Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To Make Permanent the Retail Price Improvement Program Pilot, Which Is Set To Expire on December 31, 2018, 54401-54411 [2018-23505]
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Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84472; File No. SR–BX–
2018–025]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 1, To Make Permanent
the Retail Price Improvement Program
Pilot, Which Is Set To Expire on
December 31, 2018
October 23, 2018.
I. Introduction
On July 9, 2018, Nasdaq BX, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
Rule 19b–4 thereunder,2 a proposed rule
change to make permanent the
Exchange’s Retail Price Improvement
Program Pilot. The proposed rule
change was published for comment in
the Federal Register on July 26, 2018.3
On August 31, 2018, the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.4 On October 11, 2018, the
Exchange filed Amendment No. 1 to the
proposed rule change, which replaced
and superseded the proposed rule
change as originally filed.5 The
Commission has received no comments
on the proposed rule change. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as modified by Amendment No.
1, from interested persons and this order
to institute proceedings under Section
19(b)(2)(B) of the Act 6 to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment No. 1.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 83681
(July 20, 2018), 83 FR 35516 (‘‘Notice’’).
4 See Securities Exchange Act Release No. 84013,
83 FR 45479 (September 7, 2018). The Commission
designated October 24, 2018, as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
5 Amendment No. 1 is also publicly available on
the Commission’s website at: https://www.sec.gov/
comments/sr-bx-2018-025/srbx2018-025-4523638176032.pdf.
6 15 U.S.C. 78s(b)(2)(B).
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to make
permanent the Exchange’s pilot RPI
Program,7 currently scheduled to expire
the earlier of approval of the filing to
make this rule permanent or December
31, 2018.
Background
In November 2014, the Commission
approved the RPI Program on a pilot
basis.8 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. Under the
Program, a class of market participant
called a Retail Member Organization
(‘‘RMO’’) is eligible to submit certain
retail order flow (‘‘Retail Orders’’) 9 to
the Exchange. BX members
(‘‘Members’’) are permitted to provide
potential price improvement for Retail
Orders in the form of non-displayed
interest that is priced more aggressively
than the Protected National Best Bid or
Offer (‘‘Protected NBBO’’).10
7 Securities Exchange Act Release No. 73702
(November 28, 2014), 79 FR 72049 (December 4,
2014) (SR–BX–2014–048) (‘‘RPI Approval Order’’).
8 See id.
9 A ‘‘Retail Order’’ is defined in BX Rule
4780(a)(2) by referencing BX Rule 4702, and BX
Rule 4702(b)(6) says it is an order type with a nondisplay order attribute submitted to the Exchange
by a RMO. A Retail Order must be an agency order,
or riskless principal order that satisfies the criteria
of FINRA Rule 5320.03. The Retail Order must
reflect trading interest of a natural person with no
change made to the terms of the underlying order
of the natural person with respect to price (except
in the case of a market order that is changed to a
marketable limit order) or side of market and that
does not originate from a trading algorithm or any
other computerized methodology.
10 The term Protected Quotation is defined in
Chapter XII, Sec. 1(19) and has the same meaning
as is set forth in Regulation NMS Rule 600(b)(58).
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The Program was approved by the
Commission on a pilot basis running
one-year from the date of
implementation.11 The Commission
approved the Program on November 28,
2014.12 The Exchange implemented the
Program on December 1, 2014 and the
pilot has since been extended for a oneyear period twice, as well as for a sixmonth period, with it now scheduled to
expire the earlier of approval of the
filing to make this rule permanent or
December 31, 2018.13
Specifically, BX Rule 4780(h) will be
amended to delete that the Program is
a pilot and that it is scheduled to expire
the earlier of approval of the filing to
make this rule permanent or December
31, 2018. BX Rule 4780(h) will continue
to say that the Program will be limited
to securities whose Bid Price on the
Exchange is greater than or equal to
$1.00 per share.
The SEC approved the Program pilot,
in part, because it concluded, ‘‘the
Program is reasonably designed to
benefit retail investors by providing
price improvement to retail order
flow.’’ 14 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.’’ 15 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
The Protected NBBO is the best-priced protected
bid and offer. Generally, the Protected NBBO and
the national best bid and offer (‘‘NBBO’’) will be the
same. However, a market center is not required to
route to the NBBO if that market center is subject
to an exception under Regulation NMS Rule
611(b)(1) or if such NBBO is otherwise not available
for an automatic execution. In such case, the
Protected NBBO would be the best-priced protected
bid or offer to which a market center must route
interest pursuant to Regulation NMS Rule 611.
11 See RPI Approval Order, supra note 7 at 72053.
12 Id. at 72049.
13 See Securities Exchange Act Release No. 76490
(November 20, 2015), 80 FR 74165 (November 27,
2015) (SR–BX–2015–073); Securities Exchange Act
Release No. 79446 (December 1, 2016), 81 FR 88290
(December 7, 2016) (SR–BX–2016–065); Securities
Exchange Act Release No. 82192 (December 1,
2017), 82 FR 57809 (December 7, 2017) (SR–BX–
2017–055); and Securities Exchange Act Release
No. 83539 (June 28, 2018), 83 FR 31203 (July 3,
2018) (SR–BX–2018–026).
14 See RPI Approval Order, supra note 7 at 72051.
15 Id.
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Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
exchange-based liquidity providers
provide.
As discussed below, the Exchange
believes that the Program does not harm
retail investors. In fact, so far it has
provided price improvement of more
than $4 million since inception to retail
investors that they may not otherwise
have received. As a result, the Exchange
believes that it is therefore appropriate
to make the pilot Program permanent.
Definitions
The Exchange adopted the following
definitions under BX Rule 4780. First,
the term ‘‘Retail Member Organization’’
(or ‘‘RMO’’) 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 by BX Rule 4702(b)(6)(A) as an
order type with a non-display order
attribute submitted to the Exchange by
a RMO. A Retail Order must be an
agency Order, or riskless principal
Order that satisfies the criteria of FINRA
Rule 5320.03. The Retail Order must
reflect trading interest of a natural
person with no change made to the
terms of the underlying order of the
natural person with respect to price
(except in the case of a market order that
is changed to a marketable limit order)
or side of market and that does not
originate from a trading algorithm or
any other computerized methodology.16
The criteria set forth in FINRA Rule
5320.03 adds additional precision to the
definition of ‘‘Retail Order’’ by
clarifying 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-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.
