Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Make Permanent Rule 11.24, Which Sets Forth the Exchange's Pilot Retail Price Improvement Program, 41128-41138 [2018-17736]
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41128
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–PEARL–2018–15 and
should be submitted on or before
September 7, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–17740 Filed 8–16–18; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–83831; File No. SR–
CboeBYX–2018–014]
Self-Regulatory Organizations; Cboe
BYX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Make
Permanent Rule 11.24, Which Sets
Forth the Exchange’s Pilot Retail Price
Improvement Program
amozie on DSK3GDR082PROD with NOTICES1
August 13, 2018.
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 July 30,
2018, Cboe BYX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
make permanent Rule 11.24, which sets
forth the Exchange’s pilot Retail Price
Improvement Program.
The text of the proposed rule change
is available at the Exchange’s website at
www.markets.cboe.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
19 17
comments on the proposed rule change
from interested persons.
The purpose of the proposed rule
change is to amend Rule 11.24 to make
permanent the Retail Price Improvement
Program (the ‘‘Program’’), which is
currently offered on a pilot basis. The
Exchange has operated the pilot for a six
year period and believes that it has been
successful in its stated goal of providing
price improvement opportunities to
retail investors. The analysis conducted
by the Exchange shows that retail
investors have been provided a total of
$4.5 million of price improvement
during the 2.5 year period reviewed
from January 2016 through June 2018. In
addition, the Exchange’s analysis shows
that the Program has provided these
benefits to retail investors without
having an adverse impact on the broader
market. The proposal provides an
analysis of the economic benefits to
retail investors and the marketplace
flowing from operation of the Program,
which the Exchange believes supports
making the Program permanent.
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Background
In November 2012, the Commission
approved the Program on a pilot basis.3
The Program is designed to attract retail
order flow to the Exchange, and allow
such order flow to receive potential
price improvement. The Program is
currently limited to trades occurring at
prices equal to or greater than $1.00 per
share.4 Under the Program, a class of
market participant called a Retail
Member Organization (‘‘RMO’’) is
eligible to submit certain retail order
flow (‘‘Retail Orders’’) to the Exchange.
Users 5 are permitted to provide
potential price improvement for Retail
Orders 6 in the form of non-displayed
interest that is better than the national
best bid that is a Protected Quotation
(‘‘Protected NBB’’) or the national best
offer that is a Protected Quotation
(‘‘Protected NBO’’, and together with the
Protected NBB, the ‘‘Protected NBBO’’).7
The Program was approved by the
Commission on a pilot basis running
one-year from the date of
implementation.8 The Commission
approved the Program on November 27,
2012.9 The Exchange implemented the
Program on January 11, 2013, and has
extended the pilot period five times.10
3 See Securities Exchange Act Release No. 68303
(November 27, 2012), 77 FR 71652 (December 3,
2012) (‘‘RPI Approval Order’’) (SR–BYX–2012–019).
4 The Exchange will periodically notify the
membership regarding the securities included in
the Program through an information circular.
5 A ‘‘User’’ is defined in Rule 1.5(cc) as any
member or sponsored participant of the Exchange
who is authorized to obtain access to the System.
6 A ‘‘Retail Order’’ is defined in Rule 11.24(a)(2)
as an agency order that originates from a natural
person and is submitted to the Exchange by a RMO,
provided that no change is made to the terms of the
order with respect to price or side of market and
the order does not originate from a trading
algorithm or any computerized methodology. See
Rule 11.24(a)(2).
7 The term Protected Quotation is defined in BYX
Rule 1.5(t) and has the same meaning as is set forth
in Regulation NMS Rule 600(b)(58). The terms
Protected NBB and Protected NBO are defined in
BYX Rule 1.5(s). The Protected NBB is the bestpriced protected bid and the Protected NBO is the
best-priced protected offer. Generally, the Protected
NBB and Protected NBO and the national best bid
(‘‘NBB’’) and national best offer (‘‘NBO’’, together
with the NBB, the ‘‘NBBO’’) will be the same.
However, a market center is not required to route
to the NBB or NBO if that market center is subject
to an exception under Regulation NMS Rule
611(b)(1) or if such NBB or NBO is otherwise not
available for an automatic execution. In such case,
the Protected NBB or Protected NBO would be the
best-priced protected bid or offer to which a market
center must route interest pursuant to Regulation
NMS Rule 611.
8 See RPI Approval Order, supra note 3 at 71652.
9 Id.
10 See Securities Exchange Act Release Nos.
71249 (January 7, 2014), 79 FR 2229 (January 13,
2014) (SR–BYX–2014–001); 74111 (January 22,
2015), 80 FR 4598 (January 28, 2015) (SR–BYX–
2015–05); 76965 (January 22, 2016), 81 FR 4682
(January 27, 2016) (SR–BYX–2016–01); 78180 (June
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The pilot period for the Program is
scheduled to expire on July 31, 2018.11
The Exchange believes that the Program
has been successful in its goal of
providing price improvement to Retail
Orders, and is therefore proposing to
amend Rule 11.24 to make this pilot
permanent so that retail investors can
continue to reap the benefits of the
Program.12
The SEC approved the Program on a
pilot basis, in part, because it
concluded, ‘‘the Program is reasonably
designed to benefit retail investors by
providing price improvement to retail
order flow.’’ 13 The Commission also
found that ‘‘while the Program would
treat retail order flow differently from
order flow submitted by other market
participants, such segmentation would
not be inconsistent with Section 6(b)(5)
of the Act, which requires that the rules
of an exchange are not designed to
permit unfair discrimination.’’ 14 As the
SEC acknowledged, the retail order
segmentation was designed to create
greater retail order flow competition and
thereby increase the amount of this flow
to transparent and well-regulated
exchanges. This would help to ensure
that retail investors benefit from
competitive price improvement that
exchange-based liquidity providers
provide. As discussed below, the
Exchange believes that the Program data
supports the conclusion that it provides
valuable price [sic] to retail investors
that they may not otherwise have
received, and that it is therefore
appropriate to make the Program
permanent.
Definitions
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The Exchange adopted the following
definitions under Rule 11.24(a):
First, the term ‘‘Retail Member
Organization’’ is defined as a Member
(or a division thereof) that has been
approved by the Exchange to submit
Retail Orders.
Second, the term ‘‘Retail Order’’ is
defined as an agency order or riskless
principal that meets the criteria of
FINRA Rule 5320.03 15 that originates
28, 2016), 81 FR 43306 (July 1, 2016) (SR–BYX–
2016–15); 81368 (August 10, 2017), 82 FR 38960
(August 16, 2017) (SR–BYX–2017–18).
11 Concurrently with the filing of this proposed
rule change, the Exchange is filing to extend the
current pilot period until the earlier of approval of
the filing to make this rule permanent (i.e., this
proposed rule change) or December 31, 2018.
12 The Program will continue to only apply to
trades occurring at prices equal to or greater than
$1.00 per share.
13 See RPI Approval Order, supra note 3 at 71655.
14 Id.
15 FINRA Rule 5320.03 clarifies that an RMO may
enter Retail Orders on a riskless principal basis,
provided that (i) the entry of such riskless principal
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from a natural person and is submitted
to the Exchange by a Retail Member
Organization, provided that no change
is made to the terms of the order with
respect to price or side of market and
the order does not originate from a
trading algorithm or any other
computerized methodology. A Retail
Order is an Immediate or Cancel
(‘‘IOC’’) Order and shall operate in
accordance with Rule 11.24(f). A Retail
Order may be an odd lot, round lot, or
mixed lot.
Finally, the term ‘‘Retail Price
Improvement Order’’ or ‘‘RPI Order’’
consists of non-displayed interest on the
Exchange that is priced better than the
Protected NBB or Protected NBO by at
least $0.001 and that is identified as
such (‘‘RPI interest’’).16 The System 17
will monitor whether RPI buy or sell
interest, adjusted by any offset and
subject to the ceiling or floor price, is
eligible to interact with incoming Retail
Orders. An RPI Order remains nondisplayed in its entirety (the buy or sell
interest, the offset, and the ceiling or
floor). An RPI Order may also be entered
in a sub-penny increment with an
explicit limit price. Any User is
permitted, but not required, to submit
RPI Orders. An RPI Order may be an
odd lot, round lot or mixed lot.
The price of an RPI Order is
determined by a User’s entry of the
following into the Exchange: (1) RPI buy
or sell interest; (2) an offset, if any; and
(3) a ceiling or floor price. RPI Orders
submitted with an offset are similar to
other peg orders available to Users in
that the order is tied or ‘‘pegged’’ to a
certain price, and would have its price
automatically set and adjusted upon
changes in the Protected NBBO, both
upon entry and any time thereafter. RPI
buy or sell interest is typically entered
to track the Protected NBBO, that is, RPI
orders meet the requirements of FINRA Rule
5320.03, including that the RMO maintains
supervisory systems to reconstruct, in a time-[sic]
sequenced manner, all Retail Orders that are
entered on a riskless principal basis; and (ii) the
RMO submits a report, contemporaneously with the
execution of the facilitated order, that identifies the
trade as riskless principal.
16 Exchange systems prevent Retail Orders from
interacting with RPI Orders if the RPI Order is not
priced at least $0.001 better than the Protected
NBBO. The Exchange notes, however, that price
improvement of $0.001 would be a minimum
requirement and Users could enter RPI Orders that
better the Protected NBBO by more than $0.001.
Exchange systems will accept RPI Orders without
a minimum price improvement value; however,
such interest will execute at its floor or ceiling price
only if such floor or ceiling price is better than the
Protected NBBO by $0.001 or more.
17 The ‘‘System’’ is defined in BYX Rule 1.5(aa)
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.’’
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41129
Orders are typically submitted with an
offset. The offset is a predetermined
amount by which the User is willing to
improve the Protected NBBO, subject to
a ceiling or floor price. The ceiling or
floor price is the amount above or below
which the User does not wish to trade.
RPI Orders in their entirety (the buy or
sell interest, the offset, and the ceiling
or floor) will remain non-displayed. The
Exchange also allows Users to enter RPI
Orders that establish the exact limit
price, which is similar to a nondisplayed limit order currently accepted
by the Exchange except the Exchange
accepts sub-penny limit prices on RPI
Orders in increments of $0.001. The
Exchange monitors whether RPI buy or
sell interest, adjusted by any offset and
subject to the ceiling or floor price, is
eligible to interact with incoming Retail
Orders.
Users and RMOs may enter odd lots,
round lots or mixed lots as RPI Orders
and as Retail Orders respectively. As
discussed below, RPI Orders are ranked
and allocated according to price and
time of entry into the System consistent
with Rule 11.12 and therefore without
regard to whether the size entered is an
odd lot, round lot or mixed lot amount.
Similarly, Retail Orders interact with
RPI Orders according to the Priority and
Allocation rules of the Program and
without regard to whether they are odd
lots, round lots or mixed lots. Finally,
Retail Orders are designated as Type 1
or Type 2 without regard to the size of
the order.
RPI Orders interact with Retail Orders
as follows. Assume a User enters RPI
sell interest with an offset of $0.001 and
a floor of $10.10 while the Protected
NBO is $10.11. The RPI Order could
interact with an incoming buy Retail
Order at $10.109. If, however, the
Protected NBO was $10.10, the RPI
Order could not interact with the Retail
Order because the price required to
deliver the minimum $0.001 price
improvement ($10.099) would violate
the User’s floor of $10.10. If a User
otherwise enters an offset greater than
the minimum required price
improvement and the offset would
produce a price that would violate the
User’s floor, the offset would be applied
only to the extent that it respects the
User’s floor. By way of illustration,
assume RPI buy interest is entered with
an offset of $0.005 and a ceiling of
$10.112 while the Protected NBB is at
$10.11. The RPI Order could interact
with an incoming sell Retail Order at
$10.112, because it would produce the
required price improvement without
violating the User’s ceiling, but it could
not interact above the $10.112 ceiling.
Finally, if a User enters an RPI Order
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without an offset (i.e., an explicitly
priced limit order), the RPI Order will
interact with Retail Orders at the level
of the User’s limit price as long as the
minimum required price improvement
is produced. Accordingly, if RPI sell
interest is entered with a limit price of
$10.098 and no offset while the
Protected NBO is $10.11, the RPI Order
could interact with the Retail Order at
$10.098, producing $0.012 of price
improvement. The System will not
cancel RPI interest when it is not
eligible to interact with incoming Retail
Orders; such RPI interest will remain in
the System and may become eligible
again to interact with Retail Orders
depending on the Protected NBBO.
