[Federal Register Volume 84, Number 218 (Tuesday, November 12, 2019)]
[Notices]
[Pages 61084-61088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24496]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87469; File No. SR-CboeEDGX-2019-068]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend the Fee Schedule To Adopt a New Type of Tier Related to Automated
Improvement Mechanism Customer Volume
November 5, 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 November 1, 2019, Cboe EDGX Exchange, Inc. (``Exchange'' or
``EDGX'') filed with the
[[Page 61085]]
Securities and Exchange Commission (``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 provided in 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 November 1, 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 21% 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
provides a standard rebate of $0.01 per contract for Customer 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
(October 29, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
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For example, the Exchange currently offers four non-complex
Customer Volume Tiers under Footnote 1 of the fee schedule which
provide enhanced rebates between $0.10 and $0.21 per contract for
qualifying Customer orders which meet certain total volume thresholds
and yield fee codes ``PC'' \4\ and ``NM''.\5\ Under the current non-
complex Customer Volume Tiers, a Member receives a reduced fee between
$0.10 and $0.21 per contract, where the Member has an ADV \6\ in
Customer orders greater or equal to a specified percentage of OCV \7\
(Tiers 1-3). Members also have an opportunity to receive a reduced fee
of $0.21 per contract under Tier 4 where the Member satisfies an
additional criteria by also reaching another specified ADV threshold in
Customer or Market Maker orders. The Exchange now proposes to adopt a
new type of tier related to Customer volume under proposed footnote 9
(Automated Improvement Mechanism (``AIM'') Tier) applicable to orders
yielding fee code ``BC'', which are appended to Customer AIM Agency
orders. The Exchange notes that orders yielding fee code BC are
currently provided a rebate of $0.14, and it now proposes to reduce
this rebate to $0.11 and, instead, offer a rebate of $0.14 for such
orders where a Member reaches the proposed AIM Tier.
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\4\ Appended to Customer Penny Pilot orders and provided a
rebate of $0.01.
\5\ Appended to Customer non-Penny Pilot orders and provided a
rebate of $0.01.
\6\ ``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.
\7\ ``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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Specifically, the proposed AIM Tier provides Members an additional
opportunity and alternative means to receive a rebate for meeting the
corresponding proposed criteria. Pursuant to the proposed changes, all
orders yielding the fee code BC would receive a base rebate of $0.11
and a Member would receive an enhanced rebate of $0.14 on such orders
where they have an ADV in Customer orders greater than or equal to .35%
of the OCV. Members that achieve the proposed AIM Tier must therefore
increase their overall Customer order flow, both adding and/or removing
liquidity, as a percentage greater than or equal to 0.35% of the TCV.
The Exchange believes the proposed enhanced rebates for both liquidity
adding and removing Customer orders incentivizes increased overall
order flow to the Book. The proposed tier provides both liquidity
providing Members and liquidity executing Members on the Exchange an
additional opportunity to receive a rebate. It is designed to provide
Members that add liquidity by means of Customer orders on the Exchange
a further incentive to contribute to a deeper, more liquid market, and
Members executing Customer orders on the Exchange an incentive to
increase transactions and take the execution opportunities provided by
such increased liquidity. Increased overall Customer order flow
benefits all market participants because it continues to attract
liquidity to the Exchange by providing more trading opportunities,
which attracts Market Makers. An increase in Market Maker activity, in
turn, facilitates tighter spreads, signaling additional corresponding
increase in order flow from other market participants, which
[[Page 61086]]
contributes towards a robust, well-balanced market ecosystem. In
addition to this, although the proposed based rebate for orders
yielding fee code BC is lower than the current base rebate for such
orders, Members still have an opportunity to receive a base rebate for
such orders, which is in line with similar fees for Customer orders in
place on other options exchanges.\8\ Members will now be able to
achieve the higher rebate for orders yield fee code BC pursuant to the
proposed AIM Tier described above, which is tied to the levels of a
Member's Customer order flow. Therefore, the reduced base rebate for
orders yielding fee code BC is balanced by the rebate opportunity
pursuant to the proposed AIM Tier and helps support the Exchange's
objective in implementing the proposed tier to encourage an overall
increase in Customer order flow and facilitate improved market quality
on the Exchange.
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\8\ See MIAX Options Section 1(a)(iii), Priority Customer Rebate
Program, which provides a base rebate of $0.10 for Customer Price
Improvement Mechanism (``PRIME'') Agency orders, which are
comparable to orders yielding fee code BC on the Exchange (i.e.,
Customer AIM Agency orders).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act,\9\ in general, and furthers the requirements
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 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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\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 additional opportunity for Members to
receive a rebate by providing a different set of criteria they for
which they can compete. The Exchange notes that volume-based incentives
and discounts have been widely adopted by exchanges,\11\ including the
Exchange,\12\ 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.\13\
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\11\ See e.g., Cboe BZX U.S. Options Exchange Fee Schedule,
Footnotes 1 and 12, Customer Penny Pilot and Non-Penny Pilot Add
Volume Tiers which provide enhanced rebates for Customer orders
where Members meet certain volume thresholds; see also supra note 8.
\12\ See e.g., Cboe EDGX U.S. Options Exchange Fee Schedule,
Footnote 1, Customer Volume Tiers, which provide enhanced rebates
between $0.10 and $0.21 per contract for non-complex Customer Penny
and Non-Penny orders where Members meet certain volume thresholds.