The term ‘‘Retail Price Improving
Order’’ or ‘‘RPI Order’’ or collectively
‘‘RPI interest’’ is defined as an Order
Type with a Non- Display Order
Attribute that is held on the Exchange
Book in order to provide liquidity at a
price at least $0.001 better than the
NBBO through a special execution
process described in Rule 4780. A RPI
Order may be entered in price
increments of $0.001. An RPI Order will
be posted to the Exchange Book
regardless of its price, but an RPI Order
may execute only against a Retail Order,
and only if its price is at least $0.001
better than the NBBO.17 RPI orders can
be priced either as an explicitly priced
limit order or implicitly priced as
relative to the NBBO with an offset of
at least $0.001.
The price of an RPI Order with an
offset is determined by a Member’s
entry of the following into the
Exchange: (1) RPI buy or sell interest; (2)
an offset from the Protected NBBO, if
any; and (3) a ceiling or floor price. RPI
Orders submitted with an offset are
similar to other peg orders available to
Members 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 sell or buy interest
typically are entered to track the
Protected NBBO, that is, RPI Orders
typically are submitted with an offset.
The offset is a predetermined amount by
which the Member 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
Member 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 Members 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
16 See
supra note 9.
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17 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 Members can enter RPI Orders that
better the Protected NBBO by more than $0.001.
Exchange systems accept RPI Orders without a
minimum price improvement value; however, such
interest 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.
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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.
Members 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 BX Rule
4757 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 and other price-improving
orders available on the Exchange (e.g.,
non-displayed liquidity priced more
aggressively than the NBBO) 18
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 Member 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 Member’s floor of $10.10. If a
Member otherwise enters an offset
greater than the minimum required
price improvement and the offset would
produce a price that would violate the
Member’s floor, the offset would be
applied only to the extent that it
respects the Member’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
NBBO 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
Member’s ceiling, but it could not
interact above the $10.112 ceiling.
Finally, if a Member enters an RPI Order
18 Other price improving liquidity may include,
but is not limited to: Booked non-displayed orders
with a limit price that is more aggressive than the
then-current NBBO; midpoint-pegged orders (which
are by definition non-displayed and priced more
aggressively than the NBBO); non-displayed orders
pegged to the NBBO with an aggressive offset, as
defined in BX Rule 4780(a)(4) as Other Price
Improving Contra-Side Interest. Orders that do not
constitute other price improving liquidity include,
but are not limited to: Orders with a time-in-force
instruction of IOC; displayed orders; limit orders
priced less aggressively than the NBBO.
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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 Member’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 NBBO 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. RPI
Orders are not accepted during halts.
RMO Qualifications and Approval
Process
Under BX Rule 4780(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 BX Rule 4780, 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: (i) An application form; (ii)
supporting documentation sufficient to
demonstrate the retail nature and
characteristics of the applicant’s order
flow 19 and (iii) an attestation, in a form
prescribed by the Exchange, that
substantially all orders submitted by the
Member as a Retail Order would meet
the qualifications for such orders under
proposed BX Rule 4780(b). 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
19 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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54403
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.20
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 proposed BX Rule 4780(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
BX Rule 4780(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 proposed
BX Rule 4780(d) and/or reapply for
RMO status 90 days after the
disqualification notice is issued by the
Exchange.
Appeal of Disapproval or
Disqualification
BX Rule 4780(d) provides appeal
rights to Members. If a Member disputes
the Exchange’s decision to disapprove it
as an RMO under BX Rule 4780(b) or
disqualify it under BX Rule 4780(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.
20 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 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 Executive Officer of BX.
The RPI Panel reviews the facts and
render 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 BX Rule 4780(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 System, or CTA/CQS, for
Tape A and Tape B securities, and the
Nasdaq UTP Plan for Tape C securities)
as well as through proprietary Exchange
data feeds.21 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, CQS 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.
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Retail Order Designations
Under BX Rule 4780(f), an RMO can
designate how a Retail Order interacts
with available contra-side interest as
provided in Rule 4702.
A Type 1-designated Retail Order will
attempt to execute against RPI Orders
and any other orders on the Exchange
Book with a price that is (i) equal to or
better than the price of the Type-1 Retail
Order and (ii) at least $0.001 better than
the NBBO. A Type-1 Retail Order is not
routable and will thereafter be
cancelled.
A Type 2-designated Retail Order will
first attempt to execute against RPI
Orders and any other orders on the
21 The Exchange notes that the Retail Liquidity
Identifier for Tape A and Tape B securities are
disseminated pursuant to the CTA/CQS 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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Exchange Book with a price that is (i)
equal to or better than the price of the
Type-2 Retail Order and (ii) at least
$0.001 better than the NBBO and will
then attempt to execute against any
other order on the Exchange Book with
a price that is equal to or better than the
price of the Type-2 Retail Order, unless
such executions would trade through a
Protected Quotation. A Type-2 Retail
Order may be designated as routable.
Priority and Order Allocation
Under BX Rule 4780(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 BX Rule 4757. Any
remaining unexecuted RPI interest
remain 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 BX Rule 4780(f). The following
example illustrates this method:
Protected NBBO for security ABC is
$10.00—$10.05
Member 1 enters an RPI Order to buy
ABC at $10.015 for 500
Member 2 then enters an RPI Order to
buy ABC at $10.02 for 500
Member 3 then enters an RPI Order to
buy ABC at $10.035 for 500
An incoming Retail Order to sell
1,000 shares of ABC for $10.00 executes
first against Member 3’s bid for 500 at
$10.035, because it is the best priced
bid, then against Member 2’s bid for 500
at $10.02, because it is the next best
priced bid. Member 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 Member 2’s RPI
Order to buy ABC at $10.02 is for 100.
