Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing of Proposed Rule Change To Adopt a New Order Type Called the Mid-Point Discretionary Order, 16401-16411 [2014-06461]
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Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices
limit access to its services, (i) to give
persons in any proceeding an
opportunity to be heard upon the
specific grounds for the denial,
prohibition, or limitation, and (ii) to
keep a record of those proceedings.156
As noted above, commenters raised
concerns as to whether the Proposed
Rules are consistent with the
requirements to provide ‘‘fair
procedures,’’ ‘‘notice’’ and ‘‘an
opportunity to be heard.’’ The
Commission believes that question
remain as to whether the Proposed
Rules are consistent with the
requirements of the Exchange Act.
Section 19(b)(2)(B) of the Act provides
that proceedings to determine whether
to approve or disapprove a proposed
rule change must be concluded within
180 days of the date of publication of
notice of the filing of the proposed rule
change. The time for conclusion of the
proceedings may be extended for up to
an additional 60 days if the Commission
finds good cause for such extension and
publishes its reasons for so finding or if
the self-regulatory organization consents
to the extension.
VII. Request for Written Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the concerns
identified above, as well as any others
they may have with the Proposed Rules,
as amended. In particular, the
Commission invites the written views of
interested persons concerning whether
the Proposed Rules, as modified by
Amendment Nos. 1 and 2, are
inconsistent with Sections 17A(b)(3)(H)
and 17A(b)(5) or any other provision of
the Exchange Act, or the rules and
regulations thereunder.
Although there do not appear to be
any issues relevant to approval or
disapproval which 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.157 Interested persons
are invited to submit written data,
views, and arguments on or before April
15, 2014. Any person who wishes to file
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156 15
U.S.C. 78q–1(b)(5).
157 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Acts Amendments of
1975, Public Law 94–29, 89 Stat. 97 (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 selfregulatory organization. See Securities Acts
Amendments of 1975, Report of the Senate
Committee on Banking, Housing and Urban Affairs
to Accompany S. 249, S. Rep. No. 75, 94th Cong.,
1st Sess. 30 (1975).
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a rebuttal to any other person’s
submission must file that rebuttal on or
before April 29, 2014. Comments may
be submitted by any of the following
methods:
BILLING CODE 8011–01–P
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
DTC–2013–11 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–DTC–2013–11. 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 Web site (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 Web site 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 such
filings also will be available for
inspection and copying at the principal
office of DTC and on DTC’s Web site at
https://dtcc.com/en/legal/sec-rulefilings.aspx. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
All submissions should refer to File
Number SR–DTC–2013–11 and should
be submitted on or before April 15,
2014. If comments are received, any
rebuttal comments should be submitted
on or before April 29, 2014.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.158
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–06459 Filed 3–24–14; 8:45 am]
Electronic Comments
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71747; File No. SR–EDGX–
2014–05]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing of
Proposed Rule Change To Adopt a
New Order Type Called the Mid-Point
Discretionary Order
March 19, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that, on March 7,
2014, EDGX Exchange, Inc. (the
‘‘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 self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to proposes to
[sic] amend: (i) Rule 11.5(c) to add a
new order type called the Mid-Point
Discretionary Order; and (ii) Rule
11.8(a)(2)(D) to reflect the priority of
Mid-Point Discretionary Orders.
The text of the proposed rule change
is available on the Exchange’s Internet
Web site at www.directedge.com, at the
Exchange’s principal office, and at the
Public Reference Room of the
Commission.
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
self-regulatory organization 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.
158 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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The self-regulatory organization 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: (i)
Rule 11.5(c) to add a new order type
called the Mid-Point Discretionary
Order; and (ii) Rule 11.8(a)(2)(D) to
reflect the priority of Mid-Point
Discretionary Orders. The proposed
Mid-Point Discretionary Order is
designed to increase displayed liquidity
on the Exchange while also providing
Members the opportunity to achieve
price-improvement by enabling the
order to execute at prices up to and
including the mid-point of the National
Best Bid or Offer (‘‘NBBO’’).3
Proposed Mid-Point Discretionary
Order, Rule 11.5(c)(14)
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The Exchange proposes to amend
Rule 11.5(c) to add a new order type
called the Mid-Point Discretionary
Order, which is based on and would
operate similarly to the Mid-Point
Discretionary Order on the EDGA
Exchange, Inc. (‘‘EDGA’’).4 Like the
EDGA Mid-Point Discretionary Order,
the proposed EDGX Mid-Point
Discretionary Order would be a limit
order that is displayed and pegged to
the NBBO with discretion to execute at
prices to and including the mid-point of
the NBBO. Therefore, like the EDGA
Mid-Point Discretionary Order, the
EDGX Mid-Point Discretionary Order
would include two components: (i) A
displayed price which is pegged to the
NBBO; and (ii) a discretionary range
within which it may generally execute
at prices to and including the mid-point
of the NBBO.5 The displayed price of a
Mid-Point Discretionary Order to buy
would be displayed at and pegged to the
3 Exchange Rule 1.5(o) defines ‘‘NBBO’’ as ‘‘the
national best bid or offer.’’ See also Rule 600(b)(42)
of Regulation NMS under the Securities Exchange
Act of 1934.
4 See EDGA Rule 11.5(c)(17). Securities Exchange
Act Release No. 67226 (June 20, 2012), 77 FR 38113
(June 26, 2012) (SR–EDGA–2012–22) (Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change to Adopt the Mid-Point Discretionary
Order).
5 As discussed further below, the Exchange notes
that the proposed Mid-Point Discretionary Order
would not include a discretionary range where: (i)
The NBBO is locked or crossed; (ii) for a buy (sell)
order, its limit price is equal to or less (greater) than
the NBB (NBO); or (iii) the price of the Upper Price
Band equals or moves below an existing Protected
Bid or the Lower Price Band equals or moves above
an existing Protected Offer.
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national best bid (‘‘NBB’’).6 Conversely,
the displayed price of a Mid-Point
Discretionary Order to sell would be
displayed at and pegged to the national
best offer (‘‘NBO’’).7
The displayed prices of Mid-Point
Discretionary Orders would be re-priced
to track changes in the NBBO and
would receive a new time stamp each
time they are re-priced. The displayed
price and discretionary range of a MidPoint Discretionary Order would
maintain the same time stamp, even
where the displayed price is unchanged
but the discretionary range changed due
to a change in the mid-point of the
NBBO. Like all discretionary order
types, a Mid-Point Discretionary Order’s
sole time stamp would be the one
assigned to the displayed portion of the
order. A Mid-Point Discretionary
Order’s time stamp would only change
when the displayed price is adjusted to
track changes in the NBBO to which it
is pegged.
Mid-Point Discretionary Orders
would not independently establish or
maintain the NBB or NBO; rather, the
displayed prices of Mid-Point
Discretionary Orders would be derived
from the then-current NBB or NBO. A
Mid-Point Discretionary Order would be
cancelled if no NBBO exists, or, as
discussed more fully below, a trading
halt is declared by the listing market.
The proposed Mid-Point Discretionary
Order would be able to join the
Exchange BBO when the Exchange BBO
equals the NBBO and EDGX Book is
locked or crossed by another market. If
the proposed Mid-Point Discretionary
Order displayed on the Exchange would
create a locked or crossed market, the
price of the order will be automatically
adjusted by the System to one minimum
price variation below the current NBO
(for bids) or to one minimum price
variation above the current NBB (for
offers) with no discretion to execute to
the mid-point of the NBBO.
As explained below, Mid-Point
Discretionary Orders would not be
eligible to execute against resting
Discretionary Orders,8 including contraside Mid-Point Discretionary Orders.
Mid-Point Discretionary Orders would
only be eligible to execute at the midpoint of the NBBO against Mid-Point
Match Orders 9 and incoming liquidityremoving orders when their limit price
is equal to the mid-point of the NBBO.
Mid-Point Discretionary Orders in
6 Exchange Rule 1.5(o) defines ‘‘NBB’’ as ‘‘the
national best bid.’’
7 Exchange Rule 1.5(o) defines ‘‘NBO’’ as ‘‘the
national best offer.’’
8 See Exchange Rule 11.5(c)(13).
9 Exchange Rule 11.5(c)(7).
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stocks priced at $1.00 or more would
only be executed in sub-penny
increments when they execute at the
mid-point of the NBBO against contraside Mid-Point Match Orders.
Mid-Point Discretionary Orders may
include a limit price that would specify
the highest or lowest prices at which
Mid-Point Discretionary Orders to buy
or sell would be eligible to be executed.
For example, if a Mid-Point
Discretionary Order to buy is entered
with a limit price that is less than the
prevailing mid-point of the NBBO it
would have discretion to buy only up to
its limit price, not the mid-point of the
NBBO. A Mid-Point Discretionary Order
to buy with a limit price that is greater
than the prevailing NBBO would have
discretion to buy up to the mid-point of
the NBBO and not to its limit price.
Absent a limit price that is less than the
prevailing mid-point of the NBBO, a
Mid-Point Discretionary Order would
retain its discretion to execute at prices
up to and including the mid-point of the
NBBO.10
As explained in more detail below,
like other discretionary order types,
Exchange Rule 11.8(a)(2) would require
that the discretionary range of a MidPoint Discretionary Order be given
lower priority than non-displayed limit
orders and the reserve quantity of
Reserve Orders.11 In addition, MidPoint Discretionary Orders would not be
eligible for routing pursuant to
Exchange Rule 11.9(b)(2).
The Exchange also proposes to
address how a Mid-Point Discretionary
Order would comply with the National
Market System Plan, also known as
Limit Up/Limit Down (‘‘LULD’’),
established pursuant to Rule 608 of the
Exchange Act, to address extraordinary
market volatility (the ‘‘LULD Plan’’).12
In sum, the LULD Plan sets forth
procedures that provide for market-wide
LULD requirements that are designed to
prevent trades in individual NMS
Stocks from occurring outside of
specified price bands. The price bands
would consist of a Lower Price Band
and an Upper Price Band for each NMS
Stock. Under the LULD Plan, the
Exchange is required to establish,
maintain, and enforce written policies
and procedures reasonably designed to
prevent the display of offers below the
10 The Exchange notes that a Mid-Point
Discretionary Order’s discretion to trade up to and
including the mid-point of the NBBO may be
limited where the only available contra-side
liquidity at the mid-point is represented by MidPoint Discretionary Orders, or Non-Displayed
Orders resting on the EDGX Book.
11 Exchange Rule 11.5(c)(1).
12 See Appendix A to Securities Exchange Act
Release No. 67091 (May 31, 2012) 77 FR 33498
(June 6, 2012).
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Lower Price Band and bids above the
Upper Price Band for an NMS Stock.
Like the EDGA Mid-Point Discretionary
Order, the proposed EDGX Mid-Point
Discretionary Orders will only execute
at their displayed prices and not within
their discretionary ranges when: (i) The
price of the Upper Price Band equals or
moves below an existing Protected Bid;
or (ii) the price of the Lower Price Band
equals or moves above an existing
Protected Offer in accordance with
Exchange Rule 11.9(a)(3). Mid-Point
Discretionary Orders will resume
trading against other orders in their
discretionary range when the conditions
in (i) or (ii) of the preceding sentence no
longer exist.13 For example, assume the
NBBO is $10.00 × $10.10 and the Price
Bands are $9.00 × $10.10. A Mid-Point
Discretionary Order to buy is entered
and is displayed at $10.00, the NBB,
with discretion to $10.05, the mid-point
of the NBBO. The Price Bands change to
$9.00 × $9.95. The NBBO is updated to
$9.95 × $10.10. The displayed price of
the Mid-Point Discretionary Order is repriced to $9.95, the new NBB, with no
discretionary range, since the price of
the Upper Price Band equals the NBB.
Furthermore, to comply with the
LULD Plan, a Mid-Point Discretionary
Order to buy would be re-priced to the
Upper Price Band and not the Protected
Bid where the price of the Upper Price
Band moves below an existing Protected
Bid. Likewise, a Mid-Point
Discretionary Order to sell would be repriced to the Lower Price Band and not
the Protected Offer where the price of
the Lower Price Band moves above an
existing Protected Offer. When the
above conditions no longer exist, MidPoint Discretionary Orders will resume
being displayed at and pegged to the
NBBO. For example, assume the NBBO
is $10.00 × $10.10 and the Price Bands
are $9.00 × $10.10. A Mid-Point
Discretionary Order to buy is entered
and is displayed at $10.00, the NBB,
with discretion to $10.05, the mid-point
of the NBBO. The Price Bands change to
$9.00 × $9.99. The displayed price of
the Mid-Point Discretionary Order is repriced to $9.99, the Upper Price Band,
with no discretionary range, since the
price of the Upper Price Band moved
below the NBB of $10.00. The Price
Bands then change to $9.00 × $10.10.
The Mid-Point Discretionary Order to
buy would be displayed at $10.00, the
13 See Securities Exchange Act Release No. 69002
(February 27, 2013), 78 FR 14394 (March 5, 2013)
(SR–EDGA–2013–08) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
to Amend EDGA Rules 1.5, 11.5, 11.8, 11.9 and
11.14 in Connection With the Implementation of
the National Market System Plan to Address
Extraordinary Market Volatility).
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NBB, with discretion to $10.05, the midpoint of the NBBO.
While the proposed EDGX Mid-Point
Discretionary Order is based on and
would operate similarly to the EDGA
Mid-Point Discretionary Order, the
proposed EDGX Mid-Point
Discretionary Order would differ from
the EDGA Mid-Point Discretionary
Order in four areas. The main reason for
these differences is based on the
different fee structures on EDGA and
EDGX. EDGA maintains a taker-maker
model where Members receive rebates
for removing liquidity and pay a fee for
adding liquidity.14 EDGX maintains a
maker-taker model where Members pay
a fee for removing liquidity and receive
a rebate for adding liquidity.15
First, unlike the EDGA Mid-Point
Discretionary Order, the proposed
EDGX Mid-Point Discretionary Order
would not be eligible to execute
immediately upon entry in the
System 16 at its displayed price.17
Instead, the proposed EDGX Mid-Point
Discretionary Order would be eligible to
execute at its displayed price only after
it has been posted to the EDGX Book.18
For example, assume the NBBO is
$10.00 × $10.01. A Discretionary Order
to buy at $10.00 with discretion to
$10.01 is entered on the EDGX Book. A
Mid-Point Discretionary Order to sell
with a limit price of $10.01 would not
execute against the resting Discretionary
Order to buy that is displayed at $10.00
with discretion to $10.01. Instead, the
Mid-Point Discretionary Order to sell
would be posted to the EDGX Book and
displayed at $10.01, the NBO, with no
discretionary range because it is at its
limit price. A second Discretionary
Order to buy at $10.00 with discretion
to $10.01 is entered. The second
Discretionary Order to buy is willing to
act as a liquidity remover and pay a fee.
Therefore, similar to functionality on
other exchanges,19 the second
Discretionary Order to buy would
execute against the Mid-Point
Discretionary Order to sell at $10.01.
14 See EDGA Fee Schedule available at https://
www.directedge.com/Trading/
EDGAFeeSchedule.aspx.
15 See EDGX Fee Schedule available at https://
www.directedge.com/Trading/
EDGXFeeSchedule.aspx.
16 Exchange Rule 1.5(cc) defines ‘‘System’’ as ‘‘the
electronic communications and trading facility
designated by the Board through which securities
orders of Users are consolidated for ranking,
execution and, when applicable, routing away.’’
17 The Exchange notes that the proposed MidPoint Discretionary Order would be permitted to
execute at the mid-point of the NBBO upon entry
into the System.
18 Exchange Rule 1.5(d) defines ‘‘EDGX Book’’ as
the ‘‘System’s electronic file of orders.’’
19 See infra notes 20 thru 28.
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If the Exchange would allow for the
execution of a Mid-Point Discretionary
Order at its displayed price immediately
upon entry into the System, the order
would not receive a rebate and instead
would be subject to the applicable rates
for removing liquidity from the EDGX
Book. Therefore, to avoid being charged
a fee, the proposed EDGX Mid-Point
Discretionary Order would not be
eligible to execute at its displayed price
immediately upon entry in the System.
In contrast, on EDGA, incoming MidPoint Discretionary Orders may
immediately execute upon entry and
will receive a rebate for doing so. The
Exchange believes that this approach is
designed to accomplish the twin goals
in implementing this order type—
increasing both displayed liquidity and
liquidity at the mid-point of the
NBBO—by posting Mid-Point
Discretionary Orders at their displayed
prices on the EDGX Book with
discretion to execute to and including
the mid-point of the NBBO. The
Exchange does not believe that its
proposal is unique in its application of
the Exchange’s pricing model to the
design of the functionality. For example,
under the New York Stock Exchange,
LLC (‘‘NYSE’’) Retail Liquidity Program,
a Type 1 Retail Order, will interact only
with available contra-side Retail Price
Improvement (‘‘RPI’’) Orders and will
not interact with, but instead will bypass other available contra-side interest,
including hidden orders priced better
than RPI Orders, in the NYSE’s
systems.20 The Exchange believes that,
in order to provide the Retail Order a
rebate, the NYSE by-passes non-RPI
Orders resting on the NYSE’s system
because those resting orders are also
expecting a rebate.21 Therefore, the
NYSE permits Type 1 Retail Orders to
by-pass resting contra-side interest in
favor of the RPI Order.22
In addition, a Mid-Point Discretionary
Order not executing at its displayed
price upon arrival is similar to post-only
midpoint eligible orders offered by other
exchanges.23 Other exchanges also
20 See
NYSE Rule 107C(k)(1).
