[Federal Register Volume 85, Number 159 (Monday, August 17, 2020)]
[Notices]
[Pages 50055-50059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17823]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89525; File No. SR-CboeBZX-2020-065]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Its Fees Schedule
August 11, 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 August 4, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to amend its Fee Schedule. 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/equities/regulation/rule_filings/bzx/), 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
The Exchange proposes to amend its fee schedule for its equity
options platform (``BZX Options'').\3\
---------------------------------------------------------------------------
\3\ The Exchange initially filed the proposed fee changes on
July 31, 2020 (SR-CboeBZX-2020-062). On August 4, 2020, the Exchange
withdrew that filing and submitted this filing.
---------------------------------------------------------------------------
The Exchange first notes that it 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 or incentives to be insufficient. More specifically, the
Exchange is only one of 16 options venues to which market participants
may direct their order flow. Based on publicly available information,
no single options exchange has more than 17% of the market share and
currently the Exchange represents only approximately 8% of the market
share.\4\ Thus, in such a low-concentrated and highly competitive
market, no single options exchange, including the Exchange, possesses
significant pricing power in the execution of option order flow. The
Exchange believes that the ever-shifting market share among the
exchanges from month to month demonstrates that market participants can
shift order flow, or discontinue to reduce use of certain categories of
products, in response to fee changes. Accordingly, competitive forces
constrain the Exchange's transaction fees, and market participants can
readily trade on competing venues if they deem pricing levels at those
other venues to
[[Page 50056]]
be more favorable. The Exchange's fee schedule sets forth standard
rebates and rates applied per contract, which varies depending on the
Member's Capacity (Customer, Firm, Market Maker, etc.), whether the
order adds or removes liquidity, and whether the order is in Penny or
Non-Penny Pilot Securities. Additionally, in response to the
competitive environment, the Exchange also offers tiered pricing which
provides Members opportunities to qualify for higher rebates or reduced
fees where certain volume criteria and thresholds are met. Tiered
pricing provides an incremental incentive for Members to strive for
higher tier levels, which provides increasingly higher benefits or
discounts for satisfying increasingly more stringent criteria.
---------------------------------------------------------------------------
\4\ See Cboe Global Markets U.S. Options Market Month-to-Date
Volume Summary (July 27, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
---------------------------------------------------------------------------
For example, the Exchange currently offers five NBBO Setter Tiers
under footnote 7 of the Fee Schedule which provide additional rebates
between $0.01 and $0.05 per contract for qualifying orders which
establish a new NBBO and yield fee code PM or PN,\5\ where a Member
meets certain liquidity thresholds. Under the current NBBO Setter
Tiers, a Member may receive an additional rebate where the Member has
an ADAV \6\ in Non-Customer orders, or Firm/Market Maker/Away MM orders
greater or equal to a specified percentage of OCV.\7\ The Exchange now
proposes to amend the criteria in NBBO Setter Tiers 2 through 5 by
increasing, in each, a percentage of ADV into average OCV within
existing criteria and also adding to Tier 5 a new, additional criteria
that that a Member must meet to receive the existing additional rebate.
The Exchange notes that the proposed changes do not alter the current
rebates provided under NBBO Setter Tiers 2 through 5.
---------------------------------------------------------------------------
\5\ Orders yielding fee code PM are Market Maker orders that add
liquidity in Penny Pilot Securities and are offered a rebate of
$0.29, and orders yielding fee code PN are Away Market Maker orders
that add liquidity in Penny Pilot Securities and are offered a
rebate of $0.26.
\6\ ``ADAV'' means average daily added volume calculated as the
number of contracts added, per day.
\7\ ``OCC Customer Volume'' or ``OCV'' means the total equity
and ETF options volume that clears in the Customer range at the
Options Clearing Corporation (``OCC'') for the month for which the
fees apply, excluding volume on any day that the Exchange
experiences an Exchange System Disruption and on any day with a
scheduled early market close.
---------------------------------------------------------------------------
Specifically, Tier 2 currently provides an additional rebate of
$0.02 for a Member's qualifying orders (i.e., that yield fee code PM or
PN and establish a new NBBO) for Members that have (1) an ADAV in Non-
Customer orders greater than or equal to 0.40% of average OCV, and (2)
an ADAV in Firm/Market Maker/Away Market Maker (MM) orders that
establish a new NBBO greater than or equal to 0.05% of average OCV.