The incoming Retail Order to sell 1,000
executes first against Member 3’s bid for
500 at $10.035, because it is the best
priced bid, then against Member 2’s bid
for 100 at $10.02, because it is the next
best priced bid. Member 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 Member 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 Member 3’s bid for 500 at
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Sfmt 4703
$10.03, because it is the best priced bid,
then against Member 2’s bid for 100 at
$10.02, because it is the next best priced
bid. Member 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.
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 Member’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 non-routable, as described above.
24 Given the proposed 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).
E:\FR\FM\29OCN1.SGM
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Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
Rationale for Making the Program Pilot
Permanent
The Exchange established the RPI
Program in an attempt to attract retail
order flow to the Exchange by providing
an opportunity 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 25 to interact with Retail
Orders. BX also believes that 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.
The Exchange believes, in accordance
with its filing establishing the pilot
Program, which BX 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.’’ 26 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 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.27 The Exchange
believes that the Program does not harm
retail investors and so far has provided
price improvement of more than $4
million since inception to retail
investors that they may not otherwise
have received. The data demonstrates
that the Program has continued to grow
over time and the Exchange has not
detected any negative impact to market
quality. The Exchange also has not
amozie on DSK3GDR082PROD with NOTICES1
Sep-14 .......................................................................................................................
Oct-14 ........................................................................................................................
Nov-14 .......................................................................................................................
Dec-14 .......................................................................................................................
Jan-15 ........................................................................................................................
Feb-15 ........................................................................................................................
Mar-15 ........................................................................................................................
Apr-15 ........................................................................................................................
May-15 .......................................................................................................................
Jun-15 ........................................................................................................................
Jul-15 .........................................................................................................................
Aug-15 .......................................................................................................................
Sep-15 .......................................................................................................................
Oct-15 ........................................................................................................................
Nov-15 .......................................................................................................................
Dec-15 .......................................................................................................................
Jan-16 ........................................................................................................................
Feb-16 ........................................................................................................................
Mar-16 ........................................................................................................................
Apr-16 ........................................................................................................................
May-16 .......................................................................................................................
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 .........................................................................................................................
25 A Retail Price Improvement Order is defined in
BX Rule 4780(a)(3) by referencing BX Rule 4702
and BX Rule 4702(b)(5) says that it is as an order
type with a non-display order attribute that is held
VerDate Sep<11>2014
17:48 Oct 26, 2018
Jkt 247001
received any complaints or negative
feedback concerning the Program.
As seen in the table below, RMO
orders and shares executed have
continued to rise since the introduction
of the Program in December 2014. RMO
executed share volume on BX accounted
for 0.05% of total consolidated volume
in eligible U.S. listed securities in Q4
2017. Despite its size relative to total
consolidated trading, however, the
Program has continued to provide some
price improvement to RMO orders each
month with total price improvement
during market hours from the start of
the Program through May 2018 totaling
over $4.3 million.
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 retail orders. 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.
Total RMO orders
(market hours)
Month
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
RMO shares
executed
(market hours)
0
0
0
4,003
66,903
71,204
62,216
75,558
98,859
116,570
133,917
192,546
141,496
148,414
123,267
145,022
162,025
135,409
93,729
82,819
70,192
76,092
65,121
78,611
84,240
146,207
103,046
168,638
140,203
139,447
161,154
126,665
143,927
332,266
210,309
on the Exchange Book in order to provide liquidity
at a price at least $0.001 better than the NBBO
through a special execution process described in
Rule 4780.
54405
0
0
0
521,587
9,723,791
12,948,664
10,818,042
12,121,577
16,723,281
20,341,305
22,310,364
30,011,636
23,199,937
25,745,772
20,788,967
24,414,783
30,010,815
27,794,644
17,688,230
15,269,513
13,336,738
15,356,152
13,532,803
16,412,113
17,368,907
30,827,361
19,744,407
31,003,843
23,474,999
26,643,083
30,595,963
26,587,486
31,368,371
71,569,426
39,061,892
Total RMO price
improvement
(market hours)
$0
0
0
6,572
55,480
54,769
49,232
63,247
81,268
100,520
111,657
194,706
110,415
128,838
120,037
140,444
181,781
173,988
88,900
78,241
71,145
74,035
59,305
64,231
46,792
60,624
60,391
76,025
58,887
59,372
73,250
59,141
78,979
405,933
155,669
26 See Securities Exchange Act Release No. 73410
(October 23, 2014), 79 FR 64447 at 64450 (SR–BX–
2014–048).
27 RPI Approval Order, 79 FR at 72053.
E:\FR\FM\29OCN1.SGM
29OCN1
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Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
Total RMO orders
(market hours)
Month
RMO shares
executed
(market hours)
Total RMO price
improvement
(market hours)
Aug-17 .......................................................................................................................
Sep-17 .......................................................................................................................
Oct-17 ........................................................................................................................
Nov-17 .......................................................................................................................
Dec-17 .......................................................................................................................
Jan-18 ........................................................................................................................
Feb-18 ........................................................................................................................
Mar-18 ........................................................................................................................
Apr-18 ........................................................................................................................
May-18 .......................................................................................................................
266,762
154,846
205,399
370,064
219,528
248,419
263,576
597,460
1,095,396
1,031,527
51,442,492
29,831,646
39,409,251
94,703,209
49,424,240
47,080,453
40,979,066
40,896,277
41,067,806
31,843,167
255,999
69,634
95,051
169,738
102,082
113,956
100,148
98,779
97,015
81,199
Total ....................................................................................................................
8,353,052
1,193,994,059
4,327,477
The table below shows that between
April 2017 and May 2018, roughly 50%
of RMO orders were for 100 shares or
less and around 70% of orders were for
300 shares or less. Larger orders of 7,500
shares or more accounted for
approximately 2%, ranging from 0.62%
to 3.09%. Although large order were a
small percentage of total orders, they
make up a significant portion of total
shares ordered, ranging from 21.11% to
46.22%. Orders of 300 shares or less,
which accounted for the vast majority of
total RMO orders, accounted for only
between 4.81% and 15.38% of total
shares ordered.
