[Federal Register Volume 85, Number 34 (Thursday, February 20, 2020)]
[Notices]
[Pages 9872-9879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03417]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88219; File No. SR-CboeEDGX-2020-008]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Introduce a Small Retail Broker Distribution Program
February 14, 2020.
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 February 4, 2020, Cboe EDGX Exchange, Inc. (``Exchange'' or
``EDGX'') filed with the 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. (``EDGX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to introduce a Small Retail Broker Distribution
Program. 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 purpose of the proposed rule change is to introduce a pricing
program that would allow small retail brokers that purchase top of book
market data from the Exchange to benefit from discounted fees for
access to such market data. The Small Retail Broker Distribution
Program (the ``Program'') would reduce the distribution and
consolidation fees paid by small broker-dealers that operate a retail
business. In turn, the Program may increase retail investor access to
real-time U.S. equity quote and trade information, and allow the
Exchange to better compete for this business with competitors that
offer similar optional products.
The Exchange initially filed to introduce the Program on August 1,
2019 (``Initial Proposal'') to further ensure that retail investors
served by smaller firms have cost effective access to its market data
products, and as part of its ongoing efforts to improve the retail
investor experience in the public markets. The Initial Proposal was
published in the Federal Register on August 20, 2019,\3\ and the
Commission received no comment letters on the Initial Proposal. The
Program remained in effect until the fee change was temporarily
suspended pursuant to a suspension order (the ``Initial Suspension
Order'').\4\ The Initial Suspension Order also instituted proceedings
to determine whether to approve or disapprove the Initial Proposal.\5\
On October 1, 2019, the Exchange re-filed its proposed rule change with
additional information about the basis for the proposed fee change
(``Second Proposal''). The Second Proposal was published in the Federal
Register on October 15, 2019,\6\ and the Commission received no comment
letters on the Second Proposal. The Program again remained in effect
until the fee change was temporarily suspended pursuant to a suspension
order (the ``Second Suspension Order'').\7\ The Second Suspension Order
also instituted proceedings to determine whether to approve or
disapprove the Second Proposal.\8\ On November 27, 2019, the Exchange
re-filed its proposed rule change a third time with one revision to the
requirements for participating in the Program and additional
information about the basis for the proposed fee change (``Third
Proposal''). The Third Proposal was published in the Federal Register
on December 16, 2019.\9\ Today, the Exchange is withdrawing the Third
Proposal, and replacing it with this proposed fee change as part of its
ongoing efforts to continue to facilitate retail investor access to
reasonably priced market data.
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\3\ See Securities Exchange Act Release No. 86678 (August 14,
2019), 84 FR 43246 (August 20, 2019) (SR-CboeEDGX-2019-048).
\4\ See Securities Exchange Act Release No. 87172 (September 30,
2019), 84 FR 53192 (October 4, 2019) (SR-CboeEDGX-2019-048).
\5\ Id.
\6\ See Securities Exchange Act Release No. 87295 (October 11,
2019), 84 FR 55624 (October 17, 2019) (SR-boeEDGX-2019-059).
\7\ See Securities Exchange Act Release No. 87635 (November 26,
2019), 84 FR 66242 (December 3, 2019) (SR-CboeEDGX-2019-059).
\8\ Id.
\9\ See Securities Exchange Act Release No. 87711 (December 10,
2019), 84 FR 68501 (December 16, 2019) (SR-CboeEDGX-2019-071).
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Current Fees
Today, the Exchange offers two top of book data feeds that provide
real-time
[[Page 9873]]
U.S. equity quote and trade information to investors. First, the
Exchange offers the EDGX Top Feed, which is an uncompressed data feed
that offers top of book quotations and execution information based on
equity orders entered into the System. The fee for external
distribution of EDGX Top data is $1,500 per month, and external
distributors are also liable for a fee of $4 per month for each
Professional User, and $0.10 per month for each Non-Professional User.
