[Federal Register Volume 84, Number 129 (Friday, July 5, 2019)]
[Notices]
[Pages 32238-32244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14277]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86241; File No. SR-IEX-2019-05]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing of Proposed Rule Change To Establish a Retail Price Improvement
Program
June 28, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on June 20, 2019, the Investors Exchange LLC (``IEX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78s(b)(1).
\3\ 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
Pursuant to the provisions of Section 19(b)(1) under the Act,\4\
and Rule 19b-4 thereunder,\5\ IEX is filing with the Securities and
Exchange Commission (``Commission'') a proposed rule change to
establish a Retail Price Improvement Program.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at the Exchange's
website at www.iextrading.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 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
1. Purpose
Background
IEX proposes to adopt new IEX Rule 11.232 to establish a Retail
Price Improvement Program (``Retail Program''). As proposed, the Retail
Program is designed to provide retail investors with meaningful price
improvement opportunities by executing at the Midpoint Price \6\ such
that Members will be incentivized to add midpoint orders to the
Exchange above and beyond the already existing and significant midpoint
liquidity at IEX.
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\6\ The term ``Midpoint Price'' shall mean the midpoint of the
NBBO. See IEX Rule 1.160(t). The term ``NBBO'' shall mean the
national best bid or offer, as set forth in Rule 600(b) of
Regulation NMS under the Act, determined as set forth in IEX Rule
11.410(b).
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As Commission Chairman Jay Clayton noted in a recent speech, forty-
three million U.S. households hold a retirement or brokerage account,
with $3.6 trillion in balance sheet assets in 128 million customer
accounts serviced by more than 2,800 registered broker-dealers.\7\ He
also noted the importance of continued broad, long-term retail
participation in our capital markets, and that retail investors count
on the capital markets to fund major life events such as paying for
their children's higher education or funding their own retirements.\8\
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\7\ See The Evolving Market for Retail Investment Services and
Forward-Looking Regulation--Adding Clarity and Investor Protection
while Ensuring Access and Choice, Chairman Jay Clayton, Commission
(May 2, 2018), available at https://www.sec.gov/news/speech/speech-clayton-2018-05-02.
\8\ Id.
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Against this backdrop, the Retail Program is designed to provide
retail investors with access to the Exchange's already deep pool of
midpoint liquidity by introducing a new mechanism for retail-oriented
liquidity provision, thereby providing enhanced opportunities for
meaningful price improvement at the Midpoint Price. The Exchange
believes that introducing the Retail Program could provide retail
investors with better execution quality than they are currently able to
obtain through existing exchange and over-the-counter (``OTC'') order
retail programs, by attracting counterparty liquidity to the Exchange
from Members and their clients seeking to interact with retail
liquidity.\9\ The Retail Program would therefore be consistent with the
goals of the Commission to encourage markets that are structured to
benefit ordinary investors,\10\ while facilitating order interaction
and price discovery to the benefit of all market participants.
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\9\ See discussion infra on the desirability of interacting with
retail liquidity.
\10\ See e.g., U.S. Securities and Exchange Commission,
Strategic Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf
(``Commission Strategic Plan'').
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As proposed, through the Retail Program, the Exchange would create
a new class of market participants, Retail Member Organizations
(``RMOs''), which would be eligible to submit certain retail order flow
(``Retail orders'') to the Exchange. Any Exchange Member would be
permitted to provide price improvement to Retail orders in the form of
interest that is priced to execute at the Midpoint Price, including
through a new Retail Liquidity Provider
[[Page 32239]]
(``RLP'') order that is only eligible to execute against a Retail
order.
IEX is already among the largest exchanges when measuring the
volume of executions at the Midpoint Price. Based on informal
discussions with several Members, IEX believes that some of the orders
sent to IEX today that seek to access this midpoint liquidity originate
with retail customers. Furthermore, several IEX Members firms' primary
business is on behalf of retail clients, which indicates that at least
some of IEX's current midpoint executions result from incoming retail
orders seeking price improvement compared to the NBBO, even if IEX does
not currently have the means to identify the exact percentage. IEX
therefore expects that the introduction of Retail and RLP orders will
result in a balanced mix of retail brokerage firms and their
wholesaling partners submitting Retail orders to IEX to access both
IEX's existing midpoint liquidity and the additional midpoint liquidity
IEX anticipates from the Retail Program.?>[FEDREG][VOL]*[/VOL][NO]*[/
NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
If the Commission approves this proposed rule change, the Exchange
will submit a separate proposal to amend its Price List in connection
with the Retail Program. Under that proposal, the Exchange would
initially not charge any fees for executions of either Retail orders or
RLP orders.