DISTRIBUTION OF RMO ORDERS BY ORDER SIZE
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 ....................................
VerDate Sep<11>2014
17:48 Oct 26, 2018
<=100
(%)
49.50
46.55
59.60
57.30
56.38
53.16
54.28
47.76
48.66
53.60
58.44
55.29
54.52
50.44
Jkt 247001
101–300
(%)
301–500
(%)
18.53
23.79
13.26
14.61
15.19
16.29
16.00
15.30
15.30
14.93
14.58
17.97
19.12
20.21
PO 00000
501–1,000
(%)
8.67
8.25
6.62
7.32
7.54
7.69
7.46
8.19
8.27
7.73
7.14
8.63
9.04
9.89
Frm 00099
Fmt 4703
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
5.69
5.26
4.75
5.17
5.23
5.71
5.64
7.38
6.99
5.98
4.93
5.12
5.02
5.77
3.84
3.71
3.48
3.28
3.41
4.05
3.84
5.10
4.82
4.04
3.29
2.64
2.50
2.88
2.24
2.12
2.36
2.00
1.91
2.22
2.15
2.95
2.79
2.28
1.91
1.07
0.87
0.96
1.38
1.29
1.52
1.19
1.22
1.38
1.33
2.04
1.87
1.53
1.14
0.61
0.42
0.50
9.47
8.42
7.91
8.50
8.49
8.79
8.65
10.23
10.34
9.20
8.02
8.38
8.31
9.10
Sfmt 4703
E:\FR\FM\29OCN1.SGM
29OCN1
>15,000
0.69
0.62
0.51
0.65
0.63
0.70
0.66
1.06
0.98
0.71
0.55
0.28
0.19
0.26
EN29OC18.003</GPH>
amozie on DSK3GDR082PROD with NOTICES1
Month
54407
Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
DISTRIBUTION OF RMO SHARES ORDERED BY ORDER SIZE
<=100
(%)
Month
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 ....................................
101–300
(%)
3.04
3.28
2.47
2.82
2.80
2.88
2.89
1.80
2.00
2.50
3.25
5.73
7.27
6.31
301–500
(%)
4.63
6.49
3.78
4.20
4.28
4.16
4.31
3.01
3.17
3.78
4.52
6.96
8.11
7.54
501–1,000
(%)
4.42
4.49
3.95
4.36
4.42
3.98
4.09
3.26
3.48
4.01
4.52
6.80
7.84
7.50
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
10.06
9.98
10.15
10.78
10.84
10.50
11.02
10.45
10.45
11.05
11.08
14.90
16.23
16.40
12.89
13.38
13.74
12.94
13.21
14.04
14.04
13.51
13.46
13.94
13.87
14.65
15.46
15.66
13.89
14.28
17.06
14.44
13.55
14.17
14.49
14.27
14.18
14.30
14.53
11.00
10.29
10.00
16.06
16.05
20.07
16.47
16.63
16.78
17.11
18.89
18.35
18.35
16.86
12.34
9.51
9.80
8.78
8.34
8.89
9.31
9.21
8.36
8.73
7.48
8.02
8.82
9.34
12.44
13.68
13.09
>15,000
26.23
23.71
19.88
24.67
25.08
25.14
23.32
27.33
26.91
23.26
22.02
15.17
11.61
13.70
DISTRIBUTION OF RMO SHARES EXECUTED BY ORDER SIZE
<=100
(%)
Month
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 ....................................
101–300
(%)
11.39
10.86
7.65
10.07
9.93
11.36
10.83
7.04
8.25
9.93
12.63
13.92
14.81
13.65
15.32
20.10
10.05
12.67
12.98
13.46
13.37
10.64
11.27
12.43
14.31
15.35
15.76
15.78
The table below shows the average
and median sizes of RMO removing
orders.
AVERAGE AND MEDIAN RMO SIZES
RMO taking order
size
Year
Avg
amozie on DSK3GDR082PROD with NOTICES1
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 .....................
Median
863
802
743
739
753
841
793
1,103
1,044
844
690
512
454
517
111
180
82
100
100
100
100
150
132
100
100
100
100
100
The data provided by the Exchange
describes a valuable service that
delivers some 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
VerDate Sep<11>2014
17:48 Oct 26, 2018
Jkt 247001
301–500
(%)
501–1,000
(%)
11.28
10.47
8.48
10.18
10.89
10.12
10.07
10.14
10.37
10.92
11.81
11.92
11.86
12.38
1,001–2,000
(%)
2,001–4,000
(%)
4,001–7,500
(%)
7,500–15,000
(%)
12.77
11.37
11.28
12.94
14.16
13.80
14.46
18.19
17.05
16.07
15.07
14.77
13.47
13.92
10.87
10.58
11.85
11.79
11.94
13.07
12.48
13.96
13.33
12.66
11.22
10.05
10.21
10.57
9.27
8.96
12.00
9.97
9.38
8.60
9.47
9.04
8.82
8.49
6.81
6.35
6.75
6.25
9.25
9.44
18.69
10.27
8.23
8.61
7.96
7.10
7.13
6.49
5.55
5.49
5.41
5.27
16.25
13.77
14.31
15.57
17.05
16.01
16.40
19.81
19.49
19.37
19.45
19.14
18.35
18.77
different rules and regulatory
requirements. BX found no data or
received any customer feedback that
indicated any negative impact of the
Program on overall market quality or for
retail investors.
As discussed more fully below, the
reports and assessments provided by the
Exchange to the SEC have covered (i)
the economic impact of the Program on
the entire market; (ii) the economic
impact of the Program on execution
quality; (iii) whether only eligible
participants are accessing Program
liquidity; (iv) whether the Program is
attracting retail participants; (v) the net
benefits of the Program on participants;
(vi) the overall success in achieving
intended benefits; and (vii) whether the
Program can be improved.
