[Federal Register Volume 85, Number 137 (Thursday, July 16, 2020)]
[Notices]
[Pages 43276-43279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15307]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89292; File No. SR-CboeEDGX-2020-032]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend the Fee Schedule Applicable to Its Equities Trading Platform To
Introduce a Flat Charge for the Execution of MDOs That Are Entered With
the QDP Instruction
July 10, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 1, 2020, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 43277]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to amend the fee schedule applicable to its
equities trading platform to introduce a flat charge for the execution
of MDOs that are entered with the QDP instruction. The text of the
proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On June 4, 2020, the Commission approved the Exchange's proposed
introduction of a new order instruction, Quote Depletion Protection
(``QDP''), that is available for Midpoint Discretionary Orders
(``MDOs'').\3\ QDP, which was launched by the Exchange on June 10,
2020, is designed to provide enhanced protections to MDOs by tracking
significant executions on the EDGX Book, and facilitating the ability
of Users to avoid potentially unfavorable executions by preventing MDOs
entered with the optional QDP instruction from exercising discretion to
trade at more aggressive prices when QDP has been triggered. The
Exchange now proposes to introduce a flat charge for the execution of
MDOs that are entered with the QDP instruction.
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\3\ See Securities Exchange Act Release No. 89007 (June 4,
2020), 85 FR 35454 (June 10, 2020) (SR-CboeEDGX-2020-010).
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EDGX operates pursuant to a maker/taker pricing model where orders
that add liquidity are generally provided a rebate, and orders that
remove liquidity are generally charged a fee. MDOs that are executed on
the Exchange are therefore typically paid a rebate for adding
liquidity.\4\ Specifically, an MDO that adds liquidity within its
discretionary range is currently paid a rebate of $0.00100 per share
for securities priced at or above $1.00, or receives free executions
for securities priced below $1.00.\5\ An MDO that adds liquidity at its
displayed or non-displayed ranked price would instead be paid a
standard rebate of $0.00170 per share for securities priced at or above
$1.00, or $0.00003 per share for securities priced below $1.00,\6\
subject to a number of add volume tiers that are designed to
incentivize additional liquidity on the EDGX Book.\7\ Pursuant to Rule
11.8(g), MDOs entered on the EDGX Book always act as the provider of
liquidity, and are therefore not subject to the Exchange's fees for
removing liquidity.
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\4\ As discussed below, an MDO may be provided free executions
instead of a rebate if it adds liquidity within its discretionary
range for securities priced below $1.00.
\5\ See EDGX Fee Schedule, Fee Code DM.
\6\ See EDGX Fee Schedule, Standard Rates.
\7\ See EDGX Fee Schedule, Footnote 1, Add Volume Tiers, and
Footnote 2, Tape B Volume Tier. Current tiers may provide a rebate
for adding liquidity that ranges from $0.0023 per share to $0.0029
per share.
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The Exchange now proposes to instead introduce a small flat fee for
the execution of an MDO that is entered with a QDP instruction. As
proposed, MDOs entered with a QDP instruction would be subject to a fee
of $0.00020 per share for securities priced at or above $1.00, or 0.30%
of the dollar value of the trade for securities priced below $1.00.\8\
This charge would apply to the execution of MDOs that are entered with
a QDP instruction, regardless of whether a QDP Active Period has been
enabled in the security. MDOs entered without the optional QDP
instruction would continue to be subject to current pricing. The
Exchange's affiliate, Cboe EDGA Exchange, Inc. (``EDGA'') is
simultaneously proposing a similar flat fee pricing model for MDOs
entered with a QDP instruction that are executed on that exchange.\9\
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\8\ To effect this change, the Exchange would introduce a new
fee code ``DQ'' to its fee schedule that applies to MDOs entered
with a QDP instruction.
\9\ See SR-CboeEDGA-2020-019 (pending publication).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\10\ in general, and
furthers the objectives of Section 6(b)(4),\11\ in particular, as it is
designed to provide for the equitable allocation of reasonable dues,
fees and other charges among its members and other persons using its
facilities. Specifically, the Exchange believes that the proposed rule
change is consistent with the requirements of the Act as it is designed
to compensate the Exchange for the development of new and innovative
market features, i.e., QDP, while continuing to provide a pricing model
that the Exchange believes is competitive with pricing models offered
by other national securities exchanges and off-exchange venues that
offer similar protective features to their customers. The Exchange
operates in a highly-competitive market in which market participants
can readily direct order flow to competing venues if they deem fee
levels at a particular venue to be excessive. The proposed rule change
reflects a competitive pricing structure designed both to compensate
the Exchange for the introduction of innovative features and allow it
to continue to compete aggressively with other market centers.