Definitions
The Exchange proposes to adopt the following definitions under
existing IEX Rule 11.190 (Orders and Modifiers) and proposed IEX Rule
11.232 (Retail Price Improvement Program). First, the term ``Retail
order'' would be defined as an agency or riskless principal order that
satisfies the criteria of FINRA Rule 5320.03, which is submitted by a
Retail Member Organization, designated with a ``Retail order''
modifier, and reflects trading interest of a natural person, with no
change made to the terms of the underlying order of the natural person
with respect to price (except in the case of a market order that is
changed to a marketable limit order) or side of market, and that does
not originate from a trading algorithm or any other computerized
methodology.\11\ An order from a natural person can include orders
submitted on behalf of accounts that are held in a corporate legal
form--such as an Individual Retirement Account, Corporation, or a
Limited Liability Company--that have been established for the benefit
of an individual or group of related family members, provided that the
order is submitted by an individual.\12\ Retail orders would either be
Discretionary Peg or Midpoint Peg orders with a Time-in-Force of IOC or
FOK, and would only be eligible to trade at the Midpoint Price.\13\
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\11\ See proposed Rule 11.190(15).
\12\ Id.
\13\ See proposed Rule 11.232(a)(2). As with all pegged orders,
Retail orders may only trade during the Regular Market Session. See
IEX Rule 11.190(a)(3)(E).
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Second, the term ``Retail Member Organization'' (or ``RMO'') would
be defined as an IEX Member (or division thereof) that has been
approved by the Exchange to submit Retail orders.\14\
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\14\ See proposed Rule 11.232(a)(1).
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Finally, the term ``Retail Liquidity Provider order'' (or ``RLP
order'') would be defined as a Discretionary Peg order that is only
eligible to execute against Retail orders through the execution process
described in proposed Rule 11.232(e).\15\
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\15\ See proposed Rule 11.232(a)(3).
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Retail Member Organization Qualifications and Approval Process
Under proposed IEX Rule 11.232, any IEX Member (or a division
thereof) could qualify as an RMO if it conducts a retail business or
handles retail orders on behalf of another broker-dealer. Any IEX
Member that wishes to obtain RMO status would be required to submit:
(1) An application form; (2) supporting documentation sufficient to
demonstrate the retail nature and characteristics of the applicant's
order flow; \16\ and (3) an attestation, in a form prescribed by the
Exchange, that substantially all orders submitted as Retail orders
would meet the qualifications under proposed IEX Rule 11.232.
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\16\ For example, a prospective RMO could be required to provide
sample marketing literature, website screenshots, other publicly
disclosed materials describing the Member's retail order flow, and
any other documentation and information requested by the Exchange.
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An RMO would be required to have written policies and procedures
reasonably designed to assure that it will only designate orders as
Retail orders if all requirements of a Retail order are met. Such
written policies and procedures must require the IEX Member to: (i)
Exercise due diligence before entering a Retail order to assure that
entry as a Retail order is in compliance with the requirements of this
Rule; and (ii) monitor whether orders entered as Retail orders meet the
applicable requirements. If an RMO does not itself conduct a retail
business but routes Retail orders on behalf of another broker-dealer,
the RMO's supervisory procedures must be reasonably designed to assure
that the orders it receives from such other broker-dealer that are
designated as Retail orders meet the definition of a Retail order. The
RMO must: (i) Obtain an annual written representation, in a form
acceptable to the Exchange, from each other broker-dealer that sends
the RMO orders to be designated as Retail orders that entry of such
orders as Retail orders will be in compliance with the requirements of
this Rule; and (ii) monitor whether Retail order flow routed on behalf
of such other broker-dealers meets the applicable requirements.\17\
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\17\ FINRA, on behalf of the Exchange, will review an RMO's
compliance with these requirements through an exam-based review of
the RMO's internal controls.
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After an applicant submits the RMO application form, supporting
documentation, and attestation, the Exchange would notify the applicant
of the Exchange's decision in writing. A disapproved applicant would be
able to request an appeal of such disapproval by the Exchange and/or
reapply for RMO status 90 days after the disapproval notice is issued
by the Exchange. Additionally, an RMO may voluntarily withdraw from
such status at any time by giving written notice to the
Exchange.?>[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT]
Failure of Retail Member Organization To Abide by Retail Order
Requirements
The proposed Retail Program also sets forth procedures for
addressing an RMO's failure to abide by the Retail Program's Retail
order requirements. If an RMO designates orders submitted to the
Exchange as Retail orders, and the Exchange determines, in its sole
discretion, that such orders fail to meet any of the requirements set
forth in proposed IEX Rule 11.232(a)(2), the Exchange may disqualify a
Member from its status as an RMO. When disqualification determinations
are made, the Exchange shall provide a written disqualification notice
to the Member.