1. Economic Impact of the RPI Program
on the Entire Market
The Exchange sees no way to detect
a market-wide impact from a Program of
this size. The entire size of the Program
is smaller than the normal day-to-day
fluctuations of market share between
different venues. Any positive or
negative impact of this Program is
eclipsed by much larger forces affecting
order flow, execution quality and quote
competition. For example, during the
time that the Program has been in effect,
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
>15,000
3.61
4.45
5.68
6.56
5.45
4.97
4.96
4.09
4.28
3.64
3.16
3.00
3.39
3.40
off-exchange trading has varied from
33%–40% of consolidated volume, with
much larger variation in individual
stocks. Meanwhile the Program averages
less than 0.1% of consolidated volume.
The combination of substantial variation
in other market factors and very little
variation in the Program eliminates the
ability of statistical tests to indicate
causation.
The Program is intended to attract offexchange order flow back to transparent
and well-regulated exchange trading
systems. Given current market structure,
BX believes that the Program does not
harm retail investors and it so far has
provided price improvement of more
than $4 million since inception to retail
investors that they may not otherwise
have received. The Program may also
improve overall market quality by
attracting desirable order flow and
liquidity-providers back to the vigorous
order competition available onexchange.
Using correlation tests and
visualization the Exchange failed to
detect a significant relationship between
the amount of RMO volume traded on
BX and measurements of overall market
quality. The results of correlation tests
against 30-second realized spreads show
minimal to no correlation.
E:\FR\FM\29OCN1.SGM
29OCN1
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Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
Additionally, through time series
visualization BX detects no significant
changes in BX market quality measures
during the life of the pilot Program.
Metrics including quoted spreads,
volatility, realized spreads, and depth
were examined using executions on BX
and the NBBO weighted by volume
executed on BX. Both quoted and
realized spreads did not show any
dramatic changes following the
implementation of the Program or as it
gained traction over time. Consolidated
trade-to-trade volatility appears to have
decreased slightly in the middle of the
Program.
2. Economic Impact of the BX RPI
Program on Execution Quality
To assess the execution quality of the
Program, BX focused on symbol-day
combinations when during market
hours: (i) An RMO execution occurred
on BX, (ii) a non-RMO execution
occurred on BX, and (iii) a tape-eligible
trade occurred on BX. Symbol day
combinations are aggregated to overall
daily statistics by either a simple
average or by volume weighting by RMO
executed volume during market hours.28
This results in the number and identity
of symbols captured in each daily
average changing from day to day. Using
this data, the Exchange examined
whether the economic outcomes for
RMO trades differs from non-RMO
trades and/or all trades.
amozie on DSK3GDR082PROD with NOTICES1
28 Both RMO and non-RMO execution quality
values are weighted by RMO volume and a very
small number of extreme outlier symbol-day stats
have been removed from the analysis.
VerDate Sep<11>2014
17:48 Oct 26, 2018
Jkt 247001
When comparing average price
improvement for RMO and non-RMO
executions for a subset of 100 stocks
with the largest number of RMO shares
executed, the price improvement seen
in RMO and non-RMO trades is
comparable over the life of the Program.
When volume weighting the average
price improvement by RMO volume to
emphasize those stock/day
combinations with the highest volume
traded in RMO, average price
improvement on BX for both RMO and
non-RMO trades appear generally
comparable over time, with RMO price
improvement generally beating nonRMO. Note that this price improvement
measure does not take rebates into
account.
In the subset of active RMO symbols,
RMO volume-weighted effective and
realized spreads for RMO and all
executions, which includes RMO
executions, are generally comparable
throughout the duration of the Program.
Similar to regular, liquidity-taking
orders on BX, the Program offers
inverted pricing where RMO orders
receive a rebate (on top of the price
improvement they receive) when
executing against RPI liquidity, while
there is a fee associated with RPI orders
which post non-displayed, priceimproving liquidity. RPI orders are
charged $0.0025 per share. Retail Orders
currently receive a rebate of $0.0021 per
share when executing against RPI
liquidity, a rebate of $0.0000 per share
when executing against other hidden,
price-improvising liquidity, and a rebate
of $0.0017 per share when executing
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
against other displayed liquidity on the
BX book.
3. Are Only Eligible Participants
Accessing Program Liquidity
Only RMOs that have been approved
by BX can enter RMO orders that access
the Program liquidity, and the BX
trading system does not allow non-RMO
orders to access RPI providing orders.
The BX trading system does not allow
non-RMO orders to access RPI providing
orders. BX Rule 4780(c) enables BX at
its sole discretion to disqualify RMO
members that submit orders that fail to
meet any of the requirements of the rule.
4. Is the Program Attracting Retail
Participation
The Program has attracted some retail
orders to the Exchange and participation
in the Program has continued to
increase over time. The Exchange
believes that the Program provided
tangible price improvement and
transparency to retail investors through
a competitive pricing process.
Brokers route retail orders to a wide
range of different trading systems. The
Program offers a transparent and wellregulated option providing competition
and price improvement. BX believes
that it has achieved its goal of attracting
retail order flow to BX and, as stated
above, it has resulted in a significant
price improvement to retail investors
through a competitive pricing process.
The Exchange also has not detected any
negative impact to market quality or to
retail investors as the Program has
continued to grow over time.
E:\FR\FM\29OCN1.SGM
29OCN1
Federal Register / Vol. 83, No. 209 / Monday, October 29, 2018 / Notices
5. Net Benefits of the Program on
Participants
From the beginning of 2017 through
January 2018, 97.9% of RMO shares
ordered and 98.5% of RMO shares
executed were RMO Type 1 orders,
while the remainder were RMO Type 2
orders. Type 1 orders had an aggregated
fill rate of 19.2%, while Type 2 orders
had a fill rate of 4.1% in this timeframe.
Of the RMO Type 1 executions, 94.9%
of shares were executed against RPI
liquidity and 5.1% against other nonRPI price-improving hidden liquidity.
Of the RMO Type 2 executions, 23.7%
of shares were executed against RPI
liquidity, 14% against other non-RPI
price-improving hidden liquidity, and
62.3% against other liquidity on the BX
book. None of the Type 2 orders entered
included routing instructions to allow
for executions away from BX.
The Exchange believes that the
Program through retail order
segmentation does create greater retail
order flow competition and thereby
VerDate Sep<11>2014
17:48 Oct 26, 2018
Jkt 247001
increases the amount of this flow to BX.
