[Federal Register Volume 84, Number 139 (Friday, July 19, 2019)]
[Notices]
[Pages 34960-34963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15348]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86375; File No. SR-CboeEDGX-2019-045]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Amend the Exchange's Fee Schedule Applicable to Its 
Equities Trading Platform (``EDGX Equities'') To Adopt a ``Retail 
Volume Tier'' for Firms That Execute a Significant Volume of Liquidity 
Providing Retail Order Flow on EDGX

July 15, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 1, 2019, Cboe EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule

[[Page 34961]]

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\ 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

    Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to amend the Exchange's fee schedule applicable to 
its equities trading platform (``EDGX Equities'') to adopt a ``Retail 
Volume Tier'' for firms that execute a significant volume of liquidity 
providing retail order flow on EDGX. The text of the proposed changes 
to the fee schedule are attached [sic] as Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, 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 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 purpose of the proposed rule change is to amend the EDGX 
Equities fee schedule to adopt a ``Retail Volume Tier'' for firms that 
execute a significant volume of liquidity providing retail order flow 
on EDGX, effective July 1, 2019. The Exchange believes the proposed 
change would encourage more liquidity and opportunities for investors 
to trade on the Exchange.
    The Exchange first notes that it operates in a highly-competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of several equity venues to which market 
participants may direct their order flow, and it represents a small 
percentage of the overall market. The competition for Retail Order flow 
is even more intense, particularly as it relates to exchange versus 
off-exchange venues. For example, the Exchange examined Rule 606 
disclosures from three prominent retail brokerages: E-Trade, TD 
Ameritrade and Charles Schwab. For securities listed on the New York 
Stock Exchange LLC in the first quarter of 2019, TD Ameritrade routed 
80% of its limit orders to off-exchange venues.\3\ Similarly, E-Trade 
Financial and Charles Schwab routed more than 77% and more than 90%,\4\ 
respectively, of its limit orders to off-exchange venues. This 
competition is particularly acute for non-marketable Retail Orders, 
i.e., Retail Orders that provide liquidity, and even more fiercely for 
non-marketable Retail Orders that provide displayed liquidity on an 
exchange. Accordingly, competitive forces compel the Exchange to use 
exchange transaction fees and credits, particularly as they relate to 
competing for Retail Order flow, because market participants can 
readily trade on competing venues if they deem pricing levels at those 
other venues to be more favorable.
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    \3\ See https://www.tdameritrade.com/retail-en_us/resources/pdf/AMTD2054.pdf.
    \4\ See https://content.etrade.com/etrade/powerpage/pdf/OrderRouting11AC6.pdf. See also https://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html.
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    For example, the Exchange provides special pricing for Retail 
Orders \5\ as an incentive for members to bring such orders to EDGX 
instead of another exchange or off-exchange venue. Specifically, Retail 
Orders priced at or above $1.00 that add liquidity and yield fee code 
ZA \6\ currently benefit from an enhanced rebate of $0.00320 per share 
(as compared to non-Retail Orders that add liquidity and receive a 
standard rebate of $0.00170 per share). The Exchange is interested in 
attracting additional retail order flow, and therefore proposes to 
introduce a Retail Volume Tier that is designed to encourage even more 
retail participation. More specifically, the Retail Volume Tier would 
provide a further enhanced rebate to liquidity providing Retail Orders, 
provided that the member executes a specified average daily volume 
(``ADV'') \7\ in such orders on EDGX. As proposed, a Retail Order that 
adds liquidity under fee code ZA would be eligible for a rebate of 
$0.0037 per share if the member's ADV in Retail Orders that add 
liquidity (i.e., yielding fee code ZA) is greater than or equal to 
0.50% of Total Consolidated Volume (``TCV'').\8\
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    \5\ See EDGX Rule 11.21(a)(1). A ``Retail Order'' is an agency 
or riskless principal order that meets the criteria of FINRA Rule 
5320.03 that originates from a natural person and is submitted to 
the Exchange by a Retail Member Organization, provided that no 
change is made to the terms of the order with respect to price or 
side of market and the order does not originate from a trading 
algorithm or any other computerized methodology. See EDGX Rule 
11.21(a)(2). Retail Orders are submitted by a Retail Member 
Organization'' or ``RMO'', which is a member (or a division thereof) 
that has been approved by the Exchange to submit such orders.
    \6\ ``ZA'' is associated with Retail Orders that add liquidity.
    \7\ ADV means average daily volume calculated as the number of 
shares added to, removed from, or routed by, the Exchange, or any 
combination or subset thereof, per day. ADV is calculated on a 
monthly basis. See Cboe EDGX U.S. Equities Exchange Fee Schedule.
    \8\ TCV means total consolidated volume calculated as the volume 
reported by all exchanges and trade reporting facilities to a 
consolidated transaction reporting plan for the month for which the 
fees apply.
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2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with the objectives of Section 6 of the Act,\9\ in general, and 
furthers the objectives of Section 6(b)(4),\10\ in particular, as it is 
designed to provide for the equitable allocation of reasonable dues, 
fees and other charges among its Members and other persons using its 
facilities and does not unfairly discriminate between customers, 
issuers, brokers or dealers. The Exchange operates in a highly-
competitive market in which market participants can readily direct 
order flow to competing venues if they deem fee levels at a particular 
venue to be excessive or incentives to be insufficient. The proposed 
rule change reflects a competitive pricing structure designed to 
incentivize market participants to direct their retail order flow to 
the Exchange, which the Exchange believes would enhance market quality 
to the benefit of all Members.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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    In particular, the Exchange believes the proposed tier is 
reasonable because it provides an opportunity for Members to receive an 
enhanced rebate for Retail Orders. The Exchange notes that volume-based 
incentives and discounts have been widely adopted by exchanges,\11\ 
including the Exchange,\12\