Second, the Exchange offers the Cboe One Summary Feed, which offers
similar information based on equity orders submitted to the Exchange
and its affiliated equities exchanges--i.e., Cboe EDGA Exchange, Inc.,
Cboe BZX Exchange, Inc., and Cboe BYX Exchange, Inc. Specifically, the
Cboe One Summary Feed is a data feed that contains the aggregate best
bid and offer of all displayed orders for securities traded on the
Exchange and its affiliated exchanges. The Cboe One Summary Feed also
contains the individual last sale information for the Exchange and each
of its affiliated exchanges, and consolidated volume for all listed
equity securities. The fee for external distribution of the Cboe One
Summary Feed is $5,000 per month, and external distributors are also
liable for a Data Consolidation Fee of $1,000 per month, and User fees
equal to $10 per month for each Professional User, and $0.25 per month
for each Non-Professional User.\10\
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\10\ The Exchange also offers an Enterprise license for the EDGX
Top and Cboe One Summary Feeds. An Enterprise license permits
distribution to an unlimited number of Professional and Non-
Professional Users, keeping costs down for firms that provide access
to a large number of subscribers. An Enterprise license is $15,000
per month for the EDGX Top Feed, and $50,000 per month for the Cboe
One Summary Feed.
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Small Retail Broker Eligibility Requirements
The Exchange proposes to introduce a Program that would reduce
costs for small retail brokers that provide top of book data to their
clients. In order to be approved for the Small Retail Broker
Distribution Program, Distributors would have to provide either the
EDGX Top Feed or Cboe One Summary Feed (``EDGX Equities Exchange
Data'') to a limited number of clients with which the firm has
established a brokerage relationship, and would have to provide such
data primarily to Non-Professional Data Users. Specifically,
distributors would have to attest that they meet the following
criteria: (1) Distributor is a broker-dealer distributing EDGX Equities
Exchange Data to Non-Professional Data Users with whom the broker-
dealer has a brokerage relationship; (2) At least 90% of the
Distributor's total Data User population must consist of Non-
Professional Data Users, inclusive of those not receiving EDGX Equities
Exchange Data; and (3) Distributor distributes EDGX Equities Exchange
Data to no more than 5,000 Users.11 12
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\11\ The Initial Proposal, Second Proposal, and Third Proposal
would have allowed small retail brokers to participate in the
Program if they distribute Cboe One Summary Feed Data to no more
than 5,000 Non-Professional Users. The current proposal instead
reflects a threshold of 5,000 Users--i.e., including both Non-
Professional and Professional Users.
\12\ Distributors would have to meet these requirements for
whichever product they would like to distribute pursuant to the
Program. For example, a distributor that distributes Cboe One
Summary Feed data pursuant to the Program, would be limited to
distributing the Cboe One Summary Feed to no more than 5,000 Users.
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These proposed requirements for participating in the Program are
designed to ensure that the benefits provided by the Program inure to
the benefit of small retail brokers that provide EDGX Equities Exchange
Data to a limited number of subscribers. As explained later in this
filing, distributors that provide EDGX Equities Exchange Data to a
larger number of subscribers can benefit from the current pricing
structure through scale, due to subscriber fees that are significantly
lower than those charged by the Exchange's competitors, and an
Enterprise license that caps the total fees to be paid by firms that
distribute market data to a sizeable customer base. The Exchange
believes that offering similarly attractive pricing to small retail
brokers, including regional firms both inside and outside of the U.S.
that may not have the same established client base as the larger retail
brokers, would make the Exchange's data a more competitive alternative
for those firms, and would help ensure that such information is widely
available to a larger number of retail investors globally. The Program
would also be available to retail brokers more generally, regardless of
size, that wish to trial the Exchange's top of book products with a
limited number of subscribers before potentially expanding distribution
to additional clients, potentially further increasing the accessibility
of the Exchange's market data to retail investors. The Program would be
exclusive to the Exchange's top of book offerings as retail investors
typically do not need or use depth of book data to facilitate their
equity investments, and their brokers typically do purchase such market
data on their behalf.
Discounted Fees
Distributors that participate in the Program would be liable for
lower distribution fees for access to the EDGX Top Feed, and lower
distribution and consolidation fees for access to the Cboe One Summary
Data Feed.\13\ First, the distribution fee charged for EDGX Top would
be lowered by 50% from the current $1,500 per month to $750 per month
for distributors that meet the requirements of the Program. Second, the
distribution fee charged to these distributors for the Cboe One Summary
Feed would be lowered by 30% from the current $5,000 per month to
$3,500 per month. Finally, the Data Consolidation Fee charged for the
Cboe One Summary Feed would be lowered by 65% from the current $1,000
per month to $350 per month. User fees for any Professional or Non-
Professional Users that access EDGX Top or Cboe One Summary Feed data
from a distributor that participates in the Program would remain at
their current levels as the current subscriber charges are already
among the most competitive in the industry.\14\
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\13\ New external distributors of the EDGX Top Feed or Cboe One
Summary Feed are not currently charged external distributor fees for
their first month of service. This would continue to be the case for
external distributors that participate in the Program.
