[Federal Register Volume 84, Number 214 (Tuesday, November 5, 2019)]
[Notices]
[Pages 59663-59666]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87422; File No. SR-NYSECHX-2019-16]


Self-Regulatory Organizations; NYSE Chicago, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend the 
Fee Schedule To Eliminate Market Data Revenue Rebates

October 30, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 28, 2019 the NYSE Chicago, Inc. (``NYSE 
Chicago'' or the ``Exchange'') 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 
self-regulatory organization. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \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

    The Exchange proposes to amend the Fee Schedule of NYSE Chicago, 
Inc. (the ``Fee Schedule'') to eliminate Market Data Revenue Rebates. 
The Exchange proposes to implement the fee change effective November 1, 
2019. The proposed rule change is available on the Exchange's website 
at www.nyse.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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule to eliminate Market 
Data Revenue (``MDR'') Rebates. The Exchange proposes to implement the 
fee changes effective November 1, 2019.
Background
    The Exchange operates in a highly competitive environment. The 
Commission has repeatedly expressed its preference for competition over 
regulatory intervention in determining prices, products, and services 
in the securities markets. In Regulation National Market System 
(``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.'' \4\
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
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    As the Commission itself recognized, the market for trading 
services in NMS stocks has become ``more fragmented and competitive.'' 
\5\ Indeed, equity trading is currently dispersed across 13 
exchanges,\6\ 31 alternative trading systems,\7\ and numerous broker-
dealer internalizers and wholesalers, all competing for order flow. 
Based on publicly-available information for August 2019, no single 
exchange has more than 19% market share (whether including or excluding 
auction volume).\8\ Therefore, no exchange possesses significant 
pricing power in the execution of equity order flow. More specifically, 
in the first eight months of 2019, the Exchange averaged less than

[[Page 59664]]

