[Federal Register Volume 76, Number 114 (Tuesday, June 14, 2011)]
[Notices]
[Pages 34792-34794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-14662]



[[Page 34792]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64632; File No. SR-EDGX-2011-17]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Amendments to the EDGX Exchange, Inc. Fee Schedule

June 8, 2011.
    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 June 1, 2011, the EDGX Exchange, Inc. (the ``Exchange'' or the 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which items have been prepared by the self-regulatory 
organization. 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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its fees and rebates applicable to 
Members \3\ of the Exchange pursuant to EDGX Rule 15.1(a) and (c). All 
of the changes described herein are applicable to EDGX Members. The 
text of the proposed rule change is available on the Exchange's 
Internet Web site at http://www.directedge.com.
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    \3\ A Member is any registered broker or dealer, or any person 
associated with a registered broker or dealer, that has been 
admitted to membership in the Exchange.
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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 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 these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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

Purpose
    For customer internalization, which occurs when two orders 
presented to the Exchange from the same Member (i.e., MPID) are 
presented separately and not in a paired manner, but nonetheless 
inadvertently match with one another,\4\ the Exchange charges $0.0001 
per share per side of an execution (for adding liquidity and for 
removing liquidity) for Flags E and 5. This charge occurs in lieu of 
the standard or tiered rebate/removal rates. Therefore, Members incur a 
total transaction cost of $0.0002 per share for both sides of an 
execution for customer internalization.
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    \4\ Members are advised to consult Rule 12.2 respecting 
fictitious trading.
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    In SR-EDGX-2011-13 (April 29, 2011), the Exchange represented that 
``it will work promptly to ensure that the internalization fee is no 
more favorable than each prevailing maker/taker spread.'' In order to 
ensure that the internalization fee is no more favorable than the 
prevailing maker/taker spread of $0.0007 for the standard add (rebate 
of $0.0023)--standard removal rate ($0.0030 charge per share), the 
Exchange is proposing to charge $0.00035 per side for customer 
internalization (Flags E and 5). However, if a Member posts 10,000,000 
shares or more of average daily volume (``ADV'') to EDGX, then the 
Member would get the current rate of $0.0001 per share per side for 
customer internalization.\5\ If this occurs, then the Member's rate for 
inadvertently matching with itself decreases to $0.0001 per share per 
side, as the Member has met the least restrictive criteria to satisfy a 
tier (i.e., Super Tier, Ultra Tier, Mega Tier). The Exchange is 
proposing to add language clarifying this point to footnote 11 and 
append the reference to footnote 11 to Flags E and 5.
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    \5\ As noted in SR-EDGX-2011-13 (April 29, 2011), EDGX has a 
variety of tiered rebates ranging from $0.0030-$0.0034 per share, 
which makes its maker/taker spreads range from $0 (standard removal 
rate--Super Tier rebate), -$0.0001, (standard removal rate--Ultra 
Tier rebate) -$0.0002 (standard removal rate--Mega Tier rebate of 
$0.0032), and -$.0004 (standard removal rate--Mega Tier rebate of 
$0.0034 per share). As a result of the customer internalization 
charge, Members who internalized would be charged $0.0001 per share 
per side of an execution (total of $0.0002 per share) instead of 
capturing the maker/taker spreads resulting from achieving the 
tiered rebates.
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    In each case (both tiered and standard rates), the charge for 
Members inadvertently matching with themselves is no more favorable 
than each maker/taker spread. The applicable rate for customer 
internalization thus allows the Exchange to discourage potential wash 
sales.
    The Exchange also proposes to add footnote 1 to the ``MM'' flag to 
clarify that Flag MM executions (adding liquidity to MidPoint Match) 
count towards the tiered rates listed in footnote 1 (Super Tier, Ultra 
Tier, Mega Tier).
    The Exchange proposes to amend footnote 3 to reflect NYSE's 
increase in charge from $0.0021 per share to $0.0023 per share for 
removing liquidity in stocks priced below $1.00.
    Currently, Members can qualify for the Mega Tier and be provided a 
rebate of $0.0032 per share for liquidity added on EDGX in either of 
two ways: (i) If the Member on a daily basis, measured monthly, posts 
0.75% of the Total Consolidated Volume (``TCV'') \6\ in average daily 
volume; or (ii) if the Member, on a daily basis, measured monthly, 
posts 15,000,000 shares more than their February 2011 average daily 
volume, provided that their February 2011 average daily volume equals 
or exceeds 1,000,000 shares added to EDGX. The Exchange proposes to 
amend the Mega Tier criteria in (ii), above, for achieving a $0.0032 
rebate to indicate that Members will qualify for such rebate if, on a 
daily basis, measured monthly, they post 10,000,000 shares more than 
their February 2011 average daily volume added to EDGX. In an effort to 
make it easier for Members to achieve the Mega Tier rebate during lower 
transaction volume days, the Exchange would like to lower the current 
daily share posting requirement to 10,000,000 shares from 15,000,000 
shares. Additionally, in order to allow more constituents to reach the 
Mega Tier in general, the Exchange would also like to remove, in its 
entirety, the baseline requirement that a Member's February 2011 
average daily volume equals or exceeds 1,000,000 shares.
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    \6\ TCV is defined as volume reported by all exchanges and trade 
reporting facilities to the consolidated transaction reporting plans 
for Tapes A, B and C securities.
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    Finally, the Exchange proposes to decrease the rebate on Flag C 
(routed to Nasdaq BX, removes liquidity) from $0.0014 per share to 
$0.0005 per share.
    EDGX Exchange proposes to implement these amendments to the 
Exchange fee schedule on June 1, 2011.
Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Exchange Act,\7\ in general, 
and furthers