This helps to ensure that retail investors
benefit from the price improvement that
liquidity providers are willing to
provide. The Program promotes
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.
The Program also promotes
competition for retail order flow among
execution venues, and this benefits
retail investors by creating additional
price improvement opportunities for
marketable retail order flow, most of
which is currently executed in the OTC
markets without ever reaching a public
exchange. The Exchange believes that it
has achieved its goal of attracting retail
order flow to BX, and has resulted in
price improvement to retail investors
through a competitive pricing process.
The data also demonstrates that the
Program has continued to grow over
time and the Exchange has not detected
any negative impact to market quality or
to retail investors.
6. Overall Success in Achieving
Intended Benefits
The Program has demonstrated the
effectiveness of a transparent, on-
PO 00000
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Sfmt 4703
exchange retail order price
improvement functionality, and while
small relative to total consolidated
volume, has achieved its goals of
attracting retail order flow and
providing those orders with price
improvement totaling tens of thousands
of dollars each month.
The Program provides additional
competition to the handling of retail
orders. The added opportunity for price
improvement provides pressure on
other more established venues to
increase the price improvement that
they provide. By doing this, the
Exchange believes that the Program may
have a greater positive effect than the
market share would directly indicate.
7. Can the Program Be Improved
The Program provides a transparent,
well-regulated, and competitive venue
for retail orders to receive price
improvement. The size of the Program is
somewhat limited by the rules that
prevent BX from matching features
offered by non-exchange trading venues.
Nonetheless, the Exchange believes the
Program is worthwhile and it will
continue to look for ways to further
innovate and improve the Program. The
Exchange believes that making the pilot
permanent is appropriate and through
this filing seeks to make permanent the
current operation of the Program.
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On average, an RMO execution
continues to get more price
improvement than the minimum $0.001
price improvement required of an RPI
liquidity-providing order in the
Program, and over time the price
improvement seen on BX in non-RMO
orders does not appear to be negatively
impacted by the introduction of the
Program.
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2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,29
in general, and with Section 6(b)(5) of
the Act,30 in particular, in that it is
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest and not to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
The Exchange believes that making
the pilot Program 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, BX has provided data and
analysis to the Commission, and this
data and analysis, as well as the further
analysis in this filing, shows that the
Program has operated as intended and is
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 the competition promoted by
the Program facilitates the price
discovery process and potentially
generate additional investor interest in
trading securities. Making the pilot
Program permanent will allow the
Exchange to continue to provide the
Program’s benefits to retail investors on
a permanent basis and maintain the
improvements to public price discovery
and the broader market structure. The
data provided by BX to the SEC staff
demonstrates that the Program provided
tangible price improvement and
transparency to retail investors through
a competitive pricing process.
As described below in BX’s statement
regarding the burden on competition,
the Exchange also believes that it is
subject to significant competitive forces.
For all of these reasons, the Exchange
believes that the proposal 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
29 15
30 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
VerDate Sep<11>2014
17:48 Oct 26, 2018
of the purposes of the Act, as amended.
BX believes that making the Program
permanent would continue to enhance
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. BX 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.
Additionally, 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, BX
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
No written comments were either
solicited or received.
III. Proceedings To Determine Whether
To Approve or Disapprove SR–BX–
2018–025, as Modified by Amendment
No.1, and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 31 to determine
whether the proposed rule change, as
modified by Amendment No. 1, should
be approved or disapproved. Institution
of such proceedings is appropriate at
this time in view of the legal and policy
issues raised by the proposed rule
change. Institution of proceedings does
not indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. Rather, as
described below, the Commission seeks
and encourages interested persons to
provide comments on the proposed rule
31 15
Jkt 247001
PO 00000
U.S.C. 78s(b)(2)(B).
Frm 00103
Fmt 4703
Sfmt 4703
change, as modified by Amendment No.
1.
Pursuant to Section 19(b)(2)(B) of the
Act,32 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Sections
6(b)(5) 33 and 6(b)(8) 34 of the Act.
Section 6(b)(5) of the Act requires that
the rules of a national securities
exchange be designed, among other
things, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Section 6(b)(8) of the Act requires that
the rules of a national securities
exchange not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
In Amendment No. 1, the Exchange
provides an analysis of what it
considers to be the economic benefits
for retail investors and the marketplace
flowing from operation of the Program.
With regard to the effect of the Program
on the broader market, the Exchange
states that it has not detected any
negative impact to market quality, that
it ‘‘sees no way to detect a market-wide
impact’’ from the Program given the
Program’s size, and that ‘‘substantial
variation in other market factors and
very little variation in the Program
eliminates [sic] the ability of statistical
tests to indicate causation.’’ 35
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the [Act] and the rules
and regulations issued thereunder . . .
is on the [SRO] that proposed the rule
change.’’ 36 The description of a
proposed rule change, its purpose and
operation, its effect, and a legal analysis
of its consistency with applicable
requirements must all be sufficiently
detailed and specific to support an
affirmative Commission finding,37 and
any failure of an SRO to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
32 Id.
33 15
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(8).
35 See supra Secton II.A.1.1, Economic Impact of
the RPI Program on the Entire Market.
36 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
37 See id.
34 15
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a proposed rule change is consistent
with the Act and the applicable rules
and regulations.38 Moreover,
‘‘unquestioning reliance’’ on an SRO’s
representations in a proposed rule
change would not be sufficient to justify
Commission approval of a proposed rule
change.39
The Commission believes that it
should seek public comment on
Amendment No. 1. The Commission
questions whether the information and
analysis provided by the Exchange in
Amendment No. 1 support the
Exchange’s conclusions that the
Program ‘‘has demonstrated the
effectiveness of a transparent, onexchange retail order price
improvement functionality, and while
small relative to total consolidated
volume, has achieved its goals of
attracting retail order flow and
providing those orders with price
improvement totaling tens of thousands
of dollars each month.’’ The
Commission also questions whether the
Exchange has provided sufficient
information and analysis concerning the
Program’s impact on the broader market;
for example whether the Program has
not had a material adverse impact on
market quality. As noted above, the
Exchange states that it has not detected
any negative impact to market quality,
and suggests that the size of the Program
prevents the Exchange from providing
additional information to support the
view that the Program has not had a
material adverse impact on market
quality. The Commission believes it is
appropriate to institute proceedings to
allow for public comment on
Amendment No. 1, sufficient
consideration and comment on the
issues raised herein, any potential
response to comments or supplemental
information provided by the Exchange,
and any additional independent
analysis by the Commission. The
Commission believes that these issues
raise questions as to whether the
Exchange has met its burden to
demonstrate, based on the data and
analysis provided, that permanent
approval of the Program is consistent
with the Act, and specifically, with its
requirements that the Program be
designed to perfect the mechanism of a
free and open market and the national
market system, protect investors and the
public interest, and not be unfairly
discriminatory; or not impose an
38 See
id.
