[Federal Register Volume 77, Number 71 (Thursday, April 12, 2012)]
[Notices]
[Pages 22053-22056]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8786]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66762; File No. SR-EDGX-2012-12]


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

April 6, 2012.
    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 March 30, 2012 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, II, 
and III 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, at the Exchange's 
principal office, and at the Public Reference Room of the Commission.
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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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make a technical amendment to the 
description of the Mega and Mini Tape B Tiers in footnote 1 to clarify 
that these rebates ($0.0034 per share and $0.0030 per share, 
respectively) are provided for liquidity added on EDGX in Tape B 
Securities only.
    Flag E represents a customer internalization \4\ charge per side if 
a Member inadvertently matches with itself. In order to provide 
additional transparency to Members, Flag E is proposed to be bifurcated 
into two flags and re-named to state ``Internalization'' instead of 
``Customer Internalization'': Flag EA (internalization on the adding 
liquidity side) and Flag ER (internalization on the removing

[[Page 22054]]

liquidity side). No change is proposed to the standard rate of $0.00035 
per share. A conforming amendment is proposed to be made to the first 
sentence of footnote 11 to make clear that either Flag EA or ER could 
be yielded for internalization. In addition, the last sentence of 
footnote 11 on the fee schedule provides that ``if a Member 
internalizes more than 4% of their ADV on EDGX (added, removed, and 
routed liquidity) and the Member, at a minimum, meets the criteria for 
the Mega Tier rebate of $0.0032 per share in footnote 1, then the 
Member's receives a rebate of $0.00015 per share.'' This tier is 
proposed to be amended to state that in the latter situation, a Member 
would receive the applicable rebate in footnote 1 of the fee schedule 
for adding liquidity or would be charged the applicable removal rate in 
footnote 1 or 12. This enables the Member to ascertain if they are on 
the ``adding liquidity side'' or ``removing liquidity side'' for 
purposes of internalization.
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    \4\ This 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. 
Members are advised to consult Rule 12.2 respecting fictitious 
trading.
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    The Exchange proposes to add footnote 13 to its fee schedule to 
establish a new Investor Tier under which a Member can qualify for a 
rebate of $0.0030 per share if they meet the following criteria: (i) On 
a daily basis, measured monthly, posts an ADV of at least 8 million 
shares on EDGX, where added flags are defined as B, HA, V, Y, MM, 3, or 
4 (ii) have an ``added liquidity'' to ``removed liquidity'' ratio of at 
least 70% where added flags are defined as B, HA, V, Y, MM, 3, or 4 \5\ 
and removal flags are defined as MT, N, W, PI, or 6; and (iii) have a 
message-to-trade ratio of less than 4:1. The Exchange notes that the 
message-to-trade ratio is calculated by including total messages as the 
numerator (orders, cancels, and cancel/replace messages) and dividing 
it by total executions.\6\ The Exchange also notes that any cancel/
replace message, regardless of whether it is a partial cancel, is 
considered a new order.
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    \5\ The Exchange notes that the vast majority of posted 
liquidity is displayed liquidity (Flags B, V, Y, 3, or 4) and the 
volume posted from hidden liquidity (Flags HA and MM) is incidental.
    \6\ The Exchange notes that it counts only the first partial or 
complete execution resulting from an order if it is filled in parts. 
So, if a 1,000 share order results in three partial executions of 
400 shares, 300 shares, and 300 shares, it counts only the first 
execution of 400 shares toward the denominator. Thus, the Exchange 
counts all fills against an order as one trade for purposes of 
``total executions.''
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    The Exchange proposes to amend the description of Flag K in 
reference to orders routed to the PSX to include the ROUE \7\ routing 
strategy in addition to the ROUC routing strategy. The Exchange 