Appeal of Disapproval or Disqualification
Proposed IEX Rule 11.232(d) would provide a mechanism through which
Members could appeal either the Exchange's disapproval of its
application to become an RMO or the Exchange's disqualification of a
previously-approved RMO from the Retail Program. If a Member disputes
the Exchange's decision to disapprove it as an RMO under proposed IEX
Rule 11.232(b) or disqualify it as an RMO under IEX Rule 11.232(c), the
Member may request, within five business days after notice of the
decision is issued by the Exchange, that the RMO Panel
[[Page 32240]]
(``RMO Panel'') review the decision to determine if it was correct.
The RMO Panel shall consist of the Exchange's Chief Regulatory
Officer (``CRO''), or a designee of the CRO, and two officers of the
Exchange designated by the Exchange's Chief Operating Officer
(``COO''). The RMO Panel shall review the facts and render a decision
within the time frame prescribed by the Exchange. The RMO Panel may
overturn or modify an action taken by the Exchange under proposed IEX
Rule 11.232. A determination by the RMO Panel shall constitute final
action by the Exchange.
Additionally, under the proposed Retail Program, any IEX Member
that was either disapproved as an RMO under proposed IEX Rule 11.232(b)
or disqualified as an RMO under IEX Rule 11.232(c) could reapply for
RMO status a minimum of 90 days after the date it receives its
disapproval or disqualification notice from the Exchange.
Priority and Order Allocation
As proposed, Retail Liquidity Provider orders in the same security
would be ranked and allocated according to price then time of entry
into the System.\18\ Retail orders would seek to execute upon entry
into the System at the Midpoint Price.\19\ Retail Liquidity Provider
orders would interact with Retail orders as follows:
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\18\ See proposed Rule 11.132(e)(1).
\19\ See proposed Rule 11.132(e)(2).
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A Retail order will seek to execute upon entry into the System at
the Midpoint Price against orders resting on the Order Book in price/
time priority in accordance with Rule 11.230, subject to the following:
A Retail order to buy (sell) shall execute upon entry against sell
(buy) orders resting on the Order Book in the following order:
(1) Displayed sell (buy) orders at the NBO \20\ (NBB) during a
locked or crossed market;
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\20\ The term ``NBO'' shall mean the national best offer, and
the term ``NBB'' shall mean the national best bid, as set forth in
Rule 600(b) of Regulation NMS under the Act, determined as set forth
in IEX Rule 11.410(b).
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(2) non-displayed orders priced to trade at the Midpoint Price;
followed by
(3) Retail Liquidity Provider orders priced to trade at the
Midpoint Price.
The following examples illustrate how IEX would handle orders under
this proposed new rule:
Assume the following facts:
(1) NBBO for security ABC is $10.00-$10.10.\21\
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\21\ For purposes of these examples, assume it is not a period
of quote instability as set forth in IEX Rule 11.190(g).
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(2) User 1 \22\ enters a Retail Liquidity Provider order to buy ABC
at $10.05 for 500 shares.
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\22\ The term ``User'' shall mean any Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to IEX Rule 11.130.
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(3) User 2 then enters an unpriced Discretionary Peg order to buy
500 shares of ABC.
(4) User 3 then enters a Midpoint Peg order to buy 500 shares of
ABC at $10.04.
Example 1: RMO enters a Retail order to sell 800 shares of ABC. The
order will first execute against the full size of User 2's buy order,
and then execute against 300 shares of User 1's buy order, at which
point the entire size of the Retail order to sell 800 shares is
depleted. In this example the Retail order does not execute against
User 3's buy order because the order is not priced to execute at 10.05,
the current Midpoint Price.
Example 2: Assume the same facts above, except that User 2's
unpriced Discretionary Peg order to buy ABC is for 100 shares. The
incoming Retail order to sell 800 shares executes first against User
2's buy order for 100 shares at $10.05, then against User 1's buy order
for 500 shares at $10.05. The Retail order still does not execute
against User 3's buy order because the order is not priced to execute
at 10.05, the current Midpoint Price. The Retail order is filled for
600 shares and the balance of 200 shares is cancelled back to the RMO.
Example 3: Assume the same facts as Example 1, except that User 3
enters a non-displayed limit order to buy 300 shares of ABC at 10.05.
The incoming Retail order to sell 800 shares executes first against
User 3's order for 300 shares (because it has priority over User 2's
Discretionary Peg order pursuant to IEX Rule 11.220(a)(C)(viii)) and
then against User 2 for the remaining 500 shares, completing the Retail
order's 800 share quantity. User 1's buy order is not executed because
it is ranked behind Users 2 and 3.?>[FEDREG][VOL]*[/VOL][NO]*[/
NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
Implementation
The Exchange proposes that all securities traded on the Exchange
would be eligible for inclusion in the Retail Program. Assuming that
the Commission approves this proposed rule change, the Exchange will
implement the proposed rule change within 90 days of approval and
provide at least ten (10) days' notice to Members and market
participants of the implementation timeline.
