[Federal Register Volume 89, Number 97 (Friday, May 17, 2024)]
[Notices]
[Pages 43491-43494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100115; File No. SR-CboeBZX-2024-007]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove 
Proposed Rule Change To Amend the Definition of Retail Order, and 
Codify Interpretations and Policies Regarding Permissible Uses of 
Algorithms by RMOs

May 13, 2024.

I. Introduction

    On January 25, 2024, Cboe BZX Exchange, Inc (``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the 
definition of Retail Order,\3\ and codify interpretations and policies 
regarding permissible uses of algorithms by Retail Member 
Organizations.\4\ The proposed rule change was published for comment in 
the Federal Register on February 13, 2024.\5\ On March 21, 2024, 
pursuant to Section 19(b)(2) of the Act,\6\ 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.\7\ The 
Commission did not receive any comments. The Commission is instituting 
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ 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\ The term ``Retail Order'' is defined in Exchange Rule 
11.25(a)(2). See infra section II.
    \4\ The term ``Retail Member Organization'' (or ``RMO'') is 
defined in Exchange Rule 11.25(a)(1) to mean a member of the 
Exchange (or a division thereof) that has been approved by the 
Exchange under Exchange Rule 11.25 to submit Retail Orders.
    \5\ See Securities Exchange Act Release No. 99488 (February 7, 
2024), 89 FR 10121 (``Notice'').
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 99815, 89 FR 21290 
(March 27, 2024) (designating May 13, 2024, as the date by which the 
Commission shall either approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change).
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change 9
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    \9\ For a full description of the proposed rule change, refer to 
the Notice, supra note 5. The text of the Exchange's proposed Rule 
11.25(a)(2) and Interpretations and Policies .01-.04 is available on 
the Commission's website at https://www.sec.gov/files/rules/sro/cboebzx/2024/34-99488-ex5.pdf.
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    Currently, the Exchange operates a retail attribution program 
(``Retail

[[Page 43492]]

