[Federal Register Volume 86, Number 236 (Monday, December 13, 2021)]
[Notices]
[Pages 70874-70878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26857]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93727; File No. SR-MEMX-2021-10]


Self-Regulatory Organizations; MEMX LLC; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Establish a Retail Midpoint Liquidity Program

December 7, 2021.

I. Introduction

    On August 18, 2021, MEMX LLC (``MEMX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section

[[Page 70875]]

19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to establish a Retail 
Midpoint Liquidity Program (``Program''). The proposed rule change was 
published for comment in the Federal Register on September 8, 2021.\3\ 
On October 19, 2021, the Commission designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\4\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Exchange Act \5\ to determine whether to 
approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92844 (September 1, 
2021), 86 FR 50411 (September 8, 2021).
    \4\ See Securities Exchange Act Release No. 93383 (October 19, 
2021), 86 FR 58964 (October 25, 2021).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    The Exchange proposes to establish a Retail Midpoint Liquidity 
Program to provide retail investors with enhanced price improvement 
opportunities at the midpoint of the national best bid and offer 
(``Midpoint Price'') against a limited group of liquidity providers on 
the Exchange. Specifically, the Exchange proposes to allow Retail 
Member Organizations (``RMOs'') to submit a new type of order on behalf 
of retail investors that is designed to execute at the Midpoint Price 
(a ``Retail Midpoint Order''). Contra-side liquidity would be provided 
almost exclusively by a new order type, called a Retail Midpoint 
Liquidity Order (``RML Order''), which any Exchange user would be 
permitted to submit.\6\ The Exchange would permit users to elect 
whether to have their RML Orders count towards a new Retail Liquidity 
Identifier, which MEMX would disseminate through its proprietary market 
data feeds and the appropriate securities information processor 
(``SIP'') when such elected RML Order interest aggregates to form at 
least one round lot for a particular security.
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    \6\ As discussed below, Retail Midpoint Orders also would 
execute against displayable odd lot orders priced more aggressively 
than the Midpoint Price and non-displayed orders priced more 
aggressively than the Midpoint Price. Retail Midpoint Orders would 
not be eligible to execute against other types of midpoint interest, 
such as Midpoint Peg Orders (defined below).
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Defined Terms and the Retail Liquidity Identifier

