[Federal Register Volume 88, Number 71 (Thursday, April 13, 2023)]
[Notices]
[Pages 22509-22512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-07732]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97262; File No. SR-CboeEDGX-2023-023]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Concerning Order-to-Trade Ratio Fees for Market Makers

April 7, 2023.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on March 29, 2023, Cboe EDGX Exchange, Inc. (the 
``Exchange'' or ``EDGX'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'') 
proposes 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 to adopt Order-to-
Trade Ratio Fees.\4\
---------------------------------------------------------------------------

    \4\ The Exchange initially filed the proposed rule change on 
February 1, 2023 (SR-CboeEDGX-2023-009). On March 29, 2023, the 
Exchange withdrew that filing and submitted this proposal.
---------------------------------------------------------------------------

    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 16% of the market share and 
currently the Exchange represents only approximately 6% of the market 
share.\5\ 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

[[Page 22510]]

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.
---------------------------------------------------------------------------

    \5\ See Cboe Global Markets U.S. Options Market Monthly Volume 
Summary (March 24, 2023), available at https://markets.cboe.com/us/options/market_statistics/.
---------------------------------------------------------------------------

    The Exchange proposes to adopt Order-to-Trade Ratio Fees. The 
proposed fees will be charged to market participants registered as 
Market Makers on EDGX Options based on the number of orders (including 
modification messages) entered compared to the number of orders traded 
in a calendar month. The calculation of the ratio will not include 
quotes or trades resulting from such quotes.\6\ A Market Maker's order 
flow will be aggregated together with any affiliated Member sharing at 
least 75% common ownership. The proposed fees are as follows:
---------------------------------------------------------------------------

    \6\ The term ``quote'' refers to bids and offers submitted in 
bulk messages. A bulk message means a single electronic message a 
user submits with an M (Market-Maker) capacity to the Exchange in 
which the User may enter, modify, or cancel up to an Exchange-
specified number of bids and offers. A User may submit a bulk 
message through a bulk port as set forth in Exchange Rule 
21.1(j)(3). See Rule 16.1 (definition of bulk message).

------------------------------------------------------------------------
                Tier                  Order-to-trade ratio       Fee
------------------------------------------------------------------------
Tier 1.............................  0 to 999..............           $0
Tier 2.............................  1,000 to 1,999........        2,500
Tier 3.............................  2,000 to 4,999........        5,000
Tier 4.............................  5,000 to 9,999........       10,500
Tier 5.............................  10,000 to 14,999......       35,000
Tier 6.............................  15,000 to 19,999......      100,000
Tier 7.............................  20,000 and above......      150,000
------------------------------------------------------------------------

    The Exchange notes that Market Makers with incrementally higher 
order-to-trade ratios have the potential residual effect of exhausting 
system resources, bandwidth, and capacity. Higher order-to-trade ratios 
may, in turn, create latency and impact other Members' ability to 
receive timely executions. Recognizing Market Maker quoting activity is 
an important source of liquidity on exchanges, and that orders and 
executions often occur in large numbers, the purpose of this proposal 
is to focus on activity that is truly disproportionate while fairly 
allocating costs. The proposed fee structure has multiple thresholds, 
and the proposed fees are incrementally greater at higher order-to-
trade ratios because the potential impact on exchange systems, 
bandwidth and capacity becomes greater with increased order-to-trade 
ratios. The proposal contemplates that a Market Maker would have to 
exceed the high order to trade ratio of 999 before that Market Maker 
would be charged a fee under the proposed tiers. The Exchange believes 
that it is in the interests of all Members and market participants who 
access the Exchange to not allow other market participants to exhaust 
System resources, but to encourage efficient usage of network capacity. 
The Exchange also believes this proposal (and in particular the 
proposed high fee amounts associated with higher order-to-trade ratios) 
will reduce the incentive for Market Makers to engage in excessive 
order and trade activity that may require the Exchange to otherwise 
increase its storage capacity and will encourage such activity to be 
submitted in good faith for legitimate purposes.
    The Exchange also represents that the proposed fees are not 
intended to raise revenue; rather, as noted above, it is intended to 
encourage efficient behavior so that market participants do not exhaust 
System resources. The Exchange also notes that it intends to provide 
Market Makers with daily reports, free of charge, which will detail 
their order and trade activity in order for those firms to be fully 
aware of all order and trade activity they (and their affiliates) are 
sending to the Exchange. This will allow Market Maker firms to monitor 
their behavior and determine whether it is approaching any of the 
order-to-trade thresholds that trigger the proposed fees.
    The Exchange lastly notes that other exchanges have adopted various 
fee programs that assess incrementally higher fees to Members that have 
incrementally higher order-to-trade ratios for similar reasons.\7\ 
There is also an exchange that adopted a fee applicable to Market 
Makers that exceed a prescribed high threshold of quote messages.\8\
---------------------------------------------------------------------------