Tier 3 currently provides an additional rebate of $0.03 for qualifying
orders for Members that have (1) an ADAV in Non-Customer orders greater
than or equal to 0.75% of average OCV, and (2) an ADAV in Firm/Market
Maker/Away MM orders that establish a new NBBO greater than or equal to
0.05% of average OCV. Tier 4 currently provides an additional rebate of
$0.04 for qualifying orders for Members that have (1) an ADAV in Non-
Customer orders greater than or equal to 1.80% of average OCV, (2) an
ADAV in Non-Customer Non-Penny orders greater than or equal to 0.20% of
average OCV, and (3) an ADAV in Firm/Market Maker/Away MM orders that
establish a new NBBO greater than or equal to 0.05% of average OCV.
Tier 5 currently provides an additional rebate of $0.05 for qualifying
orders for Member that have (1) an ADAV in Non-Customer orders greater
than or equal to 3.00% of average OCV, and (2) Member has an ADAV in
Firm/Market Maker/Away MM orders that establish a new NBBO greater than
or equal to 0.05% of average OCV. The Exchange notes that prong 2 of
Tiers 2, 3, and 5 and prong 3 of Tier 4 (as well as prong 2 of Tier 1
which is not being amended) provide the same criteria. The proposed
change updates these criteria in each tier to instead become
incrementally more difficult. The proposed criteria in Tier 2 requires
that a Member have an has an ADAV in Firm/Market Maker/Away MM orders
that establish a new NBBO greater than or equal to 0.15% of average
OCV, in Tier 3 requires a threshold greater than or equal to 0.30% of
average OCV, in Tier 4 requires a threshold of greater than or equal to
0.50% of average OCV, and in Tier 5 requires a threshold of 0.80% of
average OCV. In addition to this, the proposed change amends the
criteria in prong 1 of Tier 5 to decrease the threshold of Non-Customer
orders over average OCV from 3.00% to 2.55% and adopts an additional
criteria in Tier 5, a new prong 2 (current prong 2 will become prong
3), which requires an ADAV in Non-Customer Non-Penny orders greater
than or equal to 0.25% of average OCV. The proposed increases in Firm/
Market Maker/Away MM order ADAV that establish a new NBBO as a
percentage of average OCV in Tiers 2 through 5 are intended to
incrementally increase the level of difficulty in achieving each of
these tiers, thus, incentivizing Members to increase their overall
order flow to the Exchange by encouraging those Members to strive for
the different, incrementally more difficult tier criteria under the
proposed tiers to receive the additional rebates. The proposed
additional prong of criteria in Tier 5 is also designed to
incrementally increase the level of difficulty in achieving Tier 5,
while the proposed decrease in the threshold of ADAV over average OCV
in prong 1 is designed to balance the entirety of Tier 5's difficulty
in light of the proposed additional criteria, incentivizing Members to
continue to submit Non-Customer orders to the Exchange's Order Book.
The Exchange believes that the proposed fee changes are overall
designed to incentivize more Firm, Market Maker, and Away Market Maker
add volume order flow to establish a new NBBO as well as overall Non-
Customer add volume order flow to the Exchange. Increased add volume
order flow, particularly by liquidity providers, contributes to a
deeper, more liquid market, which, in turn, provides for increased
execution opportunities and thus overall enhanced price discovery and
price improvement opportunities on the Exchange. As such, this benefits
all Members by contributing towards a robust and well-balanced market
ecosystem, offering additional flexibility for all investors to enjoy
cost savings, supporting the quality of price discovery, promoting
market transparency and improving investor protection.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\8\ in general, and
furthers the objectives of Section 6(b)(4),\9\ in particular, as it is
designed to provide for the equitable allocation of reasonable dues,
fees and other charges among its Members and issuers and other persons
using its facilities. The Exchange also believes that the proposed rule
change is consistent with the objectives of Section 6(b)(5) \10\
requirements that the rules of an exchange be 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 mechanism of a
free and open market and a national market system, and, in general, to
protect
[[Page 50057]]
investors and the public interest, and, particularly, is not designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(4).
\10\ 15 U.S.C. 78f.(b)(5).