    Under the proposal, ``Retail Midpoint Order'' would be defined as a 
Retail Order submitted by an RMO that is a Pegged Order \7\ with a 
Midpoint Peg \8\ instruction (``Midpoint Peg Order'') and that is only 
eligible to execute against RML Orders and other orders priced more 
aggressively than the Midpoint Price through the execution process 
described in proposed Exchange Rule 11.22(c). As proposed, a Retail 
Midpoint Order must have a time-in-force (``TIF'') instruction of 
IOC.\9\ Further, an ``RML Order'' would be defined as a Midpoint Peg 
Order that is only eligible to execute against Retail Midpoint Orders 
through the execution process described in proposed Exchange Rule 
11.22(c). As proposed, an RML Order must have a TIF instruction of 
Day,\10\ RHO,\11\ or GTT \12\ and may not include a Minimum Execution 
Quantity \13\ instruction. According to the Exchange, the purpose of 
limiting Retail Midpoint Orders and RML Orders to interacting with each 
other (subject to the exception of Retail Midpoint Orders being 
eligible to execute against other orders priced more aggressively than 
the Midpoint Price) is that the proposed Program is designed to provide 
a mechanism whereby liquidity-providing users can provide price-
improving liquidity at the Midpoint Price specifically to retail 
investors, and liquidity-removing RMOs submitting orders on behalf of 
retail investors can interact with such price-improving liquidity at 
the Midpoint Price ``in a deterministic manner.'' \14\
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    \7\ Pegged Orders are described in Exchange Rules 11.6(h) and 
11.8(c) and generally defined as an order that is pegged to a 
reference price and automatically re-prices in response to changes 
in the national best bid and offer.
    \8\ A Midpoint Peg instruction is an instruction that may be 
placed on a Pegged Order that instructs the Exchange to peg the 
order to the Midpoint Price. See Exchange Rule 11.6(h)(2).
    \9\ ``IOC'' is an instruction the user may attach to an order 
stating the order is to be executed in whole or in part as soon as 
such order is received, and the portion not executed immediately on 
the Exchange or another trading center is treated as cancelled and 
is not posted to the MEMX Book. See Exchange Rule 11.6(o)(1). The 
term ``MEMX Book'' refers to the MEMX system's electronic file of 
orders. See Exchange Rule 1.5(q).
    \10\ See Exchange Rule 11.6(o)(2).
    \11\ See Exchange Rule 11.6(o)(5).
    \12\ See Exchange Rule 11.6(o)(4).
    \13\ See Exchange Rule 11.6(f).
    \14\ See Notice, supra note 3, at 50413.
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    The Exchange proposes to disseminate a Retail Liquidity Identifier 
through the Exchange's proprietary market data feeds, MEMOIR Depth \15\ 
and MEMOIR Top,\16\ and the appropriate SIP when designated \17\ RML 
Order interest, aggregated to form at least one round lot for a 
particular security, is available, provided that such designated RML 
Order interest is resting at the Midpoint Price \18\ and is priced at 
least $0.001 better than the national best bid (``NBB'') or national 
best offer (``NBO'').\19\ The Retail Liquidity Identifier would reflect 
the symbol and the side (buy and/or sell) of the designated RML Order 
interest but would not include the price or size.\20\ The Exchange 
proposes that a user may, but is not required to, designate an RML 
Order to be identified as RML Order interest for purposes of the Retail 
Liquidity Identifier pursuant to proposed Exchange Rule 11.22(b).\21\
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    \15\ See Exchange Rule 13.8(a).
    \16\ See Exchange Rule 13.8(b).
    \17\ The term ``designated'' indicates that users submitting RML 
Orders have the option to either include their RML Orders in the 
Retail Liquidity Identifier or not. See also infra note 21 and 
accompanying text.
    \18\ The Exchange notes that an RML Order could have a limit 
price that is less aggressive than the Midpoint Price in which case 
it would not be eligible to trade with an incoming Retail Midpoint 
Order and therefore would not be included for purposes of Retail 
Liquidity Identifier dissemination since it would not reflect 
interest available to trade with Retail Midpoint Orders. See Notice, 
supra note 3, at 50414.
    \19\ The Exchange explains that because RML Orders are proposed 
to be only Midpoint Peg Orders, they will always represent at least 
$0.001 price improvement over the NBB or NBO, with two exceptions: 
(1) In a locked or crossed market; and (2) a sub-dollar security 
when the security's spread is less than $0.002. See id. The Exchange 
would only disseminate the Retail Liquidity Identifier for sub-
dollar securities if the spread in the security is greater than or 
equal to $0.002, meaning the Midpoint Price represents at least 
$0.001 price improvement over the NBB or NBO. See id.
    \20\ As such, the Exchange explains that it would remove the 
Retail Liquidity Identifier previously disseminated through the 
MEMOIR Depth and MEMOIR Top data products and through the 
appropriate SIP after executions against Retail Midpoint Orders have 
depleted the available designated RML Order interest such that the 
remaining designated RML Order interest does not aggregate to form 
at least one round lot, or in situations where there is no 
actionable RML Order interest (such as when the market is locked or 
crossed), in order to indicate to market participants that there is 
no longer designated RML Order interest of at least one round lot 
available. See id.
    \21\ Under Exchange Rule 11.8(c)(3), Pegged Orders, including 
Midpoint Peg Orders, are not eligible to include a Displayed 
instruction; however, as proposed, an RML Order would be eligible to 
include a Displayed instruction, which would be for the sole purpose 
of indicating to the Exchange that the user has designated the RML 
Order to be identified as RML Order interest for purposes of the 
Retail Liquidity Identifier pursuant to proposed Exchange Rule 
11.22(b), and inclusion of the Displayed instruction would not 
indicate to the Exchange that the RML Order is to be displayed by 
the MEMX system on the MEMX Book. See id. at 50413 n.18. A user 
would be able to designate RML Order interest for this purpose on an 
order-by-order basis or on a port-by-port basis. See id. at 50413.
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Priority and Order Execution

    Proposed Exchange Rule 11.22(c) would set forth the execution 
priority rules for the Program.\22\ Proposed

[[Page 70876]]