NYSE, Retail Orders that remove liquidity
receive a rebate while RPI Orders would pay a fee.
See NYSE Fee Schedule available at https://
usequities.nyx.com/markets/nyse-equities/tradingfees (last visited January 29, 2014).
22 See also Securities Exchange Act Release No.
67347 (July 3, 2012), 77 FR 40673 (July 10, 2012)
(SR–NYSE–2011–55) (Order approving the NYSE’s
Retail Liquidity Program on a pilot basis).
23 See NYSE Rules 13(e) (providing that the
NYSE’s Mid-Point Passive Liquidity (‘‘MPL’’) Order
may include an ‘‘Add Liquidity Only’’ (‘‘ALO’’)
modifier which would prohibit the order from
executing upon arrival even if marketable). See
Securities Exchange Act Release No. 71330 (January
16, 2014), 79 FR 3895 (January 23, 2014) (SR–
21 On
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permit otherwise marketable orders to
post directly to that exchange and
execute against later arriving orders. For
example, the NYSE permits MPL–ALO
Orders to not execute upon arrival even
if marketable.24 The NYSE always
considers the MPL–ALO the liquidity
provider, and, therefore, it would never
interact with a contra-side MPL–ALO
order.25 Similarly, NYSE Arca, Inc.
(‘‘NYSE Arca’’) prohibits an MPL–ALO
Order from executing against an
incoming MPL–ALO Order.26 In both
cases, the MPL–ALO Order would
execute against later arriving contra-side
NYSE–2013–71) (Order Approving the MPL Order
stating that the proposed MPL Order could provide
market participants with better control of their
execution costs). An MPL order with an ALO
modifier (‘‘MPL–ALO order’’) is always considered
the liquidity providing order, and, therefore, would
never interact with a contra-side MPL–ALO order.
See Securities Exchange Act Release No. 71488
(February 5, 2014), 79 FR 8215 (February 11, 2014)
(SR–NYSE–2014–07) (providing that, ‘‘[i]f triggered
to trade, an MPL–ALO Order will be eligible to
trade with both arriving and resting contra-side
interest, but will not trade with a contra-side MPL–
ALO Order’’). Executions would be allocated
amongst the arriving and resting contra-side interest
in accordance with NYSE Rule 72. Id. Once posted,
the NYSE’s MPL–ALO Order would be considered
a ‘‘liquidity provider’’ and be eligible to receive a
rebate. See Liquidity Indicator 2 in the NYSE Fee
Schedule available at https://usequities.nyx.com/
markets/nyse-equities/trading-fees (last visited
January 29, 2014). See the Nasdaq Stock Market
LLC (‘‘Nasdaq’’) Rule 4751(f)(11) (Mid-Point Peg
Post Only Order). Nasdaq’s Mid-Point Peg Post
Only Order may also not execute upon arrival even
if marketable. See example 1 in https://
www.nasdaqtrader.com/content/productsservices/
trading/MPPO_factsheet.pdf (describing Nasdaq’s
Mid-Point Peg Post Only Order functionality).
24 See NYSE Rules 13(e) (providing that the
NYSE’s MPL Order may include an ALO modifier
which would prohibit the order from executing
upon arrival even if marketable). See Securities
Exchange Act Release No. 71330 (January 16, 2014),
79 FR 3895 (January 23, 2014) (SR–NYSE–2013–71)
(Order Approving the MPL Order stating that the
proposed MPL Order could provide market
participants with better control of their execution
costs).
25 See Securities Exchange Act Release No. 71488
(February 5, 2014), 79 FR 8215 (February 11, 2014)
(SR–NYSE–2014–07) (providing that, ‘‘[i]f triggered
to trade, an MPL–ALO Order will be eligible to
trade with both arriving and resting contra-side
interest, but will not trade with a contra-side MPL–
ALO Order’’). Once posted, the NYSE’s MPL Order
would be considered a ‘‘liquidity provider’’ and be
eligible to receive a rebate. See Liquidity Indicator
2 in the NYSE Fee Schedule available at https://
usequities.nyx.com/markets/nyse-equities/tradingfees (last visited January 29, 2014).
26 See NYSE Arca Rules 7.31(h)(5) and (nn).
NYSE Arca permits a member to elect that a
marketable MPL–ALO Order interact with a resting
MPL–ALO Order. See also Securities Exchange Act
Release No. 67652 (August 14, 2012), 77 FR 50189
(August 20, 2012) (SR–NYSEArca–2012–83). If both
the resting interest and the incoming MPL–ALO
Order are designated to interact, the incoming
MPL–ALO Order would be considered the liquidity
taker and subject to applicable fees. Id.; see also
Liquidity Indicator 2 in the NYSE Fee Schedule
available at https://usequities.nyx.com/markets/
nyse-equities/trading-fees (last visited January 29,
2014).
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mid-point liquidity ahead of the resting
contra-side MPL–ALO Order. In
addition, on the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’), if a
Silent Post-Mid Seeker Order ‘‘is to
trade upon its arrival into the system
(thereby ‘removing’ liquidity), it will not
trade, but instead rest until another
order comes in for it to trade against.’’ 27
Finally, BATS Exchange, Inc. (‘‘BATS’’)
allows display-eligible Post Only orders
to rest at prices that lock non-displayed
interest, making such non-displayed
interest temporarily non-executable and
allowing the contra-side Post Only order
to execute against later arriving orders
notwithstanding such non-displayed
interest.28
Second, Mid-Point Discretionary
Orders would also not be eligible to
execute against resting Discretionary
Orders, including contra-side Mid-Point
Discretionary Orders. For example,
assume the NBBO is $10.00 × $10.02. A
Discretionary Order to buy at $10.00
with discretion to $10.01 is entered on
the EDGX Book. A Mid-Point
Discretionary Order to buy is also
entered and displayed at $10.00, the
NBB, with discretion to $10.01, the midpoint of the NBBO. A Mid-Point
Discretionary Order to sell would not
execute against the Discretionary Order
to buy or the Mid-Point Discretionary to
buy at $10.01, the mid-point of the
NBBO.29 Instead, the Mid-Point
Discretionary Order to sell would be
posted to the EDGX Book and displayed
at $10.02, the NBO, with discretion to
execute to $10.01, the mid-point of the
NBBO. The Exchange is proposing these
restrictions so that it may offer a low
cost pricing structure for the EDGX MidPoint Discretionary Order. On EDGA, a
Mid-Point Discretionary Order may
execute against resting Discretionary
27 See CBOE Rule 51.8(g)(12); Securities Exchange
Act Release No. 67548 (July 31, 2012), 77 FR 46783
(August 6, 2012) (SR–CBOE–2012–49). See also
Nasdaq Rule 4751(f)(11) (Mid-Point Peg Post Only
Order). Nasdaq’s Mid-Point Peg Post Only Order
may also not execute upon arrival even if
marketable. See example 1 in https://
www.nasdaqtrader.com/content/productsservices/
trading/MPPO_factsheet.pdf (describing Nasdaq’s
Mid-Point Peg Post Only Order functionality).
28 See Securities Exchange Act Release No. 64475
(May 12, 2011), 76 FR 28830 (May 18, 2011) (Notice
of Filing of Proposed Rule Change by BATS
Exchange, Inc. to Amend BATS Rule 11.9, Entitled
‘‘Orders and Modifiers’’ and BATS Rule 11.13,
Entitled ‘‘Order Execution’’); see also Securities
Exchange Act Release No. 64754 (June 27, 2011), 76
FR 38712 (July 1, 2011) (Order Approving a
Proposed Rule Change to Amend BATS Rule 11.9,
Entitled ‘‘Orders and Modifiers’’ and BATS Rule
11.13, Entitled ‘‘Order Execution’’).
29 As discussed above, the proposed EDGX MidPoint Discretionary Order would not be eligible to
execute immediately upon entry in the System at
its displayed price, but would be permitted upon
entry to execute at the mid-point of the NBBO. See
supra note 17.
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Orders, including contra-side Mid-Point
Discretionary Orders, because both
orders would pay a fee. However, on
EDGX, if the Exchange were to allow
Mid-Point Discretionary Orders to
execute against each other, the provider
of liquidity would receive a rebate while
the taker of liquidity would be charged
no fee. Members electing to use the
proposed Mid-Point Discretionary Order
would forego the above described
execution opportunities to receive the
associated low cost pricing structure.
Members willing to pay a fee for broader
execution opportunities at the midpoint of the NBBO could instead choose
to utilize Mid-Point Match Orders.
Third, Mid-Point Discretionary Orders
would only be eligible to execute at the
mid-point of the NBBO against MidPoint Match Orders and incoming
liquidity-removing orders when their
limit price is equal to the mid-point of
the NBBO.30 Members utilizing these
order types are explicitly adding
liquidity at the mid-point of the NBBO
and, thereby, provide the benefit of
price improving liquidity to Users.
Restricting the orders against which a
Mid-Point Discretionary Order may
execute to those orders that are designed
to explicitly add liquidity at the midpoint of the NBBO is a reasonable
means by which to encourage Members
to add committed mid-point liquidity.
In addition, these restrictions also
enable the Exchange to offer a low cost
pricing structure for the EDGX MidPoint Discretionary Order because both
Mid-Point Match Orders and incoming
liquidity-removing orders would be
charged a fee, enabling the Exchange to
provide a rebate or no fee to the
proposed Mid-Point Discretionary
Order.
Fourth, on EDGA, in the event a
trading halt is declared by the listing
market, a resting Mid-Point
Discretionary Orders would be eligible
for execution once the trading halt is
lifted by the listing market. Conversely,
on EDGX, in the event a trading halt is
declared by the listing market, any MidPoint Discretionary Orders resting on
the EDGX Book would be immediately
cancelled. As described above, the
approach taken by EDGX is a result of
its maker-taker fee structure and serves
to avoid a situation where Mid-Point
Discretionary Order would be assessed
a take fee when the market re-opens. As
discussed above in regard to execution
of Mid-Point Discretionary Orders upon
entry into the System, this approach is
30 For a description of the proposed order
interaction, see infra, Example No. 2 under the
heading ‘‘Mid-Point Discretionary Orders Entered
with Limit Prices’’ and the first example under the
heading ‘‘Sub-Penny Executions’’.
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also consistent with the treatment of a
Mid-Point Discretionary Order that
contains a post only instruction at its
displayed price.
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Examples
The following examples demonstrate
how a Mid-Point Discretionary Order
would operate in various scenarios.
Mid-Point Discretionary Orders Entered
Without Limit Prices
Example No. 1. Assume the NBBO is
$10.00 × $10.03, resulting in a midpoint of $10.015. A Mid-Point
Discretionary Order to buy 100 shares is
entered without a limit price. The MidPoint Discretionary Order would be
displayed at $10.00, the NBB, with
discretion to buy up to $10.015, the
mid-point of the NBBO.
• A contra-side market order or
marketable limit order to sell 100 shares
at $10.00 would execute against the
Mid-Point Discretionary Order to buy at
$10.00 for 100 shares.
• A contra-side limit order to sell 100
shares at $10.01 would execute against
the Mid-Point Discretionary Order to
buy at $10.01 for 100 shares.
• A contra-side limit order to sell 100
shares at $10.02 would not execute
against the Mid-Point Discretionary
Order to buy because the Mid-Point
Discretionary Order had discretion to
buy only up to the mid-point of the
NBBO of $10.015. The limit order to sell
would be displayed at $10.02, resulting
in a new NBBO mid-point of $10.01.
Example No. 2. Assume the NBBO is
$10.00 × $10.03, resulting in a midpoint of $10.015. A Mid-Point
Discretionary Order to buy 100 shares is
entered without a limit price. The MidPoint Discretionary Order would be
displayed at $10.00, the NBB, with
discretion to buy up to $10.015, the
mid-point of the NBBO.31
• Assume the NBBO changes to
$10.01 × $10.06, resulting in a new
NBBO mid-point of $10.035. The
displayed price of the Mid-Point
Discretionary Order would be adjusted
to $10.01, the NBB, with discretion to
buy up to $10.035, the new NBBO midpoint.
• If the NBBO changes once again to
$10.03 × $10.05 resulting in a new
NBBO mid-point of $10.04, the
displayed price of the Mid-Point
Discretionary Order would be adjusted
to $10.03, the new NBB, with discretion
31 This example is designed to illustrate that the
displayed price of a Mid-Point Discretionary Order
entered without a limit price would continue to
move in tandem with, and be displayed at, changes
in the NBB (for buy orders) and the NBO (for sell
orders). The Mid-Point Discretionary Order would
receive a new time stamp each time it is re-priced.
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to buy up to $10.04, the new NBBO
mid-point.
Example No. 3. Assume the NBBO is
$10.00 × $10.03, resulting in a NBBO
mid-point of $10.015. A Mid-Point
Discretionary Order is entered to buy
100 shares without a limit price. The
Mid-Point Discretionary Order would be
displayed at $10.00, the NBB, with
discretion to buy up to $10.015, the
mid-point of the NBBO. Assume further
that the EDGX Book contains two other
displayed orders to buy 100 shares each
at $10.00, both with time priority over
the Mid-Point Discretionary Order.
Assume further that there is a displayed
resting order to buy at $9.99 on the
EDGX Book, and no other market is
publishing a bid at $10.00.
• A contra-side market order to sell
200 shares would execute against the
two buy orders with time priority over
the Mid-Point Discretionary Order at
$10.00. The Mid-Point Discretionary
Order to buy would remain on the
EDGX Book and be re-price at $9.99
because it could not independently
establish or maintain the NBB or NBO—
rather, its displayed price would be
derived from the NBB and NBO.32
• The Mid-Point Discretionary Order
would be displayed at $9.99 with
discretion to trade up to $10.01
(assuming the NBO remained at $10.03),
and the resting buy order at $9.99 would
maintain time priority over the MidPoint Discretionary Order.
Mid-Point Discretionary Orders Entered
With Limit Prices
The following examples demonstrate
how a Mid-Point Discretionary Order
entered with a limit price would
operate:
Example No. 1. Assume the NBBO is
$10.00 × $10.03, resulting in an NBBO
mid-point of $10.015. A Mid-Point
Discretionary Order is entered to buy
100 shares with a limit price of $10.03.
The Mid-Point Discretionary Order
would be displayed at $10.00, the NBB,
with discretion to buy up to $10.015,
the mid-point of the NBBO.
• A contra-side market order or
marketable limit order to sell 100 shares
at $10.00 would execute against the
Mid-Point Discretionary Order to buy at
$10.00 for 100 shares.
• A contra-side limit order to sell 100
shares at $10.01 would execute against
the Mid-Point Discretionary Order to
buy at $10.01 for 100 shares.
• A contra-side limit order to sell 100
shares at $10.02 would not execute
32 This example assumes that no other market is
displaying a quote at the NBBO. A Mid-Point
Discretionary Order that would independently
establish or maintain the NBBO would be cancelled
back to the Member.
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against the Mid-Point Discretionary
Order to buy because the Mid-Point
Discretionary Order had discretion to
buy only up to the mid-point of the
NBBO of $10.015. The limit order to sell
would be displayed at $10.02, resulting
in a new NBBO mid-point of $10.01.
Example No. 2. Assume the NBBO is
$10.00 × $10.04, resulting in a NBBO
mid-point of $10.02. A Mid-Point
Discretionary Order is entered to buy
100 shares with a limit price of 10.03.
The Mid-Point Discretionary Order
would be displayed at $10.00, the NBB,
with discretion to buy up to $10.02, the
mid-point of the NBBO.
• A contra-side limit order to sell 100
shares at $10.02 would execute against
the Mid-Point Discretionary Order to
buy at the NBBO mid-point of $10.02 for
100 shares.
• A contra-side limit order to sell 100
shares at $10.01 would execute against
the Mid-Point Discretionary Order to
buy at $10.01 for 100 shares.
Example No. 3. Assume the NBBO is
$10.01 × $10.06, resulting in a NBBO
mid-point of $10.035. A Mid-Point
Discretionary Order is entered to buy
100 shares with a limit price of 10.03.
The Mid-Point Discretionary Order to
buy would be displayed at $10.01, the
NBB, with discretion to buy up to
$10.03, and not the NBBO mid-point of
10.035, because the NBBO mid-point
would be higher than the Mid-Point
Discretionary Order’s limit price of
$10.03.