\14\ By comparison, The Nasdaq Stock Market LLC (``Nasdaq'')
charges a subscriber fee for Nasdaq Basic that adds up to $26 per
month for Professional Subscribers and $1 per month for Non-
Professional Subscribers (Tapes A, B, and C). See Nasdaq Equity
Rules, Equity 7, Pricing Schedule, Section 147(b)(1).
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The Exchange believes that these fees, which represent a
significant cost savings for small retail brokers, would help ensure
that retail investors continue to have fair and efficient access to
U.S. equity market data. While retail investors normally pay a fixed
commission when buying or selling equities, and do not typically pay
separate fees for market data, the Exchange believes that the proposed
reduction in fees would make the Exchange's data more competitive with
other available alternatives, and may encourage retail brokers to make
such data more readily available to their clients. In sum, the Exchange
believes that the proposed fee reductions may facilitate more cost
effective access to top of book data that is purchased on a voluntary
basis by retail brokers and provided to their retail investor clients.
Market Background
The market for top of book data is highly competitive as national
securities exchanges compete both with each other and with the
securities information
[[Page 9874]]
processors (``SIPs'') to provide efficient, reliable, and low cost data
to a wide range of investors and market participants. In fact,
Regulation NMS requires all U.S. equities exchanges to provide their
best bids and offers, and executed transactions, to the two registered
SIPs for dissemination to the public. Top of book data is therefore
widely available to investors today at a relatively modest cost.
National securities exchanges may also disseminate their own top of
book data, but no rule or regulation of the Commission requires market
participants to purchase top of book data from an exchange.\15\ The
EDGX Top Feed and Cboe One Summary Feed therefore compete with the SIP
and with similar products offered by other national securities
exchanges that offer their own competing top of book products. In fact,
there are ten competing top of book products offered by other national
securities exchanges today, not counting products offered by the
Exchange's affiliates.\16\
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\15\ By contrast, Rule 603(c) of Regulation NMS (the ``Vendor
Display Rule'') effectively requires that SIP data or some other
consolidated display be utilized in any context in which a trading
or order-routing decision can be implemented.
\16\ Competing top of book products include, Nasdaq Basic, BX
Basic, PSX Basic, NYSE BQT, NYSE BBO/Trades, NYSE Arca BBO/Trades,
NYSE American BBO/Trades, NYSE Chicago BBO/Trades, and IEX TOPS.
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The purpose of the proposed rule change is to further increase the
competitiveness of the Exchange's top of book market data products
compared to competitor offerings that may currently be cheaper for
firms with a limited subscriber base that do not yet have the scale to
take advantage of the lower subscriber fees offered by the Exchange. In
turn, the Exchange believes that this change may benefit market
participants and investors by spurring additional competition and
increasing the accessibility of the Exchange's top of book data.
As explained, the Exchange filed the Initial Proposal to introduce
the Program in August in order to provide an attractive pricing option
for small retail brokers. Although that filing was ultimately suspended
by the Commission, as was the Second Proposal, the Exchange believes
that its experience in offering the Program while it has been in effect
reflect the competitive nature of the market for the creation and
distribution of top of book data. Specifically, after the Exchange
reduced the fees charged to small retail brokers pursuant to the
Initial Proposal, Second Proposal, and Third Proposal, while each of
those were in effect, it successfully onboarded three new customers due
to the attractive pricing.\17\ These customers are now able to offer
high quality and cost effective data to their retail investor clients.