0.6% market share of executed volume of non-auction equity trading.\9\
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    \5\ See Securities Exchange Act Release No. 51808, 84 FR 5202, 
5253 (February 20, 2019) (File No. S7-05-18) (Transaction Fee Pilot 
for NMS Stocks Final Rule).
    \6\ See Cboe U.S Equities Market Volume Summary at https://markets.cboe.com/us/equities/market_share. See generally https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
    \7\ See FINRA ATS Transparency Data, available at https://otctransparency.finra.org/otctransparency/AtsIssueData. A list of 
alternative trading systems registered with the Commission is 
available at https://www.sec.gov/foia/docs/atslist.htm.
    \8\ See Cboe Global Markets U.S. Equities Market Volume Summary, 
available at http://markets.cboe.com/us/equities/market_share/.
    \9\ Based on Cboe U.S. Equities Market Volume Summary, the 
Exchange's market share of intraday trading (excluding auctions) for 
the months of January 2019, February 2019, March 2019, April 2019, 
May 2019, June 2019, July 2019 and August 2019 was 0.52%, 0.52%, 
0.56%, 0.50%, 0.50%, 0.48%, 0.46% and 0.43%, respectively.
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    The Exchange believes that the ever-shifting market share among the 
exchanges from month to month demonstrates that market participants can 
move order flow, or discontinue or reduce use of certain categories of 
products. While it is not possible to know a firm's reason for shifting 
order flow, the Exchange believes that one such reason is because of 
fee changes at any of the registered exchanges or non-exchange venues 
to which a firm routes order flow.
Elimination of MDR Rebates
    The Exchange proposes to amend its Fee Schedule to eliminate MDR 
Rebates by removing the text within Section P of the Fee Schedule in 
its entirety, replacing it with ``Reserved.''
The Current MDR Rebates Program
    In response to the competitive environment in which the Exchange 
operates, in 2013, the Exchange established the MDR Rebates program to 
improve displayed liquidity and promote order flow to the Exchange by 
offering an incentive for market participants to quote on the 
Exchange.\10\ The Exchange then enhanced the MDR Rebates program by 
including trade reports within the purview of the MDR Rebates 
program.\11\
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    \10\ See Securities Exchange Act Release No. 70546 (September 
27, 2013), 78 FR 61413 (October 3, 2013) (SR-CHX-2013-18) (notice of 
filing and immediate effectiveness of proposed rule change to adopt 
a Market Data Revenue Rebates program).
    \11\ See Securities Exchange Act Release No. 72759 (August 5, 
2014), 79 FR 46890 (August 11, 2014) (SR-CHX-2014-11) (notice of 
filing and immediate effectiveness of proposed rule change to amend 
Section P of the Fee Schedule concerning the Market Data Revenue 
Rebates program); see also Securities Exchange Act Release No. 71210 
(December 31, 2013), 79 FR 869 (January 7, 2014) (SR-CHX-2013-24) 
(notice of filing and immediate effectiveness of proposed rule 
change to amend the Market Data Revenue Rebates program).
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    The current MDR Rebates program provides that 50% of MDR received 
by the Exchange that exceeds an applicable threshold (``Excess MDR'') 
is shared with Participants.\12\ MDR and Excess MDR is calculated 
separately each quarter for quotes and trade reports in each of Tapes 
A, B, and C securities, for a total of six MDR pools. The Exchange 
distributes to each Participant the Excess MDR in proportion to its 
respective Eligible Quote Activity \13\ or Eligible Trade Activity \14\ 
in a pool from the previous calendar quarter.\15\
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    \12\ A ``Participant'' is, except as otherwise described in the 
Rules of the Exchange, ``any Participant Firm that holds a valid 
Trading Permit and any person associated with a Participant Firm who 
is registered with the Exchange under Articles 16 and 17 as a Market 
Maker Authorized Trader or Institutional Broker Representative, 
respectively.'' Article 1, Rule 1(s).
    \13\ Section P.1 of the Fee Schedule defines ``Eligible Quote 
Activity'' as ``a Participant's quoting of displayed orders in Tapes 
A, B and C securities.''
    \14\ Section P.1 of the Fee Schedule defines ``Eligible Trade 
Activity'' as ``trades resulting from single-sided resting orders 
submitted by the Participant in Tapes A, B and C securities.''
    \15\ The Exchange does not distribute MDR Rebates to a 
Participant if the total MDR Rebate attributed to the Participant is 
less than $500.
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    Current Section P.2 of the Fee Schedule provides the following MDR 
thresholds for Tape B securities:
     For quotes, the threshold is $204,000.
     For trade reports, the threshold is $36,000.
    The dollar value represents the amount of MDR that the Exchange 
keeps (i.e., not eligible for sharing). Any MDR in excess of the 
thresholds is Excess MDR.
    For Tape A and Tape C securities, there is no threshold for quotes. 
Therefore, all MDR received in those quote pools is considered Excess 
MDR, and 50% of all MDR received in Tape A and Tape C securities is 
eligible for sharing with Participants pursuant to the MDR Rebates 
program.
    For Tape A and Tape C securities, the threshold value for trade 
reports is equal to the MDR received by the Exchange that can be 
attributed to trade reports resulting from cross orders, as defined 
under Article 1, Rule 2(a)(2).\16\
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    \16\ A cross order is an order to buy and sell the same security 
at a specific price, and may only execute on the Exchange if it is 
priced better than the Working Price of all resting orders on the 
book.
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    In 2017, the Exchange paid a total of $907,035 under the MDR 
Rebates program to 13 Participants. In 2018, the Exchange paid a total 
of $1,243,774 under the MDR Rebates program to 10 Participants.
Application of Proposed Change
    The MDR Rebates program has not achieved its intended objective, 
which was to encourage Participants to increase their quoting and 
trading activity on the Exchange, as significantly as the Exchange had 
anticipated. Since the program (in its current form) began, the 
Exchange's market share has remained largely unchanged. In the third 
quarter of 2014, the Exchange's market share in cash equities trading, 
excluding auctions, was 0.56% \17\ and in the fourth quarter of 2014, 
after the current version of the program was implemented, it declined 
to 0.44%.\18\ In the first six months of 2019, the Exchange's market 
share, excluding auctions, remained below 0.6%.\19\ Because the program 
has not achieved the intended growth in trading on the Exchange, the 
Exchange proposes to eliminate the program in its entirety.
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    \17\ See note 8, supra.
    \18\ Id.
    \19\ See note 9, supra.
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    Based on 2018 payments under the program, only 10 Participants will 
be impacted by this proposed change.\20\ Although the Exchange is 
proposing to eliminate the MDR Rebates program mid-quarter, the 
Exchange will distribute MDR Rebates to Participants for the month of 
October 2019 unless the total MDR Rebate attributed to a Participant is 
less than $500.
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    \20\ As of December 31, 2018, there were 77 Participants on the 
Exchange that could have qualified for the program.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\21\ in general, and furthers the 
objectives of Sections 6(b)(4) and (5) of the Act,\22\ in particular, 
because it provides for the equitable allocation of reasonable dues, 
fees, and other charges among its members, issuers and other persons 
using its facilities and does not unfairly discriminate between 
customers, issuers, brokers or dealers.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(4) and (5).
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The Proposed Rule Change Is Reasonable
    As noted above, the Exchange operates in a highly competitive 
market. 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.'' \23\
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    \23\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
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    As the Commission itself recognized, the market for trading 
services in NMS stocks has become ``more fragmented and competitive.'' 
\24\ Indeed, equity trading is currently dispersed across 13