• A contra-side limit order to sell 100
shares at $10.03 would execute against
the Mid-Point Discretionary Order to
buy at $10.03.
• A contra-side limit order to sell 100
shares at $10.02 would execute against
the Mid-Point Discretionary Order to
buy at $10.02.
Example No. 4. Assume the NBBO is
$10.03 × $10.05, resulting in a NBBO
mid-point of $10.04. A Mid-Point
Discretionary Order is entered to buy
100 shares with a limit price of 10.03.
The displayed price of the Mid-Point
Discretionary Order to buy would be
$10.03, its limit price and the current
NBB. Therefore, the Mid-Point
Discretionary Order would not have
discretion to trade up to the NBBO midpoint of $10.04 because that exceeds its
limit price of $10.03.
• If the NBBO changed to $10.04 ×
$10.06, resulting in a new NBBO midpoint of $10.05, the Mid-Point
Discretionary Order to buy would be
posted to the EDGX Book at its limit
price of $10.03 and be displayed as a
limit order with no discretion because
the NBB and the NBBO mid-point
exceed its limit price of $10.03.
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• However, if the NBBO again
changed to $10.02 × $10.03, then the
Mid-Point Discretionary Order would
again be displayed at $10.02, the NBB,
with discretion to trade up to $10.025,
the new NBBO mid-point.
Example No. 5. Assume from
Example No. 4 above that the NBBO
remains $10.04 × $10.06, with a NBBO
mid-point of $10.05, and the Mid-Point
Discretionary Order to buy continues to
be posted to the EDGX Book and
displayed at its limit price of $10.03.
The EDGX Book contains a displayed
order to buy 100 shares at $10.04 and
two separate displayed orders to buy
100 shares each at $10.03 with time
priority over the Mid-Point
Discretionary Order. Assume further
that there is also a displayed order to
buy 100 shares at $10.02 on the EDGX
Book, and no other market is publishing
a bid at either $10.03 or $10.04.
• A contra-side market order to sell
300 shares would execute first against
the buy order on the book at $10.04, and
then against the two buy orders on the
book with time priority over the MidPoint Discretionary Order at $10.03. The
Mid-Point Discretionary Order to buy at
$10.03 would remain on the EDGX
Book. This execution would result in a
new NBBO of $10.03 × $10.06.
However, the Mid-Point Discretionary
Order would be re-priced to $10.02
because it could not independently
establish or maintain an NBB or NBO—
rather, its displayed price would be
derived from the then current NBB and
NBO. The Mid-Point Discretionary
Order would be displayed at $10.02
with discretion to trade up to $10.03, its
limit price (assuming the NBO remained
at $10.06). The Mid-Point Discretionary
Order would receive a new time stamp
with time priority behind the resting
buy order at $10.02.
Operation of the Mid-Point
Discretionary Order during a Locked or
Crossed Market
Example No. 1. Assume the NBBO is
$10.03 × $10.03 resulting in a locked
market. The Exchange BBO is $10.00 ×
$10.03. A Mid-Point Discretionary
Order to buy with a limit price of $10.04
is entered. Because the Mid-Point
Discretionary Order would cross the
NBO of $10.03, it is displayed on the
EDGX Book at $10.02, one minimum
price variation away from the NBO with
no discretionary range. The Exchange
BBO is now adjusted to $10.02 × $10.03.
Example No. 2. Assume the NBBO is
$10.03 × $10.03 resulting in a locked
market. The Exchange BBO is $10.00 ×
$10.03. A Mid-Point Discretionary
Order to buy with a limit price of $10.02
is entered. The Mid-Point Discretionary
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Order is posted to the EDGX Book at
$10.02 with no discretionary range. The
Exchange BBO is updated to $10.02 ×
$10.03.
Example No. 3. Assume the NBBO is
$10.03 × $10.03 resulting in a locked
market. The Exchange BBO is $10.00
(400 shares) × $10.03 (100 shares).33 A
Mid-Point Discretionary Order to sell
with a limit price of $10.02 is entered.
The Mid-Point Discretionary Order joins
the Exchange NBO and is posted to the
EDGX Book at $10.03 because it does
not independently establish the NBO
and there are displayed sell orders on
the EDGX Book. The Exchange BBO is
updated to $10.00 (400 shares) × $10.03
(200 shares).
Example No. 4. Assume the NBBO is
$10.04 × $10.03 resulting in a crossed
market. The Exchange BBO is $10.00 ×
$10.03. A Mid-Point Discretionary
Order to buy with a limit price of $10.04
is entered. Because the Mid-Point
Discretionary Order would cross the
NBO of $10.03, it displayed on the
EDGX Book at $10.02, one minimum
price variation away from the NBO with
no discretionary range. The Exchange
BBO is now adjusted to $10.02 × $10.03.
Example No. 5. Assume the NBBO is
$10.05 × $10.02 resulting in a crossed
market. The Exchange BBO is $10.00 ×
$10.02. A Mid-Point Discretionary
Order to buy with a limit price of $10.01
is entered. The Mid-Point Discretionary
Order is posted to the EDGX Book at
$10.01 because it does not lock or cross
the NBO. The Exchange BBO is updated
to $10.01 × $10.02.
Example No. 6. Assume the NBBO is
$10.05 × $10.03 resulting in a crossed
market. The Exchange BBO is $10.00
(400 shares) × $10.03 (100 shares).34 A
Mid-Point Discretionary Order to sell
with a limit price of $10.03 is entered.
The Mid-Point Discretionary Order joins
the Exchange NBO and is posted to the
EDGX Book at $10.03 because it does
not independently establish the NBO
and there are displayed sell orders on
the EDGX Book. The Exchange BBO is
updated to $10.00 (400 shares) × $10.03
(200 shares).
Sub-Penny Executions
Mid-Point Discretionary Orders in
stocks priced at $1.00 or more would
only be executed in sub-penny
increments when they execute at the
mid-point of the NBBO against contraside Mid-Point Match Orders. Mid-Point
Discretionary Orders are not eligible to
execute against contra-side Mid-Point
33 This example assumes that the Exchange BBO
equals the NBBO and did not create a locked or
crossed market.
34 Id.
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Discretionary Orders at the mid-point of
the NBBO. Mid-Point Discretionary
Orders would execute against all other
order types solely in whole penny
increments. Mid-Point Discretionary
Orders would not be displayed or
ranked in sub-penny increments.
Example No. 1. Assume the NBBO is
$10.00 × $10.03, resulting in a NBBO
mid-point of $10.015. A Mid-Point
Discretionary Order is entered to buy
100 shares with a limit price of $10.02.
The Mid-Point Discretionary Order
would be displayed at $10.00, the NBB,
with discretion to buy up to $10.015,
the mid-point of the NBBO.
• A contra-side Mid-Point Match
order sell 100 shares would execute
against the Mid-Point Discretionary
Order to buy at the NBBO mid-point of
$10.015.
• Alternatively, a contra-side MidPoint Discretionary Order to sell 100
shares would be displayed at $10.03, the
NBO, with discretion to sell to $10.015,
the mid-point of the NBBO. The MidPoint Discretionary Order to sell would
not execute against the Mid-Point
Discretionary Order to buy at the NBBO
mid-point of $10.015 because Mid-Point
Discretionary Orders are not eligible to
execute against contra-side Mid-Point
Discretionary Orders at the mid-point of
the NBBO.
Example No. 2. Assume the NBBO is
$10.00 × $10.03, resulting in a NBBO
mid-point of $10.015. A Mid-Point
Discretionary Order is entered to buy
100 shares with a limit price of $10.02.
The Mid-Point Discretionary Order
would be displayed at $10.00, the NBB,
with discretion to buy up to $10.015,
the mid-point of the NBBO. Assume the
NBBO changes to $10.02 × $10.05,
resulting in a new NBBO mid-point of
$10.035.
• The Mid-Point Discretionary Order
to buy would be displayed at $10.02, the
NBB, with no discretion to trade above
$10.02 to the NBBO mid-point of
$10.035 because its limit price prevents
executions above $10.02. A contra-side
Mid-Point Match Order to sell 100
shares is entered but would not execute
against the Mid-Point Discretionary
Order to buy at $10.02, because the
NBBO mid-point of $10.035 would
exceed its limit price. The Mid-Point
Match Order to sell would be entered on
the EDGX Book at the mid-point of the
NBBO.
Proposed Amendments to Rule 11.8(a)
The Exchange proposes to amend
Rule 11.8(a)(2)(D) to reflect the priority
that Mid-Point Discretionary Orders
would have when they are executed
within their discretionary range. Rule
11.8(a)(2) states, in sum, that the System
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shall execute equally priced trading
interest in time priority in the following
order: (i) Displayed size of limit orders;
(ii) Mid-Point Match Orders; (ii) nondisplayed limit orders and the reserve
quantity of Reserve Orders; (iii)
discretionary range of discretionary
orders as set forth in current Rule
11.5(c)(13); and (iv) Route Peg Orders as
set forth in current Rule 11.5(c)(17).
When Mid-Point Discretionary Orders
execute at their displayed price, they
would have the same priority as that of
the displayed size of limit orders, in
accordance with Rule 11.8(a)(2)(A).
However, when they execute within
their discretionary range, the Exchange
proposes that they would have the same
priority as the discretionary range of
Discretionary Orders, as set forth in
Rule 11.8(a)(2)(D). Therefore, the
Exchange is proposing to amend Rule
11.8(a)(2)(D) to account for the priority
of Mid-Point Discretionary Orders when
they act within their discretionary
range.
Example. Assume the NBBO is $10.00
× $10.04, resulting in a NBBO mid-point
of $10.02. A Mid-Point Discretionary
Order is entered to buy 100 shares with
a limit price of $10.02. A Non-Displayed
order to buy 100 shares at $10.02 is
subsequently entered. The Mid-Point
Discretionary Order would be displayed
at $10.00, the NBB, with discretion to
buy up to $10.02, the NBBO mid-point.
• A contra-side limit order to sell 100
shares at $10.02 would execute against
the Non-Displayed order, and not the
Mid-Point Discretionary Order, since
Non-Displayed orders would have
priority over the discretionary range of
Mid-Point Discretionary Orders in
accordance with Rule 11.8(a)(2).
In addition, the Exchange proposes
new Rule 11.8(a)(9) to address the
priority of orders when a Mid-Point
Discretionary Order is posted the EDGX
Book. Where orders to buy (or sell) are
made at the same price, Exchange Rule
11.8(a)(2) generally requires, that the
order clearly established as the first
entered into the System at that price
shall have precedence up to the number
of shares of stock specified in the order.
As described above, the proposed EDGX
Mid-Point Discretionary Order would
not be eligible to execute immediately
upon entry in the System at its
displayed price.35 Instead, the proposed
EDGX Mid-Point Discretionary Order
would be eligible to execute at its
35 See supra notes 16 thru 19 and accompanying
text. Mid-Point Discretionary Orders would also not
be eligible to execute against resting Discretionary
Orders, including contra-side Mid-Point
Discretionary Orders. See supra notes 29 and
accompanying text; see also infra notes 47 thru 48
and accompanying text.
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displayed price only after it has been
posted to the EDGX Book. Therefore, the
Exchange proposes to add subparagraph
(9) to Rule 11.8(a) to clarify that, in
accordance with proposed Rule
11.5(c)(14), where a Mid-Point
Discretionary Order does not execute
against certain marketable contra-side
interest resting on the EDGX Book, it
will, notwithstanding Exchange Rule
11.8(a)(2) described above, be posted
directly to the EDGX Book and will be
eligible to execute against later arriving
marketable contra-side orders.
2. Statutory Basis
The Exchange believes that the
proposed rule changes are consistent
with Section 6(b) of the Act 36 and
further the objectives of Section 6(b)(5)
of the Act,37 because they are designed
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, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities,
and, in general, to protect investors and
the public interest.
Proposed Mid-Point Discretionary
Order, Rule 11.5(c)(14)
The Exchange believes that the
proposed Mid-Point Discretionary Order
is designed 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 because it
would provide Users 38 with an order
type that may result in the efficient
execution of such orders and provide
additional flexibility and increased
functionality to the Exchange’s System
and its Users. Specifically, the Exchange
believes that Users may receive more
efficient order executions by providing
them greater flexibility to be displayed
at the NBBO with discretion to execute
up to and including the mid-point of the
NBBO, resulting in the potential benefit
of price improvement. The proposed
Mid-Point Discretionary Order is
designed to increase displayed liquidity
on the Exchange while also enhancing
execution opportunities at the midpoint of the NBBO. Promotion of
displayed liquidity at the NBBO
enhances market quality for all Users
and promotes competition amongst
market centers. Therefore, the Exchange
believes that the proposed Mid-Point
36 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
38 Exchange Rule 1.5(ee) defines ‘‘User’’ as ‘‘any
Member or Sponsored Participant who is
authorized to obtain access to the System pursuant
to [Exchange] Rule 11.3.’’
37 15
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Discretionary Order will promote just
and equitable principles of trade and
perfect the mechanism of a free and
open market and a national market
system because it is designed to: (i)
Contribute to the displayed liquidity on
the Exchange at the NBBO while
providing additional opportunities for
price improvement, which would, in
turn, benefit competition due to
improvements to overall market quality;
and (ii) increase competition between
exchanges offering similar functionality.
The proposed Mid-Point
Discretionary Order is similar to and
based on the Mid-Point Discretionary
Order on EDGA.39 While the proposed
EDGX Mid-Point Discretionary Order
would function similarly to the existing
Mid-Point Discretionary Order on
EDGA, the order types would differ in
four areas. The Exchange does not
believe that these differences are
significant or presents unique issues
with respect to the consistency of the
Mid-Point Discretionary Order with the
requirements of the Act. The Exchange
believes these differences are reasonable
due to the different fee structures on
EDGA and EDGX and are designed to
encourage explicitly priced liquidity at
the mid-point of the NBBO, while
enabling the Exchange to offer a low
cost pricing structure for the order type.
EDGA maintains a taker-maker model
where Members receive rebates for
removing liquidity and pay a fee for
adding liquidity.40 EDGX maintains a
maker-taker model where Members pay
a fee for removing liquidity and receive
a rebate for adding liquidity.41
First, unlike the EDGA Mid-Point
Discretionary Order, the proposed
EDGX Mid-Point Discretionary Order
would not be eligible to execute
immediately upon entry in the System
at its displayed price. Instead, the
proposed EDGX Mid-Point
Discretionary Order would be eligible to
execute at its displayed price only after
it has been posted to the EDGX Book. If
the Exchange would allow for the
execution of a Mid-Point Discretionary
Order at its displayed price immediately
upon entry into the System, the order
would not receive a rebate and instead
would be subject to the applicable rates
for removing liquidity from the EDGX
39 See EDGA Rule 11.5(c)(17). Securities
Exchange Act Release No. 67226 (June 20, 2012), 77
FR 38113 (June 26, 2013) (SR–EDGA–2012–22)
(Notice of Filing and Immediate Effectiveness Of
Proposed Rule Change to Adopt the Mid-Point
Discretionary Order).
40 See EDGA Fee Schedule available at https://
www.directedge.com/Trading/
EDGAFeeSchedule.aspx.
41 See EDGX Fee Schedule available at https://
www.directedge.com/Trading/
EDGXFeeSchedule.aspx.
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Book. Therefore, to avoid being charged
a fee, the proposed EDGX Mid-Point
Discretionary Order would not be
eligible to execute at its displayed price
immediately upon entry in the
System.42 It would be eligible to execute
at its displayed price against incoming
liquidity removing orders because such
orders are willing to accept the
immediate execution and not post to the
EDGX Book. Orders resting on the EDGX
Book are willing to forgo an execution
against the incoming Mid-Point
Discretionary Order at its displayed
price here because the User is expecting
to receive a rebate once posted to the
EDGX Book. The Exchange believes that
this approach is designed to accomplish
the twin goals in implementing this
order type—increasing both displayed
liquidity and liquidity at the mid-point
of the NBBO on the EDGX Book. In
addition, the Exchange believes this
would optimize available displayed
liquidity for incoming orders and
provide price improvement at the midpoint of the NBBO. The Exchange does
not believe that its proposal is unique in
its application of the Exchange’s pricing
model to the design of the
functionality.43
The Exchange does not believe that
there is anything novel or controversial
about permitting otherwise marketable
orders to post to the EDGX Book and
execute against later arriving orders in
a fully transparent manner that is
consistent with pre-existing rules of
other exchanges described above.44
Permitting otherwise marketable orders
to post directly to that exchange is
designed to provide Users with better
control over their execution costs. It
allows Users to post aggressively priced
liquidity, as such Users have certainty
as to the fee or rebate they will receive
from the Exchange if their order is
executed. Without such ability, the
Exchange believes that certain Users
would simply post less aggressively
priced liquidity, and prices available for
market participants, including retail
investors, would deteriorate. Members
remain focused on their trading costs,
and in a pricing environment
characterized by fees on one side of a
trade being used to fund rebates on the
other side, it is entirely understandable
that some Members may wish to
structure their trading activity in a
manner that is more likely to avoid a fee
42 In contrast, on EDGA, incoming Mid-Point
Discretionary Orders may immediately execute
upon entry and will receive a rebate for doing so.