    \7\ See e.g., Securities Exchange Act Release No. 60102 (June 
11, 2009), 74 FR 29251 (June 19, 2009) (SR-NYSEArca-2009-50) 
(adopting fees applicable to Members (albeit not just Market Makers) 
based on the number of orders entered compared to the number of 
executions received in a calendar month). It appears that Nasdaq 
similarly assesses a penalty charge to its members that exceed 
certain ``weighted order-to-trade ratios''. See Price List--Trading 
Connectivity, NASDAQ, available at https://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2.
    \8\ See Securities Exchange Act Release No. 91406 (March 25, 
2021), 86 FR 16795 (March 31, 2023) (SR-EMERALD-2021-10) (adopting 
an ``Excessive Quoting Fee'' to ensure that Market Makers do not 
over utilize the exchange's System by sending messages (albeit 
quotes instead of orders) to the MIAX Emerald, to the detriment of 
all other Members of the exchange).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\9\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange also believes the proposed rule 
change is consistent with Section 6(b)(4) of the Act,\12\ which 
requires that Exchange rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among its Trading Permit 
Holders and other persons using its facilities.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
    \12\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    First, the Exchange 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. The Exchange is only one of 
16 options exchanges which market participants may direct their order 
flow and/or participate on as a Market-Maker, and it represents a small 
percentage of the overall market. Competing options exchanges similarly 
assess fees to deter Members, including in some cases only Market-
Makers, from over utilizing the exchange's System by sending excessive 
messages.\13\
---------------------------------------------------------------------------

    \13\ See supra note 6.
---------------------------------------------------------------------------

    The Exchange believes the proposed fees are reasonable as Market 
Makers that do not exceed the high order to trade ratio of 999 will not 
be charged any fee under the proposed tiers. Quoting activity (and 
trades resulting from quotes) are also not included in the order-to-
trade ratio, thereby ensuring Market Makers quoting activity, which 
acts as important source of liquidity, is not impeded by the 
proposal.\14\ The Exchange believes it's reasonable, equitable and not 
unfairly discriminatory to assess higher fees for

[[Page 22511]]

greater higher order-to-trade ratios because the potential impact on 
exchange systems, bandwidth and capacity becomes greater with increased 
order-to-trade ratios. This impact may also require the Exchange to 
purchase additional hardware to increase its storage capacity. The 
Exchange believes the proposed high fee amounts are reasonable as the 
Exchange believes them to commensurate with the proposed thresholds. 
Particularly, the proposed fee amounts that correspond to high order-
to-trade ratios are designed to incentivize Market Makers to reduce 
excessive order and trade activity that the Exchange believes can be 
detrimental to all market participants at those levels and encourage 
such activity to be made in good faith and for legitimate purposes. 
Indeed, the Exchange believes that it is in the interests of all 
Members and market participants who access the Exchange to not allow 
Market Markets to exhaust System resources, but to encourage efficient 
usage of network capacity. The Exchange therefore also believes that 
the proposed order-to-trade ratio fees appropriately reflect the 
benefits to different firms of being able to send orders into the 
Exchange's System and also believes the proposed fee is one method of 
facilitating the Commission's goal of ensuring that critical market 
infrastructure has ``levels of capacity, integrity, resiliency, 
availability, and security adequate to maintain their operational 
capability and promote the maintenance of fair and orderly markets.'' 
\15\
---------------------------------------------------------------------------

    \14\ The Exchange is able to identify quoting activity versus 
other message activity because quotes come into the system via bulk 
messages.
    \15\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (File No. S7-01-13) 
(Regulation SCI Adopting Release).
---------------------------------------------------------------------------