[[Page 59665]]

exchanges,\25\ 31 alternative trading systems,\26\ and numerous broker-
dealer internalizers and wholesalers, all competing for order flow. 
Based on publicly-available information, no single exchange has more 
than 19% market share (whether including or excluding auction 
volume).\27\ Therefore, no exchange possesses significant pricing power 
in the execution of equity order flow. More specifically, in the first 
eight months of 2019, the Exchange averaged less than 0.6% market share 
of executed volume of equity trades (excluding auction volume).\28\
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    \24\ See Securities Exchange Act Release No. 51808, 84 FR 5202, 
5253 (February 20, 2019) (File No. S7-05-18) (Final Rule).
    \25\ See Cboe U.S. Equities Market Volume Summary at https://markets.cboe.com/us/equities/market_share.
    \26\ See FINRA ATS Transparency Data, available at https://otctransparency.finra.org/otctransparency/AtsIssueData. A list of 
alternative trading systems registered with the Commission is 
available at https://www.sec.gov/foia/docs/atslist.htm.
    \27\ See Cboe Global Markets U.S. Equities Market Volume 
Summary, available at http://markets.cboe.com/us/equities/market_share/.
    \28\ See note 9, supra.
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    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. With respect to non-marketable 
orders which provide liquidity on an Exchange, Participants can choose 
from any one of the 13 currently operating registered exchanges to 
route such order flow. Accordingly, competitive forces reasonably 
constrain exchange transaction fees that relate to orders that would 
provide displayed liquidity on an exchange. Stated otherwise, changes 
to exchange transaction fees can have a direct effect on the ability of 
an exchange to compete for order flow.
    The Exchange believes that the proposed change to eliminate the 
credits associated with the MDR Rebates program is reasonable because 
the MDR Rebates program has not served to incentivize Participants to 
increase quoting and trading to the level anticipated by the Exchange. 
The Exchange operates in a highly competitive environment, particularly 
for attracting order flow that provides displayed liquidity on an 
exchange. As noted above, the Exchange's market share since 2017 has 
not changed in any meaningful way.
    The Exchange further believes it is reasonable to eliminate the 
market data revenue sharing because the program has not had a 
meaningful impact.
The Proposed Rule Change Is an Equitable Allocation of Fees and Credits
    The Exchange believes its proposal equitably allocates its fees and 
credits among its market participants.
    The Exchange is proposing to eliminate the MDR Rebates program 
because it has not served to incentivize quoting and trading activity 
for which the program was designed. The Exchange expects to continue to 
explore additional opportunities to provide an incentive for order flow 
on the Exchange.
    The Exchange believes the proposed rule change eliminating the MDR 
Rebates program is equitable as it is intended to remove a program that 
does not serve as an incentive to attract more liquidity to the 
Exchange. The proposal does not target any one particular category of 
market participant. However, the proposal will impact one participant 
more significantly as that participant received a large majority of the 
MDR Rebates under the program. As to those market participants that do 
not presently qualify for the revenue sharing, the proposal will not 
impact their existing pricing for transactions or their ability to 
qualify for other fees or credits provided by the Exchange.
The Proposed Rule Change Is Not Unfairly Discriminatory
    The Exchange believes that the proposed elimination of the MDR 
Rebates program is not unfairly discriminatory because it would apply 
to all Participants on an equal and non-discriminatory basis. The 
proposal to eliminate the MDR Rebates neither targets or will it have a 
disparate impact on any particular category of market participant. As 
noted above, in 2017, the Exchange paid a total of $907,035 under the 
MDR Rebates program to 13 Participants, and in 2018, the Exchange paid 
a total of $1,243,774 under the MDR Rebates program to 10 Participants. 
These Participants comprised firms that trade on both a principal and 
an agency basis and represent more than 75% of the total liquidity 
providing shares executed on the Exchange. Most of these Participants 
are also members of other exchanges and likely directed their order 
flow primarily to those other market centers and not to the Exchange.
    The Exchange believes that the proposed rule change is not unfairly 
discriminatory because all similarly situated Participants would be 
equally impacted by the elimination of the MDR Rebates program.
* * * * *
    For the foregoing reasons, the Exchange believes that the proposal 
is consistent with the Act.