proposes to continue to assess a charge of $0.0025 per share.
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    \7\ See Exchange Rule 11.9(b)(3).
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    Similarly, the Exchange proposes to amend the description of Flag 
BY in reference to orders routed to the BATS BYX Exchange to include 
the ROUE routing strategy in addition to the ROUC and ROBY routing 
strategies. The Exchange proposes to continue to offer a rebate of 
$0.0002 per share.
    The Exchange proposes to make technical amendments to the fee 
schedule to: (i) substitute the phrase ``are defined as'' for 
``include'' in footnote 12; (ii) replace Flag H with Flag HA in 
footnote 12 since Flag HA replaced Flag H effective March 1, 2012; \8\ 
and (iii) remove the word ``customer'' in the description of Flags 5 
and footnote 11 so that it now would read ``Internalization.''
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    \8\ See Securities Exchange Act Release No. 66558 (March 9, 
2012), 77 FR 15432 (March 15, 2012) (SR-EDGX-2012-06).
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    The Exchange proposes to implement these amendments to its fee 
schedule on April 1, 2012.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with the objectives of Section 6 of the Act,\9\ in general, and 
furthers the objectives of Section 6(b)(4),\10\ 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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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed technical amendment to the 
Mini and Mega Tape B Tiers adds additional transparency to its fee 
schedule for investors as it clarifies that the tiered rate is only 
applicable as to Tape B securities. The Exchange believes that the 
proposed technical amendment to delete Flag E and replace it with Flags 
EA and ER promotes market transparency and improves investor protection 
by adding additional transparency to its fee schedule by more precisely 
delineating for Members whether they are ``adders of liquidity'' or 
``removers of liquidity'' for purposes of paying the internalization 
fee. The Exchange also believes that the proposal is non-discriminatory 
because it applies to all Members.
    Finally, the internalization rebate is equitable in that it is in 
line with the EDGX fee structure \11\ which currently has a maker/taker 
spread of $0.0006 per share (the standard rebate to add liquidity on 
EDGX is $0.0023 per share, while the standard fee to remove liquidity 
is $0.0029 per share). EDGX also has a variety of tiered rebates 
ranging from $0.0023-$0.0034 per share, which makes its maker/taker 
spreads range from $.0006 (standard add--standard removal rate), -
$.0001 (standard removal rate--Super Tier rebate), -$0.0002 (standard 
removal rate--Ultra Tier rebate), -$0.0003 (standard removal rate--Mega 
Tier rebate of $0.0032), and -$.0005 (standard removal rate--Mega Tier 
rebate of $0.0034 per share). As a result of the internalization 
rebate, Members who internalized and met the criteria to satisfy the 
Mega Tier and the volume threshold of 4% of their ADV on EDGX would be 
rebated $0.00032 per share per side of an execution (the applicable 
rebate in footnote 1 for adding liquidity) and be charged $0.0029 per 
share per side (the applicable removal rate in footnote 1, in this 
case). This makes the total net rebate equal $0.0003 per share, which 
would be an internalization rate that is no more favorable than the 
prevailing maker/taker spread by satisfying the Mega Tier rebate of 
$0.0032 ($-0.0003).
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    \11\ 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.''
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    The Exchange believes that the Investor Tier is designed to provide 
for the equitable allocation of reasonable dues, fees and other charges 
among its Members and other persons using its facilities as it rewards 
Members with order flow characteristics that contribute meaningfully to 
price discovery on the Exchange. In other words, Members that primarily 
post liquidity and provide longer duration orders are more valuable 
Members to the Exchange and the marketplace in terms of liquidity 
provision. The EDGX Investor Tier also encourages Members to primarily 
add liquidity in order to satisfy the ``added liquidity'' to ``removed 
liquidity'' ratio of at least 70%. 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 higher rebates. 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 ones proposed 
herein have been