The Exchange has also been discussing the Program with a handful of
additional prospective clients that are interested in providing top of
book data to retail investors. Without the proposed pricing discounts,
the Exchange believes that those customers and prospective customers
may not be interested in purchasing top of book data from the Exchange,
and would instead purchase such data from other national securities
exchanges or the SIPs, potentially at a higher cost than would be
available pursuant to the Program. The Program has therefore already
been successful in increasing competition for such market data, and
continued operation of the Program would serve to both reduce fees for
such customers and to provide alternatives to data and pricing offered
by competitors. Ultimately, the Exchange believes that it is critical
that it be allowed to compete by offering attractive pricing to
customers as increasing the availability of such products ensures
continued competition with alternative offerings. Such competition may
be constrained when competitors are impeded from offering alternative
and cost effective solutions to customers.
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\17\ See e.g., Cboe Innovation Spotlight, ``dough--The
commission-free online broker with premium content and insights,''
available at https://markets.cboe.com/us/equities/market_data_products/spotlight/.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\18\ in general, and
furthers the objectives of Section 6(b)(4),\19\ in particular, as it is
designed to provide for the equitable allocation of reasonable dues,
fees and other charges among its members and other recipients of
Exchange data.
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\18\ 15 U.S.C. 78f.
\19\ 15 U.S.C. 78f(b)(4).
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The Exchange also believes that the proposed rule change is
consistent with Section 11(A) of the Act.\20\ Specifically, the
proposed rule change supports (i) fair competition among brokers and
dealers, among exchange markets, and between exchange markets and
markets other than exchange markets, and (ii) the availability to
brokers, dealers, and investors of information with respect to
quotations for and transactions in securities. In addition, the
proposed rule change is consistent with Rule 603 of Regulation NMS,\21\
which provides that any national securities exchange that distributes
information with respect to quotations for or transactions in an NMS
stock do so on terms that are not unreasonably discriminatory.
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\20\ 15 U.S.C. 78k-1.
\21\ See 17 CFR 242.603.
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In adopting Regulation NMS, the Commission granted SROs and broker-
dealers increased authority and flexibility to offer new and unique
market data to the public. It was believed that this authority would
expand the amount of data available to consumers, and also spur
innovation and competition for the provision of market data. The
Exchange believes that the proposed fee change would further broaden
the availability of U.S. equity market data to investors, and in
particular retail investors, consistent with the principles of
Regulation NMS.
The Exchange operates in a highly competitive environment. Indeed,
there are thirteen registered national securities exchanges that trade
U.S. equities and offer associated top of book market data products to
their customers. The national securities exchanges also compete with
the SIPs for market data customers. 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.'' \22\ The proposed fee change is a result of the
competitive environment, as the Exchange seeks to amend its fees to
attract additional subscribers for its proprietary top of book data
offerings.
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\22\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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The proposed fee change would reduce fees charged to small retail
brokers that provide access to two top of book data products: The EDGX
Top Feed and the Cboe One Summary Feed. The EDGX Top Feed provides top
of book quotations and transactions executed on the Exchange, and
provides a valuable window into the market for securities traded on a
market that accounts for about 5% of U.S. equity market volume
today.\23\ The Cboe One Summary Feed is a competitively-priced
alternative to top of book data
[[Page 9875]]
disseminated by SIPs, or similar data disseminated by other national
securities exchanges.\24\ It provides subscribers with consolidated top
of book quotes and trades from four Cboe U.S. equities markets, which
together account for about 17% of consolidated U.S. equities trading
volume.\25\ Together, these products are purchased by a wide variety of
market participants and vendors, including data platforms, websites,
fintech firms, buy-side investors, retail brokers, regional banks, and
securities firms inside and outside of the U.S. that desire low cost,
high quality, real-time U.S. equity market data. By providing lower
cost access to U.S. equity market data, the EDGX Top and Cboe One
Summary Feeds benefit a wide range of investors that participate in the
national market system. Reducing fees for broker-dealers that represent
retail investors and that may have more limited resources than some of
their larger competitors would further increase access to such data and
facilitate a competitive market for U.S. equity securities, consistent
with the goals of the Act.
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\23\ See https://markets.cboe.com/us/equities/market_share/.
\24\ See e.g., supra note 14 (discussing Nasdaq Basic).
\25\ Id.
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While the Exchange is not required to make any data, including top
of book data, available through its proprietary market data platform,
the Exchange believes that making such data available increases
investor choice, and contributes to a fair and competitive market.
Specifically, making such data publicly available through proprietary
data feeds allows investors to choose alternative, potentially less
costly, market data based on their business needs. While some market
participants that desire a consolidated display choose the SIP for
their top of book data needs, and in some cases are effectively
required to do so under the Vendor Display Rule, others may prefer to
purchase data directly from one or more national securities exchanges.