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the objectives of Section 6(b)(4),\8\ 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.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the increased fee for customer 
internalization of $0.00035 per share per side of an execution for both 
Flags E (regular trading session) and 5 (pre and post market) 
represents an equitable allocation of reasonable dues, fees, and other 
charges as it is designed to introduce a fee for Members who 
inadvertently match with one another, thereby discouraging potential 
wash sales. The increased fee also allows the Exchange to offset its 
administrative, clearing, and other operating costs incurred in 
executing such trades. Finally, the fee is equitable in that it is in 
line \9\ with the EDGX fee structure which currently has a maker/taker 
spread of $0.0007 per share (the standard rebate to add liquidity on 
EDGX is $0.0023 per share, while the standard fee to remove liquidity 
is $0.0030 per share).
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    \9\ In each case, the internalization fee is no more favorable 
to the Member than each prevailing maker/taker spread.
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    With respect to Members that satisfy the criteria for various 
tiered rebates, EDGX notes that its maker/taker spreads range from 
$.0007 (standard add - standard removal rate), $0 (standard removal 
rate - Super Tier rebate), -$0.0001, (standard removal rate - Ultra 
Tier rebate) -$0.0002 (standard removal rate - Mega Tier rebate of 
$0.0032), and -$.0004 (standard removal rate - Mega Tier rebate of 
$0.0034 per share). As a result of the proposed charge for Members 
inadvertently matching with themselves, such Members would be charged 
$0.00035 per share per side of an execution (total of $0.0007 per 
share) for those not meeting the criteria for the Super Tier (posting 
10,000,000 shares or more of ADV to EDGX). For those meeting the 
criteria for any tier, Members would charged $0.0002 per share instead 
of capturing the maker/taker spreads resulting from achieving the 
tiered rebates, as described above.
    This increased fee per side of an execution ($.00035 per side 
instead of $0.0001 per side per share), yielding a total cost of 
$0.0007, thus brings the internalization fee in line with the current 
maker/taker spreads.\10\ The Exchange believes that the proposed rate 
is non-discriminatory in that it applies uniformly to all Members.
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    \10\ The Exchange will continue to ensure that the 
internalization fee is no more favorable than each prevailing maker/
taker spread.
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    The increase in fee from $0.0021 per share to $0.0023 per share, as 
reflected in footnote 3, is assessed by NYSE for stocks priced below 
$1.00. This increase in fee is a pass through of NYSE's increased fee, 
effective January 3, 2011. The same rate change was made for orders in 
securities priced $1 and over for securities that are routed or re-
routed to NYSE (Flag D) in the Exchange's fee filing effective January 
1, 2011.\11\ EDGX believes that it is reasonable and equitable to pass 
on these fees to its members.
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    \11\ See SR-EDGA-2010-26 (December 28, 2010).
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    The Exchange believes that amending the criteria to qualify for the 
Mega Tier represents an equitable allocation of reasonable dues, fees, 
and other charges since higher rebates are directly correlated with 
more stringent criteria.
    The Mega Tier rebate of $0.0034/$0.0032 per share has some of the 
most stringent criteria associated with it, and is $0.0003/$0.0001 
greater than the Ultra Tier rebate ($0.0031 per share) and $0.0004/
$0.0002 greater than the Super Tier rebate ($0.0030 per share).
    For example, based on average TCV for April 2011 (7.0 billion), in 
order for a Member to qualify for the Mega Tier rebate of $0.0034, the 
Member would have to add or route at least 4,000,000 shares of average 
daily volume during pre and post-trading hours and add a minimum of 
38,000,000 shares of average daily volume on EDGX in total, including 
during both market hours and pre and post-trading hours. The criteria 
for this tier is the most stringent as fewer Members generally trade 
during pre and post-trading hours because of the limited time 
parameters associated with these trading sessions. The Exchange 
believes that this higher rebate awarded to Members would incent 
liquidity during these trading sessions. Such increased volume 
increases potential revenue to the Exchange, and would allow the 