Attribution Program'' or ``Program'') pursuant to Exchange Rule 11.25. 
Under the Program, RMOs may designate a Retail Order to be identified 
as such on the Exchange's proprietary feeds, either on an order-by-
order or port-by-port basis. Pursuant to Exchange Rule 11.25(a)(2), a 
Retail Order is an agency order or riskless principal that meets the 
criteria of FINRA Rule 5320.03 that originates from a natural person 
and is submitted to the Exchange by a Retail Member Organization, 
provided that no change is made to the terms of the order with respect 
to price or side of market and the order does not originate from a 
trading algorithm or any other computerized methodology.
    The Exchange states it has received member feedback that its rule 
is unclear as to whether the use of algorithms or other computerized 
methodologies is permitted when submitting individual investors' orders 
to the Exchange,\10\ and proposes to amend its definition of Retail 
Order to provide that the use of an algorithm to submit orders to the 
Exchange on behalf of a retail investor does not automatically preclude 
an RMO from designating such orders as ``Retail Orders.'' \11\ The 
Exchange proposes that use of an algorithm to submit a Retail Order 
would be permissible provided that the order, or investment criteria 
for the order, originates from a natural person, such as the investor 
themselves, or a natural person on behalf of a retail investor (such as 
a financial advisor or trader).\12\ The Exchange states that by 
amending the Retail Order definition, more RMOs may choose to avail 
themselves of the benefits offered by the Exchange's Retail Attribution 
Program, and that the enhanced opportunity to interact with retail 
order flow is likely to incentivize more retail liquidity provision, as 
it is generally considered preferable to trade with retail orders than 
with orders of professional investors that are typically more informed 
regarding short-term price movements.\13\
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    \10\ See Notice, supra note at 10122.
    \11\ Id.
    \12\ Id. Pursuant to proposed Exchange Rule 11.25(a)(2), a 
Retail Order would be defined as an agency or riskless principal 
order that meets the criteria of FINRA Rule 5320.03, and would 
require a Retail Order to originate from a natural person, such as 
the retail investors themselves, or by a natural person on behalf of 
a retail investor, and be submitted to the Exchange by a Retail 
Member Organization. In submitting a Retail Order to the Exchange, a 
Retail Member Organization may utilize an algorithm or other 
computerized methodology, provided the terms or investment criteria 
of the order originate from a retail investor her/himself, or a 
natural person on behalf of a retail investor, and the algorithm or 
other computerized methodology does not change the terms or 
investment criteria of the Retail Order with respect to price or 
side.
    \13\ Id. at 10122-23.
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    In connection with the proposed amendments to its definition of 
Retail Order, the Exchange is proposing to adopt several 
Interpretations and Policies to describe: (1) the meaning of the term 
``retail investor'' as used in the definition, (2) the meaning of the 
term ``natural person'' as used in the definition, (3) permissible uses 
of algorithms when entering Retail Orders onto the Exchange, and (4) 
when an RMO may amend a Retail Order's price or side. First, the 
Exchange is proposing Interpretation and Policy .01 to describe that 
the term ``retail investor'' is intended to refer to a non-
professional, individual investor that invests money in their own 
account held at a brokerage firm or online brokerage firm, or an 
account held in corporate form for the benefit of an individual or 
group of related family members, and whose investment goals are mainly 
saving for retirement or education, generating income, or growing 
wealth over the long term.\14\
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    \14\ Id. at 10123. According to the Exchange, the term ``retail 
investor'' would not be intended to include individual investors 
that engage in more professional trading strategies designed to 
profit from bid-ask spreads, short-term price movements, and 
arbitrage, or in trading behavior where multiple buy and sell orders 
are entered over a short period of time based on market conditions. 
Id.
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    Second, the Exchange is proposing to adopt Interpretation and 
Policy .02 to describe the meaning of the term ``natural person'' as 
referenced in the Exchange's proposed definition of Retail Order. The 
Exchange states that it intends for the term ``natural person'' to 
refer to a human who enters an order or investment criteria for an 
order, and that this individual may be the retail investor him/herself, 
or a natural person entering the order on behalf of a retail investor, 
such as a financial advisor or trader.\15\ According to the Exchange, 
this will help to ensure that only bona fide retail orders are 
submitted to the Exchange as Retail Orders by making clear that orders 
generated automatically by an algorithm, without human intervention, 
shall not be considered Retail Orders.\16\
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    \15\ Id.
    \16\ Id.
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    Third, the Exchange states that it seeks to ensure that only bona 
fide retail flow is designated as a Retail Order and does not intend 
for professional investors and professional trading firms to avail 
themselves of the benefits provided to RMOs by the Exchange, and is 
therefore proposing to adopt Interpretation and Policy .03 to describe 
how an RMO can permissibly utilize an algorithm when entering Retail 
Orders onto the Exchange. The Exchange states that an RMO could utilize 
an algorithm to enter individual investors' orders onto the Exchange, 
and permissibly designate such orders as Retail Orders, provided the 
order or investment criteria used to generate an order originates from 
a natural person, such as the retail investor him/herself, or a natural 
person on behalf of a retail investor, and is submitted to the Exchange 
for execution by an RMO.\17\ The Exchange states that, conversely, 
orders automatically generated and submitted to the Exchange by an 
algorithm based on factors such as market conditions and price 
movements, which do not originate from a manual entry of order terms or 
investment criteria by a natural person, shall not be considered Retail 
Orders.\18\
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    \17\ Id. at 10124. The Exchange states that acceptable uses of 
algorithms by an RMO would include, but not be limited to: a smart 
order router to route the Retail Order to the Exchange for 
execution; a smart order router to assess trading venues for the 
best priced quotation and liquidity prior to routing the Retail 
Order to the Exchange; an order management system, smart order 
router, or other functionality to change the terms an order to seek 
a better execution price; use of an order management system to 
assist with portfolio rebalancing and asset reallocation for the 
accounts of retail investors; and a retail investor's use of 
automated investment management tools offered by RMOs to manage 
their assets based on their goals and risk tolerance (i.e. robo-
advisory solutions). Id.
    \18\ Id. at 10125. The Exchange states that examples of such 
algorithms would include, but not be limited to, algorithms 
developed for market-making, high-frequency trading, liquidity 
provision, arbitrage, hedging, or proprietary trading. In addition 
to the fact that such orders do not typically originate from a 
natural person, entities engaging in such trading strategies are not 
typically doing so for the account of a retail investor. Id.
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    Fourth, the Exchange is proposing to adopt Interpretation and 
Policy .04 to provide that post-order entry an RMO may algorithmically 
amend the Retail Order's price or size provided such amendments are 
made for the purposes of seeking better execution, enhancing execution 
quality, or minimizing market impact, despite the provision in the 
Exchange's proposed definition of Retail Order that would otherwise 
prohibit the changing of the price or side of a Retail Order.\19\ The 
Exchange proposes that such order amendments may also be