Comparison to Existing Retail Programs
As described above, the proposed Retail Program is a simple
approach designed to provide retail investors with the opportunity for
meaningful price improvement (by executing at the Midpoint Price), by
attracting counterparty liquidity to the Exchange from Members and
their clients seeking to interact with retail liquidity.
IEX understands that many professional market participants, such as
market makers, view interacting with orders of retail investors as more
desirable than interacting with orders of other professional market
participants. For example, as the Commission staff noted in a 2016
memorandum to the Equity Market Structure Advisory Committee (``EMSAC
Memorandum''), ``[m]arket makers are interested in retail customer
order flow because retail investors are, on balance, less informed than
other traders about short-term price movements . . . [and t]rading
against retail customer order flow enables market makers to avoid
adverse selection by informed professional traders and to more reliably
profit from market-making activity.'' The EMSAC Memorandum also
described that ``[a]fter market makers internalize the relatively
uninformed retail customer order flow, the informed order flow that
remains is left for the exchanges to absorb . . . [and that t]ypically,
dealers that pay to receive retail customer order flow will guarantee
executions of that order flow with some amount of average price
improvement over the national best bid or offer (``NBBO'') and with a
separate payment to retail brokers for directing customer orders to
them.'' \23\
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\23\ See January 26, 2016 Memorandum entitled ``Certain Issues
Affecting Customers in the Current Equity Market Structure'' from
the staff of the Commission's Division of Trading and Markets,
available at https://www.sec.gov/spotlight/equity-market-structure/issues-affecting-customers-emsac-012616.pdf.
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Consistent with the EMSAC Memorandum's conclusions, and based on
informal discussions with market participants and the knowledge and
experience of its staff, IEX believes that market makers and other
sophisticated market participants generally value interacting with
retail orders because they are smaller and not likely to be part of a
larger parent order that can move a stock price, causing a loss to the
market maker. For example, a retail order to buy 200 shares is probably
just an order for 200 shares. In contrast, a 200-share buy order from a
more sophisticated institutional market participant may be part of a
100,000-share parent order. If the market maker sells to the 200-share
child order,
[[Page 32241]]
execution of the balance of the parent order may move the market up
above the price at which the market maker sold.
The proposed rule change leverages IEX's existing market structure
to provide enhanced price improvement opportunities for retail
customers by incentivizing Members and their clients to provide
liquidity to the orders of retail investors. The IEX Retail Program is
similar to NYSE Rule 107C, governing NYSE's Retail Liquidity Program
(``NYSE RLP'') which was recently approved on a permanent basis by the
Commission.\24\ The proposed rule change is similar to the NYSE RLP
with a few key distinctions, as described below. The proposed Retail
Program is also similar to the Commission-approved retail pilot
programs of NYSE Arca,\25\ Cboe BYX \26\ and Nasdaq BX \27\ (``Current
Retail Pilot Programs''), also with several differences as highlighted
below.
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\24\ See Securities Exchange Act Release No. 85160 (February 15,
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28) (approving
NYSE RLP on a permanent basis). See also SR-NYSE-2019-26, Securities
Exchange Act Release No. 85930 (May 23, 2019) adopting substantially
similar rules for securities traded on the NYSE Pillar Platform on
an immediately effective basis.
\25\ See Securities Exchange Act Release No. 71176 (December 23,
2013), 78 FR 79524 (December 30, 2013) (SR-NYSEArca-2013-107)
(approving NYSE Arca retail pilot program).
\26\ See Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019) (approving
Cboe BYX retail pilot program).
\27\ See Securities Exchange Act Release No. 73702 (November 28,
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048) (approving
NASDAQ BX retail pilot program).
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More price improvement for retail investors. The proposed
rule change would provide more price improvement for retail customers
than the NYSE RLP, because a Retail order on IEX could only execute at
the Midpoint Price, as opposed to the minimum $.001 price improvement
that the NYSE RLP can provide.\28\ IEX believes that its approach is
preferable because executed Retail orders in stocks priced equal to or
greater than $1.00 will receive a minimum of $0.005 in price
improvement (half of the smallest bid/ask spread) compared to lesser
amounts in the NYSE RLP \29\ and the amount of price improvement is
transparent by rule, rather than being dependent on the pricing of the
contra-side non-displayed order. IEX's proposed Retail Program would
also provide greater price improvement than the Current Retail Pilot
Programs because those three retail pilot programs also allow for
execution at sub-penny prices, as opposed to the IEX proposal which
would only allow for execution at the Midpoint Price.
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\28\ The Exchange is not seeking an exemption under Rule 612 of
Regulation NMS with respect to the ``Sub-Penny Rule'' because it
will not accept or rank orders priced greater than $1.00 per share
in an increment smaller than $0.01.