43 See supra notes 20 thru 28 and accompanying
text.
44 See supra notes 20 thru 28 and accompanying
text.
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Jkt 232001
and earn a rebate.45 Therefore, the
Exchange believes Mid-Point
Discretionary Order not executing at
their displayed price upon arrival
furthers the objectives of Section 6(b)(5)
of the Act,46 because it is designed 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. The Exchange believes this to be
the case even if, as described above, a
Mid-Point Discretionary Order will
execute in certain circumstances against
a later arriving contra-side order when
there is non-displayed contra-side
interest resting on the Exchange’s order
book at that price. As discussed above,
this order, once resting, is expecting to
receive a rebate for any execution.
Second, Mid-Point Discretionary
Orders would also not be eligible to
execute against resting Discretionary
Orders, including contra-side Mid-Point
Discretionary Orders. The Exchange
believes precluding the above
executions promotes just and equitable
principles of trade by permitting the
Exchange to offer a low cost pricing
structure while also offering an order
type that provides Members the
opportunity to achieve priceimprovement at prices up to and
including the mid-point of the NBBO.
On EDGA, a Mid-Point Discretionary
Order may execute against resting
Discretionary Orders, including contraside Mid-Point Discretionary Orders,
because both orders would pay a fee.
However, on EDGX, if the Exchange
were to allow Mid-Point Discretionary
Orders to execute against each other, the
provider of liquidity would receive a
rebate while the taker of liquidity would
be charged no fee. Members willing to
pay a fee for broader execution
opportunities at the mid-point of the
NBBO could instead choose to utilize
Mid-Point Match Orders. Precluding
Mid-Point Discretionary Orders from
executing as discussed above follows
the precedent established by other order
types, such as Post Only Orders, in
which Members choose to forgo some
execution opportunities to avoid paying
a fee.47 Since the Exchange does not
45 See e.g., Securities Exchange Act Release No.
69194 (March 20, 2013), 78 FR 18386 at 18391 n.
29 (March 26, 2013) (SR–Phlx–2013–24) (Notice of
Filing of Proposed Rule Change); see also Securities
Exchange Act Release No. 69452 (April 25, 2013),
78 FR 25512 at 25514 (May 1, 2013) (Order
Approving SR–PHLX–2013–24) (stating that the
Midpoint Peg Post-Only Order ‘‘is intended to
provide market participants with better control over
their execution costs and to provide a means to
offer price improvement opportunities’’).
46 15 U.S.C. 78f(b)(5).
47 See supra notes 20 thru 28 and accompanying
text. A ‘‘Post Only Order’’ is precluded from
PO 00000
Frm 00133
Fmt 4703
Sfmt 4703
offer a Post Only Mid-Point Match
Order,48 Mid-Point Discretionary Orders
provide a means to interact with
liquidity at the mid-point of the NBBO,
while having the added benefit of not
incurring a fee. In exchange, the User of
a Mid-Point Discretionary Order
foregoes certain execution opportunities
and therefore incurs risk of not
receiving an execution. The above
restriction would provide a Mid-Point
Discretionary Order the opportunity to
become a liquidity provider and receive
a rebate. Furthermore, the Exchange
believes that this approach is consistent
with the Exchange’s belief that MidPoint Discretionary Orders would be
utilized primarily by Members seeking
access to liquidity at the mid-point of
the NBBO while seeking to not be
charged a fee. The proposed Mid-Point
Discretionary Order is designed to
provide Members with better control
over their execution costs and with a
means to offer price improvement
opportunities. As stated above,
Members remain focused on their
trading costs and may wish to structure
their trading activity in a manner that is
more likely to control those costs. Other
Members may prefer execution certainty
and are less cost-sensitive, and would
thus be less likely to use the Mid-Point
Discretionary Order. Based on the
foregoing, the Exchange believes
precluding Mid-Point Discretionary
Orders from executing against each
other is designed to promote just and
equitable principles of trade because it
would enable Members to achieve
potential price improvement and a low
cost fee structure by using the proposed
Mid-Point Discretionary Order.
Third, the Exchange believes that
limiting the circumstance within which
a Mid-Point Discretionary Order may
execute against orders at the mid-point
of the NBBO is designed to promote just
and equitable principles of trade by
incentivizing Members to submit orders
that explicitly contribute to liquidity at
the mid-point of the NBBO while also
enabling the Exchange to provide a low
cost pricing structure for the order type.
executing against orders resting on the EDGX Book
upon entry in the System and receives a rebate for
adding liquidity. See Exchange Rule 11.5(c)(5); see
also, EDGX Fee Schedule available at https://
www.directedge.com/Trading/
EDGXFeeSchedule.aspx. NYSE Arca permits
members to designate a limit order as ‘‘No MidPoint Execution’’, so that the limit order will ignore
mid-point priced orders. NYSE Arca Rule
7.31(h)(5).
48 For securities priced at or above $1.00, MidPoint Match Orders incur a fee regardless of
whether they add or remove liquidity at the midpoint of the NBBO. See Flags MM and MT on the
EDGX Fee Schedule available at https://
www.directedge.com/Trading/
EDGXFeeSchedule.aspx.
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The proposed Mid-Point Discretionary
Order would only be eligible to execute
at the mid-point of the NBBO against
contra-side Mid-Point Match Orders and
incoming liquidity-removing orders
when their limit price equals the midpoint of the NBBO. Members utilizing
these order types are explicitly adding
liquidity at the mid-point of the NBBO
and, thereby, provide the benefit of
price improving liquidity to Users and
their incoming orders. Restricting the
orders against which a Mid-Point
Discretionary Order may execute to
those orders that are designed to
explicitly add liquidity at the mid-point
of the NBBO is a reasonable means by
which to encourage Members to add
committed mid-point liquidity. The
Exchange believes that encouraging
orders that explicitly add liquidity at
the mid-point of the NBBO, rather than
by happenstance, would enhance price
improvement opportunities on the
Exchange by seeking to increase the
overall liquidity on the Exchange at the
mid-point of the NBBO. The Exchange
believes restricting the orders against
which the proposed Mid-Point
Discretionary Order may execute at the
mid-point of the NBBO to Mid-Point
Match Orders promotes just and
equitable principles of trade because it
is designed to encourage the use of MidPoint Match Orders, motivating
Members seeking price improvement to
direct their orders to EDGX because they
would have a heightened expectation of
liquidity at the midpoint of the NBBO.
In addition, these restrictions also
enable the Exchange to offer a low cost
pricing structure for the EDGX MidPoint Discretionary Order because both
Mid-Point Match Orders and incoming
liquidity-removing orders would be
charged a fee, enabling the Exchange to
provide a rebate or no fee to the
proposed Mid-Point Discretionary
Order.
Fourth, on EDGA, in the event a
trading halt is declared by the listing
market, a resting Mid-Point
Discretionary Orders would be eligible
for execution once the trading halt is
lifted by the listing market. Conversely,
on EDGX, in the event a trading halt is
declared by the listing market, any MidPoint Discretionary Orders resting on
the EDGX Book would be immediately
cancelled. As described above, the
approach taken by EDGX is a result of
its maker-taker fee structure and serves
to avoid a situation where Mid-Point
Discretionary Orders would be assessed
a take fee when the market re-opens. As
discussed above in regard to execution
of Mid-Point Discretionary Orders upon
entry into the System, this approach is
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Jkt 232001
also consistent with the treatment of a
Mid-Point Discretionary Order as
containing a post only instruction at its
displayed price.
The Mid-Point Discretionary Order
would also be similar to the Exchange’s
existing Pegged Order 49 and Mid-Point
Match Order because, like these order
types, a Mid-Point Discretionary Order
would receive a new time stamp each
time it was automatically adjusted, and
it would not be eligible for routing
pursuant to Rule 11.9(b)(2). Like a
Pegged Order, a Mid-Point Discretionary
Order’s displayed price would be
pegged to and automatically adjusted in
response to changes to the NBB or NBO.
Also, like a Pegged Order, if the
proposed Mid-Point Discretionary Order
displayed on the Exchange would lock
the market, the price of the order will
be automatically adjusted by the System
to one minimum price variation below
the current NBO (for bids) or to one
minimum price variation above the
current NBB (for offers). In addition, the
Mid-Point Discretionary Order will also
be similar to the Exchange’s Mid-Point
Match Order, because both would be
eligible to receive sub-penny executions
at the mid-point of the NBBO. However,
unlike the Mid-Point Match Order, the
Mid-Point Discretionary Order includes
a displayed component, which would
provide the added benefit of
transparency. The proposed Mid-Point
Discretionary Order would also be
similar to the Exchange’s existing
Discretionary Order in that it would
include a displayed order at a specified
price (an objectively determined price
based on the prevailing NBB or NBO)
and a non-displayed order at a specified
price (an objectively determined price
based on the mid-point of the NBBO),
subject to any limits the User attaches
the Mid-Point Discretionary Order. The
Exchange believes that this proposed
order type would benefit its Users by
offering greater flexibility to display
liquidity at the NBBO with discretion
generally to execute to the NBBO midpoint, resulting in additional
opportunities for price improvement for
contra-side orders.
The Exchange further believes that the
proposed Mid-Point Discretionary Order
is designed to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system because it is based on and would
enable the Exchange to offer an order
type that would compete with similar
order types on other exchanges. For
example, the Mid-Point Discretionary
Order is similar to NYSE Arca’s Pegged
Order 50 and Discretionary Order.51
NYSE Arca’s Pegged Order is defined as
a ‘‘limit order to buy or sell a stated
amount of a security at a displayed price
set to track the current bid or ask of the
NBBO in an amount specified by the
User. . . . A Pegged Order may be
designated as a . . . Discretionary
Order.’’ NYSE Arca defines a
Discretionary Order to be ‘‘[a]n order to
buy or sell a stated amount of a security
at a specified, undisplayed price (the
‘discretionary price’), in addition to at a
specified, displayed price (‘displayed
price’).’’ The Mid-Point Discretionary
Order is similar to Arca’s Pegged Order
when it is designated as a Discretionary
Order insofar as the displayed
components of both are designed to
track the prevailing NBB and NBO.
While the undisplayed component of
the Mid-Point Discretionary Order
presents a variation on the undisplayed
component of Arca’s order type, insofar
as the former sets a more specific
parameter on the discretionary aspect of
the order (i.e., to execute to the midpoint of the NBBO), the Exchange does
not believe that such variation presents
unique issues with respect to the
consistency of the Mid-Point
Discretionary Order with the
requirements of the Act.
The proposed Mid-Point
Discretionary Order is also not designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers
because the proposed Mid-Point
Discretionary Order would be available
to all Members on a uniform basis.
Proposed Amendment to Rule 11.8(a)
The Exchange also believes its
proposal to amend Rule 11.8(a)(2) to
reflect the priority that Mid-Point
Discretionary Orders is designed to
promote just and equitable principles of
trade. Rule 11.8(a)(2) states, in sum, that
the System shall execute equally priced
trading interest in time priority in the
following order: (i) Displayed size of
limit orders; (ii) Mid-Point Match
Orders; (ii) non-displayed limit orders
and the reserve quantity of Reserve
Orders; (iii) discretionary range of
Discretionary Orders as set forth in
current Rule 11.5(c)(13); and (iv) Route
Peg Orders as set forth in current Rule
11.5(c)(17). Under the proposal, when
Mid-Point Discretionary Orders execute
at their displayed price, they would
have the same priority as that of the
displayed size of limit orders, in
accordance with Rule 11.8(a)(2)(A).
However, when they execute within
their discretionary range, the Exchange
50 NYSE
49 Exchange
PO 00000
Rule 11.5(c)(6).
Frm 00134
Fmt 4703
Sfmt 4703
16409
51 NYSE
E:\FR\FM\25MRN1.SGM
Arca Rule 7.31(cc).
Arca Rule 7.31(h)(2)
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emcdonald on DSK67QTVN1PROD with NOTICES
proposes that they maintain priority
behind Mid-Point Match Orders but
maintain the same priority as the
discretionary range of Discretionary
Orders. The Exchange believes the
proposed priority for the discretionary
range of Mid-Point Discretionary Orders
is consistent with the Act because it
continues to provide priority to
displayed orders on the Exchange and to
orders that are designed to provide
liquidity at a set price level, such as the
mid-point of the NBBO or the limit
price of a Reserve Order. Lastly, the
Exchange notes that the proposed
priority for the discretionary range or
Mid-Point Discretionary Orders on
EDGX is identical to the priority for the
discretionary range of Mid-Point
Discretionary Orders on EDGA.52
The Exchange also believes it is
reasonable and appropriate that the
displayed price and discretionary range
of a Mid-Point Discretionary Order
maintain the same time stamp, even
when the displayed price is unchanged
but the discretionary range changed due
to a new mid-point of the NBBO being
established. It is well founded that the
price priority of a discretionary order is
based on its displayed price and not its
discretionary range.53 Should the
discretionary range widen or decrease as
a result of a new mid-point of the NBBO
being established, the time stamp and
priority of the displayed price would
remain unchanged so long as the NBBO
that the order is pegged to did not
change.
In addition, the Exchange believes
proposed subparagraph (9) to Rule
11.8(a) furthers the objectives of Section
6(b)(5) of the Act,54 because it is
designed 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. The
Exchange believes that permitting
otherwise marketable orders to post
directly to the EDGX Book is reasonable
52 See EDGA Rule 11.8(a)(2). See also BATS Rule
11.12(a)(2) (placing the discretionary range of
discretionary order last in priority behind the
displayed size of limit order, non-displayed limit
orders, pegged orders, mid-point peg orders and the
reserve size of orders); Securities Exchange Act
Release No. 67226 (June 20, 2012), 77 FR 38113
(June 26, 2012) (SR–EDGA–2012–22) (Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change to Adopt the Mid-Point Discretionary
Order).
53 NYSE Arca permits Pegged Orders to also be
designated as Discretionary Orders. See NYSE Arca
Rule 7.31(cc) and 7.31(h)(2). In such case,
Discretionary Orders are ranked based on their
displayed price, not discretionary range, and
continue to be ranked at their displayed price when
the discretionary portion of the order is
decremented. See NYSE Arca Rule 7.36(1)(C).
54 15 U.S.C. 78f(b)(5).
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18:16 Mar 24, 2014
Jkt 232001
because it is designed to provide Users
with better control over their execution
costs. Once posted to the EDGX Book,
the proposed EDGX Mid-Point
Discretionary Order would receive a
rebate if executed at its displayed price.
This allows Users to post aggressively
priced liquidity by providing certainty
as to the fee or rebate they will receive
from the Exchange if their order is
executed. In addition, as stated above,
the Exchange does not believe that there
is anything novel or controversial about
permitting otherwise marketable orders
to post to the EDGX Book and execute
against later arriving orders in a fully
transparent manner that is consistent
with pre-existing rules of other
exchanges.55
Lastly, the Exchange believes it is
reasonable for a Mid-Point Discretionary
Order to retain its time stamp and
priority in relation to other
Discretionary Orders when the
discretionary range widens or decreases
in response to a new mid-point of the
NBBO being established. A Mid-Point
Discretionary Order’s discretionary
range is capped by the mid-point of the
NBBO, which is an objectively
determined price that the User cannot
independently establish. As stated
above, no price priority is afforded to
orders based on their discretionary
range. Therefore, a Mid-Point
Discretionary Order’s discretionary
range would not receive a new time
stamp when the discretionary range
widens or decreases in response to a
new mid-point of the NBBO being
established; nor would the order’s
priority be changed in relation to other
Discretionary Orders on the EDGX Book.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change would increase
intermarket competition among the
exchanges because the Mid-Point
Discretionary Order will directly
compete with a similar order types
offered by other exchanges.56 The
Exchange believes that Users may
receive more efficient order executions
by providing them greater flexibility to
be displayed at the NBBO with
discretion to execute to the mid-point of
the NBBO, resulting in the potential
55 See
supra notes 42 thru 48 and accompanying
text.
56 See NYSE Arca Rules 7.31(cc), 7.31(h)(2),
7.31(h)(5), and 7.31(nn), Nasdaq Rules 4751(f)(4)
and 4751(11) [sic], BATS Rule 11.9(c)(8), NYSE
Rule 13, and CBOE Rule 51.8(g)(12).
PO 00000
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Fmt 4703
Sfmt 4703
benefit of price improvement.