RMO Qualifications and Application
Process
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Under Rule 11.24(b), any Member
may qualify as an RMO if it conducts a
retail business or routes retail orders on
behalf of another broker-dealer. For
purposes of Rule 11.24(b), conducting a
retail business shall include carrying
retail customer accounts on a fully
disclosed basis. Any Member that
wishes to obtain RMO status is required
to submit: (1) An application form; (2)
supporting documentation sufficient to
demonstrate the retail nature and
characteristics of the applicant’s order
flow; and (3) an attestation, in a form
prescribed by the Exchange, that
substantially all orders submitted as
Retail Orders will qualify as such under
Rule 11.24.18 The Exchange shall notify
the applicant of its decision in writing.
An RMO is required to have written
policies and procedures reasonably
designed to assure that it will only
designate orders as Retail Orders if all
requirements of a Retail Order are met.
Such written policies and procedures
must require the Member to (i) exercise
due diligence before entering a Retail
Order to assure that entry as a Retail
Order is in compliance with the
requirements of this rule, and (ii)
monitor whether orders entered as
Retail Orders meet the applicable
requirements. If the RMO represents
Retail Orders from another broker-dealer
customer, the RMO’s supervisory
procedures must be reasonably designed
to assure that the orders it receives from
such broker-dealer customer that it
designates as Retail Orders meet the
18 For example, a prospective RMO could be
required to provide sample marketing literature,
website screenshots, other publicly disclosed
materials describing the retail nature of their order
flow, and such other documentation and
information as the Exchange may require to obtain
reasonable assurance that the applicant’s order flow
would meet the requirements of the Retail Order
definition.
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definition of a Retail Order. The RMO
must (i) obtain an annual written
representation, in a form acceptable to
the Exchange, from each broker-dealer
customer that sends it orders to be
designated as Retail Orders that entry of
such orders as Retail Orders will be in
compliance with the requirements of
this rule, and (ii) monitor whether its
broker-dealer customers’ Retail Order
flow continues to meet the applicable
requirements.19
If the Exchange disapproves the
application, the Exchange provides a
written notice to the Member. The
disapproved applicant could appeal the
disapproval by the Exchange as
provided in Rule 11.24(d), and/or
reapply for RMO status 90 days after the
disapproval notice is issued by the
Exchange. An RMO also could
voluntarily withdraw from such status
at any time by giving written notice to
the Exchange.
Failure of RMO To Abide by Retail
Order Requirements
Rule 11.24(c) addresses an RMO’s
failure to abide by Retail Order
requirements. If an RMO designates
orders submitted to the Exchange as
Retail Orders and the Exchange
determines, in its sole discretion, that
those orders fail to meet any of the
requirements of Retail Orders, the
Exchange may disqualify a Member
from its status as an RMO. When
disqualification determinations are
made, the Exchange provides a written
disqualification notice to the Member. A
disqualified RMO may appeal the
disqualification as provided in Rule
11.24(d) and/or reapply for RMO status
90 days after the disqualification notice
is issued by the Exchange.
Appeal of Disapproval or
Disqualification
Rule 11.24(d) provides appeal rights
to Members. If a Member disputes the
Exchange’s decision to disapprove it as
an RMO under Rule 11.24(b) or
disqualify it under Rule 11.24(c), such
Member (‘‘appellant’’) may request,
within five business days after notice of
the decision is issued by the Exchange,
that the Retail Price Improvement
Program Panel (‘‘RPI Panel’’) review the
decision to determine if it was correct.
The RPI Panel consists of the
Exchange’s Chief Regulatory Officer
(‘‘CRO’’), or a designee of the CRO, and
two officers of the Exchange designated
by the Chief Operating Officer (‘‘COO’’).
19 The Exchange or another self-regulatory
organization on behalf of the Exchange will review
an RMO’s compliance with these requirements
through an exam-based review of the RMO’s
internal controls.
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The RPI Panel reviews the facts and
render [sic] a decision within the time
frame prescribed by the Exchange. The
RPI Panel may overturn or modify an
action taken by the Exchange and all
determinations by the RPI Panel
constitute final action by the Exchange
on the matter at issue.
Retail Liquidity Identifier
Under Rule 11.24(e), the Exchange
disseminates an identifier when RPI
interest priced at least $0.001 better
than the Exchange’s Protected Bid or
Protected Offer for a particular security
is available in the System (‘‘Retail
Liquidity Identifier’’). The Retail
Liquidity Identifier is disseminated
through consolidated data streams (i.e.,
pursuant to the Consolidated Tape
Association Plan/Consolidated
Quotation Plan, or CTA/CQ, for Tape A
and Tape B securities, and the Nasdaq
UTP Plan for Tape C securities) as well
as through proprietary Exchange data
feeds.20 The Retail Liquidity Identifier
reflects the symbol and the side (buy or
sell) of the RPI interest, but does not
include the price or size of the RPI
interest. In particular, CQ and UTP
quoting outputs include a field for codes
related to the Retail Liquidity Identifier.
The codes indicate RPI interest that is
priced better than the Exchange’s
Protected Bid or Protected Offer by at
least the minimum level of price
improvement as required by the
Program.
Retail Order Designations
Under Rule 11.24(f), an RMO can
designate how a Retail Order would
interact with available contra-side
interest as follows:
A Type 1-designated Retail Order will
interact with available contra-side RPI
Orders and other price improving
contra-side interest but will not interact
with other available contra-side interest
in the System that is not offering price
improvement or route to other markets.
The portion of a Type 1-designated
Retail Order that does not execute
against contra-side RPI Orders or other
price improving liquidity will be
immediately and automatically
cancelled.
A Type 2-designated Retail Order will
interact first with available contra-side
RPI Orders and other price improving
liquidity and then any remaining
20 The Exchange notes that the Retail Liquidity
Identifier for Tape A and Tape B securities are
disseminated pursuant to the CTA/CQ Plan. The
identifier is also available through the consolidated
public market data stream for Tape C securities. The
processor for the Nasdaq UTP quotation stream
disseminates the Retail Liquidity Identifier and
analogous identifiers from other market centers that
operate programs similar to the RPI Program.
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portion of the Retail Order will be
executed as an Immediate-or-Cancel
(‘‘IOC’’) Order pursuant to Rule
11.9(b)(1). A Type 2-designated Retail
Order can either be submitted as a BYX
Only Order 21 or as an order eligible for
routing pursuant to Rule 11.13(a)(2).
because it is the next best priced bid.
User 1 then receives an execution for
400 of its bid for 500 at $10.015, at
which point the entire size of the Retail
Order to sell 1,000 is depleted.
Priority and Order Allocation
Under Rule 11.24(g), competing RPI
Orders in the same security are ranked
and allocated according to price then
time of entry into the System.
Executions occur in price/time priority
in accordance with Rule 11.12. Any
remaining unexecuted RPI interest
remains available to interact with other
incoming Retail Orders if such interest
is at an eligible price. Any remaining
unexecuted portion of the Retail Order
will cancel or execute in accordance
with Rule 11.24(f). The following
example illustrates this method:
• Protected NBBO for security ABC is
$10.00–$10.05
• User 1 enters an RPI Order to buy
ABC at $10.015 for 500
• User 2 then enters an RPI Order to
buy ABC at $10.02 for 500
• User 3 then enters an RPI Order to
buy ABC at $10.035 for 500
An incoming Retail Order to sell ABC
for 1,000 executes first against User 3’s
bid for 500 at $10.035, because it is the
best priced bid, then against User 2’s bid
for 500 at $10.02, because it is the next
best priced bid. User 1 is not filled
because the entire size of the Retail
Order to sell 1,000 is depleted. The
Retail Order executes against RPI Orders
in price/time priority.
However, assume the same facts
above, except that User 2’s RPI Order to
buy ABC at $10.02 is for 100. The
incoming Retail Order to sell 1,000
executes first against User 3’s bid for
500 at $10.035, because it is the best
priced bid, then against User 2’s bid for
100 at $10.02, because it is the next best
priced bid. User 1 then receives an
execution for 400 of its bid for 500 at
$10.015, at which point the entire size
of the Retail Order to sell 1,000 is
depleted.
As a final example, assume the same
facts as above, except that User 3’s order
was not an RPI Order to buy ABC at
$10.035, but rather, a non-displayed
order to buy ABC at $10.03. The result
would be similar to the result
immediately above, in that the incoming
Retail Order to sell 1,000 executes first
against User 3’s bid for 500 at $10.03,
because it is the best priced bid, then
against User 2’s bid for 100 at $10.02,
All Regulation NMS securities traded
on the Exchange are eligible for
inclusion in the RPI Program. The
Exchange limits the Program to trades
occurring at prices equal to or greater
than $1.00 per share. Toward that end,
Exchange trade validation systems
prevent the interaction of RPI buy or sell
interest (adjusted by any offset) and
Retail Orders at a price below $1.00 per
share.22 For example, if there is RPI buy
interest tracking the Protected NBB at
$0.99 with an offset of $0.001 and a
ceiling of $1.02, Exchange trade
validation systems would prevent the
execution of the RPI Order at $0.991
with a sell Retail Order with a limit of
$0.99. However, if the Retail Order was
Type 2 as defined the Program,23 it
would be able to interact at $0.99 with
liquidity outside the Program in the
Exchange’s order book. In addition to
facilitating an orderly 24 and
operationally intuitive program, the
Exchange believes that limiting the
Program to trades equal to or greater
than $1.00 per share enabled it better to
focus its efforts to monitor price
competition and to assess any
indications that data disseminated
under the Program is potentially
disadvantaging retail orders. As part of
that review, the Exchange produced
data throughout the pilot, which
included statistics about participation,
the frequency and level of price
improvement provided by the Program,
and any effects on the broader market
structure.
21 A BYX Only Order is defined in BYX Rule
11.9(c)(4) and includes orders that are not eligible
for routing to other trading centers.
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Eligible Securities
22 As discussed above, the price of an RPI is
determined by a User’s entry of buy or sell interest,
an offset (if any) and a ceiling or floor price. RPI
sell or buy interest typically tracks the Protected
NBBO.
23 Type 2 Retail Orders are treated as IOC orders
that execute against displayed and non-displayed
liquidity in the Exchange’s order book where there
is no available liquidity in the Program. Type 2
Retail Orders can either be designated as eligible for
routing or as BYX Only Orders, and thus nonroutable, as described above.
24 Given the limitation, the Program would have
no impact on the minimum pricing increment for
orders priced less than $1.00 and therefore no effect
on the potential of markets executing those orders
to lock or cross. In addition, the non-displayed
nature of the liquidity in the Program simply has
no potential to disrupt displayed, protected quotes.
In any event, the Program would do nothing to
change the obligation of exchanges to avoid and
reconcile locked and crossed markets under NMS
Rule 610(d).
PO 00000
Frm 00090
Fmt 4703
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41131
Rationale for Making the Program Pilot
Permanent
The Exchange established the
Program in an attempt to attract retail
order flow to the Exchange by providing
an opportunity for price improvement to
such order flow. The Exchange believes
that the Program promotes transparent
competition for retail order flow by
allowing Exchange members to submit
RPI Orders to interact with Retail
Orders. Such competition promotes
efficiency by facilitating the price
discovery process and generating
additional investor interest in trading
securities, thereby promoting capital
formation and retail investment
opportunities. The Program will
continue to be limited to trades
occurring at prices equal to or greater
than $1.00 per share.
In accordance with its filing
establishing the pilot, the Exchange did
‘‘produce data throughout the pilot,
which will include statistics about
participation, the frequency and level of
price improvement provided by the
Program, and any effects on the broader
market structure.’’ 25 The Exchange has
fulfilled this obligation through the
reports and assessments it has
submitted to the Commission since the
implementation of the pilot Program.
The Exchange believes that the data
provided to the Commission to date, as
well as the data being provided in this
proposed rule change, support the
continued operation of the Program on
a permanent basis.
The SEC stated in the RPI Approval
Order that the Program could promote
competition for retail order flow among
execution venues, and that this could
benefit retail investors by creating
additional well-regulated and
transparent price improvement
opportunities for marketable retail order
flow, most of which is currently
executed in the Over-the-Counter
(‘‘OTC’’) markets without ever reaching
a public exchange.26 The Exchange
believes that it has achieved its goal of
attracting retail order flow to the
Exchange. As the Exchange’s analysis of
the Program data below demonstrates,
there has been consistent retail investor
interest in the Program, which has
provided tangible price improvement to
those retail investors through a
competitive pricing process over the
course of the pilot. The data also
demonstrates that the Program had an
overall negligible impact on broader
market quality outside of the Program.