\29\ See supra note 24, at 5759 (``Table 1''), which reflects
average price improvement of $0.0014-$0.0019 during the period
January 2016-December 2017. The NYSE RLP is limited to securities
priced equal to or greater than $1.00.
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RLP orders available to all Members. Unlike the NYSE RLP,
IEX's Retail Program will not limit or discriminate among its Members
and their clients, and will allow all Members and their clients to
submit RLP orders that seek to interact and provide price improvement
to incoming Retail orders. Because the order type is designed to create
as much new price improvement opportunity for retail investors as
possible, IEX does not believe that there is any reason to limit usage
to a privileged group of Members. This aspect of the IEX Retail Program
is similar to the Current Retail Pilot Programs, which also do not
limit which Members can submit specialized retail liquidity providing
orders that only interact with retail orders.
No dissemination of data identifying Retail orders on
proprietary data feeds. IEX would not disseminate when an RLP order is
on the order book on any proprietary data feeds, as opposed to the NYSE
RLP and the Current Retail Pilot Programs, each of which disseminates
retail liquidity providing orders on its proprietary data feeds. IEX
believes that such dissemination could create unnecessary complexity,
as well as a skewed and unduly limited view of the liquidity available
to trade with Retail orders. RLP orders on IEX will simply be more dark
liquidity priced to execute at the Midpoint Price. As described above,
Retail orders will be able to execute against any order priced to
execute at the Midpoint Price and RLP orders are just additive. Even in
the absence of resting RLP orders, a Retail order could execute against
existing order types. Thus, there will be no impact on consolidated or
proprietary market data feeds, no flickering disseminations, and no
inadvertent incentive to only route Retail orders to IEX when the
presence of RLP order interest is being disseminated.?>[FEDREG][VOL]*[/
VOL][NO]*[/NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
Uniform execution priority. Retail orders on IEX would
execute against available contra-side interest in a uniform manner,
with RLP orders having lower priority than other liquidity providing
orders priced to trade at the Midpoint Price. In contrast, the NYSE RLP
and Current Retail Pilot Programs enable retail liquidity providing
orders to gain higher priority than other liquidity providing orders by
virtue of the ability to provide subpenny pricing, which results in
immaterial price improvement. IEX believes that its approach is
superior because it would provide for meaningful price improvement
without complicating the market with orders priced and ranked based on
immaterial, nonstandard subpenny increments. IEX also believes that it
is appropriate for RLP orders to have lower priority than other orders
priced to trade at the Midpoint Price because RLP orders are only
available to Retail orders.
No exception relief needed for tick size trading
increments. The IEX Retail Program will operate in accordance with
existing tick size trading increments. IEX is not requesting any
exemptive relief in order to enable ranking and/or pricing orders in
otherwise impermissible increments. As described above, this approach
avoids enabling immaterial price improvement, as well as the
concomitant complexity that such an approach can lead to.
No impact on order book priority. IEX's approach will also
not impact order book priority, as is the case with the proposal by
Cboe EDGX Exchange, Inc to introduce retail order priority.\30\
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\30\ See Securities Exchange Act Release No. 85482 (April 2,
2019), 84 FR 13729 (April 5, 2019) (SR-CboeEDGX-2019-012) (proposing
rule change to give order book priority for equity orders submitted
on behalf of retail investors).
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The Exchange believes that the above distinctions between its
proposed rule change and the NYSE RLP and Current Retail Pilot Programs
reflect a simple approach designed to provide better execution quality
to retail investors, at a lower cost.
Modification to Rule 11.340
Finally, the Exchange proposes to delete Rule 11.340(d)(4), which
currently states in relevant part that the Exchange does not operate a
retail liquidity program. If the Commission approves the proposed
Retail program, the text in Rule 11.340(d)(4) would no longer be
accurate, and should therefore be deleted.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\31\ in general, and furthers the objectives of Section
6(b)(5),\32\ in particular, 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
[[Page 32242]]
transactions in securities, and 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.
Specifically, the Exchange believes that the proposed rule change is
consistent with these principles because it is designed to increase
competition among execution venues and offer the potential for
meaningful price improvement to orders of retail investors, including
through incentivizing market participants to provide additional
liquidity to execute against the orders of retail investors.
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\31\ 15 U.S.C. 78f(b).
\32\ 15 U.S.C. 78f(b)(5).
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As discussed in the Purpose section, IEX's proposed Retail Program
is a simple, transparent approach designed to provide opportunities for
meaningful price improvement for Retail orders by incentivizing
additional non-displayed resting interest priced to trade at the
Midpoint Price.
