[Federal Register Volume 82, Number 223 (Tuesday, November 21, 2017)]
[Notices]
[Pages 55472-55474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25143]



[[Page 55472]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82087; File No. SR-BatsEDGA-2017-29]


Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 11.8, Order Types, To Clarify When a MidPoint Discretionary 
Order May Execute at Sub-Penny Prices

November 15, 2017.
    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 November 2, 2017, Cboe EDGA Exchange, Inc. (``EDGA'' or the 
``Exchange'') (formerly known as Bats EDGA Exchange, Inc.) 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 Exchange. The Exchange has designated this proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders it effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend paragraph (e) of Exchange 
Rule 11.8, Order Types, to clarify when a MidPoint Discretionary Orders 
[sic] (``MDO'') may execute at sub-penny prices.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.markets.cboe.com, at the principal office of the 
Exchange, 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 parts of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    An MDO is a limit order to buy that is pegged to the National Best 
Bid (``NBB''), with discretion to execute at prices up to and including 
the midpoint of the National Best Bid and Offer (``NBBO''), or a limit 
order to sell that is pegged to the National Best Offer (``NBO''), with 
discretion to execute at prices down to and including the midpoint of 
the NBBO.\5\ MDOs are designed to exercise discretion to execute to the 
midpoint of the NBBO and provide price improvement over the NBBO.
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    \5\ See Exchange Rule 11.8(e) for a complete description of the 
operation of MDOs.
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    Currently, Rule 11.8(e) describes the operation of an MDO and 
states that an MDO in a stock priced at $1.00 or more can only be 
executed in sub-penny increments when it executes (i) at the midpoint 
of the NBBO against contra side MidPoint Peg Orders \6\ or (ii) against 
other MDOs. The Exchange included this provision within Rule 11.8(e) as 
part of a proposed rule change to provide additional specificity 
regarding the current functionality of the Exchange's System,\7\ 
including the operation of its order types and order instructions.\8\ 
Over time, this provision has become too restrictive and inadvertently 
excluded scenarios where an MDO may execute at a sub-penny price. 
Although accurate at the time it was adopted, because such contra-side 
orders (MidPoint Peg Orders and MDOs) were the only orders eligible to 
execute at the sub-penny midpoint of the NBBO, an MDO will trade at a 
sub-penny midpoint against all orders eligible to execute at the 
midpoint of the NBBO.\9\ MDOs will also currently trade at sub-penny 
prices in other scenarios. The Exchange, therefore, proposes to revise 
this provision in Rule 11.8(e) to clarify that MDOs in a stock priced 
at $1.00 or more can only be executed in sub-penny increments when it 
executes at the midpoint of the NBBO or against a contra-side order 
pursuant to Exchange Rule 11.10(a)(4)(D) (described below), regardless 
of the type of contra-side order, which would update the rule to 
reflect current system functionality.
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    \6\ See Exchange Rule 11.8(d) (describing MidPoint Peg Orders).
    \7\ Exchange Rule 1.5(cc) defines ``System'' as ``the electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.''
    \8\ See Securities Exchange Act Release No. 73592 (November 13, 
2014), 79 FR 68937 (November 19, 2014) (order approving SR-EDGA-
2014-20).
    \9\ See e.g., NYSE Arca, Inc. (``NYSE Arca'') Rule 7.31-
E(d)(3)(C) (stating that a Mid-Point Liquidity Order ``to buy (sell) 
will trade at the midpoint of the PBBO against all incoming orders 
to sell (buy) priced at or below (above) the midpoint of the 
PBBO'').
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    Rule 612 of Regulation NMS \10\ (the ``Sub-Penny Rule'') prohibits 
a national securities exchange, national securities association, 
alternative trading system (``ATS''), vendor, or broker-dealer from 
displaying, ranking, or accepting a bid or offer, an order, quotation, 
or indication of interest in any NMS stock that is priced in an 
increment smaller than $0.01 per share, unless the price of the bid or 
offer, order, or indication of interest is priced less than $1.00 per 
share. The Sub-Penny Rule, however, does not prohibit sub-penny 
executions at the midpoint of the NBBO so long as the execution does 
not result from an impermissible sub-penny order or quotation.\11\ 
Pursuant to the Sub-Penny Rule, an MDO to buy (sell) will trade at a 
sub-penny midpoint of the NBBO not only against contra-side MDOs and 
MidPoint Peg Orders, but also against other contra-side orders eligible 
to execute at the midpoint of the NBBO. The Sub-Penny Rule also does 
not prohibit sub-penny price improvement, compared to the NBBO, so long 
as the order was not priced in an impermissible sub-penny 
increment.\12\ For instance, Exchange Rule 11.10(a)(4)(D) governs the 
price at which an order is executable when it is posted non-displayed 
on the Exchange and there is a contra-side displayed order at the same 
price, creating an internally locked book. Specifically, for bids or 
offers equal to or greater than $1.00 per share, in the event that an 
incoming order on the same side of the market as the displayed order on 
the Exchange is priced more aggressively than that displayed order, the 
Exchange will execute the incoming order against the resting non-
displayed order at, in the case of an incoming sell order, one-half 
minimum price variation less than the price of the displayed order, 
and, in the case of an incoming buy order, at one-half minimum price 
variation more

