price is less
aggressive than the applicable pegged price. See Amendment 1, supra
note 6, at 8 n.11.
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Unless the User chooses otherwise, an MDO to buy (sell) entered
with a QDP instruction would default to a non-displayed instruction and
would include an Offset Amount equal to one MPV below (above) the NBB
(NBO).\19\
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\19\ The Exchange also proposes to amend EDGA Rule 11.8(e)(4) to
reflect the fact that MDOs entered with a QDP instruction would
default to non-displayed. MDOs that are not entered with the QDP
instruction would continue to default to a displayed instruction, as
currently provided in EDGA Rule 11.8(e)(4). See Amendment 1, supra
note 6, at 9 n.13.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\20\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\21\
which requires, among other things, that the rules of a national
securities exchange be designed 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.
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\20\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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EDGA proposes to introduce optional instructions that (1) would
allow Users to enter MDOs with an offset to the NBB or NBO and (2)
enter MDOs with a QDP instruction that would disable discretion for 2
milliseconds where the best bid or offer displayed on the EDGA Book is
executed below one round lot. The Exchange asserts that similar offset
functionality is already available on the Exchange in both the Primary
Peg order type and the Discretionary Range instruction. EDGA further
believes that the flexibility to specify an offset would be beneficial
for market participants that require additional discretion to manage
their order flow on the Exchange.
The Exchange states that the QDP instruction is intended to provide
Users with a protective feature that limits an order's ability to
exercise discretion in certain circumstances that may indicate that the
market is moving against the resting MDO.\22\ The Exchange provided
data for a ten day period that tested the potential performance of the
proposed QDP instruction in protecting Users from a potential negative
price move by observing market movements in the two milliseconds
following instances where QDP would have been enabled due to the
execution of the EDGA best bid or offer. The Exchange concluded that
the data showed: (1) MDOs entered with a QDP instruction could benefit
from avoiding potentially impactful executions within the order's
discretionary range when there are impending price moves; and (2) even
though the market might remain static after QDP is enabled, the
opportunity cost for disabling discretion in those circumstances is
small as QDP would only be enabled for a limited period of time during
the trading day.
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\22\ See Amendment No. 1, supra note 6, at 17-18.
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The Commission believes that the QDP feature is reasonably designed
to allow market participants who utilize MDOs the opportunity to avoid
an unfavorable execution when the market moves against a resting MDO.
In reaching this conclusion, the Commission evaluated the proposed rule
change and the data provided by the Exchange demonstrating correlation
between the operation of the QDP feature and price instability on the
EDGA market. In particular, the data indicates that: (i) There is a
reasonable likelihood that the market will move against a resting MDO
or remain static during a QDP Active Period; and (ii) a QDP Active
Period would be active on average less than a half second per trading
day per symbol. In addition, the QDP instruction is designed so that,
during the QDP Active Period, only the discretion to execute at a more
aggressive price would be suppressed and therefore an MDO, whether
displayed or non-displayed, would still be accessible to liquidity
takers at its ranked price. Finally, no User would be required to use
either of the two proposed order instructions for the MDO (i.e., NBBO
offset and QDP); it is optional functionality that would be
[[Page 35490]]
available to Users who believe it may better effect their trading
strategies. Therefore, the Commission believes that providing market
participants the ability to use this optional tool to potentially
improve the quality of their executions would promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
protect investors and the public interest.
The Commission also notes that there is current, existing
functionality for discretionary orders that is similar, although not
identical, to both the offset and QDP instructions on the Exchange \23\
and other national securities exchanges.\24\ For the NBBO offset in
particular, the Commission notes that the proposed offset instruction
is a close variant of the discretion and pegging functionality that the
Commission has approved under past exchange proposals.\25\ These
functionalities continue to exist on the Exchange and on other
exchanges.\26\
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\23\ See, e.g., EDGA Rule 11.6(j)(2).
\24\ See, e.g., IEX Rule 11.190(b)(10), Nasdaq Rule 4703(g).
\25\ See, e.g., Securities Exchange Act Release No. 73592 (Nov.
13, 2014), 79 FR 68937 (Nov. 19, 2014).
\26\ See, e.g., EDGA Rule 11.6(d); EDGA Rule 11.6(j)(2); Nasdaq
Rule 4703(g). The Commission notes that the Exchange and other
exchanges offer order types or instructions that would permit an
order with discretion or an order with pegging functionality (or
both, in some cases) to rest more passively on the exchange's book
(e.g., further away from the NBB or NBO). As noted above, the
Exchange offers both a Discretionary Range instruction (which would
allow a discretionary order to rest passively) and a Primary Peg
instruction (which would allow an order to be pegged one or more
MPVs away from the NBB or NBO). Other exchange rules permit a
discretionary order to be combined with a pegged order and would
allow for a passive offset. See, e.g., Nasdaq Rule 4703(g).
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Accordingly, for the foregoing reasons, the Commission believes
that this proposed rule change, as modified by Amendment No. 1, is
consistent with the Exchange Act. The Commission believes that the
proposed rule change is reasonably designed to promote fair and orderly
markets, promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market, and, in general, to protect investors and the public
interest.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeEDGA-2020-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeEDGA-2020-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeEDGA-2020-005, and should be
submitted on or before July 1, 2020.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. In Amendment No. 1, the Exchange further
revised the proposal to: (1) Modify the circumstances that would enable
or refresh a QDP active period; (2) set the QDP active period as 2
milliseconds; (3) include additional justification in support of the
proposed rule change, including data in support of the QDP
functionality; and (4) make technical and conforming changes. The
changes and additional information in Amendment No. 1 add additional
clarity to the original substance of the proposed rule change. In
addition, the content of Amendment No. 1 assists the Commission's
determination of whether the proposed rule change is consistent with
the Act. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\27\ to approve the proposed rule change,
as modified by Amendment No. 1, on an accelerated basis.
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\27\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-CboeEDGA-2020-005), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\28\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12521 Filed 6-9-20; 8:45 am]
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