For example, a buy-side investor may choose to purchase the Cboe One
Summary Feed, or a similar product from another exchange, in order to
perform investment analysis. The Cboe One Summary Feed represents
quotes from four highly liquid equities markets. As a result, the Cboe
One Summary Feed is within 1% of the national best bid and offer
approximately 98% of the time,\26\ and therefore serves as a valuable
reference for investors that do not require a consolidated display that
contains quotations for all U.S. equities exchanges. Making alternative
products available to market participants ultimately ensures increased
competition in the marketplace, and constrains the ability of exchanges
to charge supracompetitive fees. In the event that a market participant
views one exchanges top of book data fees as more or less attractive
than the competition they can and frequently do switch between
competing products. In fact, the competiveness of the market for such
top of book data products is one of the primary factors animating this
proposed rule change, which is designed to allow the Exchange to
further compete for this business.
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\26\ See https://markets.cboe.com/us/equities/market_data_services/cboe_one/.
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Indeed, the Exchange has already successfully onboarded three new
Distributors that have decided to purchase Cboe One Summary Data from
the Exchange rather than purchasing top of book data from a competitor
exchange. In addition, the Exchange is in discussions with a handful of
other Distributors that are interested in procuring market data from
the Exchange due to the attractive pricing offered pursuant to the
Program. Distributors can discontinue use at any time and for any
reason, including due to an assessment of the reasonableness of fees
charged. Further, firms have a wide variety of alternative market data
products from which to choose, such as similar proprietary data
products offered by other national securities exchanges. Making the
Exchange's top of book data available at a lower cost, ultimately
serves the interests of retail investors that rely on the public
markets. The Exchange understands that the Commission is interested in
ensuring that retail investors are appropriately served in the U.S.
equities market. The Exchange agrees that it is important to ensure
that our markets continue to serve the needs of ordinary investors, and
the Program is consistent with this goal.
The Exchange believes that the proposed fees are reasonable as they
represent a significant cost reduction for smaller, primarily regional,
retail brokers that provide top of book data from EDGX and its
affiliated equities exchanges to their retail investor clients. The
market for top of book data is intensely competitive due to the
availability of substitutable products that can be purchased either
from other national securities exchanges, or from registered SIPs that
make such top of book data publicly available to investors at a modest
cost. The proposed fee reduction is being made to make the Exchange's
fees more competitive with such offerings for this segment of market
participants, thereby increasing the availability of the Exchange's
data products, and expanding the options available to firms making data
purchasing decisions based on their business needs. The Exchange
believes that this is consistent with the principles enshrined in
Regulation NMS to ``promote the wide availability of market data and to
allocate revenues to SROs that produce the most useful data for
investors.'' \27\
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\27\ See Regulation NMS Adopting Release, supra note 22, at
37503.
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Today, the Exchange's top of book market data products are among
the most competitively priced in the industry due to modest subscriber
fees, and a lower Enterprise cap, both of which keep fees at a
relatively modest level for larger firms that provide market data to a
sizeable number of Professional or Non-Professional Users. Distributors
with a smaller user base, however, may choose to use competitor
products that have a lower distribution fee and higher subscriber fees.
The Program would help the Exchange compete for this segment of the
market, and may broaden the reach of the Exchange's data products by
providing an additional low cost alternative to competitor products for
small retail brokers. While such firms may already utilize similar
market data products from other sources, the Exchange believes that
offering its own data to small retail brokers at lower distribution and
data consolidation costs has the potential to increase choice for
market participants, and ultimately increase the data available to
retail investors when coupled with the Exchange's lower subscriber
fees.
The Exchange also believes that the proposed fees are equitable and
not unfairly discriminatory as the proposed fee structure is designed
to decrease the price and increase the availability of U.S. equities
market data to retail investors. The Program is designed to reduce the
cost of top of book market data for broker-dealers that provide such
data to Non-Professional Data User clients that make up a significant
majority of the distributor's total subscriber population. While there
is no ``exact science'' to choosing one eligibility threshold compared
to another, the Exchange believes that having significantly more Non-
Professional Data Users than Professional Data User across a firm's
entire business, i.e., not limited exclusively to Data Users that are
provided access to the Exchange's data products, is indicative of a
broker-dealer that is primarily and actively engaged in the business of
serving retail investors.