Exchange to spread its administrative and infrastructure costs over a 
greater number of shares, leading to lower per share costs. These lower 
per share costs would allow the Exchange to pass on the savings to 
Members in the form of a higher rebate.
    Another way a Member can qualify for the Mega Tier (with a rebate 
of $0.0032 per share) would be to post 0.75% of TCV. Based on average 
TCV for April 2011 (7.0 billion), this would be 52.5 million shares on 
EDGX. A second method, as proposed in this filing, to qualify for the 
rebate of $0.0032 per share would be to post 10,000,000 shares more 
than the Member's February 2011 average daily volume added to EDGX. The 
Exchange believes that requiring Members to post 10,000,000 shares more 
than a February 2011 baseline average daily volume encourages Members 
to add increasing amounts of liquidity to EDGX each month. Such 
increased volume increases potential revenue to the Exchange, and would 
allow the Exchange to spread its administrative and infrastructure 
costs over a greater number of shares, leading to lower per share 
costs. These lower per share costs would allow the Exchange to pass on 
the savings to Members in the form of a higher rebate. The increased 
liquidity also benefits all investors by deepening EDGX's liquidity 
pool, offering additional flexibility for all investors to enjoy cost 
savings, supporting the quality of price discovery, promoting market 
transparency and improving investor protection. Volume-based rebates 
such as the one proposed herein have been widely adopted in the cash 
equities markets, and are equitable because they are open to all 
members on an equal basis and provide discounts that are reasonably 
related to the value to an exchange's market quality associated with 
higher levels of market activity, such as higher levels of liquidity 
provision and introduction of higher volumes of orders into the price 
and volume discovery processes.
    In order to qualify for the Ultra Tier, which has less stringent 
criteria than the Mega Tier, the Member would have to post 0.50% of 
TCV. Based on average TCV for April 2011 (7.0 billion shares), this 
would be 35 million shares on EDGX.
    Finally, the Super Tier has the least stringent criteria of the 
tiers mentioned above. In order for a Member to qualify for this 
rebate, the Member would have to post at least 10 million shares on 
EDGX. As stated above, these rebates also result, in part, from lower 
administrative and other costs associated with higher volume. The 
Exchange believes that the decreased rebate on Flag C when EDGX routes 
to Nasdaq BX is designed to provide for the equitable allocation of 
reasonable dues, fees and other charges as it represents a straight 
pass through of Nasdaq BX's decreased rebate from $0.0014 per share to 
$0.0005 per share, which is effective June 1, 2011. EDGX believes that 
it is reasonable and equitable to pass on these fees to its members.
    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily direct order flow to competing 
venues if they

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deem fee levels at a particular venue to be excessive. The proposed 
rule changes reflect a competitive pricing structure designed to incent 
market participants to direct their order flow to the Exchange. The 
Exchange believes that the proposed rates are non-discriminatory in 
that they apply uniformly to all Members. The Exchange believes the 
fees and credits remain competitive with those charged by other venues 
and therefore continue to be reasonable and equitably allocated to 
Members.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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)(ii) of the Act \12\ and Rule 19b-4(f)(2) \13\ 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 shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \13\ 17 CFR 19b-4(f)(2).
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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 e-mail to [email protected]. Please include 
File Number SR-EDGX-2011-17 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-EDGX-2011-17. This file 
number should be included on the subject line if e-mail 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 Web site (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 Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing also 
will be available for inspection and copying at the principal office of 
the Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
EDGX-2011-17 and should be submitted on or before July 5, 2011.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14662 Filed 6-13-11; 8:45 am]
BILLING CODE 8011-01-P