Susquehanna Int’l Group, LLP v. Securities
and Exchange Commission, 866 F.3d 442, 446–47
(D.C. Cir. 2017) (rejecting the Commission’s reliance
on an SRO’s own determinations without sufficient
evidence of the basis for such determinations).
39 See
VerDate Sep<11>2014
17:48 Oct 26, 2018
Jkt 247001
unnecessary or inappropriate burden on
competition.40
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Sections
6(b)(5) and 6(b)(8), or any other
provision of the Exchange Act, or the
rules and regulations thereunder.
Although there do not appear to be any
issues relevant to approval or
disapproval that would be facilitated by
an oral presentation of views, data, and
arguments, the Commission will
consider, pursuant to Rule 19b–4, any
request for an opportunity to make an
oral presentation.41
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by November 19, 2018.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by December 3, 2018.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2018–025 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Numbers SR–BX–2018–025. 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
40 See
15 U.S.C. 78f(b)(4), (5), and (8).
19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Pub. L. 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
41 Section
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54411
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 these
filings also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BX–2018–025 and should
be submitted on or before November 19,
2018. Rebuttal comments should be
submitted by December 3, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–23505 Filed 10–26–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Public
Law 94–409, the Securities and
Exchange Commission will hold an
Open Meeting on Wednesday, October
31, 2018 at 10:00 a.m.
PLACE: The meeting will be held in
Auditorium LL–002 at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
STATUS: This meeting will begin at 10:00
a.m. (ET) and will be open to the public.
Seating will be on a first-come, firstserved basis. Visitors will be subject to
security checks. The meeting will be
webcast on the Commission’s website at
www.sec.gov.
TIME AND DATE:
42 17
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]]>Agencies
[Federal Register Volume 83, Number 209 (Monday, October 29, 2018)]
[Notices]
[Pages 54401-54411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23505]
[[Page 54401]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84472; File No. SR-BX-2018-025]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
of Amendment No. 1 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, To Make Permanent the Retail Price Improvement Program
Pilot, Which Is Set To Expire on December 31, 2018
October 23, 2018.
I. Introduction
On July 9, 2018, Nasdaq BX, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to make permanent the Exchange's Retail Price Improvement
Program Pilot. The proposed rule change was published for comment in
the Federal Register on July 26, 2018.\3\ On August 31, 2018, the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\4\ On October 11, 2018, the Exchange filed Amendment No. 1 to
the proposed rule change, which replaced and superseded the proposed
rule change as originally filed.\5\ The Commission has received no
comments on the proposed rule change. The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Amendment No. 1, from interested persons and this order to institute
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 83681 (July 20,
2018), 83 FR 35516 (``Notice'').
\4\ See Securities Exchange Act Release No. 84013, 83 FR 45479
(September 7, 2018). The Commission designated October 24, 2018, as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\5\ Amendment No. 1 is also publicly available on the
Commission's website at: https://www.sec.gov/comments/sr-bx-2018-025/srbx2018-025-4523638-176032.pdf.
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to make permanent the Exchange's pilot RPI
Program,\7\ currently scheduled to expire the earlier of approval of
the filing to make this rule permanent or December 31, 2018.
---------------------------------------------------------------------------
\7\ Securities Exchange Act Release No. 73702 (November 28,
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048) (``RPI
Approval Order'').
---------------------------------------------------------------------------
Background
In November 2014, the Commission approved the RPI Program on a
pilot basis.\8\ 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. Under the Program, a
class of market participant called a Retail Member Organization
(``RMO'') is eligible to submit certain retail order flow (``Retail
Orders'') \9\ to the Exchange. BX members (``Members'') are permitted
to provide potential price improvement for Retail Orders in the form of
non-displayed interest that is priced more aggressively than the
Protected National Best Bid or Offer (``Protected NBBO'').\10\
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\8\ See id.
\9\ A ``Retail Order'' is defined in BX Rule 4780(a)(2) by
referencing BX Rule 4702, and BX Rule 4702(b)(6) says it is an order
type with a non-display order attribute submitted to the Exchange by
a RMO. A Retail Order must be an agency order, or riskless principal
order that satisfies the criteria of FINRA Rule 5320.03. The Retail
Order must reflect trading interest of a natural person with no
change made to the terms of the underlying order of the natural
person with respect to price (except in the case of a market order
that is changed to a marketable limit order) or side of market and
that does not originate from a trading algorithm or any other
computerized methodology.
\10\ The term Protected Quotation is defined in Chapter XII,
Sec. 1(19) and has the same meaning as is set forth in Regulation
NMS Rule 600(b)(58). The Protected NBBO is the best-priced protected
bid and offer. Generally, the Protected NBBO and the national best
bid and offer (``NBBO'') will be the same. However, a market center
is not required to route to the NBBO if that market center is
subject to an exception under Regulation NMS Rule 611(b)(1) or if
such NBBO is otherwise not available for an automatic execution. In
such case, the Protected NBBO would be the best-priced protected bid
or offer to which a market center must route interest pursuant to
Regulation NMS Rule 611.