Promotion of displayed liquidity at the
NBBO enhances market quality for all
market participants and promotes
competition amongst market enters. The
Exchange believes that the proposed
Mid-Point Discretionary Order will
contribute to the displayed liquidity on
the Exchange, which would, in turn,
benefit competition due to
improvements to the overall market
quality of the Exchange. The proposed
rule change would not burden
intramarket competition because the
Mid-Point Discretionary Order would be
available to all Members on a uniform
basis.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any written
comments from its Members or other
interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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. In
particular, the Commission seeks
comment on the following:
• Would the Mid-Point Discretionary
Order create opportunities for queuejumping strategies by executing against
later-arriving orders rather than against
identically-priced orders already resting
on the order book?
• Is it consistent with fair and orderly
markets to prevent Mid-Point
Discretionary Orders from executing
against contra-side orders with prices
that are within the net economic range
(limit price with fee/rebate) specified in
such orders?
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Federal Register / Vol. 79, No. 57 / Tuesday, March 25, 2014 / Notices
• Would leaving Mid-Point
Discretionary Orders resting on the
order book even in the presence of
contra-side orders with prices that are
within the net economic range (limit
price with fee/rebate) specified in the
Mid-Point Discretionary Order add
unnecessary complexity to the
Exchange’s priority rules and the equity
markets generally?
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 rule-comments@
sec.gov. Please include File Number SR–
EDGX–2014–05 on the subject line.
Paper Comments
emcdonald on DSK67QTVN1PROD with NOTICES
• 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–EDGX–2014–05. 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 Web site (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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549–1090, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–EDGX–
2014–05, and should be submitted on or
before April 15, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Kevin M. O’Neill,
Deputy Secretary.
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
18:16 Mar 24, 2014
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–71744; File No. SR–CBOE–
2014–024]
The purpose of this rule change is to
amend CBOE Rule 8.3 relating to the
appointment cost for VIX options.
Presently, VIX options have an
appointment cost of .50. CBOE proposes
to reduce the appointment cost to .499,
effective April 1, 2014. Market-Makers
then could utilize the excess
appointment capacity of .001 to hold an
appointment and quote electronically in
an additional Hybrid option class,
which promotes competition and
efficiency.
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the
Appointment Cost for CBOE Volatility
Index (VIX) Options
March 19, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 14,
2014, the Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CBOE proposes to amend CBOE Rule
8.3 (Appointment of Market-Makers)
relating to the appointment cost for
options on the CBOE Volatility index
(‘‘VIX’’). The text of the proposed rule
change is available on the Exchange’s
Web site https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission.
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
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
2 17
Jkt 232001
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
BILLING CODE 8011–01–P
[FR Doc. 2014–06461 Filed 3–24–14; 8:45 am]
1 15
57 17
16411
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00136
Fmt 4703
2. Statutory Basis
The Exchange believes the proposed
rule changes are 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.3 Specifically,
the Exchange believes the proposed rule
changes are consistent with the Section
6(b)(5) 4 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.
The Exchange believes that reducing
the appointment cost for VIX options
will foster competition by enabling
Market-Makers to use the excess
capacity resulting from the reduced
appointment cost in VIX options to
quote an additional Hybrid option class.
The Exchange believes that the
appointment cost reduction for VIX
options will promote competition and
efficiency. The Exchange believes that
the marketplace will benefit because the
Exchange is incentivizing MarketMakers to quote electronically an
additional Hybrid option class.
3 15
4 15
Sfmt 4703
E:\FR\FM\25MRN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
25MRN1
]]>Agencies
[Federal Register Volume 79, Number 57 (Tuesday, March 25, 2014)]
[Notices]
[Pages 16401-16411]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06461]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71747; File No. SR-EDGX-2014-05]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing of Proposed Rule Change To Adopt a New Order Type Called the
Mid-Point Discretionary Order
March 19, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on March 7, 2014, EDGX Exchange, Inc. (the ``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 self-regulatory
organization. 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to proposes to [sic] amend: (i) Rule 11.5(c)
to add a new order type called the Mid-Point Discretionary Order; and
(ii) Rule 11.8(a)(2)(D) to reflect the priority of Mid-Point
Discretionary Orders.
The text of the proposed rule change is available on the Exchange's
Internet Web site at www.directedge.com, at the Exchange's principal
office, and at the Public Reference Room of the Commission.
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 self-regulatory organization
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.
[[Page 16402]]
The self-regulatory organization 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: (i) Rule 11.5(c) to add a new order
type called the Mid-Point Discretionary Order; and (ii) Rule
11.8(a)(2)(D) to reflect the priority of Mid-Point Discretionary
Orders. The proposed Mid-Point Discretionary Order is designed to
increase displayed liquidity on the Exchange while also providing
Members the opportunity to achieve price-improvement by enabling the
order to execute at prices up to and including the mid-point of the
National Best Bid or Offer (``NBBO'').\3\
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\3\ Exchange Rule 1.5(o) defines ``NBBO'' as ``the national best
bid or offer.'' See also Rule 600(b)(42) of Regulation NMS under the
Securities Exchange Act of 1934.
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Proposed Mid-Point Discretionary Order, Rule 11.5(c)(14)
The Exchange proposes to amend Rule 11.5(c) to add a new order type
called the Mid-Point Discretionary Order, which is based on and would
operate similarly to the Mid-Point Discretionary Order on the EDGA
Exchange, Inc. (``EDGA'').\4\ Like the EDGA Mid-Point Discretionary
Order, the proposed EDGX Mid-Point Discretionary Order would be a limit
order that is displayed and pegged to the NBBO with discretion to
execute at prices to and including the mid-point of the NBBO.
Therefore, like the EDGA Mid-Point Discretionary Order, the EDGX Mid-
Point Discretionary Order would include two components: (i) A displayed
price which is pegged to the NBBO; and (ii) a discretionary range
within which it may generally execute at prices to and including the
mid-point of the NBBO.\5\ The displayed price of a Mid-Point
Discretionary Order to buy would be displayed at and pegged to the
national best bid (``NBB'').\6\ Conversely, the displayed price of a
Mid-Point Discretionary Order to sell would be displayed at and pegged
to the national best offer (``NBO'').\7\
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\4\ See EDGA Rule 11.5(c)(17). Securities Exchange Act Release
No. 67226 (June 20, 2012), 77 FR 38113 (June 26, 2012) (SR-EDGA-
2012-22) (Notice of Filing and Immediate Effectiveness of Proposed
Rule Change to Adopt the Mid-Point Discretionary Order).
\5\ As discussed further below, the Exchange notes that the
proposed Mid-Point Discretionary Order would not include a
discretionary range where: (i) The NBBO is locked or crossed; (ii)
for a buy (sell) order, its limit price is equal to or less
(greater) than the NBB (NBO); or (iii) the price of the Upper Price
Band equals or moves below an existing Protected Bid or the Lower
Price Band equals or moves above an existing Protected Offer.
\6\ Exchange Rule 1.5(o) defines ``NBB'' as ``the national best
bid.''
\7\ Exchange Rule 1.5(o) defines ``NBO'' as ``the national best
offer.''
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The displayed prices of Mid-Point Discretionary Orders would be re-
priced to track changes in the NBBO and would receive a new time stamp
each time they are re-priced. The displayed price and discretionary
range of a Mid-Point Discretionary Order would maintain the same time
stamp, even where the displayed price is unchanged but the
discretionary range changed due to a change in the mid-point of the
NBBO. Like all discretionary order types, a Mid-Point Discretionary
Order's sole time stamp would be the one assigned to the displayed
portion of the order. A Mid-Point Discretionary Order's time stamp
would only change when the displayed price is adjusted to track changes
in the NBBO to which it is pegged.
Mid-Point Discretionary Orders would not independently establish or
maintain the NBB or NBO; rather, the displayed prices of Mid-Point
Discretionary Orders would be derived from the then-current NBB or NBO.
A Mid-Point Discretionary Order would be cancelled if no NBBO exists,
or, as discussed more fully below, a trading halt is declared by the
listing market. The proposed Mid-Point Discretionary Order would be
able to join the Exchange BBO when the Exchange BBO equals the NBBO and
EDGX Book is locked or crossed by another market. If the proposed Mid-
Point Discretionary Order displayed on the Exchange would create a
locked or crossed market, the price of the order will be automatically
adjusted by the System to one minimum price variation below the current
NBO (for bids) or to one minimum price variation above the current NBB
(for offers) with no discretion to execute to the mid-point of the
NBBO.
As explained below, Mid-Point Discretionary Orders would not be
eligible to execute against resting Discretionary Orders,\8\ including
contra-side Mid-Point Discretionary Orders. Mid-Point Discretionary
Orders would only be eligible to execute at the mid-point of the NBBO
against Mid-Point Match Orders \9\ and incoming liquidity-removing
orders when their limit price is equal to the mid-point of the NBBO.
Mid-Point Discretionary Orders in stocks priced at $1.00 or more would
only be executed in sub-penny increments when they execute at the mid-
point of the NBBO against contra-side Mid-Point Match Orders.
---------------------------------------------------------------------------
\8\ See Exchange Rule 11.5(c)(13).
\9\ Exchange Rule 11.5(c)(7).
---------------------------------------------------------------------------
Mid-Point Discretionary Orders may include a limit price that would
specify the highest or lowest prices at which Mid-Point Discretionary
Orders to buy or sell would be eligible to be executed. For example, if
a Mid-Point Discretionary Order to buy is entered with a limit price
that is less than the prevailing mid-point of the NBBO it would have
discretion to buy only up to its limit price, not the mid-point of the
NBBO. A Mid-Point Discretionary Order to buy with a limit price that is
greater than the prevailing NBBO would have discretion to buy up to the
mid-point of the NBBO and not to its limit price. Absent a limit price
that is less than the prevailing mid-point of the NBBO, a Mid-Point
Discretionary Order would retain its discretion to execute at prices up
to and including the mid-point of the NBBO.\10\
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\10\ The Exchange notes that a Mid-Point Discretionary Order's
discretion to trade up to and including the mid-point of the NBBO
may be limited where the only available contra-side liquidity at the
mid-point is represented by Mid-Point Discretionary Orders, or Non-
Displayed Orders resting on the EDGX Book.
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As explained in more detail below, like other discretionary order
types, Exchange Rule 11.8(a)(2) would require that the discretionary
range of a Mid-Point Discretionary Order be given lower priority than
non-displayed limit orders and the reserve quantity of Reserve
Orders.\11\ In addition, Mid-Point Discretionary Orders would not be
eligible for routing pursuant to Exchange Rule 11.9(b)(2).
---------------------------------------------------------------------------
\11\ Exchange Rule 11.5(c)(1).
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The Exchange also proposes to address how a Mid-Point Discretionary
Order would comply with the National Market System Plan, also known as
Limit Up/Limit Down (``LULD''), established pursuant to Rule 608 of the
Exchange Act, to address extraordinary market volatility (the ``LULD
Plan'').\12\ In sum, the LULD Plan sets forth procedures that provide
for market-wide LULD requirements that are designed to prevent trades
in individual NMS Stocks from occurring outside of specified price
bands. The price bands would consist of a Lower Price Band and an Upper
Price Band for each NMS Stock. Under the LULD Plan, the Exchange is
required to establish, maintain, and enforce written policies and
procedures reasonably designed to prevent the display of offers below
the
[[Page 16403]]
Lower Price Band and bids above the Upper Price Band for an NMS Stock.
Like the EDGA Mid-Point Discretionary Order, the proposed EDGX Mid-
Point Discretionary Orders will only execute at their displayed prices
and not within their discretionary ranges when: (i) The price of the
Upper Price Band equals or moves below an existing Protected Bid; or
(ii) the price of the Lower Price Band equals or moves above an
existing Protected Offer in accordance with Exchange Rule 11.9(a)(3).
Mid-Point Discretionary Orders will resume trading against other orders
in their discretionary range when the conditions in (i) or (ii) of the
preceding sentence no longer exist.\13\ For example, assume the NBBO is
$10.00 x $10.10 and the Price Bands are $9.00 x $10.10. A Mid-Point
Discretionary Order to buy is entered and is displayed at $10.00, the
NBB, with discretion to $10.05, the mid-point of the NBBO. The Price
Bands change to $9.00 x $9.95. The NBBO is updated to $9.95 x $10.10.
The displayed price of the Mid-Point Discretionary Order is re-priced
to $9.95, the new NBB, with no discretionary range, since the price of
the Upper Price Band equals the NBB.
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\12\ See Appendix A to Securities Exchange Act Release No. 67091
(May 31, 2012) 77 FR 33498 (June 6, 2012).
\13\ See Securities Exchange Act Release No. 69002 (February 27,
2013), 78 FR 14394 (March 5, 2013) (SR-EDGA-2013-08) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Amend
EDGA Rules 1.5, 11.5, 11.8, 11.9 and 11.14 in Connection With the
Implementation of the National Market System Plan to Address
Extraordinary Market Volatility).
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Furthermore, to comply with the LULD Plan, a Mid-Point
Discretionary Order to buy would be re-priced to the Upper Price Band
and not the Protected Bid where the price of the Upper Price Band moves
below an existing Protected Bid. Likewise, a Mid-Point Discretionary
Order to sell would be re-priced to the Lower Price Band and not the
Protected Offer where the price of the Lower Price Band moves above an
existing Protected Offer. When the above conditions no longer exist,
Mid-Point Discretionary Orders will resume being displayed at and
pegged to the NBBO. For example, assume the NBBO is $10.00 x $10.10 and
the Price Bands are $9.00 x $10.10. A Mid-Point Discretionary Order to
buy is entered and is displayed at $10.00, the NBB, with discretion to
$10.05, the mid-point of the NBBO. The Price Bands change to $9.00 x
$9.99. The displayed price of the Mid-Point Discretionary Order is re-
priced to $9.99, the Upper Price Band, with no discretionary range,
since the price of the Upper Price Band moved below the NBB of $10.00.
The Price Bands then change to $9.00 x $10.10. The Mid-Point
Discretionary Order to buy would be displayed at $10.00, the NBB, with
discretion to $10.05, the mid-point of the NBBO.
While the proposed EDGX Mid-Point Discretionary Order is based on
and would operate similarly to the EDGA Mid-Point Discretionary Order,
the proposed EDGX Mid-Point Discretionary Order would differ from the
EDGA Mid-Point Discretionary Order in four areas. The main reason for
these differences is based on the different fee structures on EDGA and
EDGX. EDGA maintains a taker-maker model where Members receive rebates
for removing liquidity and pay a fee for adding liquidity.\14\ EDGX
maintains a maker-taker model where Members pay a fee for removing
liquidity and receive a rebate for adding liquidity.\15\
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\14\ See EDGA Fee Schedule available at https://www.directedge.com/Trading/EDGAFeeSchedule.aspx.
\15\ See EDGX Fee Schedule available at https://www.directedge.com/Trading/EDGXFeeSchedule.aspx.
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First, unlike the EDGA Mid-Point Discretionary Order, the proposed
EDGX Mid-Point Discretionary Order would not be eligible to execute
immediately upon entry in the System \16\ at its displayed price.\17\
Instead, the proposed EDGX Mid-Point Discretionary Order would be
eligible to execute at its displayed price only after it has been
posted to the EDGX Book.\18\ For example, assume the NBBO is $10.00 x
$10.01. A Discretionary Order to buy at $10.00 with discretion to
$10.01 is entered on the EDGX Book. A Mid-Point Discretionary Order to
sell with a limit price of $10.01 would not execute against the resting
Discretionary Order to buy that is displayed at $10.00 with discretion
to $10.01. Instead, the Mid-Point Discretionary Order to sell would be
posted to the EDGX Book and displayed at $10.01, the NBO, with no
discretionary range because it is at its limit price. A second
Discretionary Order to buy at $10.00 with discretion to $10.01 is
entered. The second Discretionary Order to buy is willing to act as a
liquidity remover and pay a fee. Therefore, similar to functionality on
other exchanges,\19\ the second Discretionary Order to buy would
execute against the Mid-Point Discretionary Order to sell at $10.01.
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\16\ Exchange Rule 1.5(cc) defines ``System'' as ``the
electronic communications and trading facility designated by the
Board through which securities orders of Users are consolidated for
ranking, execution and, when applicable, routing away.''
\17\ The Exchange notes that the proposed Mid-Point
Discretionary Order would be permitted to execute at the mid-point
of the NBBO upon entry into the System.
\18\ Exchange Rule 1.5(d) defines ``EDGX Book'' as the
``System's electronic file of orders.''
\19\ See infra notes 20 thru 28.