Section 6(b)(5) of the Act prohibits an exchange from establishing
rules that treat market participants in an unfairly discriminatory
manner. However, Section 6(b)(5) of the Act does not prohibit exchange
members or other broker-dealers from discriminating, so long as their
activities are otherwise consistent with the federal securities laws.
And IEX understands that broker-dealers commonly differentiate between
customers based on the nature and profitability of their business.
While the Retail Program would differentiate among its Members, the
Exchange believes that such differentiation is not unfairly
discriminatory but rather is designed to promote a competitive process
for retail executions while providing retail investors with the
potential to receive meaningful price improvement. There is ample
precedent for differentiation of retail order flow in the existing
approved programs of other national securities exchanges.\33\ As the
Commission has recognized, retail order segmentation was designed to
create additional competition for retail order flow, leading to
additional retail order flow to the exchange environment and ensuring
that retail investors benefit from the better price that liquidity
providers are willing to give their orders.\34\
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\33\ See supra notes 24, 25, 26, and 27.
\34\ See supra note 24 at 40679.
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The Commission consistently highlights the need to ensure that the
U.S. capital markets are structured with the interests of retail
investors in mind, and recently highlighted its focus on the ``long-
term interest of Main Street Investors'' as its number one strategic
goal for fiscal years 2018 to 2022. The Exchange believes its Retail
Program would serve the retail investing public by providing them with
the opportunity for meaningful price improvement on eligible trades.
The Exchange notes that several other national securities
exchanges, including NYSE as described herein, have for several years
operated retail liquidity programs that include market segmentation
whereby retail orders receive execution priority in specified
circumstances.\35\ A NYSE rule filing to make its retail liquidity
pilot program permanent was recently approved by the Commission
notwithstanding market segmentation. IEX understands that these
programs were designed to promote competition for retail order flow
among execution venues, most of which continues to be executed in the
OTC markets rather than on exchanges.\36\ Similarly, IEX's Retail
Program is designed to provide an additional competitive alternative
for retail orders. IEX believes that it is appropriate to provide
incentives to bring more retail order flow to a public exchange. As
described in the Purpose section, these incentives include the
opportunity for retail orders to receive meaningful price improvement,
while also providing all Members with the opportunity to execute
against such orders.
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\35\ See NYSE Rule 107C, NYSE Arca Equities Rule 7.44, Cboe Rule
11.24, and NASDAQ BX Rule 4780.
\36\ See Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673, 40679 (July 10, 2012) (SR-NYSE-2011-55) (order
approving NYSE RLP pilot program).
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IEX believes that the proposed distinctions between its Retail
Program and the NYSE RLP, as well as similar Current Retail Pilot
Programs, will enhance competition among exchange venues. IEX further
believes that this structure is designed to foster competition among
exchanges and OTC markets, as well as to protect investors and the
public interest, and is therefore consistent with the Act. IEX also
believes that the segmentation in its Retail Program, as proposed, is
less significant than in the NYSE RLP and the Current Retail Pilot
Programs for two reasons. First, non-RLP orders priced to execute at
the Midpoint Price have higher priority than RLP order. And second, any
Member, or clients thereof, can enter an RLP order. This structure is
designed to facilitate a broader interaction between Retail orders and
those of all IEX market participants, rather than a more constrained
approach whereby retail orders interact primarily with a segmented pool
of liquidity providing orders of privileged members.?>[FEDREG][VOL]*[/
VOL][NO]*[/NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
IEX believes that its proposed eligibility criteria for submission
of a Retail order are consistent with the Act in that they are designed
to provide reasonable assurance that such orders are on behalf of
actual retail investors, as opposed to professional market
participants. In this regard, IEX notes that the definition of a Retail
order clearly specifies that it must reflect the trading interest of a
natural person (including orders placed on behalf of accounts held in a
corporate legal form such as Individual Retirement Accounts, so long as
the order is submitted by an individual) without algorithmic or
computerized methodology changes to the order (except to change a
market order to a marketable limit order). Further, as proposed, a
Retail order can only be submitted by a Member that has been approved
by IEX as an RMO, based upon appropriate criteria that provide
reasonable assurances to IEX that the RMO will only identify orders as
Retail orders in conformance with applicable IEX rules, as proposed.
The proposed criteria and approval process are substantially similar to
the definition of Retail Order in NYSE Rule 107C(a)(3) as well as
comparable provisions of the rules of Current Retail Pilot Programs.
The definition also includes additional clarifying text to explicitly
include orders placed on behalf of accounts held in a corporate legal
form such as Individual Retirement Accounts so long as the order is
submitted by an individual, which is based on the definition of
``Designated Retail Order'' in the Nasdaq Stock Market (``Nasdaq'')
pricing schedule.\37\ Thus, IEX does not believe that its proposed
criteria and approval process for submission of Retail orders raises
any new or novel issues not already considered by the Commission.