The Exchange has not received any
25 RPI
Approval Order, 77 FR at 71655.
26 Id.
E:\FR\FM\17AUN1.SGM
17AUN1
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
complaints or negative feedback
concerning the Program.
I. Overall Analysis of the Program
amozie on DSK3GDR082PROD with NOTICES1
Brokers route retail orders to a wide
range of different trading systems. The
Program offers a transparent and wellregulated option, providing meaningful
competition and price improvement. As
explained above, the purpose of the
Program is to attract retail order flow to
the Exchange by providing an
Furthermore, Retail Order volume
executed in the Program accounted for
between 0.86% and 2.32% of total BYX
volume from January 2017 to June 2018,
as shown in Chart 2 below, and between
0.05% and 0.11% of total consolidated
volume, as shown in Chart 3 below.
Despite its size relative to total volume
executed on the Exchange or the broader
market, the Program has continued to
provide considerable price
improvement each month to retail
VerDate Sep<11>2014
17:17 Aug 16, 2018
Jkt 244001
opportunity for retail investors to
receive price improvement. The
Exchange believes that the Program has
satisfied this goal, having provided a
total of $4.5 million of price
improvement, or approximately
$153,000 per month, in the last 2.5
years. Furthermore, while the amount of
price improvement provided in the
Program varies month to month, the
amount of price improvement provided
in recent months has generally
increased relative to prior months due
to additional participation in the
Program by market participants with
retail order flow. The Exchange believes
that this supports permanent approval
of the pilot as retail investors continue
to reap the benefits afforded by the
Program. The amount of monthly and
cumulative price improvement provided
in the Program is illustrated in Chart 1
below.
investors that participated in the
Program. In addition, the Exchange
believes that the relatively modest
volume executed in the Program relative
to total BYX volume and total
consolidated volume limits the potential
impact of the Program on broader
market quality on the Exchange.27 The
Exchange therefore believes that the
Program has demonstrated the
effectiveness of a transparent, onexchange retail order price
improvement functionality,
notwithstanding that the majority of
retail volume is still traded offexchange.
27 The Exchange has also performed an analysis
of the impact of the Program on other market
quality indicators, which found that the Program
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
did not have a significant impact on market quality
in the broader market. See Section III below.
E:\FR\FM\17AUN1.SGM
17AUN1
EN17AU18.019</GPH>
41132
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
41133
VerDate Sep<11>2014
17:17 Aug 16, 2018
Jkt 244001
PO 00000
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E:\FR\FM\17AUN1.SGM
17AUN1
EN17AU18.020</GPH>
amozie on DSK3GDR082PROD with NOTICES1
Chart 2: RPI Volume as a Percentage of Total BYX Volume
41134
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
Retail Orders are routed by
sophisticated brokers using systems that
seek the highest fill rates and amounts
of price improvement. These brokers
have many choices of execution venues
for this order flow. When they choose to
route to the Program, they have
determined that it is the best
opportunity for fill rate and price
improvement at that time. As shown in
Table 1 below, Retail Order average
daily volume (‘‘ADV’’) executed in the
Program averaged between 2 and 7
million shares from January 2016 to
June 2018. Increased volatility in
February 2018 likely contributed to the
increased Retail Order shares executed
in the Program that month. Fill rates for
the majority of the period studied
ranged from 11%–19% with fill rates
declining below 10% starting in
December 2017, likely due to additional
participation in the Program that
resulted in a significant increase in the
Retail Order volume entered on the
Exchange. Retail Orders also continue to
receive more than the minimum $0.001
price improvement required of a
liquidity providing RPI Order, with the
monthly average price improvement
provided to Retail Orders ranging from
$0.0011–$0.0014 per share, and the
monthly effective/quoted spread ratio
ranging from 0.77–0.90. The Exchange
believes that this data supports
permanent approval of the Program as
this would allow retail investors to
continue to execute their orders with
price improvement in the Program.
Retail shares
executed ADV
Date
Jan-16 ..........................
Feb-16 ..........................
Mar-16 ..........................
Apr-16 ..........................
May-16 .........................
VerDate Sep<11>2014
17:17 Aug 16, 2018
4,666,052
4,083,670
3,474,997
3,216,923
2,912,160
Jkt 244001
Retail orders
placed ADV
Effective
spread BPS
20,560
18,025
15,103
14,126
12,980
PO 00000
Frm 00093
Quoted
spread BPS
19
19
21
18
18
Fmt 4703
Sfmt 4703
Effective/
quoted
spread ratio
22
22
24
21
21
E:\FR\FM\17AUN1.SGM
0.89
0.87
0.90
0.88
0.87
17AUN1
Price
improvement
$0.0011
0.0011
0.0011
0.0011
0.0011
Fill rate
(%)
16.09
16.10
17.50
19.23
19.73
EN17AU18.021</GPH>
amozie on DSK3GDR082PROD with NOTICES1
TABLE 1—SUMMARY STATISTICS ON THE PROGRAM
41135
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
TABLE 1—SUMMARY STATISTICS ON THE PROGRAM—Continued
Retail shares
executed ADV
Date
Jun-16 ..........................
Jul-16 ...........................
Aug-16 ..........................
Sep-16 ..........................
Oct-16 ..........................
Nov-16 ..........................
Dec-16 ..........................
Jan-17 ..........................
Feb-17 ..........................
Mar-17 ..........................
Apr-17 ..........................
May-17 .........................
Jun-17 ..........................
Jul-17 ...........................
Aug-17 ..........................
Sep-17 ..........................
Oct-17 ..........................
Nov-17 ..........................
Dec-17 ..........................
Jan-18 ..........................
Feb-18 ..........................
Mar-18 ..........................
Apr-18 ..........................
May-18 .........................
Jun-18 ..........................
Retail orders
placed ADV
3,144,024
4,009,916
3,906,624
4,887,221
3,595,900
2,273,885
3,192,065
3,122,721
3,262,046
3,068,930
2,680,646
3,407,603
7,896,833
5,966,961
6,467,615
5,237,243
5,702,759
4,427,779
5,131,502
6,359,122
7,230,230
5,967,844
4,976,642
4,367,743
5,211,044
Effective
spread BPS
13,924
17,257
17,135
20,708
15,922
8,972
12,768
16,951
21,151
20,921
18,518
23,437
46,398
36,717
38,608
33,314
33,578
62,352
142,810
167,730
227,980
202,050
178,009
169,085
202,601
II. Analysis of Retail Orders by Order
Size
Tables 2, 3, and 4 show the
distribution of Retail Orders entered and
executed in the Program for the period
from January 2017 to June 2018. As
shown in Table 2, a majority of all Retail
Orders entered to participate in the
Program from January 2016 to June 2018
were for a round lot or fewer shares.
Specifically, Retail Orders of one round
Effective/
quoted
spread ratio
Quoted
spread BPS
16
18
19
17
24
29
36
31
31
33
34
29
28
27
23
27
34
33
34
29
21
23
20
23
23
18
20
21
19
27
33
41
36
35
38
38
33
32
31
26
31
40
40
41
36
27
31
27
28
31
Price
improvement
0.89
0.90
0.90
0.88
0.90
0.88
0.88
0.88
0.88
0.88
0.88
0.87
0.88
0.88
0.88
0.87
0.84
0.83
0.84
0.82
0.79
0.73
0.75
0.83
0.77
lot or fewer shares accounted for an
average of approximately 56% of the
total number of Retail Orders entered.
More than 73% of Retail Orders entered
were for 300 shares or less. Very large
orders of more than 7,500 shares
accounted for only 1.9% of Retail
Orders submitted to the Program but
accounted for a significant portion
(approximately 40%) of the shares
entered, as shown in Table 3. In
addition, despite lower fill rates, large
Fill rate
(%)
0.0011
0.0011
0.0011
0.0011
0.0012
0.0013
0.0013
0.0013
0.0013
0.0014
0.0013
0.0013
0.0013
0.0012
0.0013
0.0013
0.0012
0.0012
0.0012
0.0013
0.0012
0.0011
0.0011
0.0011
0.0011
19.65
19.97
17.66
17.28
17.19
12.71
14.82
16.09
14.71
13.85
13.97
16.88
17.07
16.43
16.24
15.76
16.77
11.61
8.30
7.98
8.29
7.69
7.90
7.02
7.19
orders account for a reasonable portion
(approximately 9%) of the shares
executed in the Program, as shown in
Table 4. The Program also receives a
significantly large number of odd lot
and single lot sized shares, which could
be representative of retail marketable
orders from retail customers. By
providing price improvement to these
orders, retail customers would continue
to benefit from the Program.
TABLE 2—DISTRIBUTION OF RETAIL ORDERS ENTERED BY ORDER SIZE
amozie on DSK3GDR082PROD with NOTICES1
Date
Jan-17 .....................................
Feb-17 .....................................
Mar-17 .....................................
Apr-17 ......................................
May-17 ....................................
Jun-17 .....................................
Jul-17 .......................................
Aug-17 .....................................
Sep-17 .....................................
Oct-17 ......................................
Nov-17 .....................................
Dec-17 .....................................
Jan-18 .....................................
Feb-18 .....................................
Mar-18 .....................................
Apr-18 ......................................
May-18 ....................................
Jun-18 .....................................
≤100
(%)
44.90
47.80
47.60
48.82
52.39
55.32
53.18
49.41
49.88
49.92
61.01
61.48
61.20
66.63
66.11
67.41
66.09
66.29
101–300
(%)
18.45
18.04
17.76
17.30
18.69
13.89
15.12
16.53
16.51
16.17
17.66
18.49
17.06
15.79
15.39
15.45
16.12
16.17
301–500
(%)
501–1,000
(%)
8.60
8.21
8.16
7.88
7.13
6.67
7.32
8.00
7.94
7.73
5.65
6.31
6.54
5.61
5.82
5.40
5.43
5.59
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
6.84
6.27
6.36
6.19
5.21
5.35
5.86
6.33
6.27
6.49
3.86
3.40
3.84
2.98
3.25
3.10
3.41
3.20
4.90
4.41
4.60
4.61
3.81
4.47
4.12
4.49
4.49
4.67
2.54
1.97
2.25
1.70
1.76
1.43
1.47
1.46
3.10
2.82
3.01
2.88
2.40
3.24
2.71
2.75
2.71
2.76
1.39
0.93
1.06
0.80
0.78
0.59
0.59
0.59
1.93
1.75
1.78
1.82
1.41
2.03
1.79
1.76
1.71
1.79
0.98
0.49
0.58
0.43
0.41
0.34
0.35
0.35
10.12
9.61
9.67
9.48
8.13
8.08
8.85
9.65
9.50
9.45
6.33
6.65
7.14
5.80
6.22
6.06
6.30
6.14
>15,000
(%)
1.16
1.09
1.05
1.02
0.83
0.95
1.05
1.08
1.00
1.02
0.59
0.28
0.33
0.25
0.24
0.22
0.24
0.22
TABLE 3—DISTRIBUTION OF SHARES ENTERED BY ORDER SIZE
Date
Jan-17 .....................................
Feb-17 .....................................
VerDate Sep<11>2014
17:17 Aug 16, 2018
≤100
(%)
2.15
2.36
Jkt 244001
101–300
(%)
3.45
3.64
PO 00000
301–500
(%)
501–1,000
(%)
3.27
3.40
Frm 00094
Fmt 4703
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
9.15
9.16
12.48
12.29
14.61
14.52
17.00
16.80
7.03
7.30
Sfmt 4703
E:\FR\FM\17AUN1.SGM
17AUN1
>15,000
(%)
30.87
30.53
41136
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
TABLE 3—DISTRIBUTION OF SHARES ENTERED BY ORDER SIZE—Continued
Date
Mar-17 .....................................
Apr-17 ......................................
May-17 ....................................
Jun-17 .....................................
Jul-17 .......................................
Aug-17 .....................................
Sep-17 .....................................
Oct-17 ......................................
Nov-17 .....................................
Dec-17 .....................................
Jan-18 .....................................
Feb-18 .....................................
Mar-18 .....................................
Apr-18 ......................................
May-18 ....................................
Jun-18 .....................................