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If the Exchange would allow for the execution of a Mid-Point
Discretionary Order at its displayed price immediately upon entry into
the System, the order would not receive a rebate and instead would be
subject to the applicable rates for removing liquidity from the EDGX
Book. Therefore, to avoid being charged a fee, the proposed EDGX Mid-
Point Discretionary Order would not be eligible to execute at its
displayed price immediately upon entry in the System. In contrast, on
EDGA, incoming Mid-Point Discretionary Orders may immediately execute
upon entry and will receive a rebate for doing so. The Exchange
believes that this approach is designed to accomplish the twin goals in
implementing this order type--increasing both displayed liquidity and
liquidity at the mid-point of the NBBO--by posting Mid-Point
Discretionary Orders at their displayed prices on the EDGX Book with
discretion to execute to and including the mid-point of the NBBO. The
Exchange does not believe that its proposal is unique in its
application of the Exchange's pricing model to the design of the
functionality. For example, under the New York Stock Exchange, LLC
(``NYSE'') Retail Liquidity Program, a Type 1 Retail Order, will
interact only with available contra-side Retail Price Improvement
(``RPI'') Orders and will not interact with, but instead will by-pass
other available contra-side interest, including hidden orders priced
better than RPI Orders, in the NYSE's systems.\20\ The Exchange
believes that, in order to provide the Retail Order a rebate, the NYSE
by-passes non-RPI Orders resting on the NYSE's system because those
resting orders are also expecting a rebate.\21\ Therefore, the NYSE
permits Type 1 Retail Orders to by-pass resting contra-side interest in
favor of the RPI Order.\22\
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\20\ See NYSE Rule 107C(k)(1).
\21\ On NYSE, Retail Orders that remove liquidity receive a
rebate while RPI Orders would pay a fee. See NYSE Fee Schedule
available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited January 29, 2014).
\22\ See also Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55) (Order
approving the NYSE's Retail Liquidity Program on a pilot basis).
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In addition, a Mid-Point Discretionary Order not executing at its
displayed price upon arrival is similar to post-only midpoint eligible
orders offered by other exchanges.\23\ Other exchanges also
[[Page 16404]]
permit otherwise marketable orders to post directly to that exchange
and execute against later arriving orders. For example, the NYSE
permits MPL-ALO Orders to not execute upon arrival even if
marketable.\24\ The NYSE always considers the MPL-ALO the liquidity
provider, and, therefore, it would never interact with a contra-side
MPL-ALO order.\25\ Similarly, NYSE Arca, Inc. (``NYSE Arca'') prohibits
an MPL-ALO Order from executing against an incoming MPL-ALO Order.\26\
In both cases, the MPL-ALO Order would execute against later arriving
contra-side mid-point liquidity ahead of the resting contra-side MPL-
ALO Order. In addition, on the Chicago Board Options Exchange,
Incorporated (``CBOE''), if a Silent Post-Mid Seeker Order ``is to
trade upon its arrival into the system (thereby `removing' liquidity),
it will not trade, but instead rest until another order comes in for it
to trade against.'' \27\ Finally, BATS Exchange, Inc. (``BATS'') allows
display-eligible Post Only orders to rest at prices that lock non-
displayed interest, making such non-displayed interest temporarily non-
executable and allowing the contra-side Post Only order to execute
against later arriving orders notwithstanding such non-displayed
interest.\28\
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\23\ See NYSE Rules 13(e) (providing that the NYSE's Mid-Point
Passive Liquidity (``MPL'') Order may include an ``Add Liquidity
Only'' (``ALO'') modifier which would prohibit the order from
executing upon arrival even if marketable). See Securities Exchange
Act Release No. 71330 (January 16, 2014), 79 FR 3895 (January 23,
2014) (SR-NYSE-2013-71) (Order Approving the MPL Order stating that
the proposed MPL Order could provide market participants with better
control of their execution costs). An MPL order with an ALO modifier
(``MPL-ALO order'') is always considered the liquidity providing
order, and, therefore, would never interact with a contra-side MPL-
ALO order. See Securities Exchange Act Release No. 71488 (February
5, 2014), 79 FR 8215 (February 11, 2014) (SR-NYSE-2014-07)
(providing that, ``[i]f triggered to trade, an MPL-ALO Order will be
eligible to trade with both arriving and resting contra-side
interest, but will not trade with a contra-side MPL-ALO Order'').
Executions would be allocated amongst the arriving and resting
contra-side interest in accordance with NYSE Rule 72. Id. Once
posted, the NYSE's MPL-ALO Order would be considered a ``liquidity
provider'' and be eligible to receive a rebate. See Liquidity
Indicator 2 in the NYSE Fee Schedule available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited
January 29, 2014). See the Nasdaq Stock Market LLC (``Nasdaq'') Rule
4751(f)(11) (Mid-Point Peg Post Only Order). Nasdaq's Mid-Point Peg
Post Only Order may also not execute upon arrival even if
marketable. See example 1 in https://www.nasdaqtrader.com/content/productsservices/trading/MPPO_factsheet.pdf (describing Nasdaq's
Mid-Point Peg Post Only Order functionality).
\24\ See NYSE Rules 13(e) (providing that the NYSE's MPL Order
may include an ALO modifier which would prohibit the order from
executing upon arrival even if marketable). See Securities Exchange
Act Release No. 71330 (January 16, 2014), 79 FR 3895 (January 23,
2014) (SR-NYSE-2013-71) (Order Approving the MPL Order stating that
the proposed MPL Order could provide market participants with better
control of their execution costs).
\25\ See Securities Exchange Act Release No. 71488 (February 5,
2014), 79 FR 8215 (February 11, 2014) (SR-NYSE-2014-07) (providing
that, ``[i]f triggered to trade, an MPL-ALO Order will be eligible
to trade with both arriving and resting contra-side interest, but
will not trade with a contra-side MPL-ALO Order''). Once posted, the
NYSE's MPL Order would be considered a ``liquidity provider'' and be
eligible to receive a rebate. See Liquidity Indicator 2 in the NYSE
Fee Schedule available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited January 29, 2014).
\26\ See NYSE Arca Rules 7.31(h)(5) and (nn). NYSE Arca permits
a member to elect that a marketable MPL-ALO Order interact with a
resting MPL-ALO Order. See also Securities Exchange Act Release No.
67652 (August 14, 2012), 77 FR 50189 (August 20, 2012) (SR-NYSEArca-
2012-83). If both the resting interest and the incoming MPL-ALO
Order are designated to interact, the incoming MPL-ALO Order would
be considered the liquidity taker and subject to applicable fees.
Id.; see also Liquidity Indicator 2 in the NYSE Fee Schedule
available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited January 29, 2014).
\27\ See CBOE Rule 51.8(g)(12); Securities Exchange Act Release
No. 67548 (July 31, 2012), 77 FR 46783 (August 6, 2012) (SR-CBOE-
2012-49). See also Nasdaq Rule 4751(f)(11) (Mid-Point Peg Post Only
Order). Nasdaq's Mid-Point Peg Post Only Order may also not execute
upon arrival even if marketable. See example 1 in https://www.nasdaqtrader.com/content/productsservices/trading/MPPO_factsheet.pdf (describing Nasdaq's Mid-Point Peg Post Only Order
functionality).
\28\ See Securities Exchange Act Release No. 64475 (May 12,
2011), 76 FR 28830 (May 18, 2011) (Notice of Filing of Proposed Rule
Change by BATS Exchange, Inc. to Amend BATS Rule 11.9, Entitled
``Orders and Modifiers'' and BATS Rule 11.13, Entitled ``Order
Execution''); see also Securities Exchange Act Release No. 64754
(June 27, 2011), 76 FR 38712 (July 1, 2011) (Order Approving a
Proposed Rule Change to Amend BATS Rule 11.9, Entitled ``Orders and
Modifiers'' and BATS Rule 11.13, Entitled ``Order Execution'').
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Second, Mid-Point Discretionary Orders would also not be eligible
to execute against resting Discretionary Orders, including contra-side
Mid-Point Discretionary Orders. For example, assume the NBBO is $10.00
x $10.02. A Discretionary Order to buy at $10.00 with discretion to
$10.01 is entered on the EDGX Book. A Mid-Point Discretionary Order to
buy is also entered and displayed at $10.00, the NBB, with discretion
to $10.01, the mid-point of the NBBO. A Mid-Point Discretionary Order
to sell would not execute against the Discretionary Order to buy or the
Mid-Point Discretionary to buy at $10.01, the mid-point of the
NBBO.\29\ Instead, the Mid-Point Discretionary Order to sell would be
posted to the EDGX Book and displayed at $10.02, the NBO, with
discretion to execute to $10.01, the mid-point of the NBBO. The
Exchange is proposing these restrictions so that it may offer a low
cost pricing structure for the EDGX Mid-Point Discretionary Order. On
EDGA, a Mid-Point Discretionary Order may execute against resting
Discretionary Orders, including contra-side Mid-Point Discretionary
Orders, because both orders would pay a fee. However, on EDGX, if the
Exchange were to allow Mid-Point Discretionary Orders to execute
against each other, the provider of liquidity would receive a rebate
while the taker of liquidity would be charged no fee. Members electing
to use the proposed Mid-Point Discretionary Order would forego the
above described execution opportunities to receive the associated low
cost pricing structure. Members willing to pay a fee for broader
execution opportunities at the mid-point of the NBBO could instead
choose to utilize Mid-Point Match Orders.
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\29\ As discussed above, the proposed EDGX Mid-Point
Discretionary Order would not be eligible to execute immediately
upon entry in the System at its displayed price, but would be
permitted upon entry to execute at the mid-point of the NBBO. See
supra note 17.
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Third, Mid-Point Discretionary Orders would only be eligible to
execute at the mid-point of the NBBO against Mid-Point Match Orders and
incoming liquidity-removing orders when their limit price is equal to
the mid-point of the NBBO.\30\ Members utilizing these order types are
explicitly adding liquidity at the mid-point of the NBBO and, thereby,
provide the benefit of price improving liquidity to Users. Restricting
the orders against which a Mid-Point Discretionary Order may execute to
those orders that are designed to explicitly add liquidity at the mid-
point of the NBBO is a reasonable means by which to encourage Members
to add committed mid-point liquidity. In addition, these restrictions
also enable the Exchange to offer a low cost pricing structure for the
EDGX Mid-Point Discretionary Order because both Mid-Point Match Orders
and incoming liquidity-removing orders would be charged a fee, enabling
the Exchange to provide a rebate or no fee to the proposed Mid-Point
Discretionary Order.
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\30\ For a description of the proposed order interaction, see
infra, Example No. 2 under the heading ``Mid-Point Discretionary
Orders Entered with Limit Prices'' and the first example under the
heading ``Sub-Penny Executions''.
---------------------------------------------------------------------------
Fourth, on EDGA, in the event a trading halt is declared by the
listing market, a resting Mid-Point Discretionary Orders would be
eligible for execution once the trading halt is lifted by the listing
market. Conversely, on EDGX, in the event a trading halt is declared by
the listing market, any Mid-Point Discretionary Orders resting on the
EDGX Book would be immediately cancelled. As described above, the
approach taken by EDGX is a result of its maker-taker fee structure and
serves to avoid a situation where Mid-Point Discretionary Order would
be assessed a take fee when the market re-opens. As discussed above in
regard to execution of Mid-Point Discretionary Orders upon entry into
the System, this approach is
[[Page 16405]]
also consistent with the treatment of a Mid-Point Discretionary Order
that contains a post only instruction at its displayed price.
Examples
The following examples demonstrate how a Mid-Point Discretionary
Order would operate in various scenarios.
Mid-Point Discretionary Orders Entered Without Limit Prices
Example No. 1. Assume the NBBO is $10.00 x $10.03, resulting in a
mid-point of $10.015. A Mid-Point Discretionary Order to buy 100 shares
is entered without a limit price. The Mid-Point Discretionary Order
would be displayed at $10.00, the NBB, with discretion to buy up to
$10.015, the mid-point of the NBBO.
A contra-side market order or marketable limit order to
sell 100 shares at $10.00 would execute against the Mid-Point
Discretionary Order to buy at $10.00 for 100 shares.
A contra-side limit order to sell 100 shares at $10.01
would execute against the Mid-Point Discretionary Order to buy at
$10.01 for 100 shares.
A contra-side limit order to sell 100 shares at $10.02
would not execute against the Mid-Point Discretionary Order to buy
because the Mid-Point Discretionary Order had discretion to buy only up
to the mid-point of the NBBO of $10.015. The limit order to sell would
be displayed at $10.02, resulting in a new NBBO mid-point of $10.01.
Example No. 2. Assume the NBBO is $10.00 x $10.03, resulting in a
mid-point of $10.015. A Mid-Point Discretionary Order to buy 100 shares
is entered without a limit price. The Mid-Point Discretionary Order
would be displayed at $10.00, the NBB, with discretion to buy up to
$10.015, the mid-point of the NBBO.\31\
---------------------------------------------------------------------------
\31\ This example is designed to illustrate that the displayed
price of a Mid-Point Discretionary Order entered without a limit
price would continue to move in tandem with, and be displayed at,
changes in the NBB (for buy orders) and the NBO (for sell orders).
The Mid-Point Discretionary Order would receive a new time stamp
each time it is re-priced.
---------------------------------------------------------------------------
Assume the NBBO changes to $10.01 x $10.06, resulting in a
new NBBO mid-point of $10.035. The displayed price of the Mid-Point
Discretionary Order would be adjusted to $10.01, the NBB, with
discretion to buy up to $10.035, the new NBBO mid-point.
If the NBBO changes once again to $10.03 x $10.05
resulting in a new NBBO mid-point of $10.04, the displayed price of the
Mid-Point Discretionary Order would be adjusted to $10.03, the new NBB,
with discretion to buy up to $10.04, the new NBBO mid-point.
Example No. 3. Assume the NBBO is $10.00 x $10.03, resulting in a
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered
to buy 100 shares without a limit price. The Mid-Point Discretionary
Order would be displayed at $10.00, the NBB, with discretion to buy up
to $10.015, the mid-point of the NBBO. Assume further that the EDGX
Book contains two other displayed orders to buy 100 shares each at
$10.00, both with time priority over the Mid-Point Discretionary Order.
Assume further that there is a displayed resting order to buy at $9.99
on the EDGX Book, and no other market is publishing a bid at $10.00.
A contra-side market order to sell 200 shares would
execute against the two buy orders with time priority over the Mid-
Point Discretionary Order at $10.00. The Mid-Point Discretionary Order
to buy would remain on the EDGX Book and be re-price at $9.99 because
it could not independently establish or maintain the NBB or NBO--
rather, its displayed price would be derived from the NBB and NBO.\32\
---------------------------------------------------------------------------
\32\ This example assumes that no other market is displaying a
quote at the NBBO. A Mid-Point Discretionary Order that would
independently establish or maintain the NBBO would be cancelled back
to the Member.
---------------------------------------------------------------------------
The Mid-Point Discretionary Order would be displayed at
$9.99 with discretion to trade up to $10.01 (assuming the NBO remained
at $10.03), and the resting buy order at $9.99 would maintain time
priority over the Mid-Point Discretionary Order.
Mid-Point Discretionary Orders Entered With Limit Prices
The following examples demonstrate how a Mid-Point Discretionary
Order entered with a limit price would operate:
Example No. 1. Assume the NBBO is $10.00 x $10.03, resulting in an
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered
to buy 100 shares with a limit price of $10.03. The Mid-Point
Discretionary Order would be displayed at $10.00, the NBB, with
discretion to buy up to $10.015, the mid-point of the NBBO.
A contra-side market order or marketable limit order to
sell 100 shares at $10.00 would execute against the Mid-Point
Discretionary Order to buy at $10.00 for 100 shares.
A contra-side limit order to sell 100 shares at $10.01
would execute against the Mid-Point Discretionary Order to buy at
$10.01 for 100 shares.
A contra-side limit order to sell 100 shares at $10.02
would not execute against the Mid-Point Discretionary Order to buy
because the Mid-Point Discretionary Order had discretion to buy only up
to the mid-point of the NBBO of $10.015. The limit order to sell would
be displayed at $10.02, resulting in a new NBBO mid-point of $10.01.
Example No. 2. Assume the NBBO is $10.00 x $10.04, resulting in a
NBBO mid-point of $10.02. A Mid-Point Discretionary Order is entered to
buy 100 shares with a limit price of 10.03. The Mid-Point Discretionary
Order would be displayed at $10.00, the NBB, with discretion to buy up
to $10.02, the mid-point of the NBBO.
A contra-side limit order to sell 100 shares at $10.02
would execute against the Mid-Point Discretionary Order to buy at the
NBBO mid-point of $10.02 for 100 shares.
A contra-side limit order to sell 100 shares at $10.01
would execute against the Mid-Point Discretionary Order to buy at
$10.01 for 100 shares.
Example No. 3. Assume the NBBO is $10.01 x $10.06, resulting in a
NBBO mid-point of $10.035. A Mid-Point Discretionary Order is entered
to buy 100 shares with a limit price of 10.03. The Mid-Point
Discretionary Order to buy would be displayed at $10.01, the NBB, with
discretion to buy up to $10.03, and not the NBBO mid-point of 10.035,
because the NBBO mid-point would be higher than the Mid-Point
Discretionary Order's limit price of $10.03.
A contra-side limit order to sell 100 shares at $10.03
would execute against the Mid-Point Discretionary Order to buy at
$10.03.
A contra-side limit order to sell 100 shares at $10.02
would execute against the Mid-Point Discretionary Order to buy at
$10.02.
