[Federal Register Volume 84, Number 180 (Tuesday, September 17, 2019)]
[Notices]
[Pages 48960-48963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20016]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86926; File No. SR-CboeEDGX-2019-056]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating To Amend Its Fee Schedule
September 11, 2019.
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 September 3, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange''
or ``EDGX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, 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. (the ``Exchange'' or ``EDGX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to amend its Fee Schedule. The text of the proposed rule
change is 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 Exchange proposes to amend its fee schedule for its equity
options platform (``EDGX Options''), effective September 3, 2019.
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 16 options venues to which market participants
may direct their order flow. Based on publicly available information,
no single options exchange has more than 24% of the market share and
currently the Exchange represents only 3% of the market share.\3\ Thus,
in such a low-concentrated and highly competitive market, no single
options exchange, including the Exchange, possesses significant pricing
power in the execution of option order flow. The Exchange believes that
the ever-shifting market share among the exchanges from month to month
demonstrates that market participants can shift order flow, or
discontinue to reduce use of certain categories of products, in
response to fee changes. Accordingly, competitive forces constrain the
Exchange's transaction fees, and market participants can readily trade
on competing venues if they deem pricing levels at those other venues
to be more favorable. The Exchange's Fees Schedule sets forth standard
rebates and rates applied per contract. For example, the Exchange
assesses a standard fee of $0.20 per contract for Market Maker orders
that add liquidity in both Penny and Non-Penny Securities.
Additionally, in response to the competitive environment, the Exchange
also offers tiered pricing which provides Members opportunities to
qualify for higher rebates or reduced fees where certain volume
criteria and thresholds are met. Tiered pricing provides an incremental
incentive for Members to strive for higher tier levels, which provides
increasingly higher benefits or discounts for satisfying increasingly
more stringent criteria.
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\3\ See Cboe Global Markets U.S. Options Market Volume Summary
(August 30, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
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For example, the Exchange currently offers seven Market Maker
Volume Tiers under Footnote 2 of the fee schedule which provide reduced
fees between $0.17 per contract and $0.01 per contract for qualifying
Market Maker orders which meet certain add liquidity thresholds and
yield fee codes PM and NM. Under the current Market Maker Volume Tiers,
a Member receives a reduced fee between $0.01--$0.17 per contract,
where the Member has an ADV \4\ in Market Maker orders greater or equal
to a specified percentage of OCV \5\ (Tiers 1-5). Members also have an
opportunity to receive a reduced fee of $0.03-$0.04 per contract under
Tiers 6 and 7 where the Member satisfies alternative criteria
including, reaching specified ADV thresholds in (i) in Customer orders,
(ii) Customer or Market Maker orders, (iii) AIM Agency Orders and (iv)
complex Customer orders. The Exchange proposes to adopt a new Market
Maker Volume Tier, ``Tier 2'' and renumber the remaining tiers
accordingly.
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\4\ ``ADV'' means average daily volume calculated as the number
of contracts added or removed, combined, per day. ADV is calculated
on a monthly basis. See Cboe EDGX Options Exchange Fee Schedule.
\5\ ``OCV'' means the total equity and ETF options volume that
clears in the Customer range at the Options Clearing Corporation
(``OCC'') for the month for which the fees apply, excluding volume
on any day that the Exchange experiences an Exchange System
Disruption and on any day with a scheduled early market close. See
Cboe EDGX Options Exchange Fee Schedule.
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The Exchange believes the proposed MM Penny Add Tier will provide
Members an additional opportunity and alternative means to receive a
reduced fee for meeting the corresponding proposed criteria. The
Exchange believes the proposed tier, along with the existing tiers,
also provide an incremental incentive for Members to strive for the
highest tier levels, which provide increasingly higher discounts for
such transactions.
Particularly, the Exchange proposes to add new Market Maker Volume
Tier 2, which would provide a reduced fee of $0.13 per contract where a
Member (i) has an ADV in Market Maker orders greater than or equal to
0.15% of average OCV, (ii) Member has a Step-Up ADAV \6\ in Market
Maker orders from
[[Page 48961]]
July 2019 greater than or equal to 0.10% of average OCV; and (iii)
Member has on EDGX Equities an ADAV greater than or equal to 0.30% of
average TCV.\7\ As such, under the proposed Tier, the Exchange is
adopting an alternative set of criteria that Members must meet in
addition to the standard ADV in Market Maker orders threshold.
