[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47899-47902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-19611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67598; File No. SR-EDGX-2012-33]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Proposed Rule Change to Amend EDGX Rule 11.5(c) to add the 
Edge Market Close \SM\ Order

August 6, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\

[[Page 47900]]

notice is hereby given that, on July 27, 2012, the 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 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 Rule 11.5(c) to add a new order 
type, the Edge Market CloseSM (``EMC'') Order, to the rule. 
The text of the proposed rule changes is available on the Exchange's 
Web site at www.directedge.com, at the Exchange's principal office and 
at the Public Reference Room of the Commission.

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 changes and 
discussed any comments it received on the proposed rule changes. 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

1. Purpose
    The Exchange is proposing to amend Rule 11.5(c) to add new 
subparagraph (15), which would describe a new order type, the EMC 
Order. An EMC Order would be defined as an order to buy or sell on the 
Exchange a security that is listed on the New York Stock Exchange LLC 
(the ``NYSE'') or The NASDAQ Stock Market LLC (``NASDAQ'') (each, a 
``Listing Market'') at the official closing price of such security 
published by the corresponding Listing Market.\3\ Users \4\ would be 
able to enter, cancel and cancel/replace EMC Orders from prior to the 
Pre-Opening Session \5\ on trade date until five (5) minutes prior to 
the ``cut-off time'' for the entry of Market At-the-Close Orders on the 
NYSE and Market-on-Close Orders on NASDAQ (in each case, the ``EMC Cut-
Off Time'').\6\ All EMC Orders on the EDGX Book \7\ at the EMC Cut-Off 
Time would be locked-in either for execution on the Exchange or for 
routing to the applicable Listing Market (to the extent not otherwise 
matched with a contra-side EMC Order), as described below. Users would 
not be able to cancel or cancel/replace any EMC Order after the EMC 
Cut-Off Time, and the Exchange would reject back to the User any EMC 
Order received after the EMC Cut-Off Time. During the time between the 
EMC Cut-Off Time and the NYSE Cut-Off Time or the NASDAQ Cut-Off time, 
as the case may be, the Exchange would calculate, for each security for 
which EMC Orders were entered, the maximum number of shares underlying 
such EMC Orders that can be matched, or paired off. Priority on the 
EDGX Book for EMC Orders would be based strictly on time of entry. EMC 
Orders would be eligible for partial execution on the Exchange. The 
unmatched portion of any EMC Orders that could not be paired off on the 
Exchange pursuant to this process would then be routed as Market At-
the-Close Orders to the closing process of the NYSE for NYSE-listed 
stocks, or as Market-on-Close Orders to the closing process of NASDAQ 
for NASDAQ-listed stocks. If there was no contra-side EMC Order on the 
Exchange to match against a particular EMC Order, then such EMC Order 
would be routed to the closing process of the applicable Listing Market 
as described above. The execution price of an EMC Order executed on the 
Exchange would be the official closing price \8\ published by the NYSE 
for EMC Orders in NYSE-listed stocks, or by NASDAQ for EMC Orders in 
NASDAQ-listed stocks, and Users would be charged fees, if any, for such 
executions according to the Exchange's published fee schedule. The 
execution prices of the unmatched portion of any EMC Orders that were 
routed to the applicable Listing Market for execution in such Listing 
Market's closing auction would also be the official closing price 
published by such Listing Market, and the Exchange would pass through 
to the Member any fees charged by the Listing Market for the execution 
of orders in its respective closing process.
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    \3\ In the event that a particular security were listed on both 
the NYSE and NASDAQ, the Exchange would select one of such exchanges 
for purposes of ascertaining the official closing price for the 
execution of EMC Orders in such security, based on the exchange with 
the greater market share in the security measured over the previous 
three (3) calendar months. The Exchange would disclose on its Web 
site such selection prospectively in advance of offering the EMC 
Order in such security.
    \4\ As defined in EDGX Rule 1.5(ee).
    \5\ As defined in EDGX Rule 1.5(s).
    \6\ Currently, the NYSE designates the cut-off time for the 
entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time (the 
``NYSE Cut-off Time''). See NYSE Rule 123C. NASDAQ in turn, 
designates the ``end of the order entry period'' as 3:50 p.m. (the 
``NASDAQ Cut-Off Time''). See NASDAQ Rule 4754. Thus, the EMC Cut-
Off Times would be 3:40 p.m. for EMC Orders in NYSE-listed stocks, 
and 3:45 p.m. for EMC Orders in NASDAQ-listed stocks.
    \7\ As defined in EDGX Rule 1.5(d).
    \8\ For example, NYSE Rule 900(e) defines ``closing price'' as 
``the price established by the last `regular way' sale in a security 
prior to the official closing of the 9:30 a.m. to 4:00 p.m. trading 
session, as determined by the Exchange.'' Further, while the term 
``NASDAQ Official Closing Price'' is not specifically defined in 
NASDAQ's rules, it is referenced in NASDAQ IM-5505(b) and NASDAQ 
Rules 4753 (halt and imbalance crosses) and 4754 (closing cross).
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    The following examples illustrate how the EMC Order would work. In 
each case, assume that XYZ stock is listed on the NYSE; therefore, the 
EMC Cut-Off Time would be 3:40 p.m.