[[Page 43493]]

made manually by a natural person who entered the order on behalf of 
the retail investor. Pursuant to proposed Interpretation and Policy 
.04, the purpose of the prohibition on changing the terms of an order 
in Exchange Rule 11.25(a)(2) is to prevent RMOs from utilizing 
algorithms that trade in a manner more appropriate for professional 
trading.\20\
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    \19\ Id. See also supra note 12 describing the Exchange's 
proposed definition of Retail Order. The Exchange states that 
accordingly, an RMO may utilize an algorithm to add a limit price to 
an unpriced order, amend an order's price or size to manage an 
order's marketability or mitigate the risk of receiving executions 
at aberrant prices, or adjust the price or size of an order as 
market conditions or trading objectives may dictate. See Notice, 
supra note 5, at 10125.
    \20\ Proposed Interpretation and Policy .04 to Exchange Rule 
11.25.
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    The Exchange states that by routing Retail Orders to the Exchange, 
RMOs and their retail investors will benefit from the Exchange's 
retail-only pricing incentives.\21\ In support of its proposal, the 
Exchange also states that it has in place robust protections to ensure 
only bona fide retail orders are designated as ``Retail Orders,'' and 
that the proposed amendments will augment the Exchange's existing RMO 
framework.\22\
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    \21\ See Notice, supra note 5, at 10127.
    \22\ See id. at 10126.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2024-007, and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \23\ 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 
additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\24\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
described above, the Exchange has proposed to amend its definition of 
Retail Order and adopt related Interpretations and Policies describing: 
(1) the term ``retail investor'' as used therein, (2) the term 
``natural person'' as used therein, (3) permissible uses of algorithms 
when entering Retail Orders onto the Exchange, and (4) when an RMO may 
amend a Retail Order's price or side. The Commission is instituting 
proceedings to allow for additional analysis of, and input from 
commenters with respect to, the proposed rule change's consistency with 
the Act, and in particular, Section 6(b)(5) of the Act, which requires, 
among other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, 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.\25\
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    \24\ Id.
    \25\ 15 U.S.C. 78f(b)(5).
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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 questions and asks commenters to submit 
data where appropriate to support their views:
    1. The Exchange states that it ``seeks to clarify precisely how 
Retail Orders may be entered onto the Exchange by RMOs through the use 
of algorithms.\26\ What are commenters' views on whether the Exchange 
has described with sufficient clarity its proposed new definition of 
Retail Order and related Interpretations and Policies, including with 
respect to the circumstances under which (i) algorithms and 
computerized methodologies would be permitted for the submission of 
Retail Orders, and (ii) a Retail Member Organization would be permitted 
to change the terms of a Retail Order with respect to price and side, 
either manually or algorithmically? Why or why not?
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    \26\ See Notice, supra note 5, at 10127.
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    2. The Exchange states that the proposed rule change will ``ensure 
that only bona fide retail orders are able to take advantage of the 
benefits provided to Retail Orders by the Exchange.'' \27\ What are 
commenters' views on whether the proposed rule change would ensure that 
only bona fide retail orders benefit from retail-only pricing 
incentives \28\ provided by the Exchange? Why or why not?
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    \27\ Id.
    \28\ See Cboe U.S. Equities Fee Schedule for BZX available at 
https://www.cboe.com/us/equities/membership/fee_schedule/bzx/.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, 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 proposed rule 
change, is consistent with Sections 6(b)(5) 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 data, views, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\29\ 
any request for an opportunity to make an oral presentation.\30\
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    \29\ 17 CFR 240.19b-4.
    \30\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (Jun. 4, 1975), grants to 
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 Acts 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 proposed rule change should be approved 
or disapproved by June 7, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
June 21, 2024. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
    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-CboeBZX-2024-007 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-CboeBZX-2024-007. 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/

[[Page 43494]]

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 a.m. and 3 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. Do 
not include personal identifiable information in submissions; you 
should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-CboeBZX-2024-007 and 
should be submitted by June 7, 2024. Rebuttal comments should be 
submitted by June 21, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10824 Filed 5-16-24; 8:45 am]
BILLING CODE 8011-01-P