Particularly, Members must additionally satisfy a (i) cross-asset
threshold, which is designed to incentivize members to achieve certain
levels of participation on both the Exchange's options and equities
platform (``EDGX Equities'') and (ii) a step-up ADAV threshold, which
is designed to encourage growth (i.e., Members must increase their
relative liquidity each month over a predetermined baseline (in this
case the month being July 2019)). Overall, the proposed reduced fee and
corresponding criteria is designed to encourage Members to increase
their order flow, thereby contributing to a deeper and more liquid
market, which benefits all market participants and provides greater
execution opportunities on the Exchange.
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\6\ ``ADAV'' means average daily added volume calculated as the
number of contracts added. ADAV is calculated on a monthly basis.
See Cboe EDGX Options Exchange Fee Schedule. To alleviate confusion,
the Exchange also proposes to adopt the definition of ``Step-Up
ADAV'' in the Fees Schedule, which term shall mean ADAV in the
relevant baseline month subtracted from current ADAV.
\7\ ``TCV'' means total consolidated volume calculated as the
volume reported by all exchanges to the consolidated transaction
reporting plan for the month for which the fees apply. See Cboe EDGX
Options Exchange Fee Schedule.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act,\8\ in general, and furthers the requirements
of Section 6(b)(4),\9\ in particular, as it is designed to provide for
the equitable allocation of reasonable dues, fees and other charges
among 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 order flow to the
Exchange, which the Exchange believes would enhance market quality to
the benefit of all Members.
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\8\ 15 U.S.C. 78f.
\9\ 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 additional opportunity for Members to
receive lower fees by providing a different set of criteria they can
reach for. The Exchange notes that volume-based incentives and
discounts have been widely adopted by exchanges,\10\ including the
Exchange,\11\ 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 options
venues to which market participants may direct their order flow, and it
represents a small percentage of the overall market. Competing options
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, including pricing incentives tied to
comparable tiers.\12\
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\10\ See e.g., Cboe BZX U.S. Options Exchange Fee Schedule,
Footnotes 6 and 7, Market Maker Penny Pilot and Non-Penny Pilot
Volume Tiers which provide enhanced rebates for Market Maker orders
where Members meet certain volume thresholds.
\11\ See e.g., Cboe EDGX U.S. Options Exchange Fee Schedule,
Footnote 2, Market Maker Volume Tiers, which provide reduced fees
between $0.01 and $0.17 per contract for Market Maker Penny and Non-
Penny orders where Members meet certain volume thresholds.
\12\ See e.g., Cboe BZX U.S. Options Exchange Fee Schedule,
Footnotes 6 and 7, Market Maker Penny Pilot and Non-Penny Pilot Add
Volume Tiers, which provide enhanced rebates between $0.33-$0.54 per
contract where Members, among other things including a cross-asset
threshold, meet a specified level of ADAV in Market Maker orders as
a percentage of OCV.