Example No. 4. Assume the NBBO is $10.03 x $10.05, resulting in a
NBBO mid-point of $10.04. A Mid-Point Discretionary Order is entered to
buy 100 shares with a limit price of 10.03. The displayed price of the
Mid-Point Discretionary Order to buy would be $10.03, its limit price
and the current NBB. Therefore, the Mid-Point Discretionary Order would
not have discretion to trade up to the NBBO mid-point of $10.04 because
that exceeds its limit price of $10.03.
If the NBBO changed to $10.04 x $10.06, resulting in a new
NBBO mid-point of $10.05, the Mid-Point Discretionary Order to buy
would be posted to the EDGX Book at its limit price of $10.03 and be
displayed as a limit order with no discretion because the NBB and the
NBBO mid-point exceed its limit price of $10.03.
[[Page 16406]]
However, if the NBBO again changed to $10.02 x $10.03,
then the Mid-Point Discretionary Order would again be displayed at
$10.02, the NBB, with discretion to trade up to $10.025, the new NBBO
mid-point.
Example No. 5. Assume from Example No. 4 above that the NBBO
remains $10.04 x $10.06, with a NBBO mid-point of $10.05, and the Mid-
Point Discretionary Order to buy continues to be posted to the EDGX
Book and displayed at its limit price of $10.03. The EDGX Book contains
a displayed order to buy 100 shares at $10.04 and two separate
displayed orders to buy 100 shares each at $10.03 with time priority
over the Mid-Point Discretionary Order. Assume further that there is
also a displayed order to buy 100 shares at $10.02 on the EDGX Book,
and no other market is publishing a bid at either $10.03 or $10.04.
A contra-side market order to sell 300 shares would
execute first against the buy order on the book at $10.04, and then
against the two buy orders on the book with time priority over the Mid-
Point Discretionary Order at $10.03. The Mid-Point Discretionary Order
to buy at $10.03 would remain on the EDGX Book. This execution would
result in a new NBBO of $10.03 x $10.06. However, the Mid-Point
Discretionary Order would be re-priced to $10.02 because it could not
independently establish or maintain an NBB or NBO--rather, its
displayed price would be derived from the then current NBB and NBO. The
Mid-Point Discretionary Order would be displayed at $10.02 with
discretion to trade up to $10.03, its limit price (assuming the NBO
remained at $10.06). The Mid-Point Discretionary Order would receive a
new time stamp with time priority behind the resting buy order at
$10.02.
Operation of the Mid-Point Discretionary Order during a Locked or
Crossed Market
Example No. 1. Assume the NBBO is $10.03 x $10.03 resulting in a
locked market. The Exchange BBO is $10.00 x $10.03. A Mid-Point
Discretionary Order to buy with a limit price of $10.04 is entered.
Because the Mid-Point Discretionary Order would cross the NBO of
$10.03, it is displayed on the EDGX Book at $10.02, one minimum price
variation away from the NBO with no discretionary range. The Exchange
BBO is now adjusted to $10.02 x $10.03.
Example No. 2. Assume the NBBO is $10.03 x $10.03 resulting in a
locked market. The Exchange BBO is $10.00 x $10.03. A Mid-Point
Discretionary Order to buy with a limit price of $10.02 is entered. The
Mid-Point Discretionary Order is posted to the EDGX Book at $10.02 with
no discretionary range. The Exchange BBO is updated to $10.02 x $10.03.
Example No. 3. Assume the NBBO is $10.03 x $10.03 resulting in a
locked market. The Exchange BBO is $10.00 (400 shares) x $10.03 (100
shares).\33\ A Mid-Point Discretionary Order to sell with a limit price
of $10.02 is entered. The Mid-Point Discretionary Order joins the
Exchange NBO and is posted to the EDGX Book at $10.03 because it does
not independently establish the NBO and there are displayed sell orders
on the EDGX Book. The Exchange BBO is updated to $10.00 (400 shares) x
$10.03 (200 shares).
---------------------------------------------------------------------------
\33\ This example assumes that the Exchange BBO equals the NBBO
and did not create a locked or crossed market.
---------------------------------------------------------------------------
Example No. 4. Assume the NBBO is $10.04 x $10.03 resulting in a
crossed market. The Exchange BBO is $10.00 x $10.03. A Mid-Point
Discretionary Order to buy with a limit price of $10.04 is entered.
Because the Mid-Point Discretionary Order would cross the NBO of
$10.03, it displayed on the EDGX Book at $10.02, one minimum price
variation away from the NBO with no discretionary range. The Exchange
BBO is now adjusted to $10.02 x $10.03.
Example No. 5. Assume the NBBO is $10.05 x $10.02 resulting in a
crossed market. The Exchange BBO is $10.00 x $10.02. A Mid-Point
Discretionary Order to buy with a limit price of $10.01 is entered. The
Mid-Point Discretionary Order is posted to the EDGX Book at $10.01
because it does not lock or cross the NBO. The Exchange BBO is updated
to $10.01 x $10.02.
Example No. 6. Assume the NBBO is $10.05 x $10.03 resulting in a
crossed market. The Exchange BBO is $10.00 (400 shares) x $10.03 (100
shares).\34\ A Mid-Point Discretionary Order to sell with a limit price
of $10.03 is entered. The Mid-Point Discretionary Order joins the
Exchange NBO and is posted to the EDGX Book at $10.03 because it does
not independently establish the NBO and there are displayed sell orders
on the EDGX Book. The Exchange BBO is updated to $10.00 (400 shares) x
$10.03 (200 shares).
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
Sub-Penny Executions
Mid-Point Discretionary Orders in stocks priced at $1.00 or more
would only be executed in sub-penny increments when they execute at the
mid-point of the NBBO against contra-side Mid-Point Match Orders. Mid-
Point Discretionary Orders are not eligible to execute against contra-
side Mid-Point Discretionary Orders at the mid-point of the NBBO. Mid-
Point Discretionary Orders would execute against all other order types
solely in whole penny increments. Mid-Point Discretionary Orders would
not be displayed or ranked in sub-penny increments.
Example No. 1. Assume the NBBO is $10.00 x $10.03, resulting in a
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered
to buy 100 shares with a limit price of $10.02. The Mid-Point
Discretionary Order would be displayed at $10.00, the NBB, with
discretion to buy up to $10.015, the mid-point of the NBBO.
A contra-side Mid-Point Match order sell 100 shares would
execute against the Mid-Point Discretionary Order to buy at the NBBO
mid-point of $10.015.
Alternatively, a contra-side Mid-Point Discretionary Order
to sell 100 shares would be displayed at $10.03, the NBO, with
discretion to sell to $10.015, the mid-point of the NBBO. The Mid-Point
Discretionary Order to sell would not execute against the Mid-Point
Discretionary Order to buy at the NBBO mid-point of $10.015 because
Mid-Point Discretionary Orders are not eligible to execute against
contra-side Mid-Point Discretionary Orders at the mid-point of the
NBBO.
Example No. 2. Assume the NBBO is $10.00 x $10.03, resulting in a
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered
to buy 100 shares with a limit price of $10.02. The Mid-Point
Discretionary Order would be displayed at $10.00, the NBB, with
discretion to buy up to $10.015, the mid-point of the NBBO. Assume the
NBBO changes to $10.02 x $10.05, resulting in a new NBBO mid-point of
$10.035.
The Mid-Point Discretionary Order to buy would be
displayed at $10.02, the NBB, with no discretion to trade above $10.02
to the NBBO mid-point of $10.035 because its limit price prevents
executions above $10.02. A contra-side Mid-Point Match Order to sell
100 shares is entered but would not execute against the Mid-Point
Discretionary Order to buy at $10.02, because the NBBO mid-point of
$10.035 would exceed its limit price. The Mid-Point Match Order to sell
would be entered on the EDGX Book at the mid-point of the NBBO.
Proposed Amendments to Rule 11.8(a)
The Exchange proposes to amend Rule 11.8(a)(2)(D) to reflect the
priority that Mid-Point Discretionary Orders would have when they are
executed within their discretionary range. Rule 11.8(a)(2) states, in
sum, that the System
[[Page 16407]]
shall execute equally priced trading interest in time priority in the
following order: (i) Displayed size of limit orders; (ii) Mid-Point
Match Orders; (ii) non-displayed limit orders and the reserve quantity
of Reserve Orders; (iii) discretionary range of discretionary orders as
set forth in current Rule 11.5(c)(13); and (iv) Route Peg Orders as set
forth in current Rule 11.5(c)(17).
When Mid-Point Discretionary Orders execute at their displayed
price, they would have the same priority as that of the displayed size
of limit orders, in accordance with Rule 11.8(a)(2)(A). However, when
they execute within their discretionary range, the Exchange proposes
that they would have the same priority as the discretionary range of
Discretionary Orders, as set forth in Rule 11.8(a)(2)(D). Therefore,
the Exchange is proposing to amend Rule 11.8(a)(2)(D) to account for
the priority of Mid-Point Discretionary Orders when they act within
their discretionary range.
Example. Assume the NBBO is $10.00 x $10.04, resulting in a NBBO
mid-point of $10.02. A Mid-Point Discretionary Order is entered to buy
100 shares with a limit price of $10.02. A Non-Displayed order to buy
100 shares at $10.02 is subsequently entered. The Mid-Point
Discretionary Order would be displayed at $10.00, the NBB, with
discretion to buy up to $10.02, the NBBO mid-point.
A contra-side limit order to sell 100 shares at $10.02
would execute against the Non-Displayed order, and not the Mid-Point
Discretionary Order, since Non-Displayed orders would have priority
over the discretionary range of Mid-Point Discretionary Orders in
accordance with Rule 11.8(a)(2).
In addition, the Exchange proposes new Rule 11.8(a)(9) to address
the priority of orders when a Mid-Point Discretionary Order is posted
the EDGX Book. Where orders to buy (or sell) are made at the same
price, Exchange Rule 11.8(a)(2) generally requires, that the order
clearly established as the first entered into the System at that price
shall have precedence up to the number of shares of stock specified in
the order. As described above, the proposed EDGX Mid-Point
Discretionary Order would not be eligible to execute immediately upon
entry in the System at its displayed price.\35\ Instead, the proposed
EDGX Mid-Point Discretionary Order would be eligible to execute at its
displayed price only after it has been posted to the EDGX Book.
Therefore, the Exchange proposes to add subparagraph (9) to Rule
11.8(a) to clarify that, in accordance with proposed Rule 11.5(c)(14),
where a Mid-Point Discretionary Order does not execute against certain
marketable contra-side interest resting on the EDGX Book, it will,
notwithstanding Exchange Rule 11.8(a)(2) described above, be posted
directly to the EDGX Book and will be eligible to execute against later
arriving marketable contra-side orders.
---------------------------------------------------------------------------
\35\ See supra notes 16 thru 19 and accompanying text. Mid-Point
Discretionary Orders would also not be eligible to execute against
resting Discretionary Orders, including contra-side Mid-Point
Discretionary Orders. See supra notes 29 and accompanying text; see
also infra notes 47 thru 48 and accompanying text.
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2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent
with Section 6(b) of the Act \36\ and further the objectives of Section
6(b)(5) of the Act,\37\ because they are designed 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, to
foster cooperation and coordination with persons engaged in
facilitating transactions in securities, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Proposed Mid-Point Discretionary Order, Rule 11.5(c)(14)
The Exchange believes that the proposed Mid-Point Discretionary
Order is designed 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 because it would provide Users \38\
with an order type that may result in the efficient execution of such
orders and provide additional flexibility and increased functionality
to the Exchange's System and its Users. Specifically, the Exchange
believes that Users may receive more efficient order executions by
providing them greater flexibility to be displayed at the NBBO with
discretion to execute up to and including the mid-point of the NBBO,
resulting in the potential benefit of price improvement. The proposed
Mid-Point Discretionary Order is designed to increase displayed
liquidity on the Exchange while also enhancing execution opportunities
at the mid-point of the NBBO. Promotion of displayed liquidity at the
NBBO enhances market quality for all Users and promotes competition
amongst market centers. Therefore, the Exchange believes that the
proposed Mid-Point Discretionary Order will promote just and equitable
principles of trade and perfect the mechanism of a free and open market
and a national market system because it is designed to: (i) Contribute
to the displayed liquidity on the Exchange at the NBBO while providing
additional opportunities for price improvement, which would, in turn,
benefit competition due to improvements to overall market quality; and
(ii) increase competition between exchanges offering similar
functionality.
---------------------------------------------------------------------------
\38\ Exchange Rule 1.5(ee) defines ``User'' as ``any Member or
Sponsored Participant who is authorized to obtain access to the
System pursuant to [Exchange] Rule 11.3.''
---------------------------------------------------------------------------
The proposed Mid-Point Discretionary Order is similar to and based
on the Mid-Point Discretionary Order on EDGA.\39\ While the proposed
EDGX Mid-Point Discretionary Order would function similarly to the
existing Mid-Point Discretionary Order on EDGA, the order types would
differ in four areas. The Exchange does not believe that these
differences are significant or presents unique issues with respect to
the consistency of the Mid-Point Discretionary Order with the
requirements of the Act. The Exchange believes these differences are
reasonable due to the different fee structures on EDGA and EDGX and are
designed to encourage explicitly priced liquidity at the mid-point of
the NBBO, while enabling the Exchange to offer a low cost pricing
structure for the order type. EDGA maintains a taker-maker model where
Members receive rebates for removing liquidity and pay a fee for adding
liquidity.\40\ EDGX maintains a maker-taker model where Members pay a
fee for removing liquidity and receive a rebate for adding
liquidity.\41\
---------------------------------------------------------------------------
\39\ See EDGA Rule 11.5(c)(17). Securities Exchange Act Release
No. 67226 (June 20, 2012), 77 FR 38113 (June 26, 2013) (SR-EDGA-
2012-22) (Notice of Filing and Immediate Effectiveness Of Proposed
Rule Change to Adopt the Mid-Point Discretionary Order).
\40\ See EDGA Fee Schedule available at https://www.directedge.com/Trading/EDGAFeeSchedule.aspx.
\41\ See EDGX Fee Schedule available at https://www.directedge.com/Trading/EDGXFeeSchedule.aspx.
---------------------------------------------------------------------------
First, unlike the EDGA Mid-Point Discretionary Order, the proposed
EDGX Mid-Point Discretionary Order would not be eligible to execute
immediately upon entry in the System at its displayed price. Instead,
the proposed EDGX Mid-Point Discretionary Order would be eligible to
execute at its displayed price only after it has been posted to the
EDGX Book. If the Exchange would allow for the execution of a Mid-Point
Discretionary Order at its displayed price immediately upon entry into
the System, the order would not receive a rebate and instead would be
subject to the applicable rates for removing liquidity from the EDGX
[[Page 16408]]
Book. Therefore, to avoid being charged a fee, the proposed EDGX Mid-
Point Discretionary Order would not be eligible to execute at its
displayed price immediately upon entry in the System.\42\ It would be
eligible to execute at its displayed price against incoming liquidity
removing orders because such orders are willing to accept the immediate
execution and not post to the EDGX Book. Orders resting on the EDGX
Book are willing to forgo an execution against the incoming Mid-Point
Discretionary Order at its displayed price here because the User is
expecting to receive a rebate once posted to the EDGX Book. The
Exchange believes that this approach is designed to accomplish the twin
goals in implementing this order type--increasing both displayed
liquidity and liquidity at the mid-point of the NBBO on the EDGX Book.
In addition, the Exchange believes this would optimize available
displayed liquidity for incoming orders and provide price improvement
at the mid-point of the NBBO. The Exchange does not believe that its
proposal is unique in its application of the Exchange's pricing model
to the design of the functionality.\43\
---------------------------------------------------------------------------
\42\ In contrast, on EDGA, incoming Mid-Point Discretionary
Orders may immediately execute upon entry and will receive a rebate
for doing so.
\43\ See supra notes 20 thru 28 and accompanying text.
---------------------------------------------------------------------------
The Exchange does not believe that there is anything novel or
controversial about permitting otherwise marketable orders to post to
the EDGX Book and execute against later arriving orders in a fully
transparent manner that is consistent with pre-existing rules of other
exchanges described above.\44\ Permitting otherwise marketable orders
to post directly to that exchange is designed to provide Users with
better control over their execution costs. It allows Users to post
aggressively priced liquidity, as such Users have certainty as to the
fee or rebate they will receive from the Exchange if their order is
executed. Without such ability, the Exchange believes that certain
Users would simply post less aggressively priced liquidity, and prices
available for market participants, including retail investors, would
deteriorate. Members remain focused on their trading costs, and in a
pricing environment characterized by fees on one side of a trade being
used to fund rebates on the other side, it is entirely understandable
that some Members may wish to structure their trading activity in a
manner that is more likely to avoid a fee and earn a rebate.\45\
Therefore, the Exchange believes Mid-Point Discretionary Order not
executing at their displayed price upon arrival furthers the objectives
of Section 6(b)(5) of the Act,\46\ because it is designed 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. The Exchange believes this to be the case even if, as described
above, a Mid-Point Discretionary Order will execute in certain
circumstances against a later arriving contra-side order when there is
non-displayed contra-side interest resting on the Exchange's order book
at that price. As discussed above, this order, once resting, is
expecting to receive a rebate for any execution.