    Example 1: Member A enters an EMC Order to buy 500 shares of XYZ 
at 2:00 p.m. Member B enters an EMC Order to sell 300 shares of XYZ 
at 2:30 p.m. At or shortly after 3:40 p.m. but prior to the NYSE 
Cut-Off Time of 3:45 p.m., the Exchange would pair off Member B's 
EMC Order to sell 300 shares with 300 shares of Member A's EMC Order 
to buy 500 shares, leaving a remainder of 200 shares to buy. Before 
3:45 p.m., the remaining 200 shares of Member A's order would be 
routed to the NYSE via EDGX's routing broker-dealer, Direct Edge ECN 
LLC d/b/a DE Route, as a Market At-the-Close Order.
    After 4:00 p.m., the Exchange would execute Member A's and 
Member B's EMC Orders, for 300 shares each, at the official closing 
price for XYZ published by the NYSE and report such execution to the 
responsible Securities Information Processor. The Exchange would 
also report back to Member A an execution at the official closing 
price of the remaining 200 shares in the NYSE's closing auction, and 
pass through to Member A the fees charged by the NYSE for executions 
of Market At-the-Close Orders in its closing auction.
    Example 2: Assume the same facts as above, except now Member C 
enters an EMC Order to buy 1000 shares of XYZ at 3:40:02 p.m. The 
Exchange would reject the order back to Member C because it would 
have been submitted after the EMC Cut-Off Time of 3:40 p.m.
    Example 3: Assume the same facts as above, except now Member D 
enters an EMC Order to buy 300 shares of XYZ at 3:15 p.m., and at 
3:20 p.m. Member A cancels its EMC Order to buy 500 shares and 
replaces it with an EMC Order to buy 700 shares. Following the EMC 
Cut-Off Time at 3:40 p.m., the Exchange would pair off Member D's 
EMC Order to buy 300 shares with Member B's EMC Order to sell 300 
shares, as Member A would have lost its time priority on the Book 
when it cancelled and replaced its original order with greater size. 
Member A's order would then be routed via DE Route to the NYSE as a 
Market At-the-Close Order in accordance with NYSE rules.

    The Exchange is proposing the EMC Order in order to increase the 
level of

[[Page 47901]]