\13\ See e.g., Cboe BZX U.S. Options Exchange Fee Schedule,
Footnotes 1 and 12, Customer Penny Pilot and Non-Penny Pilot Add
Volume Tiers, which provide enhanced rebates between $0.35-$1.05 per
contract where Members, among other things including a cross-asset
threshold, meet a specified level of ADAV in Customer orders as a
percentage of OCV.
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Moreover, the Exchange believes the proposed AIM Tier is a
reasonable means to encourage Members to increase Customer volume on
the Exchange. Particularly, the Exchange believes the proposed tier is
reasonable because it will encourage increased Customer volume, thus a
deeper, more liquid market, and an increase in transaction
opportunities for all market participants provided by the increased
Customer liquidity. As stated, increased Customer order flow provides
continued liquidity to the Exchange, in that it provides additional
transaction opportunities which attract Market Makers. Increased Market
Maker activity facilitates tighter spreads and signals an increase in
additional order flow from other market participants. In turn, these
increases benefit all Members by contributing towards a robust and
well-balanced market ecosystem. Also, increased overall order flow
benefits all investors by deepening the Exchange's liquidity pool,
providing greater execution incentives and opportunities, offering
additional flexibility for all investors to enjoy cost savings,
supporting the quality of price discovery, promoting market
transparency, and improving investor protection. Additionally, the
Exchange believes the proposed reduction in the base rebate for orders
yielding fee code BC is reasonable because Members still have an
opportunity to receive a rebate for such orders, albeit at a lesser
amount. Moreover, the reduced base rebate is still higher than offered
at other exchanges for similar transactions.\14\ As described above,
the Exchange will continue to offer an opportunity to receive the $0.14
rebate, but will now tie it to a requirement to increase Members'
Customer order flow. Accordingly, balancing the reduced base rebate for
orders yielding fee code BC with the higher rebate opportunity for such
orders helps support Exchange's objective in implementing an incentive
to encourage an increase in Customer order flow and contribution to
enhanced market quality on the Exchange.
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\14\ See supra note 8.
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The Exchange also believes that the proposed rebate amount and
criteria under the AIM Tier does not represent a significant departure
from the rebates currently offered, or required criteria, under the
Exchange's existing Customer Volume Tiers. For example, under existing
non-complex Customer Volume Tier 1 (applicable to orders yielding fee
code PC or NC which are provided a standard rebate of $0.01), if a
Member has a daily average volume (ADV) of 0.35% or greater than the
OCV the Member receives a rebate of $0.10 per share. The Exchange
believes the proposed tier criteria and rebate of $0.14 is comparable
to this existing tier, especially given that orders yielding fees code
PC or NC receive a standard rebate of $0.01 as compared to the $0.11
base rebate (as proposed) for orders yielding fee code BC.
The Exchange believes that the proposed tier represents an
equitable allocation of fees and is not unfairly discriminatory because
it applies uniformly to all Members. All Members are eligible for the
proposed AIM tier, would have the opportunity to meet the tier's
criteria (which the Exchange believes is less stringent that other
existing Customer Volume tiers),\15\ and would receive the proposed
rebate if such criteria is met. While the Exchange has no way of
knowing whether this
[[Page 61087]]
proposed rule change would definitively result in any particular Member
qualifying for the proposed tier or if it would otherwise impact Member
activity, the Exchange anticipates at least three Members meeting, or
being reasonably able to meet, the proposed criteria. Accordingly, the
Exchange believes the proposed tier is reasonably designed to provide
an incentive for Members interested in meeting the tier criteria to
submit additional Customer volume to achieve the proposed rebate. The
Exchange lastly notes that the proposed tier 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
rebate would uniformly apply to all Members that meet the required
criteria under proposed AIM Tier. Likewise, the Exchange believes that
the proposed reduction in the base rebate for orders yielding fee code
BC represents an equitable allocation of rebates and is not unfairly
discriminatory because it is balanced by the higher rebate for such
orders provided under the proposed AIM Tier and Members will continue
to have the opportunity to receive a base rebate on such orders which
will also continue to uniformly apply to all such orders.
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\15\ See e.g., Cboe EDGX U.S. Options Exchange Fee Schedule,
Footnote 1, Customer Volume Tiers 2-4, which require a Member to
have an ADV of over 0.35% (as proposed in the AIM Tier) of the OCV.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
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.'' \16\
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\16\ 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 to all Members equally in that all Members are eligible
for the proposed tier, have a reasonable opportunity to meet the tier's
criteria and will all receive the proposed rebate if such criteria is
met. Additionally, the proposed change is designed to attract
additional order flow to the Exchange. The Exchange believes that the
proposed tier would incentivize market participants to direct both
liquidity providing and executable order flow to the Exchange. Greater
overall order flow benefits all market participants on the Exchange by
providing more trading opportunities and continuing to encourage
Members to send orders, thereby contributing towards a robust and well-
balanced market ecosystem, which benefits all market participants.
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 21% of the market
share.\17\ 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.'' \18\ 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'. . . .''.\19\
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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\17\ See supra note 3.
\18\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
\19\ 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 \20\ and paragraph (f) of Rule 19b-4 \21\
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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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 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
[[Page 61088]]
Send an email to [email protected]. Please include
File Number SR-CboeEDGX-2019-068 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-2019-068. 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-2019-068 and should be
submitted on or before December 3, 2019.
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\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24496 Filed 11-8-19; 8:45 am]
BILLING CODE 8011-01-P