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b)(4).
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As discussed, the proposed rule change would introduce pricing that
is specific to MDOs entered with the recently-introduced QDP
instruction. Although MDOs, which are always executed on the Exchange
as the maker of liquidity, would be subject to a small flat fee instead
of a rebate, the Exchange believes that the proposed pricing is
reasonable given the enhanced benefits provided to Users that choose to
utilize the protective features provided by the QDP instruction. QDP,
which was introduced on the Exchange in June, is designed to facilitate
the ability for market participants, including buy-side and other
investors, to avoid potentially unfavorable executions in an MDO's
discretionary range by preventing the exercise of discretion for two
milliseconds following the execution of the EDGX best bid or offer on
the same side of the market as the MDO below one round lot. While
market participants that use this instruction would be subject to a
small flat charge, the Exchange believes that the value of the
protection provided by this feature outweighs the small fee that would
be charged by the Exchange.
[[Page 43278]]
The Nasdaq Stock Market LLC (``Nasdaq'') similarly charges special
fees for the use of orders that are designed to offer certain
protections to market participants. Specifically, Nasdaq charges a fee
of $0.0004 per share to members that trade using its Midpoint Extended
Life Order (``M-ELO'') in securities priced at or above $1.\12\ The
Exchange believes that the proposed fees would be competitive with the
fees that Nasdaq charges for M-ELO executions, as well as the fees
charged by other national securities exchanges and off-exchange venues
that provide various protective features.\13\ QDP is offered on a
voluntary basis, and therefore market participants that would prefer to
operate under the current pricing structure can continue to enter MDOs
without the QDP instruction. The Exchange believes, however, that
market participants may find value in the use of the QDP instruction,
and--similar to firms that trade using Nasdaq M-ELO, IEX Discretionary
Peg, or other similar trading mechanisms--would be willing to pay a
small flat fee to benefit from the protections that this instruction is
designed to provide to investors.
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\12\ See Nasdaq Rules, Equity 7, Pricing Schedule, Section
118(a)(1), (2), (3). Nasdaq does not charge a fee for M-ELO
executions in securities priced below $1. See Nasdaq Rules, Equity
7, Pricing Schedule, Section 118(b).
\13\ For example, Investors Exchange LLC (``IEX''), charges a
fee of $0.0009 or $0.0003 per share for adding or removing non-
displayed or displayed liquidity, respectively. See IEX Fee
Schedule, Fee Codes I and L. Although IEX does not have special
pricing for its Discretionary Peg Orders, which are similar in
certain respects to an MDO entered with a QDP instruction, firms
that trade such orders on IEX would be subject to the general
transaction fees described above.
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The Exchange also believes that the proposed fee change is
equitable and not unfairly discriminatory because it would apply
equally to all MDOs entered with a QDP instruction. As discussed, QDP
is an optional order instruction that a market participant can choose
to include on an MDO entered on the Exchange in order to benefit from
enhanced protections at times when recent executions on the EDGX Book
suggest that the market may be about to move against the resting MDO.
Both the MDO order type and the associated QDP instruction are
available to all Users on an equal and non-discriminatory basis, and
any User that chooses to use the QDP instruction would be subject to
the same fee. As proposed, any MDO entered with a QDP instruction would
be charged a small flat fee, regardless of how the order is ultimately
executed. That is, an MDO entered with a QDP instruction would always
be subject to a small transaction fee whether or not the MDO is
executed within its discretionary range or at its displayed or non-
displayed ranked price, and irrespective of whether or not the MDO is
executed during a QDP Active Period where executions within the order's
discretionary range are prevented.