[[Page 22055]]

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 addition, the rebate is also reasonable in that other exchanges 
likewise employ similar pricing mechanisms. For example, NASDAQ \12\ 
and NYSE Arca \13\ offer investor support programs and investor tiers, 
respectively. Such programs reward liquidity provision attributes, 
encourage price discovery and market transparency by encouraging growth 
in liquidity over a defined baseline, and encourage a low cancellation 
rate on liquidity-providing orders. EDGX's Investor Tier is similar to 
NASDAQ's/NYSE Arca's programs in they both encourage efficient 
liquidity provision. It is similar to NASDAQ's Investor Support Program 
in that for NASDAQ members to qualify, among a firm's liquidity-
providing orders, it must maintain a ratio of ``orders'' to ``orders 
executed'' of less than ten to one (i.e., at least one out of every ten 
liquidity-providing orders submitted must be executed rather than 
cancelled). Similarly, NYSE Arca's investor tiers require its members 
to maintain a ratio of cancelled orders to total orders of less than 
30% and maintain a ratio of executed liquidity adding volume to total 
volume of greater than 80%, among other criteria. EDGX's Investor Tier 
is similar to NYSE Arca's investor tiers in that like NYSE Arca's 
investor tiers, the Exchange's goal is to incentivize Members to 
maintain low cancellation rates and provide liquidity that supports the 
quality of price discovery and promotes market transparency. In 
addition, similar to the investor tiers of NYSE Arca, EDGX's Investor 
Tier ``reward[s] providers whose orders stay on the [b]ook and do not 
rapidly cancel a large portion of their orders placed, which makes the 
price discovery process more efficient and results in higher fill 
rates, greater depth and lower volatility. It serves to encourage 
Members to post orders that are more likely to be executed.'' \14\
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    \12\ See NASDAQ Rule 7014. Similarly, NASDAQ established an 
Investor Support Program (``ISP'') targeting retail and 
institutional investor orders where firms receive a higher rebate if 
they meet all of the following criteria: 1) Add at least 10 million 
shares of liquidity per day via ISP-designated ports; 2) Maintain a 
ratio of orders-to-orders executed of less than 10 to 1 (counting 
only liquidity-providing orders and excluding certain order types) 
on ISP-designated ports; 3) Exceed the firm's August 2010/2011 
``baseline'' volume of liquidity added across all the firm's ports. 
For a detailed description of the Investor Support Program as 
originally implemented, see Securities Exchange Act Release No. 
63270 (November 8, 2010), 75 FR 69489 (November 12, 2010) (NASDAQ-
2010-141) (notice of filing and immediate effectiveness) (the ``ISP 
Filing''). See also Securities Exchange Act Release Nos. 63414 
(December 2, 2010), 75 FR 76505 (December 8, 2010) (NASDAQ-2010-153) 
(notice of filing and immediate effectiveness); 63628 (January 3, 
2011), 76 FR 1201 (January 7, 2011) (NASDAQ-2010-154) (notice of 
filing and immediate effectiveness); 63891 (February 11, 2011), 76 
FR 9384 (February 17, 2011) (NASDAQ-2011-022) (notice of filing and 
immediate effectiveness); and 64050 (March 8, 2011), 76 FR 13694 
March 14, 2011) (SR-NASDAQ-2011-034). See also Securities Exchange 
Act Release No. 65717 (November 9, 2011), 76 FR 70784 (November 15, 
2011) (SR-NASDAQ-2011-150).
    \13\ NYSE Arca also implemented investor tiers where they allow 
Members to earn a credit of $0.0032 per share for executed orders 
that provide liquidity to the Book for Tape A, Tape B and Tape C 
securities when they meet all of the following criteria on a monthly 
basis: 1) Maintain a ratio of cancelled orders to total orders of 
less than 30%; 2) Maintain a ratio of executed liquidity adding 
volume to total volume of greater than 80%; and 3) Firms must add 
liquidity that represents 0.45% or more of the total U.S. average 
daily consolidated share volume (``ADV'') per month (volume on days 
when the market closes early is excluded from the calculation of 
ADV). See Securities Exchange Act Release No. 64593 (June 3, 2011), 
76 FR 33380 (June 8, 2011) (SR-NYSEArca-2011-34); Securities 
Exchange Act Release No. 66115 (January 6, 2012), 77 FR 1969 
(January 12, 2012) (SR-NYSEArca-2011-101) (notice of filing and 
immediate effectiveness of a proposed rule change replacing 
numerical thresholds with percentage thresholds for the Investor 
Tiers' volume requirements). See also Securities Exchange Act 
Release No. 66378 (February 10, 2012), 77 FR 9278 (February 16, 
2012) (SR-NYSEArca-2012-13).
    \14\ See Securities Exchange Act Release No. 64593 (June 3, 
2011), 76 FR 33380 (June 8, 2011) (SR-NYSEArca-2011-34).
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    The Exchange proposes to amend the description of Flag K in 
reference to orders routed to the PSX to include the ROUE routing 
strategy in addition to the ROUC routing strategy. The Exchange 
proposes to continue to assess a charge of $0.0025 per share. The 
Exchange believes that by including the ROUE routing strategy in the 
description of Flag K, the Exchange is providing additional 
transparency to the fee schedule by broadening that flag's 
applicability to several routing strategies. This encourages Members to 
utilize the Exchange to route to various destinations, which results in 
a lower overall routed rate for Members and allows the Exchange to pass 
on the savings it receives to the Exchange's Members. The Exchange 
believes that the proposed rebate is non-discriminatory in that it 
applies uniformly to all Members.
    Similarly, the Exchange proposes to amend the description of Flag 
BY in reference to orders routed to the BATS BYX Exchange to include 
the ROUE routing strategy in addition to the ROUC and ROBY routing 
strategies. The Exchange proposes to continue to offer a rebate of 
$0.0002 per share. The Exchange believes that by including the ROUE 
routing strategy in the description of Flag BY the Exchange is 
providing additional transparency to the fee schedule by broadening 
that flag's applicability to several routing strategies. This 
encourages Members to utilize the Exchange to route to various 
destinations, which results in a lower overall routed rate for Members 
and allows the Exchange to pass on the savings it receives to the 
Exchange's Members. The Exchange believes that the proposed rebate is 
non-discriminatory in that it applies uniformly to all Members.
    The Exchange also 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. The proposed rule change reflects 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 
equitable and 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) of the Act \15\ and Rule 19b-4(f)(2) \16\ thereunder. At any 
time within 60 days of the filing of such proposed rule

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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.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 19b-4(f)(2) [sic].
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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-EDGX-2012-12 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-2012-12. 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 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, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 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; 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-2012-12 and should be 
submitted on or before May 3, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8786 Filed 4-11-12; 8:45 am]
BILLING CODE 8011-01-P