competition for orders seeking execution at the official closing 
price.\9\ No other national securities exchange has offered its members 
the ability to obtain a closing price execution away from the NYSE and 
NASDAQ; as a result, the Exchange believes that the fees that the NYSE 
and NASDAQ charge for executions of Market At-the-Close Orders and 
Market-on-Close Orders, respectively, are not being sufficiently 
challenged by competitive forces. While robust competition between and 
among national securities exchanges and alternative market centers for 
intraday equities order flow has resulted in a steady decrease in 
trading fees over the previous decade, the fees charged by the NYSE and 
NASDAQ for closing price executions have actually increased over the 
past six years.
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    \9\ If and to the extent that the Exchange charges any fees for 
the execution of EMC Orders, it will file such fees with the 
Commission and post them on its Web site prior to implementation of 
the EMC Order.
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    For example, from August 2006 through July 2009, excluding any 
tiered discounts offered by NASDAQ, NASDAQ charged $0.0005 per side for 
closing price executions,\10\ which increased to $0.0007 per side in 
2009 \11\ and to $0.0010 per side in 2010 \12\--approximately doubling 
the rate in 3 years. Thus, currently the ``cost of match'' \13\ for 
closing price executions on NASDAQ is approximately $0.0020, or ``20 
mils''.\14\ Similarly, excluding any tiered discounts offered by the 
NYSE, the NYSE increased its rate from $0.0005 per side to $0.0007 per 
side in August 2009,\15\ then to $0.00085 per side from September 2010 
\16\ to March 2012, when it was increased to $0.00095 per side,\17\ 
nearly doubling its rates in approximately three years. Thus, the cost 
of match for closing price executions on the NYSE is approximately 
$0.0019, or ``19 mils''.\18\
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    \10\ See Securities Exchange Act Release No. 60323 (July 16, 
2009), 74 FR 36543 (July 23, 2009) (SR-NASDAQ-2009-67) (citing to 
the proposition that NASDAQ did not modify its fee for MOC orders 
since it began to operate as a national securities exchange in 
2006).
    \11\ Id.
    \12\ See Securities Exchange Act Release No. 62592 (July 29, 
2010), 75 FR 47053 (August 4, 2010) (SR-NASDAQ-2010-95).
    \13\ For purposes of this rule filing, the ``cost of match'' 
refers to the total or net cost of a single execution to both sides 
of the transaction. For closing price executions on NASDAQ and the 
NYSE, for example, it is currently measured by the explicit fee 
charged to both sides of the cross (although under certain narrow 
circumstances, on one or both sides, they are subject to reduction, 
as described infra at footnotes 14 and 18). For most exchanges, 
however, the ``cost of match'' for intraday matches or executions is 
generally calculated by netting rebate credits against take or 
removal fees.
    \14\ The rate per share can be reduced to $0.0001 only in the 
case of internalized shares (meaning, those shares executed in the 
NASDAQ Closing Cross that execute against other ``on close'' orders 
submitted by the same Market Participant Identifier (``MPID'')) of 
MPIDs that execute more than 100 million Market-on-Close or Limit-
on-Close Orders in the NASDAQ Closing Cross per month, and that add 
liquidity meeting the thresholds equivalent to NASDAQ's $0.00295 
pricing tier.
    \15\ See Securities Exchange Act Release No. 60436 (August 5, 
2009), 74 FR 40252 (August 11, 2009) (SR-NYSE-2009-77).
    \16\ See Securities Exchange Act Release No. 62826 (September 1, 
2010), 75 FR 54928 (September 9, 2010) (SR-NYSE-2010-63).
    \17\ See Securities Exchange Act Release No. 66600 (March 20, 
2012) [sic], 77 FR 16298 (March 20, 2012) (SR-NYSE-2012-07).
    \18\ The rate per share can be reduced to $0.00055 for market 
participants whose average daily volume of ``on close'' orders is 14 
million shares or more.
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    Relative to intraday matches or executions the fees charged by the 
NYSE and NASDAQ for closing price executions are significantly more 
expensive. For example, large order flow providers that reach certain 
of NASDAQ's top tiers have a typical cost of match that varies from 
$0.00005 to $0.0005 (or ``1/2 a mil'' to ``5 mils'').\19\ Moreover, a 
typical cost of match for market participants that are not Designated 
Market Makers (``DMMs'') or Supplemental Liquidity Providers (``SLPs'') 
on the NYSE is approximately $0.0008 (or ``8 mils'').\20\
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    \19\ For example, NASDAQ's cost of match at two of its top tiers 
can be approximated by subtracting the rebate credit (0.00295 or 
0.0025) from the take or removal fee (0.0030) to equal 0.00005 or 
0.0005/share, respectively. See http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
    \20\ Non-DMM and non-SLP liquidity providers earn a rebate of 
0.0015 per share. Non-floor based liquidity removers are charged 
0.0023 per share. Thus, the approximate cost of match on the NYSE 
(for non-DMM and non-SLPs) is 0.0008 per share. See http://usequities.nyx.com/markets/nyse-equities/trading-fees.
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    The Exchange has designed the EMC Order to provide an alternative 
means to obtain a closing price execution, without any impact on the 
price discovery function of the NYSE's and NASDAQ's respective closing 
processes. The existence of an alternative venue to obtain closing 
price executions introduces competition, and, consequently, a potential 
decrease in the fees charged to market participants for such 
executions.\21\ Moreover, the EMC Order would not impact the price 
discovery function of the NYSE's and NASDAQ's respective closing 
processes by replicating only market-on-close type orders, as opposed 
to limit-on-close orders, and the Exchange would only execute those EMC 
Orders that naturally paired off and effectively cancelled each other 
out. Any unmatched EMC Orders would be routed to the applicable Listing 
Market for execution in that Listing Market's closing process.
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    \21\ It is the Exchange's intention, upon the Commission 
approval of the EMC Order, to offer executions of EMC Orders, to the 
extent matched on the Exchange, at zero cost for at least some 
period of time. It is further the Exchange's intention that, if and 
when it determines to charge a fee for the execution on the Exchange 
of an EMC Order, such fee would be less than the fee charged by the 
applicable Listing Market.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \22\ and furthers the objectives of 
Section 6(b)(5) of the Act,\23\ in that it is 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change would remove impediments to 
and perfect the mechanisms of a free and open market and a national 
market system, and foster cooperation and coordination with persons 
engaged in facilitating transactions in securities, by promoting 
competition among national securities exchanges in the execution of 
matching closing price orders without disrupting the price discovery 
process of NYSE's and NASDAQ's respective closing processes. The EMC 
Order would be neutral to price discovery, as it would only execute on 
the Exchange against a matching contra-side EMC Order. Any imbalance 
resulting from unmatched EMC Orders to the buy or sell side would be 
routed to the applicable Listing Market for execution in their 
respective closing processes. The proposed rule change would protect 
investors and the public interest by encouraging the NYSE and NASDAQ to 
compete for market orders in their closing processes.

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

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

[[Page 47902]]

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2012-33 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-2012-33. 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 
10:00 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; 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-2012-33 and should be 
submitted on or before August 31, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19611 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P