[[Page 9876]]
This understanding is confirmed by an analysis conducted by the
Exchange on the user population of its retail broker clients that
purchase market data from the Exchange and its affiliated exchanges. To
perform its analysis, the Exchange reviewed user populations for each
broker dealer that it identified as primarily engaged in serving retail
investors (i.e., retail brokers), and for which the Exchange has
reported usage broken down into Professional and Non-Professional
Users.\28\ This analysis showed that each retail broker identified
currently provides market data from the Exchange or its affiliates to
at least 90% Non-Professional Users, with the Professional/Non-
Professional breakdown ranging from 90.9% Non-Professional Users on the
low end to 100% Non-Professional Users on the high end. As a result of
this analysis, the Exchange believes that a requirement that at least
90% of a broker-dealer's user population qualify as Non-Professional
Users is appropriate to ensure that the benefits provided by the
Program inure to the benefit of broker-dealers that primarily serve
retail investors. Indeed, this belief is further supported by the
Exchange's experience with the customers that currently participate in
the Program, each of which are focused on providing trading services to
ordinary investors.
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\28\ Broker dealers with an Enterprise license are required to
report total user populations but not whether each user is a
Professional or Non-Professional User. As a result, the Exchange has
excluded those firms from this portion of its analysis. That said,
the Exchange believes those firms may have a similar Professional/
Non-Professional breakdown to other retail brokers.
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As such, the Program would be broadly available to a wide range of
retail brokers that either purchase EDGX Equities Exchange Data today,
or that may choose to switch from competing products due to the
potential cost savings. In addition to the subscribers that are
currently participating in the Program, a number of distributors that
currently purchase top of book data from one of the four Cboe U.S.
equities exchanges, and many more prospective customers, could benefit
from the Program. Each of these current or prospective retail broker
customers would receive the same benefits in terms of reduced
distribution and consolidation fees based on the product that they
purchase from the Exchange.
The Commission has long stressed the need to ensure that the
equities markets are structured in a way that meets the needs of
ordinary investors. For example, the Commission's strategic plan for
fiscal years 2018-2022 touts ``focus on the long-term interests of our
Main Street investors'' as the Commission's number one strategic
goal.\29\ The Program would be consistent with the Commission's stated
goal of improving the retail investor experience in the public markets.
Furthermore, national securities exchanges commonly charge reduced fees
and offer market structure benefits to retail investors, and the
Commission has consistently held that such incentives are consistent
with the Act. The Exchange believes that the Program is consistent with
longstanding precedent indicating that it is consistent with the Act to
provide reasonable incentives to retail investors that rely on the
public markets for their investment needs.
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\29\ See U.S. Securities and Exchange Commission, Strategic
Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf.
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In addition, while the Program would be effectively limited to
smaller firms that distribute data to no more than 5,000 Users, the
Exchange does not believe that this limitation makes the fees
inequitable, unfairly discriminatory, or otherwise contrary to the
purposes of the Act. The Program is designed to ensure that small
retail brokers have access to Exchange data at a modest cost, and
therefore contains an eligibility cutoff based on the number of Users
that would receive EDGX Equities Exchange Data. The retail broker
clients identified by the Exchange provide data from the Exchange or
its affiliates to an average of more than 160,000 Non-Professional
Users, with a small handful of large retail brokers operating pursuant
to an Enterprise license accounting for about 95% of those Non-
Professional Users.\30\ Many retail broker clients, however, have
significantly smaller Non-Professional User populations, with retail
brokers that are not operating pursuant to an Enterprise license
providing data from the Exchange or its affiliates to an average of
8,845 Non-Professional Users. The 5,000 User threshold would therefore
ensure that the benefits of the Program flow to small retail brokers,
as intended, and not larger firms that already benefit from the current
fee structure.
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\30\ As explained, broker dealers with an Enterprise license are
required to report total user populations but not whether each user
is a Professional or Non-Professional User. See supra note 28. To
perform this analysis, the Exchange therefore assumed that retail
brokers qualifying for the enterprise cap had a similar breakdown of
Professional/Non-Professional Users as retail brokers that reported
this information.