≤100
(%)
101–300
(%)
2.25
2.36
3.44
1.89
1.98
1.92
2.15
1.97
6.28
9.96
8.56
11.33
11.06
12.30
12.14
12.39
3.55
3.54
4.59
2.89
3.18
3.36
3.49
3.34
5.19
7.34
6.29
7.16
6.96
7.46
7.50
7.77
301–500
(%)
501–1,000
(%)
3.36
3.32
3.60
2.92
3.22
3.39
3.43
3.30
3.86
5.96
5.64
6.01
6.10
5.95
5.74
6.12
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
9.21
9.17
9.25
8.44
9.17
9.57
9.70
9.91
9.53
11.24
11.49
11.12
11.88
12.19
12.76
12.60
12.68
13.00
12.92
13.27
12.23
12.76
13.15
13.48
12.10
12.70
13.17
12.42
12.69
11.17
11.08
11.42
15.38
14.92
15.02
17.56
14.73
14.33
14.55
14.54
12.18
11.15
11.61
10.99
10.62
8.89
8.53
8.76
16.92
17.45
16.32
20.05
18.29
17.21
17.27
17.90
16.22
11.31
12.18
11.30
10.82
9.73
9.67
9.89
7.32
7.32
7.51
6.64
7.24
7.59
7.55
7.41
7.92
11.51
11.27
11.31
12.00
12.51
12.40
12.60
>15,000
(%)
29.33
28.91
27.35
26.34
29.96
29.87
28.70
28.16
26.72
18.83
19.79
18.37
17.88
19.80
20.17
18.45
TABLE 4—DISTRIBUTION OF SHARES EXECUTED BY ORDER SIZE
Date
Jan-17 .....................................
Feb-17 .....................................
Mar-17 .....................................
Apr-17 ......................................
May-17 ....................................
Jun-17 .....................................
Jul-17 .......................................
Aug-17 .....................................
Sep-17 .....................................
Oct-17 ......................................
Nov-17 .....................................
Dec-17 .....................................
Jan-18 .....................................
Feb-18 .....................................
Mar-18 .....................................
Apr-18 ......................................
May-18 ....................................
Jun-18 .....................................
≤100
(%)
101–300
(%)
11.39
13.96
14.14
14.69
17.86
9.74
10.37
9.39
10.60
9.40
12.42
14.98
14.27
16.74
17.27
17.12
18.24
18.93
14.06
15.27
14.99
14.83
18.10
11.25
12.33
12.34
12.93
12.40
13.48
15.80
14.96
15.75
15.97
15.58
16.29
17.28
The Exchange also analyzed fill rates
across the different order size buckets
and found that while fill rates are higher
for smaller orders as expected, large size
orders are still able to access liquidity
and therefore receive price
improvement in the Program. Moreover,
overall fill rates indicate that market
participants that provide liquidity are
301–500
(%)
501–1,000
(%)
10.40
10.48
10.15
10.01
9.98
8.91
9.91
10.01
10.22
10.16
9.27
10.29
10.28
10.78
10.58
10.24
10.18
10.59
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
15.88
14.54
14.74
14.84
13.17
14.58
16.17
16.70
16.28
17.12
15.84
14.92
15.27
14.27
13.81
13.60
12.80
12.96
12.34
11.44
11.80
11.55
10.48
14.86
12.75
13.36
13.00
13.45
13.24
11.67
11.90
11.08
10.51
10.04
9.80
9.64
8.41
7.82
8.15
7.85
6.94
12.03
8.96
8.77
8.56
8.58
7.98
6.98
7.12
6.48
6.66
6.71
6.25
5.66
5.26
5.15
5.02
5.00
4.23
7.97
6.56
6.15
5.74
5.86
6.63
5.04
5.16
4.57
4.63
5.37
5.25
4.95
18.41
17.77
17.53
17.80
16.46
16.71
18.84
18.97
18.87
19.36
16.56
16.77
17.53
17.05
16.87
16.30
15.89
16.16
responding with quote depth when the
contra side order is looking for a fill.
While fill rates decreased starting in
November 2017, the Exchange believes
that this is due to new Retail Order flow
being routed to the Program, rather than
a decrease in the available liquidity.
Monthly volume executed in the
Program, as shown in Table 1, has
>15,000
(%)
3.86
3.60
3.48
3.42
2.78
3.95
4.11
4.31
3.79
3.66
4.56
3.55
3.50
3.30
3.70
5.03
5.31
3.84
therefore remained constant or
increased since November 2017 despite
the lower overall fill rates for those
months. The Exchange therefore
believes that the Program is an attractive
option for market participants looking to
fill Retail Orders with price
improvement.
TABLE 5—FILL RATES
amozie on DSK3GDR082PROD with NOTICES1
Date
Jan-17 .....................................
Feb-17 .....................................
Mar-17 .....................................
Apr-17 ......................................
May-17 ....................................
Jun-17 .....................................
Jul-17 .......................................
Aug-17 .....................................
Sep-17 .....................................
Oct-17 ......................................
Nov-17 .....................................
Dec-17 .....................................
Jan-18 .....................................
Feb-18 .....................................
Mar-18 .....................................
Apr-18 ......................................
May-18 ....................................
Jun-18 .....................................
VerDate Sep<11>2014
17:17 Aug 16, 2018
≤100
(%)
85.19
87.21
87.04
86.90
87.53
87.78
85.99
79.61
77.55
80.19
22.78
12.14
12.84
11.79
11.56
10.61
10.11
10.57
Jkt 244001
101–300
(%)
65.62
61.69
58.53
58.46
66.54
66.50
63.63
59.74
58.32
62.29
29.93
17.37
18.31
17.56
17.00
15.91
14.61
15.39
PO 00000
301–500
(%)
501–1,000
(%)
51.13
45.31
41.87
42.12
46.75
52.07
50.52
48.02
46.98
51.71
27.66
13.96
14.06
14.32
12.85
13.11
11.93
11.98
Frm 00095
Fmt 4703
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
27.93
23.36
22.18
22.59
24.03
29.48
28.96
28.33
26.44
28.97
19.16
10.72
10.24
10.24
8.60
8.50
6.75
7.12
15.91
13.69
12.89
12.40
13.69
19.12
17.12
17.00
15.58
16.73
12.61
7.42
6.96
7.12
6.13
6.85
5.95
5.84
9.26
7.92
7.34
7.35
7.80
11.70
9.99
9.94
9.27
9.90
7.55
5.05
4.72
4.70
4.64
5.76
4.93
4.47
4.98
4.51
4.11
4.00
4.38
6.78
5.89
5.81
5.24
5.49
4.71
3.60
3.26
3.23
3.17
4.21
3.65
3.46
42.16
35.83
33.20
33.97
36.99
42.98
42.77
40.59
39.39
43.82
24.11
11.77
11.98
12.03
10.42
9.93
8.62
8.88
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>15,000
(%)
2.01
1.73
1.65
1.65
1.71
2.56
2.25
2.34
2.08
2.18
1.97
1.52
1.36
1.43
1.53
1.94
1.77
1.44
41137
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
III. Impact of the Program on Broader
Market Quality
As shown in Charts 2 and 3 above,
Retail Order volume executed in the
Program is a small percentage of both
total volume executed on the Exchange
and total consolidated volume. While
the Program has better depth available
for Retail Orders, it does not
significantly affect the market volume of
BYX. The average volume within the
95th percentile is between 1.3% and
1.7%. With the Program volume mostly
below 2.5% of BYX volume, the
Exchange does not believe that it is able
to significantly impact BYX market
quality. Nevertheless, to test the impact
of the Program on broader market
quality, the Exchange reviewed the
correlation between metrics that are tied
to overall market quality with relevant
Program metrics over both 2017 and
2018. Based on this analysis, which is
provided in Table 6 below, the
Exchange does not believe that the
Program has had any significant impact
on broader market quality.
Specifically, the Exchange’s analysis
shows that: (1) Inside size in the broader
market is not correlated with either RPI
effective spreads or the percentage of
volume executed in the Program, which
suggests that market participants are not
moving volume from the regular market
to the Program as effective spreads
narrow or volume executed in the
Program increases; (2) effective spreads
in the broader market are not correlated
with the percentage of volume executed
in the Program, which suggests that
spreads are not widening as a result of
more Retail Order flow being executed
in the Program, (3) midpoint volume
executed is not correlated with effective
spreads in the Program, which suggests
that market participants are not moving
midpoint liquidity from the regular
market to instead receive price
improvement in the Program, and (4)
displayed volume executed is not
correlated with quoted spreads in the
Program, which suggest that market
participants are not entering nondisplayed retail price improving interest
in the Program as an alternative to
displaying interest on an order book.
The Exchange therefore believes that the
Program can continue on a permanent
basis—and thereby provide increased
price improvement opportunities to
retail investors on a transparent wellregulated exchange—without degrading
market quality outside of the Program.
TABLE 6—BYX MARKET QUALITY CORRELATION ANALYSIS
Date
2017
amozie on DSK3GDR082PROD with NOTICES1
Correlation
Correlation
Correlation
Correlation
Correlation
of
of
of
of
of
RPI
RPI
RPI
RPI
RPI
Effective Spread to Average Inside Size across all Equities Exchanges 28 .............................
Volume as a Percent of Total Volume to Average Inside Size across all Equities Exchanges
Volume as a Percent of Total Volume to Average Effective Spread across all Venues .........
Effective Spread to Total Midpoint Volume across all Venues .................................................
Quoted Spread to Total Protected Lit Volume across all Equities Exchanges ........................
IV. Conclusion
Based on the Exchange’s experience
in operating the Program, and the data
provided here and during the duration
of the pilot, the Exchange believes that
the Program has been a positive
experiment in attracting retail order
flow to a public exchange. The data
provided by the Exchange describes a
valuable service that delivers
considerable price improvement in a
transparent and well-regulated
environment. The Program represents
just a fraction of retail orders, most of
which are executed off-exchange by a
wide range of order handling services
that have considerably more market
share, and which operate pursuant to
different rules and regulatory
requirements. The order flow the
Program attracted to the Exchange
provided tangible price improvement to
retail investors through a competitive
and transparent pricing process
unavailable in non-exchange venues. As
such, despite relatively modest
volumes, the Exchange believes that the
Program satisfied the twin goals of
attracting retail order flow to the
Exchange and allowing such order flow
to receive potential price improvement.
28 Inside size is the average bid or ask size when
the venue is at the NBB or NBO.
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17:17 Aug 16, 2018
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Moreover, the Exchange believes that
the data collected supports the
conclusion that the Program did not
have a negative impact on broader
market quality. Although the results of
the Program highlight the substantial
advantages that broker-dealers retain
when managing the benefits of retail
order flow, the Exchange believes that
the level of price improvement provided
by the Program and the scant evidence
that the Program negatively impacted
the marketplace justifies making the
Program permanent.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act,29 in general, and Section 6(b)(5) of
the Act,30 in particular, in that it is
designed to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest
and not to permit unfair discrimination
between customers, issuers, brokers, or
dealers.
29 15
30 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00096
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¥0.0145
¥0.0217
0.1175
¥0.1438
¥0.1221
2018
¥0.0096
¥0.0056
0.0134
¥0.1366
¥0.0999
The Exchange believes that making
the pilot permanent is consistent with
these principles because the Program is
reasonably designed to attract retail
order flow to the exchange environment,
while helping to ensure that retail
investors benefit from the better price
that liquidity providers are willing to
give their orders. During the pilot
period, the Exchange has provided data
and analysis to the Commission. The
Exchange believes that this data and
analysis, as well as the further analysis
provided in this filing, show that the
Program has provided the intended
benefits to the market, and retail
investors in particular, and is therefore
consistent with the Act.
Additionally, the Exchange believes
the proposed rule change is designed to
facilitate transactions in securities and
to remove impediments to, and perfect
the mechanisms of, a free and open
market and a national market system
because making the Program permanent
would allow the Exchange to continue
to attract retail order flow to a public
exchange and allow such order flow to
receive potential price improvement.
The data provided by the Exchange to
the Commission staff demonstrates that
the Program provided tangible price
improvement to retail investors through
a competitive pricing process
E:\FR\FM\17AUN1.SGM
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41138
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices
unavailable in non-exchange venues,
and otherwise had an insignificant
impact on the broader market. The
Exchange believes that making the
Program permanent would encourage
the additional utilization of, and
interaction with, the Exchange and
provide retail customers with an
additional venue for price discovery,
liquidity, competitive quotes, and price
improvement. For the same reasons, the
Exchange believes that making the
Program permanent would promote just
and equitable principles of trade and
remove impediments to and perfect the
mechanism of a free and open market.