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Moreover, the Exchange believes the proposed Market Maker Tier 2 is
a reasonable means to encourage Members to increase their liquidity on
the Exchange and also their participation on EDGX Equities. The
Exchange believes that adopting a tier with alternative criteria to the
existing Market Maker Volume Tiers, will encourage those Members who
could not previously achieve the criteria under the existing Market
Maker Volume Tiers, to increase their order flow on EDGX options and
equities. For example, the proposed tier would provide an opportunity
for Members who have an ADV in Market Makers Orders of at least 0.15%
of average OCV, but less than 0.25% of average OCV (the requirement
under current Tier 2), to receive the same lower fee as offered under
current Tier 2 if they can otherwise meet the threshold requirement
based on EDGX equities participation and can grow a modest amount since
July 2019. Similarly, for Market Makers that participate on both EDGX
Options and Equities, and do not currently meet the ADV threshold under
current Tier 2 (i.e., 0.25%), but can or do meet the proposed equities
ADAV threshold, the proposed tier may incentivize those participants to
grow their options volume in order to receive reduced fees. Increased
liquidity benefits all investors by deepening the Exchange's liquidity
pool, offering additional flexibility for all investors to enjoy cost
savings, supporting the quality of price discovery, promoting market
transparency and improving investor protection. The Exchange also
believes that proposed reduced fee is reasonable based on the
difficulty of satisfying the tier's criteria and ensures the proposed
fee and threshold appropriately reflects the incremental difficulty to
achieve the existing Market Maker Volume Tiers. The proposed reduced
fee amount also does not represent a significant departure from the
reduced fees currently offered under the Exchange's existing Market
Maker Volume Tiers. Indeed, the proposed reduced fee amount is the same
offered as the existing Market Maker Volume Tier 2 (i.e., $0.13 per
contract) and within the range of the reduced fees offered under the
remaining Market Maker Volume Tiers (i.e., $0.17-$0.01 per contract).
The Exchange believes that the proposal represents an equitable
allocation of fees and is not unfairly discriminatory because it
applies uniformly to all Market Makers. Additionally a number of Market
Makers have a reasonable opportunity to satisfy the tier's criteria,
which the Exchange believe is less stringent than other existing Market
Maker Volume Tiers. While the Exchange has no way of knowing whether
this proposed rule change would definitively result in any particular
Market Maker qualifying for the proposed tier, the Exchange anticipates
one to three members meeting, or being reasonably able to meet, the
proposed criteria. The Exchange believes the proposed tier could
provide an incentive for other Members to submit additional liquidity
on EDGX Options and Equities to qualify for the proposed reduced fee.
To the extent a Member participates on the Exchange but not on EDGX
Equities, the Exchange does believe that the proposal is still
reasonable, equitably allocated and non-discriminatory with respect to
such Member based on the overall benefit to the Exchange resulting from
[[Page 48962]]
the success of EDGX Equities. Particularly, the Exchange believes such
success allows the Exchange to continue to provide and potentially
expand its existing incentive programs to the benefit of all
participants on the Exchange, whether they participate on EDGX Equities
or not. The proposed pricing program is also fair and equitable in that
membership in EDGX Equities is available to all market participants,
which would provide them with access to the benefits on EDGX Equities
provided by the proposed change, even where a member of EDGX Equities
is not necessarily eligible for the proposed reduced fee on the
Exchange.
The Exchange lastly notes that the proposal will not adversely
impact any Member's pricing or their ability to qualify for other
tiers. Rather, should a Member not meet the proposed criteria, the
Member will merely not receive the proposed reduced fee. Furthermore,
the proposed reduced fee would apply to all Members that meet the
required criteria under proposed Market Maker Volume Tier 2.
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.'' \13\
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\13\ 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. As discussed above, to
the extent a Member participates on the Exchange but not on EDGX
Equities, the Exchange notes that the proposed change can provide an
overall benefit to the Exchange resulting from the success of EDGX
Equities. Such success enables the Exchange to continue to provide and
potentially expand its existing incentive programs to the benefit of
all participants on the Exchange, whether they participate on EDGX
Equities or not. The proposed pricing program is also fair and
equitable in that membership in EDGX Equities is available to all
market participants. Additionally the proposed change is designed to
attract additional order flow to the Exchange and EDGX Equities.
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.
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 director their order flow, including 15 other options exchanges and
off-exchange venues. Additionally, the Exchange represents a small
percentage of the overall market. Based on publicly available
information, no single options exchange has more than 24% of the market
share.\14\ 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.
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.'' \15\ 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'. . . .''.\16\
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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\14\ See Cboe Global Markets U.S. Options Market Volume Summary
(August 30, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
\15\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
\16\ 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
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written comments from members or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\
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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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 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:
[[Page 48963]]
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-2019-056 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-2019-056. 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-2019-056 and should be
submitted on or before October 8, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20016 Filed 9-16-19; 8:45 am]
BILLING CODE 8011-01-P