    The Exchange also believes adopting order-to-trade ratio fees is 
reasonable as unfettered usage of System capacity and network resource 
consumption can have a detrimental effect on all market participants 
who access and use the Exchange. As discussed, high order-to-trade 
ratios may adversely impact system resources, bandwidth, and capacity 
which may, in turn, create latency and impact other Members' ability to 
receive timely executions. The Exchange believes the proposed fees are 
therefore reasonable as they are designed to focus on activity that is 
truly disproportionate while fairly allocating costs.
    The Exchange believes the proposed change is also equitable and not 
unfairly discriminatory because it applies uniformly to all Market 
Makers registered on EDGX Options. While the Exchange has no way of 
predicting with certainty how the proposed changes will impact Market 
Maker activity, based on trading activity from the prior months the 
Exchange would expect that, absent any changes to Member behavior, the 
vast majority of Members would fall within proposed Tier 1 (and thus 
not be subject to any new fees). With respect to Market Makers that 
exceed this threshold, the Exchange anticipates, absent any change in 
behavior, approximately two Members to fall within Tier 2, one Member 
to fall within Tier 3, no Members to fall within Tiers 4, 5 or 6 one 
Member to fall within Tier 7. Since the implementation of the proposed 
fee on February 1, 2023, the Exchange notes that it has observed a 
decrease in order-to-trade ratios by Market Makers, which the Exchange 
believes demonstrates that the proposed fee is working as designed. 
Particularly, in February 2023, only two Market Makers were assessed 
the proposed order-to-trade ratio fees; particularly one Market Maker 
fell within Tier 2 and one Market-Maker fell within Tier 4 (down from 
anticipated Tier 7). Additionally, as discussed above, the Exchange 
believes it's equitable and not unfairly discriminatory to assess 
incrementally higher fees for Market Makers that have higher order-to-
trade ratios because the potential impact on exchange systems, 
bandwidth and capacity becomes greater with increased order-to-trade 
ratios. In addition, the Exchange believes that excluding quoting 
activity from the calculation of the ratio for the proposed fees is not 
unfairly discriminatory because it will ensure Market Makers are able 
to continue providing important liquidity to the Exchange and meet 
their quoting obligations. The Exchange also believes its equitable and 
not unfairly discriminatory to only assess the proposed fees to Market 
Makers because Market Makers on the Exchange are the only market 
participants that are exceeding proposed Tier 1, which is the only tier 
in which no fee is assessed (said another way, no other market 
participant has an order-to-trade ratio high enough to trigger a fee). 
For example, most market participants that route customer orders to the 
Exchange currently have order-to-trade ratios lower than 10. The 
Exchange also believes it's equitable and not unfairly discriminatory 
to aggregate a Market Maker's order flow with any affiliated Member 
sharing at least 75% common ownership even if such affiliated Member is 
not a Market Maker in order to prevent Market Makers from shifting 
their order flow and trading activity to their non-Market Maker 
affiliate in order to circumvent the proposed fees.
    The Exchange lastly believes that its proposal is reasonable, 
equitably allocated and not unfairly discriminatory because it is not 
intended to raise revenue for the Exchange; rather, it is intended to 
encourage efficient behavior so that Market Makers do not exhaust 
System resources, while balancing the increase in order-to-trade ratio 
has seen from some market participants.

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 competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. In particular, the Exchange 
believes the proposed rule change does not impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Particularly, the proposed fees 
applies uniformly to all Market Makers registered on EDGX Options. 
Further, any Market Maker who exceeds the order-to-trade ratio of 999 
will be subject to a fee under the proposed tiers. As noted above, the 
Exchange also believes its not unfairly discriminatory to only assess 
the proposed fees to Market Makers because Market Makers on the 
Exchange are the only market participants that are exceeding an order-
to-trade ratio of 999(i.e., Tier 1). The Exchange believes it's 
equitable and not unfairly discriminatory to aggregate a Market Maker's 
order flow with any affiliated Member sharing at least 75% common 
ownership even if such affiliated Member is not a Market Maker in order 
to prevent Market Makers from shifting their order flow and trading 
activity to their non-Market Maker affiliate in order to circumvent the 
proposed fees. As such, the Exchange believes that the proposed change 
neither favors nor penalizes one or more categories of market 
participants in a manner that would impose an undue burden on 
competition. Rather, the proposal seeks to benefit all market 
participants by encouraging the efficient utilization of the Exchange's 
network while taking into account the important liquidity provided by 
Market Makers. As discussed above potential impact on exchange systems, 
bandwidth and capacity becomes greater with increased order-to-trade 
ratios. The Exchange also anticipates that the vast majority of Market 
Makers on the Exchange will not be subject to any fees under the 
proposed tiers. Accordingly, the Exchange believes that the proposed

[[Page 22512]]

Order-to-Trade Ratio Fees does not favor certain categories of market 
participants in a manner that would impose a burden on competition.
    The Exchange also 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 they may participate on and 
direct their order flow, including 15 other options exchanges. 
Additionally, the Exchange represents a small percentage of the overall 
market. Based on publicly available information, no single options 
exchange has more than 16% of the market share. Therefore, no exchange 
possesses significant pricing power in the execution of order flow. 
Indeed, participants can readily choose to send their orders to other 
exchanges 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.'' 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'. . .''. 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \16\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \17\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b 4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \18\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2023-023 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-2023-023. 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 (https://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-2023-023, and 
should be submitted on or before May 4, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-07732 Filed 4-12-23; 8:45 am]
BILLING CODE 8011-01-P