Finally, the Exchange also believes
that it is subject to significant
competitive forces, as described below
in the Exchange’s statement regarding
the burden on competition. For all of
these reasons, the Exchange believes
that the proposed rule change is
consistent with the Act.
amozie on DSK3GDR082PROD with NOTICES1
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that making the
Program permanent would continue to
promote competition for retail order
flow among execution venues and
contribute to the public price discovery
process. The Exchange believes that the
data supplied to the Commission, and
experience gained over the life of the
pilot, have demonstrated that the
Program creates price improvement
opportunities for retail orders that are
equal to what would be provided under
OTC internalization arrangements,
thereby benefiting retail investors and
increasing competition between
execution venues. The Exchange also
believes that making the Program
permanent will promote competition
between execution venues operating
their own retail liquidity programs.
Such competition will lead to
innovation within the market, thereby
increasing the quality of the national
market system. Finally, the Exchange
notes that it operates in a highly
competitive market in which market
participants can easily direct their
orders to competing venues, including
off-exchange venues. In such an
environment, the Exchange must
continually review, and consider
adjusting the services it offers and the
requirements it imposes to remain
competitive with other U.S. equity
exchanges. For the reasons described
above, the Exchange believes that the
VerDate Sep<11>2014
17:17 Aug 16, 2018
Jkt 244001
proposed rule change reflects this
competitive environment.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
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 (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange 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 proposal is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
CboeBYX–2018–014 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 No.
SR–CboeBYX–2018–014. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing will also be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File No. SRCboeBYX–2018–014 and should be
submitted on or before September 7,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–17736 Filed 8–16–18; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #15567 and #15568;
HAWAII Disaster Number HI–00049]
Presidential Declaration Amendment of
a Major Disaster for the State of Hawaii
U.S. Small Business
Administration.
ACTION: Amendment 1.
AGENCY:
This is an amendment of the
Presidential declaration of a major
disaster for the State of Hawaii (FEMA–
4366–DR), dated 06/14/2018.
Incident: Kilauea Volcanic Eruption
and Earthquakes.
Incident Period: 05/03/2018 and
continuing.
SUMMARY:
Issued on 06/14/2018.
Physical Loan Application Deadline
Date: 09/12/2018.
Economic Injury (EIDL) Loan
Application Deadline Date: 03/14/2019.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
DATES:
31 17
E:\FR\FM\17AUN1.SGM
CFR 200.30–3(a)(12).
17AUN1
]]>Agencies
[Federal Register Volume 83, Number 160 (Friday, August 17, 2018)]
[Notices]
[Pages 41128-41138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17736]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83831; File No. SR-CboeBYX-2018-014]
Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Make Permanent Rule 11.24, Which
Sets Forth the Exchange's Pilot Retail Price Improvement Program
August 13, 2018.
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 July 30, 2018, Cboe BYX Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposal to make permanent Rule 11.24, which
sets forth the Exchange's pilot Retail Price Improvement Program.
The text of the proposed rule change is available at the Exchange's
website at www.markets.cboe.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend Rule 11.24 to
make permanent the Retail Price Improvement Program (the ``Program''),
which is currently offered on a pilot basis. The Exchange has operated
the pilot for a six year period and believes that it has been
successful in its stated goal of providing price improvement
opportunities to retail investors. The analysis conducted by the
Exchange shows that retail investors have been provided a total of $4.5
million of price improvement during the 2.5 year period reviewed from
January 2016 through June 2018. In addition, the Exchange's analysis
shows that the Program has provided these benefits to retail investors
without having an adverse impact on the broader market. The proposal
provides an analysis of the economic benefits to retail investors and
the marketplace flowing from operation of the Program, which the
Exchange believes supports making the Program permanent.
Background
In November 2012, the Commission approved the Program on a pilot
basis.\3\ The Program is designed to attract retail order flow to the
Exchange, and allow such order flow to receive potential price
improvement. The Program is currently limited to trades occurring at
prices equal to or greater than $1.00 per share.\4\ Under the Program,
a class of market participant called a Retail Member Organization
(``RMO'') is eligible to submit certain retail order flow (``Retail
Orders'') to the Exchange. Users \5\ are permitted to provide potential
price improvement for Retail Orders \6\ in the form of non-displayed
interest that is better than the national best bid that is a Protected
Quotation (``Protected NBB'') or the national best offer that is a
Protected Quotation (``Protected NBO'', and together with the Protected
NBB, the ``Protected NBBO'').\7\ The Program was approved by the
Commission on a pilot basis running one-year from the date of
implementation.\8\ The Commission approved the Program on November 27,
2012.\9\ The Exchange implemented the Program on January 11, 2013, and
has extended the pilot period five times.\10\
[[Page 41129]]
The pilot period for the Program is scheduled to expire on July 31,
2018.\11\ The Exchange believes that the Program has been successful in
its goal of providing price improvement to Retail Orders, and is
therefore proposing to amend Rule 11.24 to make this pilot permanent so
that retail investors can continue to reap the benefits of the
Program.\12\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (``RPI Approval Order'') (SR-
BYX-2012-019).
\4\ The Exchange will periodically notify the membership
regarding the securities included in the Program through an
information circular.
\5\ A ``User'' is defined in Rule 1.5(cc) as any member or
sponsored participant of the Exchange who is authorized to obtain
access to the System.
\6\ A ``Retail Order'' is defined in Rule 11.24(a)(2) as an
agency order that originates from a natural person and is submitted
to the Exchange by a RMO, provided that no change is made to the
terms of the order with respect to price or side of market and the
order does not originate from a trading algorithm or any
computerized methodology. See Rule 11.24(a)(2).
\7\ The term Protected Quotation is defined in BYX Rule 1.5(t)
and has the same meaning as is set forth in Regulation NMS Rule
600(b)(58). The terms Protected NBB and Protected NBO are defined in
BYX Rule 1.5(s). The Protected NBB is the best-priced protected bid
and the Protected NBO is the best-priced protected offer. Generally,
the Protected NBB and Protected NBO and the national best bid
(``NBB'') and national best offer (``NBO'', together with the NBB,
the ``NBBO'') will be the same. However, a market center is not
required to route to the NBB or NBO if that market center is subject
to an exception under Regulation NMS Rule 611(b)(1) or if such NBB
or NBO is otherwise not available for an automatic execution. In
such case, the Protected NBB or Protected NBO would be the best-
priced protected bid or offer to which a market center must route
interest pursuant to Regulation NMS Rule 611.
\8\ See RPI Approval Order, supra note 3 at 71652.
\9\ Id.
\10\ See Securities Exchange Act Release Nos. 71249 (January 7,
2014), 79 FR 2229 (January 13, 2014) (SR-BYX-2014-001); 74111
(January 22, 2015), 80 FR 4598 (January 28, 2015) (SR-BYX-2015-05);
76965 (January 22, 2016), 81 FR 4682 (January 27, 2016) (SR-BYX-
2016-01); 78180 (June 28, 2016), 81 FR 43306 (July 1, 2016) (SR-BYX-
2016-15); 81368 (August 10, 2017), 82 FR 38960 (August 16, 2017)
(SR-BYX-2017-18).
\11\ Concurrently with the filing of this proposed rule change,
the Exchange is filing to extend the current pilot period until the
earlier of approval of the filing to make this rule permanent (i.e.,
this proposed rule change) or December 31, 2018.
\12\ The Program will continue to only apply to trades occurring
at prices equal to or greater than $1.00 per share.
---------------------------------------------------------------------------
The SEC approved the Program on a pilot basis, in part, because it
concluded, ``the Program is reasonably designed to benefit retail
investors by providing price improvement to retail order flow.'' \13\
The Commission also found that ``while the Program would treat retail
order flow differently from order flow submitted by other market
participants, such segmentation would not be inconsistent with Section
6(b)(5) of the Act, which requires that the rules of an exchange are
not designed to permit unfair discrimination.'' \14\ As the SEC
acknowledged, the retail order segmentation was designed to create
greater retail order flow competition and thereby increase the amount
of this flow to transparent and well-regulated exchanges. This would
help to ensure that retail investors benefit from competitive price
improvement that exchange-based liquidity providers provide. As
discussed below, the Exchange believes that the Program data supports
the conclusion that it provides valuable price [sic] to retail
investors that they may not otherwise have received, and that it is
therefore appropriate to make the Program permanent.
---------------------------------------------------------------------------
\13\ See RPI Approval Order, supra note 3 at 71655.
\14\ Id.
---------------------------------------------------------------------------
Definitions
The Exchange adopted the following definitions under Rule 11.24(a):
First, the term ``Retail Member Organization'' is defined as a
Member (or a division thereof) that has been approved by the Exchange
to submit Retail Orders.
Second, the term ``Retail Order'' is defined as an agency order or
riskless principal that meets the criteria of FINRA Rule 5320.03 \15\
that originates from a natural person and is submitted to the Exchange
by a Retail Member Organization, provided that no change is made to the
terms of the order with respect to price or side of market and the
order does not originate from a trading algorithm or any other
computerized methodology. A Retail Order is an Immediate or Cancel
(``IOC'') Order and shall operate in accordance with Rule 11.24(f). A
Retail Order may be an odd lot, round lot, or mixed lot.
---------------------------------------------------------------------------
\15\ FINRA Rule 5320.03 clarifies that an RMO may enter Retail
Orders on a riskless principal basis, provided that (i) the entry of
such riskless principal orders meet the requirements of FINRA Rule
5320.03, including that the RMO maintains supervisory systems to
reconstruct, in a time-[sic] sequenced manner, all Retail Orders
that are entered on a riskless principal basis; and (ii) the RMO
submits a report, contemporaneously with the execution of the
facilitated order, that identifies the trade as riskless principal.
---------------------------------------------------------------------------
Finally, the term ``Retail Price Improvement Order'' or ``RPI
Order'' consists of non-displayed interest on the Exchange that is
priced better than the Protected NBB or Protected NBO by at least
$0.001 and that is identified as such (``RPI interest'').\16\ The
System \17\ will monitor whether RPI buy or sell interest, adjusted by
any offset and subject to the ceiling or floor price, is eligible to
interact with incoming Retail Orders. An RPI Order remains non-
displayed in its entirety (the buy or sell interest, the offset, and
the ceiling or floor). An RPI Order may also be entered in a sub-penny
increment with an explicit limit price. Any User is permitted, but not
required, to submit RPI Orders. An RPI Order may be an odd lot, round
lot or mixed lot.
---------------------------------------------------------------------------
\16\ Exchange systems prevent Retail Orders from interacting
with RPI Orders if the RPI Order is not priced at least $0.001
better than the Protected NBBO. The Exchange notes, however, that
price improvement of $0.001 would be a minimum requirement and Users
could enter RPI Orders that better the Protected NBBO by more than
$0.001. Exchange systems will accept RPI Orders without a minimum
price improvement value; however, such interest will execute at its
floor or ceiling price only if such floor or ceiling price is better
than the Protected NBBO by $0.001 or more.
\17\ The ``System'' is defined in BYX Rule 1.5(aa) 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.''
---------------------------------------------------------------------------
The price of an RPI Order is determined by a User's entry of the
following into the Exchange: (1) RPI buy or sell interest; (2) an
offset, if any; and (3) a ceiling or floor price. RPI Orders submitted
with an offset are similar to other peg orders available to Users in
that the order is tied or ``pegged'' to a certain price, and would have
its price automatically set and adjusted upon changes in the Protected
NBBO, both upon entry and any time thereafter. RPI buy or sell interest
is typically entered to track the Protected NBBO, that is, RPI Orders
are typically submitted with an offset. The offset is a predetermined
amount by which the User is willing to improve the Protected NBBO,
subject to a ceiling or floor price. The ceiling or floor price is the
amount above or below which the User does not wish to trade. RPI Orders
in their entirety (the buy or sell interest, the offset, and the
ceiling or floor) will remain non-displayed. The Exchange also allows
Users to enter RPI Orders that establish the exact limit price, which
is similar to a non-displayed limit order currently accepted by the
Exchange except the Exchange accepts sub-penny limit prices on RPI
Orders in increments of $0.001. The Exchange monitors whether RPI buy
or sell interest, adjusted by any offset and subject to the ceiling or
floor price, is eligible to interact with incoming Retail Orders.