---------------------------------------------------------------------------
As described above, 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 or incentives to be insufficient. The proposed rule change
reflects a competitive pricing structure designed to incentivize market
participants to direct their order flow to the Exchange, which the
Exchange believes would enhance market quality to the benefit of all
Members.
In particular, the Exchange believes the proposed tiers are
reasonable because they amend existing opportunities in a manner that
incentivizes increased Non-Customer (which would include, where
applicable, Firm, Market Maker, and Away MM specifically) order flow
via incrementally more challenging criteria in order to receive the
same additional rebates on a Member's qualifying orders. The Exchange
notes that volume-based incentives and discounts have been widely
adopted by exchanges,\11\ including the Exchange,\12\ and are
reasonable, equitable and non-discriminatory because they are open to
all Members on an equal basis and provide additional benefits or
discounts that are reasonably related to (i) the value to an exchange's
market quality and (ii) associated higher levels of market activity,
such as higher levels of liquidity provision and/or growth patterns.
Additionally, as noted above, the Exchange operates in a highly
competitive market. The Exchange is only one of several options venues
to which market participants may direct their order flow, and it
represents a small percentage of the overall market. Competing options
exchanges offer similar tiered pricing structures to that of the
Exchange, including schedules of rebates and fees that apply based upon
Members achieving certain volume and/or growth thresholds.
---------------------------------------------------------------------------
\11\ See e.g., NYSE Arca Options Fee Schedule, Firm and Broker
Dealer Penny Posting Credit Tiers, and Non-Customer Non-Penny
Posting Credit Tiers.
\12\ See e.g., The Exchange's Fee Schedule, Footnote 4, NBBO
Setter Tiers.
---------------------------------------------------------------------------
Moreover, the Exchange believes the amended NBBO Setter Tiers are a
reasonable means to encourage Members to increase their liquidity on
the Exchange, specifically their Non-Customer add volume order flow.
The Exchange believes that modifying existing criteria in Tiers 2
through 5 to be incrementally more difficult to achieve, as opposed to
the current fixed criteria pursuant to the same prong in each tier, and
adopting an additional prong of criteria in Tier 5 are reasonable
modifications of existing criteria because they are designed to
incrementally increase the difficulty in achieving these tiers, thereby
incentivizing Members to increase their overall add volume order flow,
and particularly, to strive to establish new NBBOs. This benefits all
market participants by incentivizing continuous display of and
opportunity to execute at the best prices, and by incentivizing overall
additional liquidity, which signals other market participants to take
the additional execution opportunities provided by such liquidity. This
overall increase in activity deepens the Exchange's liquidity pool,
offers additional cost savings, supports the quality of price
discovery, promotes market transparency and improves market quality,
for all investors. The Exchange also notes that it is reasonable to
decrease the threshold of ADAV as a percentage average OCV in prong 1
of Tier 5 in order to balance the ultimate level of difficult in
achieving the tier with the added proposed prong of criteria that a
Member must meet to achieve the current rebate.
Further, the Exchange believes that the proposed rule changes are
reasonable as they represent proportional increases in difficulty per
adjacent tiers and the criteria thresholds appropriately reflect the
incremental difficulty to achieve the existing rebates that increase
with each ascending tier. For example, the Exchange proposes to
simultaneously increase the ADAV thresholds of Firm/Market Maker/Away
MM orders that establish a new NBBO in each of Tier 2, 3, 4, and 5 in a
manner that poses a step up in difficulty per each ascending tier to
achieve the current ascending rebates per each tier. The Exchange also
believes that the proposed change to Tier 5 in adding another prong of
criteria, as well as tempering the difficulty posed by the added prong
by decreasing the threshold of ADAV over average OCV in an existing
prong, appropriately balances the step up in difficulty from Tier 4 to
Tier 5. The Exchange again notes that the proposed rule changes do not
alter the amount of any of the current rebates in place.
The Exchange believes that the proposal represents an equitable
allocation of fees and is not unfairly discriminatory because all
Members will be eligible for the proposed tier and the corresponding
additional rebate will apply uniformly to all Members that reach the
proposed tier criteria. That is, the proposed tiers are designed as an
incentive to any and all Members interested in meeting the tier
criteria to submit additional order flow to the Exchange and each will
receive the proposed additional rebate if the tier criteria is met.