Exchange Rule 11.22(c)(1) states that Retail Midpoint Orders and RML 
Orders would only execute at the Midpoint Price. Proposed Exchange Rule 
11.22(c)(3) states that Retail Midpoint Orders would execute against 
RML Orders in time priority in accordance with Exchange Rule 11.10, 
except that RML Orders designated to be included in the Retail 
Liquidity Identifier would have priority over RML Orders that are not 
so designated. Thus, as proposed, because Retail Midpoint Orders are 
only eligible to execute against RML Orders and orders priced more 
aggressively than the Midpoint Price, other types of orders resting at 
the Midpoint Price that may be present on MEMX (including those with 
time priority over an RML Order) would not be allowed to execute 
against a Retail Midpoint Order and retail investors would not get the 
benefit of being able to access that additional midpoint liquidity 
through the Retail Midpoint Order type.
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    \22\ In addition to the rule text explaining the Program's 
priority rules, proposed Exchange Rule 11.22(c) also provides two 
examples to further demonstrate how these priority rules would 
operate.
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    Proposed Exchange Rule 11.22(c)(2) provides that if there is: (A) A 
Limit Order \23\ of Odd Lot \24\ size that is displayed by the MEMX 
system (``Displayed Odd Lot Order'') and that is priced more 
aggressively than the Midpoint Price and/or (B) an order that is not 
displayed by the MEMX system (``Non-Displayed Order'') and that is 
priced more aggressively than the Midpoint Price, resting on the MEMX 
Book, an incoming Retail Midpoint Order would first execute against any 
such orders pursuant to the Exchange's standard price/time priority in 
accordance with Exchange Rule 11.9 and Exchange Rule 11.10 before 
executing against resting RML Orders.\25\ Proposed Exchange Rule 
11.22(c)(2) further provides that any such executions would be at the 
Midpoint Price irrespective of the prices at which such Displayed Odd 
Lot Orders and/or Non-Displayed Orders were ranked by the MEMX system 
on the MEMX Book. Thus, as proposed, any additional price improvement 
over the Midpoint Price would not accrue to the retail investor's 
Retail Midpoint Order but rather would accrue to the Displayed Odd Lot 
Order or Non-Displayed Order because those orders would execute at the 
Midpoint Price, which is less aggressive than the price at which they 
were resting on the MEMX Book.
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    \23\ See Exchange Rule 11.8(b).
    \24\ See Exchange Rule 11.6(q)(2).
    \25\ The Exchange states that Displayed Odd Lot Orders and Non-
Displayed Orders are the only types of orders that could rest on the 
MEMX Book at a price that is more aggressive than the Midpoint 
Price, as any displayed buy (sell) order that is at least one round 
lot in size would be eligible to form the NBB (NBO). See Notice, 
supra note 3, at 50415 n.37; Exchange Rule 1.5(z).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-MEMX-
2021-10 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \26\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change to inform the Commission's analysis of 
whether to disapprove the proposed rule change.
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    \26\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\27\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Sections 
6(b)(5) \28\ and 6(b)(8) \29\ of the Act. Section 6(b)(5) of the Act 
requires that the rules of a national securities exchange be designed, 
among other things, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. Section 
6(b)(8) of the Exchange Act requires that the rules of a national 
securities exchange not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \27\ Id.
    \28\ 15 U.S.C. 78f(b)(5).
    \29\ 15 U.S.C. 78f(b)(8).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice, in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following aspects of the proposal and asks 
commenters to submit data where appropriate to support their views:
    1. What are commenters' views on proposed Exchange Rule 11.22(c)(2) 
and the treatment of orders priced more aggressively than the Midpoint 
Price when executing against Retail Midpoint Orders? In allowing Retail 
Midpoint Orders to first execute against orders on MEMX that are priced 
more aggressively than the Midpoint Price, the Exchange states that it 
seeks to ensure that the priority of more aggressively priced orders 
over less aggressively priced orders is maintained on the Exchange, 
consistent with Exchange Rule 11.9.\30\ However, the Exchange proposes 
that Retail Midpoint Orders execute against any such Displayed Odd Lot 
Orders and/or Non-Displayed Orders at the Midpoint Price instead of the 
more aggressive prices at which such orders were ranked, which the 
Exchange explains is ``because RMOs that submit Retail Midpoint Orders 
to the Exchange are, by selecting an order type that is specifically 
limited to executing at the Midpoint Price, expecting to receive an 
execution at the Midpoint Price and not at any other price(s).'' \31\ 
The Exchange further states that it ``is proposing to address the needs 
of RMOs that focus their Retail Order trading on receiving executions 
at the Midpoint Price'' and explains that ``based on informal 
discussions with market participants, the Exchange believes that there 
are benefits associated with executing Retail Orders submitted to the 
Exchange at one price level rather than multiple prices, such as 
simplified record-keeping for retail investors and execution reporting 
by RMOs.'' \32\ Aside from the benefits that may accrue to the RMO 
(i.e., the broker-dealer handling the retail investor's order) under 
the Exchange's proposal, the Exchange's proposal could deny the retail 
investor a further opportunity for price improvement as it would 
instead award that further price improvement to the resting Displayed 
Odd Lot Orders and/or Non-Displayed Orders. What are commenters' views 
on the Exchange's assertions and whether this aspect of the proposal 
could harm retail investors?
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    \30\ See Notice, supra note 3, at 50419.
    \31\ See id. at 50415.
    \32\ See id.
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    2. What are commenters' views on proposed Exchange Rule 11.22(c)(2) 
and (3), which would only allow Retail Midpoint Orders to execute 
against RML Orders (and orders priced more aggressively than the 
Midpoint Price) but would not allow Retail Midpoint Orders to execute 
against other interest resting at the Midpoint Price, even if, for