Users and RMOs may enter odd lots, round lots or mixed lots as RPI
Orders and as Retail Orders respectively. As discussed below, RPI
Orders are ranked and allocated according to price and time of entry
into the System consistent with Rule 11.12 and therefore without regard
to whether the size entered is an odd lot, round lot or mixed lot
amount. Similarly, Retail Orders interact with RPI Orders according to
the Priority and Allocation rules of the Program and without regard to
whether they are odd lots, round lots or mixed lots. Finally, Retail
Orders are designated as Type 1 or Type 2 without regard to the size of
the order.
RPI Orders interact with Retail Orders as follows. Assume a User
enters RPI sell interest with an offset of $0.001 and a floor of $10.10
while the Protected NBO is $10.11. The RPI Order could interact with an
incoming buy Retail Order at $10.109. If, however, the Protected NBO
was $10.10, the RPI Order could not interact with the Retail Order
because the price required to deliver the minimum $0.001 price
improvement ($10.099) would violate the User's floor of $10.10. If a
User otherwise enters an offset greater than the minimum required price
improvement and the offset would produce a price that would violate the
User's floor, the offset would be applied only to the extent that it
respects the User's floor. By way of illustration, assume RPI buy
interest is entered with an offset of $0.005 and a ceiling of $10.112
while the Protected NBB is at $10.11. The RPI Order could interact with
an incoming sell Retail Order at $10.112, because it would produce the
required price improvement without violating the User's ceiling, but it
could not interact above the $10.112 ceiling. Finally, if a User enters
an RPI Order
[[Page 41130]]
without an offset (i.e., an explicitly priced limit order), the RPI
Order will interact with Retail Orders at the level of the User's limit
price as long as the minimum required price improvement is produced.
Accordingly, if RPI sell interest is entered with a limit price of
$10.098 and no offset while the Protected NBO is $10.11, the RPI Order
could interact with the Retail Order at $10.098, producing $0.012 of
price improvement. The System will not cancel RPI interest when it is
not eligible to interact with incoming Retail Orders; such RPI interest
will remain in the System and may become eligible again to interact
with Retail Orders depending on the Protected NBBO.
RMO Qualifications and Application Process
Under Rule 11.24(b), any Member may qualify as an RMO if it
conducts a retail business or routes retail orders on behalf of another
broker-dealer. For purposes of Rule 11.24(b), conducting a retail
business shall include carrying retail customer accounts on a fully
disclosed basis. Any Member that wishes to obtain RMO status is
required to submit: (1) An application form; (2) supporting
documentation sufficient to demonstrate the retail nature and
characteristics of the applicant's order flow; and (3) an attestation,
in a form prescribed by the Exchange, that substantially all orders
submitted as Retail Orders will qualify as such under Rule 11.24.\18\
The Exchange shall notify the applicant of its decision in writing.
---------------------------------------------------------------------------
\18\ For example, a prospective RMO could be required to provide
sample marketing literature, website screenshots, other publicly
disclosed materials describing the retail nature of their order
flow, and such other documentation and information as the Exchange
may require to obtain reasonable assurance that the applicant's
order flow would meet the requirements of the Retail Order
definition.
---------------------------------------------------------------------------
An RMO is required to have written policies and procedures
reasonably designed to assure that it will only designate orders as
Retail Orders if all requirements of a Retail Order are met. Such
written policies and procedures must require the Member to (i) exercise
due diligence before entering a Retail Order to assure that entry as a
Retail Order is in compliance with the requirements of this rule, and
(ii) monitor whether orders entered as Retail Orders meet the
applicable requirements. If the RMO represents Retail Orders from
another broker-dealer customer, the RMO's supervisory procedures must
be reasonably designed to assure that the orders it receives from such
broker-dealer customer that it designates as Retail Orders meet the
definition of a Retail Order. The RMO must (i) obtain an annual written
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders
that entry of such orders as Retail Orders will be in compliance with
the requirements of this rule, and (ii) monitor whether its broker-
dealer customers' Retail Order flow continues to meet the applicable
requirements.\19\
---------------------------------------------------------------------------
\19\ The Exchange or another self-regulatory organization on
behalf of the Exchange will review an RMO's compliance with these
requirements through an exam-based review of the RMO's internal
controls.
---------------------------------------------------------------------------
If the Exchange disapproves the application, the Exchange provides
a written notice to the Member. The disapproved applicant could appeal
the disapproval by the Exchange as provided in Rule 11.24(d), and/or
reapply for RMO status 90 days after the disapproval notice is issued
by the Exchange. An RMO also could voluntarily withdraw from such
status at any time by giving written notice to the Exchange.
Failure of RMO To Abide by Retail Order Requirements
Rule 11.24(c) addresses an RMO's failure to abide by Retail Order
requirements. If an RMO designates orders submitted to the Exchange as
Retail Orders and the Exchange determines, in its sole discretion, that
those orders fail to meet any of the requirements of Retail Orders, the
Exchange may disqualify a Member from its status as an RMO. When
disqualification determinations are made, the Exchange provides a
written disqualification notice to the Member. A disqualified RMO may
appeal the disqualification as provided in Rule 11.24(d) and/or reapply
for RMO status 90 days after the disqualification notice is issued by
the Exchange.
Appeal of Disapproval or Disqualification
Rule 11.24(d) provides appeal rights to Members. If a Member
disputes the Exchange's decision to disapprove it as an RMO under Rule
11.24(b) or disqualify it under Rule 11.24(c), such Member
(``appellant'') may request, within five business days after notice of
the decision is issued by the Exchange, that the Retail Price
Improvement Program Panel (``RPI Panel'') review the decision to
determine if it was correct.
The RPI Panel consists of the Exchange's Chief Regulatory Officer
(``CRO''), or a designee of the CRO, and two officers of the Exchange
designated by the Chief Operating Officer (``COO''). The RPI Panel
reviews the facts and render [sic] a decision within the time frame
prescribed by the Exchange. The RPI Panel may overturn or modify an
action taken by the Exchange and all determinations by the RPI Panel
constitute final action by the Exchange on the matter at issue.
Retail Liquidity Identifier
Under Rule 11.24(e), the Exchange disseminates an identifier when
RPI interest priced at least $0.001 better than the Exchange's
Protected Bid or Protected Offer for a particular security is available
in the System (``Retail Liquidity Identifier''). The Retail Liquidity
Identifier is disseminated through consolidated data streams (i.e.,
pursuant to the Consolidated Tape Association Plan/Consolidated
Quotation Plan, or CTA/CQ, for Tape A and Tape B securities, and the
Nasdaq UTP Plan for Tape C securities) as well as through proprietary
Exchange data feeds.\20\ The Retail Liquidity Identifier reflects the
symbol and the side (buy or sell) of the RPI interest, but does not
include the price or size of the RPI interest. In particular, CQ and
UTP quoting outputs include a field for codes related to the Retail
Liquidity Identifier. The codes indicate RPI interest that is priced
better than the Exchange's Protected Bid or Protected Offer by at least
the minimum level of price improvement as required by the Program.
---------------------------------------------------------------------------
\20\ The Exchange notes that the Retail Liquidity Identifier for
Tape A and Tape B securities are disseminated pursuant to the CTA/CQ
Plan. The identifier is also available through the consolidated
public market data stream for Tape C securities. The processor for
the Nasdaq UTP quotation stream disseminates the Retail Liquidity
Identifier and analogous identifiers from other market centers that
operate programs similar to the RPI Program.
---------------------------------------------------------------------------
Retail Order Designations
Under Rule 11.24(f), an RMO can designate how a Retail Order would
interact with available contra-side interest as follows:
A Type 1-designated Retail Order will interact with available
contra-side RPI Orders and other price improving contra-side interest
but will not interact with other available contra-side interest in the
System that is not offering price improvement or route to other
markets. The portion of a Type 1-designated Retail Order that does not
execute against contra-side RPI Orders or other price improving
liquidity will be immediately and automatically cancelled.
A Type 2-designated Retail Order will interact first with available
contra-side RPI Orders and other price improving liquidity and then any
remaining
[[Page 41131]]
portion of the Retail Order will be executed as an Immediate-or-Cancel
(``IOC'') Order pursuant to Rule 11.9(b)(1). A Type 2-designated Retail
Order can either be submitted as a BYX Only Order \21\ or as an order
eligible for routing pursuant to Rule 11.13(a)(2).
---------------------------------------------------------------------------
\21\ A BYX Only Order is defined in BYX Rule 11.9(c)(4) and
includes orders that are not eligible for routing to other trading
centers.
---------------------------------------------------------------------------
Priority and Order Allocation
Under Rule 11.24(g), competing RPI Orders in the same security are
ranked and allocated according to price then time of entry into the
System. Executions occur in price/time priority in accordance with Rule
11.12. Any remaining unexecuted RPI interest remains available to
interact with other incoming Retail Orders if such interest is at an
eligible price. Any remaining unexecuted portion of the Retail Order
will cancel or execute in accordance with Rule 11.24(f). The following
example illustrates this method:
Protected NBBO for security ABC is $10.00-$10.05
User 1 enters an RPI Order to buy ABC at $10.015 for 500
User 2 then enters an RPI Order to buy ABC at $10.02 for 500
User 3 then enters an RPI Order to buy ABC at $10.035 for 500
An incoming Retail Order to sell ABC for 1,000 executes first
against User 3's bid for 500 at $10.035, because it is the best priced
bid, then against User 2's bid for 500 at $10.02, because it is the
next best priced bid. User 1 is not filled because the entire size of
the Retail Order to sell 1,000 is depleted. The Retail Order executes
against RPI Orders in price/time priority.
However, assume the same facts above, except that User 2's RPI
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to
sell 1,000 executes first against User 3's bid for 500 at $10.035,
because it is the best priced bid, then against User 2's bid for 100 at
$10.02, because it is the next best priced bid. User 1 then receives an
execution for 400 of its bid for 500 at $10.015, at which point the
entire size of the Retail Order to sell 1,000 is depleted.
As a final example, assume the same facts as above, except that
User 3's order was not an RPI Order to buy ABC at $10.035, but rather,
a non-displayed order to buy ABC at $10.03. The result would be similar
to the result immediately above, in that the incoming Retail Order to
sell 1,000 executes first against User 3's bid for 500 at $10.03,
because it is the best priced bid, then against User 2's bid for 100 at
$10.02, because it is the next best priced bid. User 1 then receives an
execution for 400 of its bid for 500 at $10.015, at which point the
entire size of the Retail Order to sell 1,000 is depleted.
Eligible Securities
All Regulation NMS securities traded on the Exchange are eligible
for inclusion in the RPI Program. The Exchange limits the Program to
trades occurring at prices equal to or greater than $1.00 per share.
Toward that end, Exchange trade validation systems prevent the
interaction of RPI buy or sell interest (adjusted by any offset) and
Retail Orders at a price below $1.00 per share.\22\ For example, if
there is RPI buy interest tracking the Protected NBB at $0.99 with an
offset of $0.001 and a ceiling of $1.02, Exchange trade validation
systems would prevent the execution of the RPI Order at $0.991 with a
sell Retail Order with a limit of $0.99. However, if the Retail Order
was Type 2 as defined the Program,\23\ it would be able to interact at
$0.99 with liquidity outside the Program in the Exchange's order book.
In addition to facilitating an orderly \24\ and operationally intuitive
program, the Exchange believes that limiting the Program to trades
equal to or greater than $1.00 per share enabled it better to focus its
efforts to monitor price competition and to assess any indications that
data disseminated under the Program is potentially disadvantaging
retail orders. As part of that review, the Exchange produced data
throughout the pilot, which included statistics about participation,
the frequency and level of price improvement provided by the Program,
and any effects on the broader market structure.
---------------------------------------------------------------------------
\22\ As discussed above, the price of an RPI is determined by a
User's entry of buy or sell interest, an offset (if any) and a
ceiling or floor price. RPI sell or buy interest typically tracks
the Protected NBBO.
\23\ Type 2 Retail Orders are treated as IOC orders that execute
against displayed and non-displayed liquidity in the Exchange's
order book where there is no available liquidity in the Program.
Type 2 Retail Orders can either be designated as eligible for
routing or as BYX Only Orders, and thus non-routable, as described
above.
\24\ Given the limitation, the Program would have no impact on
the minimum pricing increment for orders priced less than $1.00 and
therefore no effect on the potential of markets executing those
orders to lock or cross. In addition, the non-displayed nature of
the liquidity in the Program simply has no potential to disrupt
displayed, protected quotes. In any event, the Program would do
nothing to change the obligation of exchanges to avoid and reconcile
locked and crossed markets under NMS Rule 610(d).