[[Page 34962]]

and are reasonable, equitable and non-discriminatory because they are 
open to all members on an equal basis and provide additional benefits 
or discounts that are reasonably related to (i) the value to an 
exchange's market quality and (ii) associated higher levels of market 
activity, such as higher levels of liquidity provision and/or growth 
patterns. Additionally, as noted above, the Exchange operates in highly 
competitive market. The Exchange is only one of several equity venues 
to which market participants may direct their order flow, and it 
represents a small percentage of the overall market. Competing equity 
exchanges offer similar tiered pricing structures to that of the 
Exchange, including schedules of rebates and fees that apply based upon 
members achieving certain volume and/or growth thresholds. These 
competing pricing schedules, moreover, are presently comparable to 
those that the Exchange provides.\13\
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    \11\ See e.g., Cboe BZX U.S. Equities Exchange Fee Schedule, 
Footnote 1, Add Volume Tiers.
    \12\ See e.g., Cboe EDGX U.S. Equities Exchange Fee Schedule, 
Footnote 1, Add Volume Tiers.
    \13\ See e.g., NYSE Arca Equities, Fees and Charges, Basic 
Rates, which assesses a standard credit of $0.0030 per share for 
Retail Orders that add liquidity.
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    The Exchange currently provides pricing incentives to Retail Member 
Organizations that execute liquidity providing Retail Orders on EDGX, 
and desires to further enhance those incentives in order to encourage 
additional retail participation. The proposed Retail Volume Tier would 
achieve that result by providing a higher rebate to Retail Orders that 
provide liquidity if submitted by a member that executes a significant 
volume of liquidity providing Retail Orders on EDGX. The Exchange notes 
that NYSE Arca, Inc. (``Arca'') also operates a similar volume-based 
rebate program that provides tiered rebates of up to $0.0035 per share 
to attract retail order flow.\14\
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    \14\ See Arca Equities Fees and Charges, Trade Related Fees and 
Credits, Retail Order Tier and Retail Order Step-Up Tiers. Members 
receive an enhanced credit of $0.0033 per share for Retail orders 
that provide liquidity to the books where a Member meets the 
criteria set forth in Retail Order Tier and Retail Order Step-Up 
Tier 1. Members receive an enhanced credit of $0.0035 per share for 
Retail Orders that provide liquidity under Retail Order Step-Up Tier 
2 where a Member meets the criteria set forth under the Tier. 
Specifically, the Member must (1) submit an average daily share 
volume per month of resting limit orders (i.e., provide liquidity) 
in an amount equal to or greater than 1.10% or more of US 
Consolidated Average Daily Volume (``CADV''), and (2) execute during 
the month, Retail Orders with a time-in-force of Day that is an 
increase of 0.35% or more of the US CADV from the ETP Holder's April 
2018 ADV, taken as a percentage of US CADV.
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    The Exchange believes that the proposed Retail Volume Tier is 
reasonable and equitable as it would allow EDGX to effectively compete 
for retail order flow with Arca as well as other exchanges and the many 
off-exchange venues that execute the majority of retail order flow 
today. The Exchange believes that the current proposal, including the 
level of rebate and corresponding threshold, is appropriately designed 
to attract Retail Orders to EDGX given the high degree of competition 
for such orders in today's market, which was discussed above. The 
Exchange believes that attracting liquidity in Retail Orders would 
incentivize other members to send order flow to EDGX to trade with such 
Retail Orders. In addition, the Exchange believes that this increased 
liquidity would potentially stimulate further price competition for 
Retail Orders, thereby deepening the Exchange's liquidity pool in both 
and retail and other orders, supporting the quality of price discovery, 
and promoting market transparency.
    The Exchange also believes that the proposed Retail Volume Tier is 
not unfairly discriminatory because it applies equally to all members 
that execute liquidity providing Retail Orders and meet the specified 
volume threshold. Without having a view of Members' activity on other 
markets and off-exchange venues, the Exchange has no way of knowing 
whether this proposed rule change would definitely result in any 
Members qualifying for this tier. However, the Exchange believes the 
proposed tier will provide an incentive for Retail Member Organizations 
to increase retail order flow to EDGX. Retail Member Organizations that 
do not meet the proposed volume threshold would continue to earn the 
current rebate, which already provides a significant incentive for 
executing retail order flow on EDGX.
    The Exchange believes that it is appropriate to limit the proposed 
enhanced rebate to Retail Orders as the Exchange is attempting to 
increase retail participation. Retail participation is more likely to 
reflect long-term investment intentions, and may therefore positively 
impact market quality. Accordingly, the presence of Retail Orders on 
EDGX has the potential to benefit all market participants. As explained 
in the purpose section of this proposed rule change, competition for 
retail order flow is particularly fierce, as demonstrated by the 
percentage of Retail Orders that are executive off-exchange also by 
Arca providing a high rebate to market participants that execute a 
significant amount of such orders on that exchange. In that context, 
the Exchange believes that it is appropriate to provide additional 
incentives to Retail Orders in order to attract that order flow.