[[Page 70877]]

example, those orders have time priority over the RML Order(s)? \33\ In 
other words, the proposed rule would bypass a non-RML Midpoint Peg 
Order with time priority to execute the Retail Midpoint Order against 
an RML Order (which also is a Midpoint Peg Order, but one that is 
``less aggressive'' in that it is not willing to trade with any 
incoming order but instead is limited to only trading with retail 
interest submitted as Retail Midpoint Orders). In its proposal, the 
Exchange states that the ``Program is designed to incentivize RMOs to 
submit Retail Midpoint Orders to the Exchange'' and that the Program 
``is designed to facilitate the provision of meaningful price 
improvement (i.e., at the Midpoint Price) for orders of retail 
investors.'' \34\ However, the proposal would prohibit Retail Midpoint 
Orders from interacting with non-RML Midpoint Peg Orders at the 
Midpoint Price, thus potentially limiting retail investors' 
opportunities to obtain meaningful price improvement, especially if RML 
Order interest were of insufficient size to fill the Retail Midpoint 
Order in full.\35\ What are commenters' views of the Exchange's 
assertions? Do commenters believe that this aspect of the proposal 
could possibly harm retail investors? Do commenters believe that 
precluding executions of Retail Midpoint Orders against non-RML 
Midpoint Peg Orders unfairly discriminates against such non-RML orders?
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    \33\ As discussed above, certain non-RML Orders that are priced 
more aggressively than the Midpoint Price (and thus have price 
priority over RML Orders priced at the Midpoint Price) could 
interact with Retail Midpoint Orders subject to the conditions 
discussed above.
    \34\ See Notice, supra note 3, at 50418.
    \35\ The Exchange notes that it ``typically has resting non-
displayed liquidity priced to execute at the Midpoint Price.'' See 
id. at 50419.
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    3. The Exchange further states that it ``believes that it is 
appropriate and consistent with the Act to structure its [Program] such 
that Retail Midpoint Orders and RML Orders are only eligible to execute 
against each other at the Midpoint Price, so that Retail Midpoint 
Orders, which are entered on behalf of retail investors, receive price 
improvement that is meaningful by definition, as they are guaranteed, 
if executed, to execute at the Midpoint Price.'' \36\ Do commenters 
agree with that assertion? Or would that same rationale apply if the 
Exchange also allowed Retail Midpoint Orders to execute against non-RML 
midpoint interest (because if the Exchange were to do so, Retail 
Midpoint Orders also would be ``guaranteed, if executed, to execute at 
the Midpoint Price'' when executing against such non-RML midpoint 
interest)?
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    \36\ See id. at 50418.
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    4. The Exchange also states that it ``believes that introducing a 
program that provides and encourages additional liquidity and price 
improvement to Retail Orders, in the form of Retail Midpoint Orders 
designed to execute at the Midpoint Price, is appropriate because 
retail investors are typically less sophisticated than professional 
market participants and therefore would not have the type of technology 
to enable them to compete with such market participants.'' \37\ Do 
commenters agree that Retail Midpoint Orders, if permitted to take 
liquidity against resting non-RML midpoint interest, would be competing 
with such market participants in a way that could negatively impact 
retail investors?
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    \37\ See id. at 50418-19.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the [SRO] 
that proposed the rule change.'' \38\ The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative Commission 
finding,\39\ and any failure of an SRO to provide this information may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a proposed rule change is consistent with the 
Act and the applicable rules and regulations.\40\ Moreover, 
``unquestioning reliance'' on an SRO's representations in a proposed 
rule change would not be sufficient to justify Commission approval of a 
proposed rule change.\41\
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    \38\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \39\ See id.
    \40\ See id.
    \41\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
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    The Commission believes it is appropriate to institute proceedings 
to allow for additional consideration and comment on the issues raised 
herein, any potential response to comments or supplemental information 
provided by the Exchange, and any additional independent analysis by 
the Commission.

IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\42\
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    \42\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by January 3, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 18, 2022.
    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-MEMX-2021-10 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 Numbers SR-MEMX-2021-10. 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

[[Page 70878]]

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 these filings 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 MEMX-2021-10 and should be submitted on or 
before January 3, 2022. Rebuttal comments should be submitted by 
January 18, 2022.
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    \43\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26857 Filed 12-10-21; 8:45 am]
BILLING CODE 8011-01-P