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\37\ See Equity 7, Section 118.
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IEX also believes that the proposed RMO approval, disapproval, and
disqualification rules are consistent with the Act in that they provide
a fair process for determining whether a Member qualifies as an RMO, as
well as for appeals of denials thereof. These processes are also
substantially similar to comparable provisions in NYSE Rule 107C(b) and
the rules of Current Retail Pilot Programs.
The Exchange further believes that it is consistent with the Act to
structure its proposed Retail Program such that a Retail order must be
a Discretionary Peg order or Midpoint Peg order with a Time-in-Force of
IOC or FOK, and is
[[Page 32243]]
only eligible to trade at the Midpoint Price. As described above, the
Exchange has structured its proposed Retail Program to provide that
Retail orders will trade at the Midpoint Price, so that such orders
receive meaningful price improvement. Further, and as discussed in the
Purpose section, only permitting Retail orders to be executed at the
Midpoint Price is designed to be a simple approach that does not
introduce unnecessary complexity to the order entry and execution
process on IEX. All orders, including Retail orders, will continue to
be priced and ranked in standard increments and pursuant to existing
priority.
The Exchange believes that introducing a program that provides and
encourages additional liquidity and price improvement to Retail orders
is appropriate because retail investors are typically less
sophisticated than professional market participants and therefore would
not have the type of technology to enable them to compete with such
market participants. Therefore, the Exchange believes that it is
consistent with the public interest and the protection of investors to
provide retail investors with these enhanced opportunities.
In addition, the Exchange believes that providing for execution of
Retail orders only at the Midpoint Price is also designed to facilitate
Members' compliance with their best execution obligations when acting
as agent on behalf of a Retail order.\38\ Specifically, as noted in
FINRA Regulatory Notice 15-46 (Guidance on Best Execution Obligations
in Equity, Options and Fixed Income Markets), when conducting its
review of execution quality in any security, a firm should consider,
among other things, whether it could obtain mid-point price improvement
on one venue versus less price improvement on another venue.\39\
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\38\ All IEX Members that handle customer orders as agent are
required to be FINRA members, and therefore are subject to FINRA
guidance. See 17 CFR 240.15b9-1(a).
\39\ See FINRA Regulatory Notice 15-46, endnote 25 available at:
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf.
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The Exchange also believes that specifying that a Retail order must
be Discretionary Peg order or Midpoint Peg order with a Time-in-Force
of IOC or FOK is designed to maximize the opportunity for such orders
to be executed on IEX and receive such price improvement against
resting interest on IEX priced to trade at the Midpoint Price. Thus,
IEX believes that this approach is designed to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and further the investor protection and public interest
objectives of Section 6(b) of the Act, by establishing a structure that
is designed to facilitate the provision of meaningful price improvement
for orders of retail investors.
The Exchange believes that its priority and order execution
approach for the Retail Program is consistent with the Act. As
discussed in the Purpose section, the Exchange understands that a large
majority of orders from retail investors are executed in the OTC
market, and exchange retail programs have not attracted a significant
volume.\40\ While there are likely a variety of reasons for this, the
IEX Retail Program is designed to provide meaningful incentives for
Members to send orders of retail investors to IEX as well as for market
participants to provide liquidity to Retail orders. Currently, retail
orders are routed across different wholesalers and dark pools. The
Exchange believes that creating an exchange retail program specifically
designed to provide midpoint executions for retail investors will help
grow that overall opportunity for exchange price improvement and
introduce additional, healthy competition to the benefit of the retail
investor.
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\40\ See supra note 24, at 5762 (``Although the Program provides
the opportunity to achieve significant price improvement, the
Program has not generated significant activity. . . . The Program's
share of NYSE volume during [in 2016-17] was below
0.4%'').?>[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT]
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As discussed in detail above, the Exchange believes that the
opportunity to obtain meaningful price improvement for Retail orders
should operate as a powerful incentive for Members to send retail
orders to IEX. Based on publicly available information, IEX notes that
other exchange retail programs provide less price improvement
overall,\41\ and believes that OTC retail programs guarantee to execute
retail orders at prices better than the NBBO but not necessarily at the
midpoint of the NBBO.\42\ While IEX typically has a deep pool of non-
displayed liquidity priced to execute at the Midpoint Price, a key
aspect of IEX's Retail Program is to further incentivize Members and
their clients to enter additional non-displayed interest, including
interest that will only trade with Retail orders. As discussed in the
Purpose section, IEX believes that many professional market
participants view interacting with orders of retail investors as
desirable. Further, IEX understands that some market participants may
be hesitant to enter resting interest to trade in public markets
because of the risk of being subjected to latency arbitrage by more
sophisticated market participants leveraging fast proprietary market
data feeds and connectivity along with predictive strategies to chase
short-term price momentum and successfully target resting orders at
unstable prices. IEX also believes that retail investors are unlikely
to have such technological advantages and as a result, certain market
participants, including buy-side and other fundamental investors, may
be more willing to enter resting interest to trade on a public
exchange, and to allow that interest to rest for a longer period of
time, if they were assured that their orders would not be subject to
latency arbitrage by more sophisticated market participants. As the
stock and exchange trading product values fluctuate throughout the day,
professional market participants will be able to utilize the RLP order
type to provide liquidity to Retail orders at times when they might
otherwise be unwilling to do so because of the differences between
Retail and non-Retail orders described above. These market participants
would have the additional flexibility to submit both RLP and non-RLP
mid-point orders, and switch between them based on intraday values,
resulting in enhanced mid-point liquidity throughout the trading day.