---------------------------------------------------------------------------
\44\ See supra notes 20 thru 28 and accompanying text.
\45\ See e.g., Securities Exchange Act Release No. 69194 (March
20, 2013), 78 FR 18386 at 18391 n. 29 (March 26, 2013) (SR-Phlx-
2013-24) (Notice of Filing of Proposed Rule Change); see also
Securities Exchange Act Release No. 69452 (April 25, 2013), 78 FR
25512 at 25514 (May 1, 2013) (Order Approving SR-PHLX-2013-24)
(stating that the Midpoint Peg Post-Only Order ``is intended to
provide market participants with better control over their execution
costs and to provide a means to offer price improvement
opportunities'').
\46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Second, Mid-Point Discretionary Orders would also not be eligible
to execute against resting Discretionary Orders, including contra-side
Mid-Point Discretionary Orders. The Exchange believes precluding the
above executions promotes just and equitable principles of trade by
permitting the Exchange to offer a low cost pricing structure while
also offering an order type that provides Members the opportunity to
achieve price-improvement at prices up to and including the mid-point
of the NBBO. On EDGA, a Mid-Point Discretionary Order may execute
against resting Discretionary Orders, including contra-side Mid-Point
Discretionary Orders, because both orders would pay a fee. However, on
EDGX, if the Exchange were to allow Mid-Point Discretionary Orders to
execute against each other, the provider of liquidity would receive a
rebate while the taker of liquidity would be charged no fee. Members
willing to pay a fee for broader execution opportunities at the mid-
point of the NBBO could instead choose to utilize Mid-Point Match
Orders. Precluding Mid-Point Discretionary Orders from executing as
discussed above follows the precedent established by other order types,
such as Post Only Orders, in which Members choose to forgo some
execution opportunities to avoid paying a fee.\47\ Since the Exchange
does not offer a Post Only Mid-Point Match Order,\48\ Mid-Point
Discretionary Orders provide a means to interact with liquidity at the
mid-point of the NBBO, while having the added benefit of not incurring
a fee. In exchange, the User of a Mid-Point Discretionary Order
foregoes certain execution opportunities and therefore incurs risk of
not receiving an execution. The above restriction would provide a Mid-
Point Discretionary Order the opportunity to become a liquidity
provider and receive a rebate. Furthermore, the Exchange believes that
this approach is consistent with the Exchange's belief that Mid-Point
Discretionary Orders would be utilized primarily by Members seeking
access to liquidity at the mid-point of the NBBO while seeking to not
be charged a fee. The proposed Mid-Point Discretionary Order is
designed to provide Members with better control over their execution
costs and with a means to offer price improvement opportunities. As
stated above, Members remain focused on their trading costs and may
wish to structure their trading activity in a manner that is more
likely to control those costs. Other Members may prefer execution
certainty and are less cost-sensitive, and would thus be less likely to
use the Mid-Point Discretionary Order. Based on the foregoing, the
Exchange believes precluding Mid-Point Discretionary Orders from
executing against each other is designed to promote just and equitable
principles of trade because it would enable Members to achieve
potential price improvement and a low cost fee structure by using the
proposed Mid-Point Discretionary Order.
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\47\ See supra notes 20 thru 28 and accompanying text. A ``Post
Only Order'' is precluded from executing against orders resting on
the EDGX Book upon entry in the System and receives a rebate for
adding liquidity. See Exchange Rule 11.5(c)(5); see also, EDGX Fee
Schedule available at https://www.directedge.com/Trading/EDGXFeeSchedule.aspx. NYSE Arca permits members to designate a limit
order as ``No Mid-Point Execution'', so that the limit order will
ignore mid-point priced orders. NYSE Arca Rule 7.31(h)(5).
\48\ For securities priced at or above $1.00, Mid-Point Match
Orders incur a fee regardless of whether they add or remove
liquidity at the mid-point of the NBBO. See Flags MM and MT on the
EDGX Fee Schedule available at https://www.directedge.com/Trading/EDGXFeeSchedule.aspx.
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Third, the Exchange believes that limiting the circumstance within
which a Mid-Point Discretionary Order may execute against orders at the
mid-point of the NBBO is designed to promote just and equitable
principles of trade by incentivizing Members to submit orders that
explicitly contribute to liquidity at the mid-point of the NBBO while
also enabling the Exchange to provide a low cost pricing structure for
the order type.
[[Page 16409]]
The proposed Mid-Point Discretionary Order would only be eligible to
execute at the mid-point of the NBBO against contra-side Mid-Point
Match Orders and incoming liquidity-removing orders when their limit
price equals the mid-point of the NBBO. Members utilizing these order
types are explicitly adding liquidity at the mid-point of the NBBO and,
thereby, provide the benefit of price improving liquidity to Users and
their incoming orders. Restricting the orders against which a Mid-Point
Discretionary Order may execute to those orders that are designed to
explicitly add liquidity at the mid-point of the NBBO is a reasonable
means by which to encourage Members to add committed mid-point
liquidity. The Exchange believes that encouraging orders that
explicitly add liquidity at the mid-point of the NBBO, rather than by
happenstance, would enhance price improvement opportunities on the
Exchange by seeking to increase the overall liquidity on the Exchange
at the mid-point of the NBBO. The Exchange believes restricting the
orders against which the proposed Mid-Point Discretionary Order may
execute at the mid-point of the NBBO to Mid-Point Match Orders promotes
just and equitable principles of trade because it is designed to
encourage the use of Mid-Point Match Orders, motivating Members seeking
price improvement to direct their orders to EDGX because they would
have a heightened expectation of liquidity at the midpoint of the NBBO.
In addition, these restrictions also enable the Exchange to offer a low
cost pricing structure for the EDGX Mid-Point Discretionary Order
because both Mid-Point Match Orders and incoming liquidity-removing
orders would be charged a fee, enabling the Exchange to provide a
rebate or no fee to the proposed Mid-Point Discretionary Order.
Fourth, on EDGA, in the event a trading halt is declared by the
listing market, a resting Mid-Point Discretionary Orders would be
eligible for execution once the trading halt is lifted by the listing
market. Conversely, on EDGX, in the event a trading halt is declared by
the listing market, any Mid-Point Discretionary Orders resting on the
EDGX Book would be immediately cancelled. As described above, the
approach taken by EDGX is a result of its maker-taker fee structure and
serves to avoid a situation where Mid-Point Discretionary Orders would
be assessed a take fee when the market re-opens. As discussed above in
regard to execution of Mid-Point Discretionary Orders upon entry into
the System, this approach is also consistent with the treatment of a
Mid-Point Discretionary Order as containing a post only instruction at
its displayed price.
The Mid-Point Discretionary Order would also be similar to the
Exchange's existing Pegged Order \49\ and Mid-Point Match Order
because, like these order types, a Mid-Point Discretionary Order would
receive a new time stamp each time it was automatically adjusted, and
it would not be eligible for routing pursuant to Rule 11.9(b)(2). Like
a Pegged Order, a Mid-Point Discretionary Order's displayed price would
be pegged to and automatically adjusted in response to changes to the
NBB or NBO. Also, like a Pegged Order, if the proposed Mid-Point
Discretionary Order displayed on the Exchange would lock the market,
the price of the order will be automatically adjusted by the System to
one minimum price variation below the current NBO (for bids) or to one
minimum price variation above the current NBB (for offers). In
addition, the Mid-Point Discretionary Order will also be similar to the
Exchange's Mid-Point Match Order, because both would be eligible to
receive sub-penny executions at the mid-point of the NBBO. However,
unlike the Mid-Point Match Order, the Mid-Point Discretionary Order
includes a displayed component, which would provide the added benefit
of transparency. The proposed Mid-Point Discretionary Order would also
be similar to the Exchange's existing Discretionary Order in that it
would include a displayed order at a specified price (an objectively
determined price based on the prevailing NBB or NBO) and a non-
displayed order at a specified price (an objectively determined price
based on the mid-point of the NBBO), subject to any limits the User
attaches the Mid-Point Discretionary Order. The Exchange believes that
this proposed order type would benefit its Users by offering greater
flexibility to display liquidity at the NBBO with discretion generally
to execute to the NBBO mid-point, resulting in additional opportunities
for price improvement for contra-side orders.
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\49\ Exchange Rule 11.5(c)(6).
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The Exchange further believes that the proposed Mid-Point
Discretionary Order is designed to remove impediments to and perfect
the mechanism of a free and open market and a national market system
because it is based on and would enable the Exchange to offer an order
type that would compete with similar order types on other exchanges.
For example, the Mid-Point Discretionary Order is similar to NYSE
Arca's Pegged Order \50\ and Discretionary Order.\51\ NYSE Arca's
Pegged Order is defined as a ``limit order to buy or sell a stated
amount of a security at a displayed price set to track the current bid
or ask of the NBBO in an amount specified by the User. . . . A Pegged
Order may be designated as a . . . Discretionary Order.'' NYSE Arca
defines a Discretionary Order to be ``[a]n order to buy or sell a
stated amount of a security at a specified, undisplayed price (the
`discretionary price'), in addition to at a specified, displayed price
(`displayed price').'' The Mid-Point Discretionary Order is similar to
Arca's Pegged Order when it is designated as a Discretionary Order
insofar as the displayed components of both are designed to track the
prevailing NBB and NBO. While the undisplayed component of the Mid-
Point Discretionary Order presents a variation on the undisplayed
component of Arca's order type, insofar as the former sets a more
specific parameter on the discretionary aspect of the order (i.e., to
execute to the mid-point of the NBBO), the Exchange does not believe
that such variation presents unique issues with respect to the
consistency of the Mid-Point Discretionary Order with the requirements
of the Act.
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\50\ NYSE Arca Rule 7.31(cc).
\51\ NYSE Arca Rule 7.31(h)(2)
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The proposed Mid-Point Discretionary Order is also not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers because the proposed Mid-Point Discretionary Order would be
available to all Members on a uniform basis.
Proposed Amendment to Rule 11.8(a)
The Exchange also believes its proposal to amend Rule 11.8(a)(2) to
reflect the priority that Mid-Point Discretionary Orders is designed to
promote just and equitable principles of trade. Rule 11.8(a)(2) states,
in sum, that the System shall execute equally priced trading interest
in time priority in the following order: (i) Displayed size of limit
orders; (ii) Mid-Point Match Orders; (ii) non-displayed limit orders
and the reserve quantity of Reserve Orders; (iii) discretionary range
of Discretionary Orders as set forth in current Rule 11.5(c)(13); and
(iv) Route Peg Orders as set forth in current Rule 11.5(c)(17). Under
the proposal, when Mid-Point Discretionary Orders execute at their
displayed price, they would have the same priority as that of the
displayed size of limit orders, in accordance with Rule 11.8(a)(2)(A).
However, when they execute within their discretionary range, the
Exchange
[[Page 16410]]
proposes that they maintain priority behind Mid-Point Match Orders but
maintain the same priority as the discretionary range of Discretionary
Orders. The Exchange believes the proposed priority for the
discretionary range of Mid-Point Discretionary Orders is consistent
with the Act because it continues to provide priority to displayed
orders on the Exchange and to orders that are designed to provide
liquidity at a set price level, such as the mid-point of the NBBO or
the limit price of a Reserve Order. Lastly, the Exchange notes that the
proposed priority for the discretionary range or Mid-Point
Discretionary Orders on EDGX is identical to the priority for the
discretionary range of Mid-Point Discretionary Orders on EDGA.\52\
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\52\ See EDGA Rule 11.8(a)(2). See also BATS Rule 11.12(a)(2)
(placing the discretionary range of discretionary order last in
priority behind the displayed size of limit order, non-displayed
limit orders, pegged orders, mid-point peg orders and the reserve
size of orders); Securities Exchange Act Release No. 67226 (June 20,
2012), 77 FR 38113 (June 26, 2012) (SR-EDGA-2012-22) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Adopt
the Mid-Point Discretionary Order).
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The Exchange also believes it is reasonable and appropriate that
the displayed price and discretionary range of a Mid-Point
Discretionary Order maintain the same time stamp, even when the
displayed price is unchanged but the discretionary range changed due to
a new mid-point of the NBBO being established. It is well founded that
the price priority of a discretionary order is based on its displayed
price and not its discretionary range.\53\ Should the discretionary
range widen or decrease as a result of a new mid-point of the NBBO
being established, the time stamp and priority of the displayed price
would remain unchanged so long as the NBBO that the order is pegged to
did not change.
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\53\ NYSE Arca permits Pegged Orders to also be designated as
Discretionary Orders. See NYSE Arca Rule 7.31(cc) and 7.31(h)(2). In
such case, Discretionary Orders are ranked based on their displayed
price, not discretionary range, and continue to be ranked at their
displayed price when the discretionary portion of the order is
decremented. See NYSE Arca Rule 7.36(1)(C).
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In addition, the Exchange believes proposed subparagraph (9) to
Rule 11.8(a) furthers the objectives of Section 6(b)(5) of the Act,\54\
because it is designed 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. The Exchange believes that
permitting otherwise marketable orders to post directly to the EDGX
Book is reasonable because it is designed to provide Users with better
control over their execution costs. Once posted to the EDGX Book, the
proposed EDGX Mid-Point Discretionary Order would receive a rebate if
executed at its displayed price. This allows Users to post aggressively
priced liquidity by providing certainty as to the fee or rebate they
will receive from the Exchange if their order is executed. In addition,
as stated above, the Exchange does not believe that there is anything
novel or controversial about permitting otherwise marketable orders to
post to the EDGX Book and execute against later arriving orders in a
fully transparent manner that is consistent with pre-existing rules of
other exchanges.\55\
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\54\ 15 U.S.C. 78f(b)(5).
\55\ See supra notes 42 thru 48 and accompanying text.
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Lastly, the Exchange believes it is reasonable for a Mid-Point
Discretionary Order to retain its time stamp and priority in relation
to other Discretionary Orders when the discretionary range widens or
decreases in response to a new mid-point of the NBBO being established.
A Mid-Point Discretionary Order's discretionary range is capped by the
mid-point of the NBBO, which is an objectively determined price that
the User cannot independently establish. As stated above, no price
priority is afforded to orders based on their discretionary range.
Therefore, a Mid-Point Discretionary Order's discretionary range would
not receive a new time stamp when the discretionary range widens or
decreases in response to a new mid-point of the NBBO being established;
nor would the order's priority be changed in relation to other
Discretionary Orders on the EDGX Book.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
would increase intermarket competition among the exchanges because the
Mid-Point Discretionary Order will directly compete with a similar
order types offered by other exchanges.\56\ The Exchange believes that
Users may receive more efficient order executions by providing them
greater flexibility to be displayed at the NBBO with discretion to
execute to the mid-point of the NBBO, resulting in the potential
benefit of price improvement. Promotion of displayed liquidity at the
NBBO enhances market quality for all market participants and promotes
competition amongst market enters. The Exchange believes that the
proposed Mid-Point Discretionary Order will contribute to the displayed
liquidity on the Exchange, which would, in turn, benefit competition
due to improvements to the overall market quality of the Exchange. The
proposed rule change would not burden intramarket competition because
the Mid-Point Discretionary Order would be available to all Members on
a uniform basis.
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\56\ See NYSE Arca Rules 7.31(cc), 7.31(h)(2), 7.31(h)(5), and
7.31(nn), Nasdaq Rules 4751(f)(4) and 4751(11) [sic], BATS Rule
11.9(c)(8), NYSE Rule 13, and CBOE Rule 51.8(g)(12).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written comments from its Members or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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. In particular, the Commission seeks
comment on the following:
Would the Mid-Point Discretionary Order create
opportunities for queue-jumping strategies by executing against later-
arriving orders rather than against identically-priced orders already
resting on the order book?
Is it consistent with fair and orderly markets to prevent
Mid-Point Discretionary Orders from executing against contra-side
orders with prices that are within the net economic range (limit price
with fee/rebate) specified in such orders?
[[Page 16411]]
Would leaving Mid-Point Discretionary Orders resting on
the order book even in the presence of contra-side orders with prices
that are within the net economic range (limit price with fee/rebate)
specified in the Mid-Point Discretionary Order add unnecessary
complexity to the Exchange's priority rules and the equity markets
generally?
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 rule-comments@sec.gov. Please include
File Number SR-EDGX-2014-05 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-EDGX-2014-05. 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 Web site (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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549-1090, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
EDGX-2014-05, and should be submitted on or before April 15, 2014.
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\57\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06461 Filed 3-24-14; 8:45 am]
BILLING CODE 8011-01-P