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Large broker-dealers and/or vendors that distribute the Exchange's
data products to a sizeable number of investors benefit from the
current fee structure, which includes lower subscriber fees and
Enterprise licenses. Due to lower subscriber fees, distributors that
provide EDGX Equities Exchange Data to more than 5,000 Users already
enjoy cost savings compared to competitor products. The Program would
therefore ensure that small retail brokers that distribute top of book
data to their retail investor customers could also benefit from reduced
pricing, and would aid in increasing the competitiveness of the
Exchange's data products for this key segment of the market.
The table below illustrates the impact of the proposed pricing on
firms that qualify for the Program, both compared to the Exchange's
current pricing, and compared to the fees charged for a competitor
product, i.e., Nasdaq Basic. As shown, Cboe One Summary Feed Data
provided pursuant to the Program would be cheaper than Nasdaq Basic for
firms with more than 1,200 Users, and the benefits of the pricing
structure would continue to scale up to firms with 5,000 Users.\31\
Further, EDGX Top Data, which is already subject to a lower
distribution fee than Nasdaq Basic, would become even more cost
effective. After 5,000 Users the firm would no longer be eligible for
the Small Retail Broker Distribution Program but would already enjoy
significant cost savings compared to Nasdaq Basic under the current
pricing structure. The Exchange therefore believes that the Program
would allow the Exchange to better compete with competitors for smaller
firms that currently pay a lower fee under, for example, the Nasdaq
Basic pricing model, while also ensuring that larger firms continue to
receive attractive pricing that is already cheaper than top of book
data offered by the main competitor product. The Exchange believes this
supplemental information further validates its assessment that the
proposed fee reduction is reasonable, equitable, and not unfairly
discriminatory. Without the proposed fee reduction, small retail
brokers that would otherwise qualify for the reduced fees proposed
would be subject to either higher fees for accessing Exchange top of
book data, or may switch to competitor offerings that are also less
cost effective, but at current fees levels,
[[Page 9877]]
cheaper than the current Cboe One Summary fee.
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\31\ For purposes of illustration, the examples included in the
table assume that the small retail broker provides Cboe One Summary
Data solely to Non-Professional Users, which pursuant to the
requirements of the Program must make up at least 90% of the
Distributor's total subscriber population, and may, in practice,
make up an even larger proportion of the user population.
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The Exchange also notes that the proposed fees for the Cboe One
Summary Feed are designed in a manner that would allow a market data
vendor to offer a similar competing product that includes data from the
Exchange and its affiliated equities exchanges. Specifically, the
Distribution fees proposed for the Cboe One Summary Feed are equivalent
to the fees that would be charged to a small retail broker for access
to the top of book feeds offered by the individual exchanges. In
addition, Distributors of the Cboe One Summary Feed are liable for a
Data Consolidation Fee that is designed to reflect the value of the
consolidation of the data. Thus, the pricing for the Cboe One Summary
Feed would enable a vendor to receive the underlying data feeds and
offer a similar product on a competitive basis and with no pricing
disadvantage relative to the exchanges. The examples below illustrate
the fees that would be associated with the Cboe One Summary Feed
compared with the fees that would be charged for a competing product
that incorporates top of book information taken from the Exchange and
its affiliated equities exchanges.\32\
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\32\ All Distributors that receive an uncontrolled data feed,
including small retail brokers that qualify for the Program, would
have to license directly with the Exchange, and would be responsible
for paying any applicable fees, but would be able to access such
market data through the services of a vendor.
Example 1: Vendor Distributes Cboe One Summary Feed to Two Small Retail
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Brokers
A vendor that distributes the Cboe One Summary Feed to one or more
clients for further internal or external distribution would be liable
for an External Distribution Fee of $5,000 per month and a Data
Consolidation Fee of $1,000 per month.\33\ In addition, each small
retail broker that receives data from the vendor would be liable for
its own Distribution Fees, which would be reduced to $3,500 per month
pursuant to the Program, and Data Consolidation Fees, which would be
reduced to $350 per month. These amounts would be paid directly by each
small retail broker to the Exchange pursuant to a license agreement
despite the fact that such clients are utilizing the services of a
[[Page 9878]]
vendor to facilitate their access to the data.