Although MDOs that include the new QDP instruction would forgo a
rebate relative to MDOs that do not include this instruction, the
Exchange does not believe that this is inequitable or unfairly
discriminatory within the meaning of the Act. All similarly situated
market participants would be subject to consistent and non-
discriminatory pricing based on the instructions that they include on
their MDOs, with Users that include the optional QDP instruction paying
a small fee that the Exchange believes is modest in relation to the
value provided by the QDP instruction in avoiding potentially
unfavorable executions. The proposed pricing is designed to be
attractive to Users that enter MDOs with a QDP instruction,
notwithstanding the fact that market participants would be subject to a
fee instead of a rebate. Further, the Exchange believes that the
ability to charge a flat fee for the execution of such orders would
appropriately compensate the Exchange for the development of this
feature, while allowing the Exchange to offer pricing that is
competitive with other national securities exchanges and off-exchange
venues that may offer competing features. To the extent that any
particular User believes that the benefits of the QDP instruction are
outweighed by the proposed pricing, such Users would be free to enter
MDOs without the QDP instruction, in which case their orders would be
subject to the same pricing offered today.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the Exchange
believes that the proposed changes to its fees would promote continued
competition between the Exchange, other national securities exchanges,
and off-exchange venues that must continuously compete to offer both
competitive pricing and services to members and investors. As proposed,
the Exchange would charge a small flat fee for the use of its recently-
introduced QDP instruction. Charging fees for the use of this
instruction would both compensate for the development and introduction
of new and innovative features, and provide continued incentives for
the Exchange to compete on both cost and the quality of its products
and services.
Intramarket Competition
The Exchange believes the proposed rule change would not impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed fees would
apply to all members equally in that all members would be subject to
the same flat fee for the execution of orders that include a QDP
instruction. The Exchange and other national securities exchanges
(e.g., Nasdaq) offer pricing that is based on the characteristics of
the order that is executed on the Exchange. Although MDOs entered with
the QDP instruction would be subject to the pricing described in this
proposed rule change, the Exchange does not believe that pricing would
impose any significant burden on intramarket competition as this fee
would be applied in the same manner to the execution of any MDO entered
with this instruction. Both MDO and the associated QDP instruction
discussed in this filing are available to all Users on an equal and
non-discriminatory basis. As a result, any User can decide to use (or
not use) the QDP instruction based on the benefits provided by that
instruction in potentially avoiding unfavorable executions, and the
associated charge that the Exchange proposes to introduce for its use.
As discussed, any firm that chooses to use the QDP instruction would be
charged the same flat fee for the execution of orders that are entered
with this instruction.
Intermarket Competition
The Exchange also believes the proposed fees would not impose any
burden on intermarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act. As discussed, the Exchange
operates in a highly competitive market where members can direct their
orders to a number of different market centers. These include 12 live
U.S. equities exchanges, as well as a large number of off-exchange
venues that trade NMS stocks. In addition, the Exchange represents a
small percentage of the overall market. Based on publicly available
information, no single equities exchange has more than 20% of U.S.
equities market share.\14\ Therefore, no exchange possesses significant
pricing power in the execution of order flow.
[[Page 43279]]
Indeed, market participants can readily choose to send their orders to
other exchange and off-exchange venues if they deem fee levels at those
other venues to be more favorable, or if they believe that the products
and services that they offer are better serve their trading needs.
Since competitors are free to modify their own pricing in response, and
as market participants may readily adjust their order routing
practices, the Exchange believes that the degree to which pricing
changes in this market may impose any burden on competition is
extremely limited.
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\14\ See Cboe Global Markets U.S. Equities Market Volume Summary
(May 28, 2020), available at http://markets.cboe.com/us/equities/market_share/.
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Conclusion
In sum, if the changes proposed herein are unattractive to market
participants, it is likely that the Exchange will lose market share to
competing exchanges and off-exchange venues as a result. Accordingly,
the Exchange does not believe that the proposed changes would impair
the ability of members or competing order execution venues to maintain
their competitive standing in the financial markets. Indeed, the
Commission has repeatedly expressed its preference for competition over
regulatory intervention in determining prices, products, and services
in the securities markets. Specifically, in Regulation NMS, the
Commission highlighted the importance of market forces in determining
prices and SRO revenues and, also, recognized that current regulation
of the market system ``has been remarkably successful in promoting
market competition in its broader forms that are most important to
investors and listed companies.'' \15\
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\15\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
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The fact that this market is competitive has also long been
recognized by the courts. In NetCoalition v. Securities and Exchange
Commission, the D.C. Circuit stated as follows: ``[n]o one disputes
that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .''\16\ Accordingly, the Exchange does not believe the
proposed fees impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
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\16\ See NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeEDGX-2020-032 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-CboeEDGX-2020-032. 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-CboeEDGX-2020-032, and should be
submitted on or before August 6, 2020.
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\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15307 Filed 7-15-20; 8:45 am]
BILLING CODE 8011-01-P