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 intramarket or intermarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. 
Rather, as discussed above, the Exchange believes that the proposed 
change would encourage the submission of additional liquidity to a 
public exchange, thereby promoting market depth, price discovery and 
transparency and enhancing order execution opportunities for all 
Members. As a result, the Exchange believes that the proposed change 
furthers the Commission's goal in adopting Regulation NMS of fostering 
competition among orders, which promotes ``more efficient pricing of 
individual stocks for all types of orders, large and small.'' \15\
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    \15\ Securities Exchange Act Release No. 51808, 70 FR 37495, 
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
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    The Exchange believes the proposed rule change does impose any 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Particularly, the proposed 
change applies uniformly to market participants. The Exchange believes 
that the proposed tier would incentivize market participants to direct 
providing Retail Order flow to the Exchange. Greater liquidity benefits 
all market participants on the Exchange by providing more trading 
opportunities and encourages Members to send orders, thereby 
contributing to robust levels of liquidity, which benefits all market 
participant. While the proposed tier is only available for Retail 
Orders, the Exchange notes it is attempting to increase retail 
participation and that, as noted above, retail participation is more 
likely to reflect long-term investment intentions, and may therefore 
positively impact market quality.
    Next, the Exchange believes the proposed rule change does not 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As previously 
discussed, the Exchange operates in a highly competitive market. 
Members have numerous alternative venues that they may participate on 
and direct their order flow, including 12 other equities exchanges and 
off-exchange venues, including 32 alternative trading systems. 
Additionally, the Exchange represents a

[[Page 34963]]

small percentage of the overall market. Based on publicly available 
information, no single equities exchange has more than 23% of the 
market share.\16\ Therefore, no exchange possesses significant pricing 
power in the execution of option order flow. Indeed, participants can 
readily choose to send their orders to other exchange and off-exchange 
venues if they deem fee levels at those other venues to be more 
favorable. Additionally, as discussed above, the market for Retail 
Orders in even more stark given the amount of Retail Orders that are 
routed to and executed on off-exchange venues. Moreover, the Commission 
has repeatedly expressed its preference for competition over regulatory 
intervention in determining prices, products, and services in the 
securities markets. Specifically, in Regulation NMS, the Commission 
highlighted the importance of market forces in determining prices and 
SRO revenues and, also, recognized that current regulation of the 
market system ``has been remarkably successful in promoting market 
competition in its broader forms that are most important to investors 
and listed companies.'' \17\ The fact that this market is competitive 
has also long been recognized by the courts. In NetCoalition v. 
Securities and Exchange Commission, the D.C. Circuit stated as follows: 
``[n]o one disputes that competition for order flow is `fierce.' . . . 
As the SEC explained, `[i]n the U.S. national market system, buyers and 
sellers of securities, and the broker-dealers that act as their order-
routing agents, have a wide range of choices of where to route orders 
for execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers'. . . .''.\18\ Accordingly, the Exchange does not believe its 
proposed fee change imposes any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \16\ See Cboe Global Markets U.S. Equities Market Volume Summary 
(June 28, 2019), available at http://markets.cboe.com/us/equities/market_share/.
    \17\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \18\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \19\ and paragraph (f) of Rule 19b-4 \20\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2019-045 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-CboeEDGX-2019-045. 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 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-CboeEDGX-2019-045 and should be 
submitted on or before August 9, 2019.

    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).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15348 Filed 7-18-19; 8:45 am]
 BILLING CODE 8011-01-P