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\33\ Typically, a vendor's business involves distributing market
data to a wide range of customers, which would likely include a
number of firms that do not qualify for the Program (e.g., other
vendors, larger broker-dealers, etc.). In both examples, the fees
charged to the vendor would permit it to distribute to each of those
downstream customers without paying additional fees for each
customer.
Example 2: Vendor Distributes Competing Product to Two Small Retail
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Brokers
Similar to Example 1, a vendor that consolidates and distributes
top of book data taken from the Exchange and its affiliated equities
exchanges would be liable for External Distribution Fees of $5,000 per
month--i.e., $2,500 for BZX Top, $1,000 per month for BYX Top, and
$1,500 for EDGX Top, and $0 per month for EDGA Top. Unlike Example 1,
however, the vendor would be performing its own consolidation of the
data incorporated from the four top of book feeds, and would not be
liable for the Data Consolidation Fee. Similarly, each of the small
retail brokers would pay their own Distribution Fees to the Exchange,
which would be reduced to $3,500 under the Program--i.e., $2,500 per
month for BZX Top, $250 per month for BYX Top, $750 per month for EDGX
Top, and $0 per month for EDGA Top. Similar to the vendor, the small
retail brokers would not pay any Data Consolidation Fee. As a result, a
vendor could offer its own competing product at a price that is
competitive with the Exchange's pricing.\34\
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\34\ The discounted Data Consolidation Fee should continue to
allow a vendor that takes top of book feeds from the Exchange and
its affiliated equities exchanges to offer a competing product at a
similar cost. In this regard, the Exchange notes that Nasdaq
similarly charges a $350 data consolidation fee for Nasdaq Last Sale
Plus. See Nasdaq Rules, Equity 7, Pricing Schedule, Section
139(e)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The Exchange
operates in a highly competitive environment, and its ability to price
these data products is constrained by: (i) Competition among exchanges
that offer similar data products to their customers; and (ii) the
existence of inexpensive real-time consolidated data disseminated by
the SIPs. Top of book data is disseminated by both the SIPs and the
thirteen equities exchanges. There are therefore a number of
alternative products available to market participants and investors. In
this competitive environment potential subscribers are free to choose
which competing product to purchase to satisfy their need for market
information. Often, the choice comes down to price, as broker-dealers
or vendors look to purchase the cheapest top of book data product, or
quality, as market participants seek to purchase data that represents
significant market liquidity. In order to better compete for this
segment of the market, the Exchange is proposing to reduce the cost of
top of book data provided by small retail brokers to their retail
investor clients. The Exchange believes that this would facilitate
greater access to such data, ultimately benefiting the retail investors
that are provided access to such market data.
The Exchange does not believe that this price reduction would cause
any unnecessary or inappropriate burden on intermarket competition as
other exchanges and data vendors are free to lower their prices to
better compete with the Exchange's offering. Indeed, as explained in
the basis section of this proposed rule change, the Exchange's decision
to lower its distribution and consolidation fees for small retail
brokers is itself a competitive response to different fee structures
available on competing markets. The Exchange therefore believes that
the proposed rule change is pro-competitive as it seeks to offer
pricing incentives to customers to better position the Exchange as it
competes to attract additional market data subscribers. The Exchange
also believes that the proposed reduction in fees for small retail
brokers would not cause any unnecessary or inappropriate burden on
intramarket competition. Although the proposed fee discount would be
largely limited to small retail broker subscribers, larger broker-
dealers and vendors can already purchase top of book data from the
Exchange at prices that represent a significant cost savings when
compared to competitor products that combine higher subscriber fees
with lower fees for distribution. In light of the benefits already
provided to this group of subscribers, the Exchange believes that
additional discounts to small retail brokers would increase rather than
decrease competition among broker-dealers that participate on the
Exchange. Furthermore, as discussed earlier in this proposed rule
change, the Exchange believes that offering pricing benefits to brokers
that represent retail investors facilitates the Commission's mission of
protecting ordinary investors, and is therefore consistent with the
Act.
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 \35\ and paragraph (f) of Rule 19b-4 \36\
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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\35\ 15 U.S.C. 78s(b)(3)(A).
\36\ 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-2020-008 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-2020-008. 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
[[Page 9879]]
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-2020-008 and should
be submitted on or before March 12, 2020.
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\37\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03417 Filed 2-19-20; 8:45 am]
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