[[Page 55473]]

than the price of the displayed order. For example, assume the NBBO was 
$16.10 by $16.11 resulting in a sub-penny midpoint of $16.105. An order 
to buy at $16.11 is resting non-displayed on the EDGA Book. A Limit 
Order to sell at $16.11 with a Post Only instruction is subsequently 
entered. Assume that the order to sell with a Post Only instruction 
would not remove any liquidity upon entry pursuant to the Exchange's 
economic best interest functionality, and would post to the EDGA Book 
and be displayed at $16.11. The display of this order would, in turn, 
make the resting non-displayed bid not executable at $16.11. If an 
incoming MDO to sell at $16.10 is entered into the EDGA Book, the 
resting non-displayed bid originally priced at $16.11 will execute 
against the incoming MDO at $16.105 per share, thus providing a half-
penny of price improvement as compared to the order's limit price of 
$16.11.
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    \10\ 17 CFR 242.612.
    \11\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37556 (June 29, 2005).
    \12\ See Question 13, Division of Market Regulation: Responses 
to Frequently Asked Questions Concerning Rule 612 (Minimum Pricing 
Increment) of Regulation NMS, available at https://www.sec.gov/divisions/marketreg/subpenny612faq.htm#q13.
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    Also consider the following example where the execution occurs at a 
sub-penny price that is not at the midpoint of the NBBO. Assume the 
NBBO is $16.08 by $16.10 resulting in a midpoint of $16.09. An order to 
sell at $16.08 is resting non-displayed on the EDGA Book. A Limit Order 
to buy at $16.08 with a Post Only instruction is subsequently entered. 
Assume that the order to buy with a Post Only instruction would not 
remove any liquidity upon entry pursuant to the Exchange's economic 
best interest functionality, and would post to the EDGA Book and be 
displayed at $16.08. The display of this order would, in turn, make the 
resting non-displayed offer not executable at $16.08. If an incoming 
MDO to buy is entered into the EDGA Book, the resting non-displayed 
sell originally priced at $16.08 will execute against the incoming MDO 
at $16.085 per share, thus providing a half-penny of price improvement 
as compared to the order's limit price of $16.08.
    These scenarios were historically unavailable on the Exchange prior 
to the merger of the Exchange's former parent company, Direct Edge 
Holdings LLC, with Bats Global Markets, Inc.\13\ Therefore, the 
Exchange proposes to amend Rule 11.8(e) to clarify that a MDO's ability 
to execute at sub-penny midpoint prices is not limited to contra-side 
orders that are MDOs or MidPoint Peg Orders and that a sub-penny 
execution may also occur against a contra-side order pursuant to 
Exchange Rule 11.10(a)(4)(D). The Exchange does not propose any 
additional changes to the operation of MDOs as described in Rule 
11.8(e).
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    \13\ See Securities Exchange Act Release No. 71449 (January 30, 
2014), 79 FR 6961 (February 5, 2014) (SR-EDGX-2013-43; SR-EDGA-2013-
34).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in 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 investors and the public interest. As stated above, the 
Exchange included this provision within Rule 11.8(e) as part of a 
proposed rule change to provide additional specificity regarding the 
current functionality of the Exchange's System, including the operation 
of its order types and order instructions.\16\ Over time, this 
provision has become too restrictive and inadvertently excludes 
scenarios where an MDO may execute at a sub-penny price in accordance 
with the Sub-Penny Rule. The Exchange does not propose to amend or 
alter the operation of MDOs. Therefore, the proposed rule change 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system by further aligning the rule with 
current system functionality.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See supra note 8.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. The 
proposed rule change does not propose any new functionality and simply 
updates the rule to reflect current system functionality.

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

    No comments were solicited or received on the proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and paragraph 
(f)(6) of Rule 19b-4 thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of its filing. However, 
Rule 19b-4(f)(6)(iii) \19\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay so that the proposed rule 
change will become operative upon filing. The Exchange stated that such 
waiver will enable the Exchange to immediately align Rule 11.8(e) with 
current system functionality. The Commission believes that waiver of 
the 30-day operative delay is consistent with the protection of 
investors and the public interest because it would enable the Exchange 
to update its rule without delay. Therefore, the Commission hereby 
waives the operative delay and designates the proposed rule change 
operative upon filing.\20\
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    \19\ 17 CFR 240.19b-4(f)(6)(iii).
    \20\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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.

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:

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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-BatsEDGA-2017-29 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-BatsEDGA-2017-29. 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. 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-BatsEDGA-2017-29 and should 
be submitted on or before December 12, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12) and (59).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-25143 Filed 11-20-17; 8:45 am]
 BILLING CODE 8011-01-P