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

    In accordance with Section 6(b)(8) of the Act,\29\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \29\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
    The Exchange does not believe that the proposed elimination of the 
MDR Rebates program will impair the ability of Participants to compete 
in the financial markets. There are 13 exchanges, 31 alternative 
trading systems, and numerous broker-dealer internalizers and 
wholesalers, all competing for order flow from which Participants may 
choose to send their quotes and trades. The Exchange also does not 
believe the proposed rule change would impact intramarket competition 
as it would apply to all Participants equally that transact on the 
Exchange, and therefore the proposed change would not impose a 
disparate burden on competition among market participants on the 
Exchange.
Intermarket Competition
    The Exchange does not believe that eliminating the MDR Rebates 
program would impact intermarket competition because the program has 
not achieved its intended objective of attracting liquidity to the 
Exchange and therefore, eliminating the program would not have a 
material impact to the Exchange's standing with respect to its 
competitors, none of whom provide a similar rebate. The Exchange notes 
that in the first eight months of 2019, the Exchange averaged less than 
0.6% market share of executed volume of non-auction equity trading.\30\ 
In such an environment, the Exchange must continually adjust its fees 
and rebates to remain competitive with other exchanges and with off-
exchange venues. Because competitors are free to modify their own fees 
and credits in response, and because market participants may readily 
adjust their order routing practices, the Exchange does not believe the 
proposed change can impose any burden on competition. The Exchange 
operates in a highly competitive market in which market participants 
can readily choose to send their orders to other exchange and off-
exchange venues if they deem fee and rebate levels at those other 
venues to be

[[Page 59666]]

more favorable. Further, inefficient pricing, including rebates that do 
not incentivize increased trading and quoting activity, would serve to 
impair an exchange's ability to compete for order flow rather than 
burdening competition.
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    \30\ See note 9, supra.
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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 solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \31\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \32\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \31\ 15 U.S.C. 78s(b)(3)(A).
    \32\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \33\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \33\ 15 U.S.C. 78s(b)(2)(B).
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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-NYSECHX-2019-16 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-NYSECHX-2019-16. 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-NYSECHX-2019-16 and should be submitted 
on or before November 26, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24089 Filed 11-4-19; 8:45 am]
BILLING CODE 8011-01-P