---------------------------------------------------------------------------
Rationale for Making the Program Pilot Permanent
The Exchange established the Program in an attempt to attract
retail order flow to the Exchange by providing an opportunity for price
improvement to such order flow. The Exchange believes that the Program
promotes transparent competition for retail order flow by allowing
Exchange members to submit RPI Orders to interact with Retail Orders.
Such competition promotes efficiency by facilitating the price
discovery process and generating additional investor interest in
trading securities, thereby promoting capital formation and retail
investment opportunities. The Program will continue to be limited to
trades occurring at prices equal to or greater than $1.00 per share.
In accordance with its filing establishing the pilot, the Exchange
did ``produce data throughout the pilot, which will include statistics
about participation, the frequency and level of price improvement
provided by the Program, and any effects on the broader market
structure.'' \25\ The Exchange has fulfilled this obligation through
the reports and assessments it has submitted to the Commission since
the implementation of the pilot Program. The Exchange believes that the
data provided to the Commission to date, as well as the data being
provided in this proposed rule change, support the continued operation
of the Program on a permanent basis.
---------------------------------------------------------------------------
\25\ RPI Approval Order, 77 FR at 71655.
---------------------------------------------------------------------------
The SEC stated in the RPI Approval Order that the Program could
promote competition for retail order flow among execution venues, and
that this could benefit retail investors by creating additional well-
regulated and transparent price improvement opportunities for
marketable retail order flow, most of which is currently executed in
the Over-the-Counter (``OTC'') markets without ever reaching a public
exchange.\26\ The Exchange believes that it has achieved its goal of
attracting retail order flow to the Exchange. As the Exchange's
analysis of the Program data below demonstrates, there has been
consistent retail investor interest in the Program, which has provided
tangible price improvement to those retail investors through a
competitive pricing process over the course of the pilot. The data also
demonstrates that the Program had an overall negligible impact on
broader market quality outside of the Program. The Exchange has not
received any
[[Page 41132]]
complaints or negative feedback concerning the Program.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
I. Overall Analysis of the Program
Brokers route retail orders to a wide range of different trading
systems. The Program offers a transparent and well-regulated option,
providing meaningful competition and price improvement. As explained
above, the purpose of the Program is to attract retail order flow to
the Exchange by providing an opportunity for retail investors to
receive price improvement. The Exchange believes that the Program has
satisfied this goal, having provided a total of $4.5 million of price
improvement, or approximately $153,000 per month, in the last 2.5
years. Furthermore, while the amount of price improvement provided in
the Program varies month to month, the amount of price improvement
provided in recent months has generally increased relative to prior
months due to additional participation in the Program by market
participants with retail order flow. The Exchange believes that this
supports permanent approval of the pilot as retail investors continue
to reap the benefits afforded by the Program. The amount of monthly and
cumulative price improvement provided in the Program is illustrated in
Chart 1 below.
[GRAPHIC] [TIFF OMITTED] TN17AU18.019
Furthermore, Retail Order volume executed in the Program accounted
for between 0.86% and 2.32% of total BYX volume from January 2017 to
June 2018, as shown in Chart 2 below, and between 0.05% and 0.11% of
total consolidated volume, as shown in Chart 3 below. Despite its size
relative to total volume executed on the Exchange or the broader
market, the Program has continued to provide considerable price
improvement each month to retail investors that participated in the
Program. In addition, the Exchange believes that the relatively modest
volume executed in the Program relative to total BYX volume and total
consolidated volume limits the potential impact of the Program on
broader market quality on the Exchange.\27\ The Exchange therefore
believes that the Program has demonstrated the effectiveness of a
transparent, on-exchange retail order price improvement functionality,
notwithstanding that the majority of retail volume is still traded off-
exchange.
---------------------------------------------------------------------------
\27\ The Exchange has also performed an analysis of the impact
of the Program on other market quality indicators, which found that
the Program did not have a significant impact on market quality in
the broader market. See Section III below.
---------------------------------------------------------------------------
[[Page 41133]]
[GRAPHIC] [TIFF OMITTED] TN17AU18.020
[[Page 41134]]
[GRAPHIC] [TIFF OMITTED] TN17AU18.021
Retail Orders are routed by sophisticated brokers using systems
that seek the highest fill rates and amounts of price improvement.
These brokers have many choices of execution venues for this order
flow. When they choose to route to the Program, they have determined
that it is the best opportunity for fill rate and price improvement at
that time. As shown in Table 1 below, Retail Order average daily volume
(``ADV'') executed in the Program averaged between 2 and 7 million
shares from January 2016 to June 2018. Increased volatility in February
2018 likely contributed to the increased Retail Order shares executed
in the Program that month. Fill rates for the majority of the period
studied ranged from 11%-19% with fill rates declining below 10%
starting in December 2017, likely due to additional participation in
the Program that resulted in a significant increase in the Retail Order
volume entered on the Exchange. Retail Orders also continue to receive
more than the minimum $0.001 price improvement required of a liquidity
providing RPI Order, with the monthly average price improvement
provided to Retail Orders ranging from $0.0011-$0.0014 per share, and
the monthly effective/quoted spread ratio ranging from 0.77-0.90. The
Exchange believes that this data supports permanent approval of the
Program as this would allow retail investors to continue to execute
their orders with price improvement in the Program.
Table 1--Summary Statistics on the Program
--------------------------------------------------------------------------------------------------------------------------------------------------------
Effective/
Date Retail shares Retail orders Effective Quoted spread quoted spread Price Fill rate (%)
executed ADV placed ADV spread BPS BPS ratio improvement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-16.................................. 4,666,052 20,560 19 22 0.89 $0.0011 16.09
Feb-16.................................. 4,083,670 18,025 19 22 0.87 0.0011 16.10
Mar-16.................................. 3,474,997 15,103 21 24 0.90 0.0011 17.50
Apr-16.................................. 3,216,923 14,126 18 21 0.88 0.0011 19.23
May-16.................................. 2,912,160 12,980 18 21 0.87 0.0011 19.73
[[Page 41135]]
Jun-16.................................. 3,144,024 13,924 16 18 0.89 0.0011 19.65
Jul-16.................................. 4,009,916 17,257 18 20 0.90 0.0011 19.97
Aug-16.................................. 3,906,624 17,135 19 21 0.90 0.0011 17.66
Sep-16.................................. 4,887,221 20,708 17 19 0.88 0.0011 17.28
Oct-16.................................. 3,595,900 15,922 24 27 0.90 0.0012 17.19
Nov-16.................................. 2,273,885 8,972 29 33 0.88 0.0013 12.71
Dec-16.................................. 3,192,065 12,768 36 41 0.88 0.0013 14.82
Jan-17.................................. 3,122,721 16,951 31 36 0.88 0.0013 16.09
Feb-17.................................. 3,262,046 21,151 31 35 0.88 0.0013 14.71
Mar-17.................................. 3,068,930 20,921 33 38 0.88 0.0014 13.85
Apr-17.................................. 2,680,646 18,518 34 38 0.88 0.0013 13.97
May-17.................................. 3,407,603 23,437 29 33 0.87 0.0013 16.88
Jun-17.................................. 7,896,833 46,398 28 32 0.88 0.0013 17.07
Jul-17.................................. 5,966,961 36,717 27 31 0.88 0.0012 16.43
Aug-17.................................. 6,467,615 38,608 23 26 0.88 0.0013 16.24
Sep-17.................................. 5,237,243 33,314 27 31 0.87 0.0013 15.76
Oct-17.................................. 5,702,759 33,578 34 40 0.84 0.0012 16.77
Nov-17.................................. 4,427,779 62,352 33 40 0.83 0.0012 11.61
Dec-17.................................. 5,131,502 142,810 34 41 0.84 0.0012 8.30
Jan-18.................................. 6,359,122 167,730 29 36 0.82 0.0013 7.98
Feb-18.................................. 7,230,230 227,980 21 27 0.79 0.0012 8.29
Mar-18.................................. 5,967,844 202,050 23 31 0.73 0.0011 7.69
Apr-18.................................. 4,976,642 178,009 20 27 0.75 0.0011 7.90
May-18.................................. 4,367,743 169,085 23 28 0.83 0.0011 7.02
Jun-18.................................. 5,211,044 202,601 23 31 0.77 0.0011 7.19
--------------------------------------------------------------------------------------------------------------------------------------------------------
II. Analysis of Retail Orders by Order Size
Tables 2, 3, and 4 show the distribution of Retail Orders entered
and executed in the Program for the period from January 2017 to June
2018. As shown in Table 2, a majority of all Retail Orders entered to
participate in the Program from January 2016 to June 2018 were for a
round lot or fewer shares. Specifically, Retail Orders of one round lot
or fewer shares accounted for an average of approximately 56% of the
total number of Retail Orders entered. More than 73% of Retail Orders
entered were for 300 shares or less. Very large orders of more than
7,500 shares accounted for only 1.9% of Retail Orders submitted to the
Program but accounted for a significant portion (approximately 40%) of
the shares entered, as shown in Table 3. In addition, despite lower
fill rates, large orders account for a reasonable portion
(approximately 9%) of the shares executed in the Program, as shown in
Table 4. The Program also receives a significantly large number of odd
lot and single lot sized shares, which could be representative of
retail marketable orders from retail customers. By providing price
improvement to these orders, retail customers would continue to benefit
from the Program.