---------------------------------------------------------------------------
\41\ See e.g., supra note 29.
\42\ See supra note 23.
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Thus, IEX believes that by providing an order type that only
executes against retail orders, other market participants may be
incentivized to enter additional resting interest on IEX. Accordingly,
the Exchange further believes that it is consistent with the Act for
RLP orders to only execute against Retail orders so as to incentivize
the entry of RLP orders and thereby provide meaningful price
improvement to Retail orders. In addition, to the extent that the RLP
order structure is successful in incentivizing the entry of resting
interest by buy-side and other fundamental investors, it would reduce
unnecessary intermediation of Retail orders, which is consistent with
the purposes of Section 6(b)(5) of the Act to remove impediments to and
perfect the mechanism of a free and open market and a national market
system as well as with Section 11A of the Act in that it is designed to
provide enhanced opportunities for investor orders to be executed
without the participation of a dealer, as described above.\43\
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\43\ 15 U.S.C. 78k-1(a)(1)(c)(v).
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At the same time, the Exchange believes that, given the benefit of
[[Page 32244]]
trading only with Retail orders, it is consistent with the Act for RLP
orders to have lower execution priority than other orders priced to
trade at the Midpoint Price. IEX believes that a healthy market
includes interaction between a diverse array of market participants and
is not seeking to establish a segmented pool within the Exchange.
Accordingly, IEX believes that providing other orders priced to trade
at the Midpoint Price with higher priority is an appropriate balancing
of these competing considerations.
Finally, the Exchange believes that the deletion of Rule 11.340(d)
pertaining to the expired Tick Size Pilot Plan,\44\ which currently
states in relevant part that the Exchange does not operate a retail
liquidity program is consistent with the Act because, if the Commission
approves the proposed rule change, the provision will be inaccurate.
Notwithstanding that the Tick Size Pilot expired at the close of
trading on September 28, 2018, continued inclusion of this provision
could engender confusion on the part of Members and other market
participants as to IEX's Retail Program. Consequently, the Exchange
believes that it is consistent with the Act to delete the provision to
ensure accuracy and consistency in IEX's rules.
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\44\ See IEX Trading Alert #2018-035 (Tick Size Pilot Program
Expiration), available at https://iextrading.com/alerts/#/35.
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In sum, the Exchange submits that its proposed Retail Program is a
simple approach designed to provide an opportunity for retail
customers' orders to receive meaningful price improvement in a manner
consistent with the approved retail programs of other exchanges, but
without certain complexities that IEX believes are unnecessary for its
program. Thus, IEX believes that the proposed Retail Program is
consistent with the Act in that it is designed 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. Further, IEX does not believe that the proposal raises any
new or novel issues not already considered by the
Commission.?>[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT]
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 competition that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, IEX
believes that introducing a Retail Program would continue to enhance
competition and execution quality for retail order flow among execution
venues and contribute to the public price discovery process.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition since competing venues
have and can continue to adopt similar retail programs, subject to the
SEC rule change process. The Exchange operates in a highly competitive
market in which market participants can easily direct their orders to
competing venues, including off-exchange venues.
The Exchange also does not believe that the proposed rule change
will impose any burden on intramarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act. While orders
submitted by some Members will be treated differently, as described in
the Purpose section, those differences are not based on the type of
Member entering orders but on whether the order is for a retail
customer, and there is no restriction on whether a Member can handle
retail customer orders. Further, any Member can enter an RLP order.
Finally, the Exchange does not believe that deleting Rule
11.340(d), pertaining to the expired Tick Size Pilot Plan, will impose
any burden on competition since it is merely designed to remove a
conflicting rule provision.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
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 Exchange consents, the Commission shall: (a) By order approve
or disapprove such 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-IEX-2019-05 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-IEX-2019-05. 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 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 offices 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-IEX-2019-05, and should be submitted on
or before July 26, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14277 Filed 7-3-19; 8:45 am]
BILLING CODE 8011-01-P?>