The Exchange believes that the proposal represents an equitable
allocation of rebates and is not unfairly discriminatory because all
Members will continue to be eligible for NBBO Setter Tiers 2 through 5,
as amended. The proposed changes to the tiers' criteria are designed as
an incentive to any and all Members interested in meeting the tier
criteria to submit additional Non-Customer orders (with opportunities
to achieve such tiers via criteria for Firm/Market Maker/Away MM
orders) to the Exchange. Each will have the opportunity to submit the
requisite order flow and will receive the applicable existing rebate if
the tier criteria are met. Without having a view of activity on other
markets and off-exchange venues, the Exchange has no way of knowing
whether this proposed rule change would definitely result in any
Members qualifying for the proposed tiers. While the Exchange has no
way of predicting with certainty how the proposed tiers will impact
Member activity, the Exchange anticipates that approximately at least
three Members will be able to compete for and achieve the amended
criteria in each of Tier 2 and Tier 3, and at least one Member will be
able to compete for and achieve the amended criteria in each of Tier 4
and Tier 5. The Exchange anticipates that the tiers will particularly
include liquidity providers, such as traditional Market Makers, and
wholesale or consolidator firms that mainly make markets for retail
orders, each providing distinct types of order flow to the Exchange to
the benefit of all market participants. The Exchange also notes that
the proposed tiers will not adversely impact any Member's pricing or
their ability to qualify for other rebate tiers. Rather, should a
Member not meet the proposed criteria for a tier, the Member will
merely not receive the corresponding additional rebate. Furthermore,
the existing rebate and fees will continue to uniformly apply to all
Members that meet the required criteria, as amended, per each
respective tier.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on intramarket or intermarket competition that is not
[[Page 50058]]
necessary or appropriate in furtherance of the purposes of the Act.
Rather, as discussed above, the Exchange believes that the proposed
change would encourage the submission of additional liquidity to a
public exchange, thereby promoting market depth, price discovery and
transparency and enhancing order execution opportunities for all
Members. As a result, the Exchange believes that the proposed change
furthers the Commission's goal in adopting Regulation NMS of fostering
competition among orders, which promotes ``more efficient pricing of
individual stocks for all types of orders, large and small.'' \13\
---------------------------------------------------------------------------
\13\ Securities Exchange Act Release No. 51808, 70 FR 37495,
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
---------------------------------------------------------------------------
The Exchange believes the proposed rule change does not impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Particularly, the proposed
change applies to all Members equally in that all Members are eligible
to achieve the tiers' proposed criteria, have a reasonable opportunity
to meet the tiers' proposed criteria and will all receive the existing
rebates if such criteria is met. Overall, the proposed change is
designed to attract additional Non-Customer (including, where
applicable, specifically Firm/Market Maker/Away MM) order flow to the
Exchange. The Exchange believes that the modified tier criteria would
incentivize market participants to strive to increase such order flow
to the Exchange to meet the proposed criteria and, as a result, provide
for deeper levels of liquidity, increasing trading opportunities for
other market participants, thus signaling further trading activity,
ultimately incentivizing more overall order flow and improving price
transparency on the Exchange. Greater overall order flow and pricing
transparency benefits all market participants on the Exchange by
generally providing continuous trading opportunities, enhancing market
quality, and continuing to encourage Members to send orders, thereby
contributing towards a robust and well-balanced market ecosystem, which
benefits all market participants.
Next, the Exchange believes the proposed rule change does not
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As previously
discussed, the Exchange operates in a highly competitive market.
Members have numerous alternative venues that they may participate on
and director their order flow, including 15 other options exchanges and
off-exchange venues. Additionally, the Exchange represents a small
percentage of the overall market. Based on publicly available
information, no single options exchange has more than 17% of the market
share.\14\ Therefore, no exchange possesses significant pricing power
in the execution of option order flow. Indeed, 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.
Moreover, 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\ 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 its proposed fee change
imposes any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\14\ See supra note 3.
\15\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
\16\ 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)).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
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-CboeBZX-2020-065 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-CboeBZX-2020-065. 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
[[Page 50059]]
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-
CboeBZX-2020-065 and should be submitted on or before September 8,
2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17823 Filed 8-14-20; 8:45 am]
BILLING CODE 8011-01-P