Table 2--Distribution of Retail Orders Entered by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Date <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................ 44.90 18.45 8.60 10.12 6.84 4.90 3.10 1.93 1.16
Feb-17............................ 47.80 18.04 8.21 9.61 6.27 4.41 2.82 1.75 1.09
Mar-17............................ 47.60 17.76 8.16 9.67 6.36 4.60 3.01 1.78 1.05
Apr-17............................ 48.82 17.30 7.88 9.48 6.19 4.61 2.88 1.82 1.02
May-17............................ 52.39 18.69 7.13 8.13 5.21 3.81 2.40 1.41 0.83
Jun-17............................ 55.32 13.89 6.67 8.08 5.35 4.47 3.24 2.03 0.95
Jul-17............................ 53.18 15.12 7.32 8.85 5.86 4.12 2.71 1.79 1.05
Aug-17............................ 49.41 16.53 8.00 9.65 6.33 4.49 2.75 1.76 1.08
Sep-17............................ 49.88 16.51 7.94 9.50 6.27 4.49 2.71 1.71 1.00
Oct-17............................ 49.92 16.17 7.73 9.45 6.49 4.67 2.76 1.79 1.02
Nov-17............................ 61.01 17.66 5.65 6.33 3.86 2.54 1.39 0.98 0.59
Dec-17............................ 61.48 18.49 6.31 6.65 3.40 1.97 0.93 0.49 0.28
Jan-18............................ 61.20 17.06 6.54 7.14 3.84 2.25 1.06 0.58 0.33
Feb-18............................ 66.63 15.79 5.61 5.80 2.98 1.70 0.80 0.43 0.25
Mar-18............................ 66.11 15.39 5.82 6.22 3.25 1.76 0.78 0.41 0.24
Apr-18............................ 67.41 15.45 5.40 6.06 3.10 1.43 0.59 0.34 0.22
May-18............................ 66.09 16.12 5.43 6.30 3.41 1.47 0.59 0.35 0.24
Jun-18............................ 66.29 16.17 5.59 6.14 3.20 1.46 0.59 0.35 0.22
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 3--Distribution of Shares Entered by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Date <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................ 2.15 3.45 3.27 7.03 9.15 12.48 14.61 17.00 30.87
Feb-17............................ 2.36 3.64 3.40 7.30 9.16 12.29 14.52 16.80 30.53
[[Page 41136]]
Mar-17............................ 2.25 3.55 3.36 7.32 9.21 12.68 15.38 16.92 29.33
Apr-17............................ 2.36 3.54 3.32 7.32 9.17 13.00 14.92 17.45 28.91
May-17............................ 3.44 4.59 3.60 7.51 9.25 12.92 15.02 16.32 27.35
Jun-17............................ 1.89 2.89 2.92 6.64 8.44 13.27 17.56 20.05 26.34
Jul-17............................ 1.98 3.18 3.22 7.24 9.17 12.23 14.73 18.29 29.96
Aug-17............................ 1.92 3.36 3.39 7.59 9.57 12.76 14.33 17.21 29.87
Sep-17............................ 2.15 3.49 3.43 7.55 9.70 13.15 14.55 17.27 28.70
Oct-17............................ 1.97 3.34 3.30 7.41 9.91 13.48 14.54 17.90 28.16
Nov-17............................ 6.28 5.19 3.86 7.92 9.53 12.10 12.18 16.22 26.72
Dec-17............................ 9.96 7.34 5.96 11.51 11.24 12.70 11.15 11.31 18.83
Jan-18............................ 8.56 6.29 5.64 11.27 11.49 13.17 11.61 12.18 19.79
Feb-18............................ 11.33 7.16 6.01 11.31 11.12 12.42 10.99 11.30 18.37
Mar-18............................ 11.06 6.96 6.10 12.00 11.88 12.69 10.62 10.82 17.88
Apr-18............................ 12.30 7.46 5.95 12.51 12.19 11.17 8.89 9.73 19.80
May-18............................ 12.14 7.50 5.74 12.40 12.76 11.08 8.53 9.67 20.17
Jun-18............................ 12.39 7.77 6.12 12.60 12.60 11.42 8.76 9.89 18.45
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 4--Distribution of Shares Executed by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Date <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................ 11.39 14.06 10.40 18.41 15.88 12.34 8.41 5.26 3.86
Feb-17............................ 13.96 15.27 10.48 17.77 14.54 11.44 7.82 5.15 3.60
Mar-17............................ 14.14 14.99 10.15 17.53 14.74 11.80 8.15 5.02 3.48
Apr-17............................ 14.69 14.83 10.01 17.80 14.84 11.55 7.85 5.00 3.42
May-17............................ 17.86 18.10 9.98 16.46 13.17 10.48 6.94 4.23 2.78
Jun-17............................ 9.74 11.25 8.91 16.71 14.58 14.86 12.03 7.97 3.95
Jul-17............................ 10.37 12.33 9.91 18.84 16.17 12.75 8.96 6.56 4.11
Aug-17............................ 9.39 12.34 10.01 18.97 16.70 13.36 8.77 6.15 4.31
Sep-17............................ 10.60 12.93 10.22 18.87 16.28 13.00 8.56 5.74 3.79
Oct-17............................ 9.40 12.40 10.16 19.36 17.12 13.45 8.58 5.86 3.66
Nov-17............................ 12.42 13.48 9.27 16.56 15.84 13.24 7.98 6.63 4.56
Dec-17............................ 14.98 15.80 10.29 16.77 14.92 11.67 6.98 5.04 3.55
Jan-18............................ 14.27 14.96 10.28 17.53 15.27 11.90 7.12 5.16 3.50
Feb-18............................ 16.74 15.75 10.78 17.05 14.27 11.08 6.48 4.57 3.30
Mar-18............................ 17.27 15.97 10.58 16.87 13.81 10.51 6.66 4.63 3.70
Apr-18............................ 17.12 15.58 10.24 16.30 13.60 10.04 6.71 5.37 5.03
May-18............................ 18.24 16.29 10.18 15.89 12.80 9.80 6.25 5.25 5.31
Jun-18............................ 18.93 17.28 10.59 16.16 12.96 9.64 5.66 4.95 3.84
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Exchange also analyzed fill rates across the different order
size buckets and found that while fill rates are higher for smaller
orders as expected, large size orders are still able to access
liquidity and therefore receive price improvement in the Program.
Moreover, overall fill rates indicate that market participants that
provide liquidity are responding with quote depth when the contra side
order is looking for a fill. While fill rates decreased starting in
November 2017, the Exchange believes that this is due to new Retail
Order flow being routed to the Program, rather than a decrease in the
available liquidity. Monthly volume executed in the Program, as shown
in Table 1, has therefore remained constant or increased since November
2017 despite the lower overall fill rates for those months. The
Exchange therefore believes that the Program is an attractive option
for market participants looking to fill Retail Orders with price
improvement.
Table 5--Fill Rates
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501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Date <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000 (%)
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Jan-17............................ 85.19 65.62 51.13 42.16 27.93 15.91 9.26 4.98 2.01
Feb-17............................ 87.21 61.69 45.31 35.83 23.36 13.69 7.92 4.51 1.73
Mar-17............................ 87.04 58.53 41.87 33.20 22.18 12.89 7.34 4.11 1.65
Apr-17............................ 86.90 58.46 42.12 33.97 22.59 12.40 7.35 4.00 1.65
May-17............................ 87.53 66.54 46.75 36.99 24.03 13.69 7.80 4.38 1.71
Jun-17............................ 87.78 66.50 52.07 42.98 29.48 19.12 11.70 6.78 2.56
Jul-17............................ 85.99 63.63 50.52 42.77 28.96 17.12 9.99 5.89 2.25
Aug-17............................ 79.61 59.74 48.02 40.59 28.33 17.00 9.94 5.81 2.34
Sep-17............................ 77.55 58.32 46.98 39.39 26.44 15.58 9.27 5.24 2.08
Oct-17............................ 80.19 62.29 51.71 43.82 28.97 16.73 9.90 5.49 2.18
Nov-17............................ 22.78 29.93 27.66 24.11 19.16 12.61 7.55 4.71 1.97
Dec-17............................ 12.14 17.37 13.96 11.77 10.72 7.42 5.05 3.60 1.52
Jan-18............................ 12.84 18.31 14.06 11.98 10.24 6.96 4.72 3.26 1.36
Feb-18............................ 11.79 17.56 14.32 12.03 10.24 7.12 4.70 3.23 1.43
Mar-18............................ 11.56 17.00 12.85 10.42 8.60 6.13 4.64 3.17 1.53
Apr-18............................ 10.61 15.91 13.11 9.93 8.50 6.85 5.76 4.21 1.94
May-18............................ 10.11 14.61 11.93 8.62 6.75 5.95 4.93 3.65 1.77
Jun-18............................ 10.57 15.39 11.98 8.88 7.12 5.84 4.47 3.46 1.44
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[[Page 41137]]
III. Impact of the Program on Broader Market Quality
As shown in Charts 2 and 3 above, Retail Order volume executed in
the Program is a small percentage of both total volume executed on the
Exchange and total consolidated volume. While the Program has better
depth available for Retail Orders, it does not significantly affect the
market volume of BYX. The average volume within the 95th percentile is
between 1.3% and 1.7%. With the Program volume mostly below 2.5% of BYX
volume, the Exchange does not believe that it is able to significantly
impact BYX market quality. Nevertheless, to test the impact of the
Program on broader market quality, the Exchange reviewed the
correlation between metrics that are tied to overall market quality
with relevant Program metrics over both 2017 and 2018. Based on this
analysis, which is provided in Table 6 below, the Exchange does not
believe that the Program has had any significant impact on broader
market quality.
Specifically, the Exchange's analysis shows that: (1) Inside size
in the broader market is not correlated with either RPI effective
spreads or the percentage of volume executed in the Program, which
suggests that market participants are not moving volume from the
regular market to the Program as effective spreads narrow or volume
executed in the Program increases; (2) effective spreads in the broader
market are not correlated with the percentage of volume executed in the
Program, which suggests that spreads are not widening as a result of
more Retail Order flow being executed in the Program, (3) midpoint
volume executed is not correlated with effective spreads in the
Program, which suggests that market participants are not moving
midpoint liquidity from the regular market to instead receive price
improvement in the Program, and (4) displayed volume executed is not
correlated with quoted spreads in the Program, which suggest that
market participants are not entering non-displayed retail price
improving interest in the Program as an alternative to displaying
interest on an order book. The Exchange therefore believes that the
Program can continue on a permanent basis--and thereby provide
increased price improvement opportunities to retail investors on a
transparent well-regulated exchange--without degrading market quality
outside of the Program.
Table 6--BYX Market Quality Correlation Analysis
------------------------------------------------------------------------
Date
-------------------------------
2017 2018
------------------------------------------------------------------------
Correlation of RPI Effective Spread to -0.0145 -0.0096
Average Inside Size across all Equities
Exchanges \28\.........................
Correlation of RPI Volume as a Percent -0.0217 -0.0056
of Total Volume to Average Inside Size
across all Equities Exchanges..........
Correlation of RPI Volume as a Percent 0.1175 0.0134
of Total Volume to Average Effective
Spread across all Venues...............
Correlation of RPI Effective Spread to -0.1438 -0.1366
Total Midpoint Volume across all Venues
Correlation of RPI Quoted Spread to -0.1221 -0.0999
Total Protected Lit Volume across all
Equities Exchanges.....................
------------------------------------------------------------------------
IV. Conclusion
Based on the Exchange's experience in operating the Program, and
the data provided here and during the duration of the pilot, the
Exchange believes that the Program has been a positive experiment in
attracting retail order flow to a public exchange. The data provided by
the Exchange describes a valuable service that delivers considerable
price improvement in a transparent and well-regulated environment. The
Program represents just a fraction of retail orders, most of which are
executed off-exchange by a wide range of order handling services that
have considerably more market share, and which operate pursuant to
different rules and regulatory requirements. The order flow the Program
attracted to the Exchange provided tangible price improvement to retail
investors through a competitive and transparent pricing process
unavailable in non-exchange venues. As such, despite relatively modest
volumes, the Exchange believes that the Program satisfied the twin
goals of attracting retail order flow to the Exchange and allowing such
order flow to receive potential price improvement. Moreover, the
Exchange believes that the data collected supports the conclusion that
the Program did not have a negative impact on broader market quality.
Although the results of the Program highlight the substantial
advantages that broker-dealers retain when managing the benefits of
retail order flow, the Exchange believes that the level of price
improvement provided by the Program and the scant evidence that the
Program negatively impacted the marketplace justifies making the
Program permanent.
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\28\ Inside size is the average bid or ask size when the venue
is at the NBB or NBO.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\29\ in general, and
Section 6(b)(5) of the Act,\30\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that making the pilot permanent is consistent
with these principles because the Program is reasonably designed to
attract retail order flow to the exchange environment, while helping to
ensure that retail investors benefit from the better price that
liquidity providers are willing to give their orders. During the pilot
period, the Exchange has provided data and analysis to the Commission.
The Exchange believes that this data and analysis, as well as the
further analysis provided in this filing, show that the Program has
provided the intended benefits to the market, and retail investors in
particular, and is therefore consistent with the Act.
Additionally, the Exchange believes the proposed rule change is
designed to facilitate transactions in securities and to remove
impediments to, and perfect the mechanisms of, a free and open market
and a national market system because making the Program permanent would
allow the Exchange to continue to attract retail order flow to a public
exchange and allow such order flow to receive potential price
improvement. The data provided by the Exchange to the Commission staff
demonstrates that the Program provided tangible price improvement to
retail investors through a competitive pricing process
[[Page 41138]]
unavailable in non-exchange venues, and otherwise had an insignificant
impact on the broader market. The Exchange believes that making the
Program permanent would encourage the additional utilization of, and
interaction with, the Exchange and provide retail customers with an
additional venue for price discovery, liquidity, competitive quotes,
and price improvement. For the same reasons, the Exchange believes that
making the Program permanent would promote just and equitable
principles of trade and remove impediments to and perfect the mechanism
of a free and open market.
Finally, the Exchange also believes that it is subject to
significant competitive forces, as described below in the Exchange's
statement regarding the burden on competition. For all of these
reasons, the Exchange believes that the proposed rule change is
consistent with the Act.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The Exchange
believes that making the Program permanent would continue to promote
competition for retail order flow among execution venues and contribute
to the public price discovery process. The Exchange believes that the
data supplied to the Commission, and experience gained over the life of
the pilot, have demonstrated that the Program creates price improvement
opportunities for retail orders that are equal to what would be
provided under OTC internalization arrangements, thereby benefiting
retail investors and increasing competition between execution venues.
The Exchange also believes that making the Program permanent will
promote competition between execution venues operating their own retail
liquidity programs. Such competition will lead to innovation within the
market, thereby increasing the quality of the national market system.
Finally, the Exchange notes that it operates in a highly competitive
market in which market participants can easily direct their orders to
competing venues, including off-exchange venues. In such an
environment, the Exchange must continually review, and consider
adjusting the services it offers and the requirements it imposes to
remain competitive with other U.S. equity exchanges. For the reasons
described above, the Exchange believes that the proposed rule change
reflects this competitive environment.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
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 (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange 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 proposal is
consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-CboeBYX-2018-014 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 No. SR-CboeBYX-2018-014. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing will also be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-CboeBYX-2018-014 and should be submitted on
or before September 7, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-17736 Filed 8-16-18; 8:45 am]
BILLING CODE 8011-01-P