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The Program was approved by the Commission on a pilot basis running
one-year from the date of implementation.\11\ The Commission approved
the Program on November 28, 2014.\12\ The Exchange implemented the
Program on December 1, 2014 and the pilot has since been extended for a
one-year period twice, as well as for a six-month period, with it now
scheduled to expire the earlier of approval of the filing to make this
rule permanent or December 31, 2018.\13\
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\11\ See RPI Approval Order, supra note 7 at 72053.
\12\ Id. at 72049.
\13\ See Securities Exchange Act Release No. 76490 (November 20,
2015), 80 FR 74165 (November 27, 2015) (SR-BX-2015-073); Securities
Exchange Act Release No. 79446 (December 1, 2016), 81 FR 88290
(December 7, 2016) (SR-BX-2016-065); Securities Exchange Act Release
No. 82192 (December 1, 2017), 82 FR 57809 (December 7, 2017) (SR-BX-
2017-055); and Securities Exchange Act Release No. 83539 (June 28,
2018), 83 FR 31203 (July 3, 2018) (SR-BX-2018-026).
---------------------------------------------------------------------------
Specifically, BX Rule 4780(h) will be amended to delete that the
Program is a pilot and that it is scheduled to expire the earlier of
approval of the filing to make this rule permanent or December 31,
2018. BX Rule 4780(h) will continue to say that the Program will be
limited to securities whose Bid Price on the Exchange is greater than
or equal to $1.00 per share.
The SEC approved the Program pilot, in part, because it concluded,
``the Program is reasonably designed to benefit retail investors by
providing price improvement to retail order flow.'' \14\ 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.'' \15\ 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
[[Page 54402]]
exchange-based liquidity providers provide.
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\14\ See RPI Approval Order, supra note 7 at 72051.
\15\ Id.
---------------------------------------------------------------------------
As discussed below, the Exchange believes that the Program does not
harm retail investors. In fact, so far it has provided price
improvement of more than $4 million since inception to retail investors
that they may not otherwise have received. As a result, the Exchange
believes that it is therefore appropriate to make the pilot Program
permanent.
[GRAPHIC] [TIFF OMITTED] TN29OC18.002
Definitions
The Exchange adopted the following definitions under BX Rule 4780.
First, the term ``Retail Member Organization'' (or ``RMO'') 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 by BX Rule
4702(b)(6)(A) as an order type with a non-display order attribute
submitted to the Exchange by a RMO. A Retail Order must be an agency
Order, or riskless principal Order that satisfies the criteria of FINRA
Rule 5320.03. The Retail Order must reflect trading interest of a
natural person with no change made to the terms of the underlying order
of the natural person with respect to price (except in the case of a
market order that is changed to a marketable limit order) or side of
market and that does not originate from a trading algorithm or any
other computerized methodology.\16\
---------------------------------------------------------------------------
\16\ See supra note 9.
---------------------------------------------------------------------------
The criteria set forth in FINRA Rule 5320.03 adds additional
precision to the definition of ``Retail Order'' by clarifying 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[hyphen]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.
The term ``Retail Price Improving Order'' or ``RPI Order'' or
collectively ``RPI interest'' is defined as an Order Type with a Non-
Display Order Attribute that is held on the Exchange Book in order to
provide liquidity at a price at least $0.001 better than the NBBO
through a special execution process described in Rule 4780. A RPI Order
may be entered in price increments of $0.001. An RPI Order will be
posted to the Exchange Book regardless of its price, but an RPI Order
may execute only against a Retail Order, and only if its price is at
least $0.001 better than the NBBO.\17\ RPI orders can be priced either
as an explicitly priced limit order or implicitly priced as relative to
the NBBO with an offset of at least $0.001.
---------------------------------------------------------------------------
\17\ 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
Members can enter RPI Orders that better the Protected NBBO by more
than $0.001. Exchange systems accept RPI Orders without a minimum
price improvement value; however, such interest 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.
---------------------------------------------------------------------------
The price of an RPI Order with an offset is determined by a
Member's entry of the following into the Exchange: (1) RPI buy or sell
interest; (2) an offset from the Protected NBBO, if any; and (3) a
ceiling or floor price. RPI Orders submitted with an offset are similar
to other peg orders available to Members 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 sell or buy interest typically are entered
to track the Protected NBBO, that is, RPI Orders typically are
submitted with an offset. The offset is a predetermined amount by which
the Member 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 Member 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 Members 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
[[Page 54403]]
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.
Members 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 BX Rule 4757 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 and other
price-improving orders available on the Exchange (e.g., non-displayed
liquidity priced more aggressively than the NBBO) \18\ 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.
---------------------------------------------------------------------------
\18\ Other price improving liquidity may include, but is not
limited to: Booked non-displayed orders with a limit price that is
more aggressive than the then-current NBBO; midpoint-pegged orders
(which are by definition non-displayed and priced more aggressively
than the NBBO); non-displayed orders pegged to the NBBO with an
aggressive offset, as defined in BX Rule 4780(a)(4) as Other Price
Improving Contra-Side Interest. Orders that do not constitute other
price improving liquidity include, but are not limited to: Orders
with a time-in-force instruction of IOC; displayed orders; limit
orders priced less aggressively than the NBBO.
---------------------------------------------------------------------------
RPI Orders interact with Retail Orders as follows. Assume a Member
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 Member's floor of $10.10. If a
Member otherwise enters an offset greater than the minimum required
price improvement and the offset would produce a price that would
violate the Member's floor, the offset would be applied only to the
extent that it respects the Member'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 NBBO 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
Member's ceiling, but it could not interact above the $10.112 ceiling.
Finally, if a Member enters an RPI Order without an offset (i.e., an
explicitly priced limit order), the RPI Order will interact with Retail
Orders at the level of the Member'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 NBBO 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. RPI Orders are not accepted during
halts.
RMO Qualifications and Approval Process
Under BX Rule 4780(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 BX Rule 4780, 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: (i) An application form; (ii) supporting
documentation sufficient to demonstrate the retail nature and
characteristics of the applicant's order flow \19\ and (iii) an
attestation, in a form prescribed by the Exchange, that substantially
all orders submitted by the Member as a Retail Order would meet the
qualifications for such orders under proposed BX Rule 4780(b). The
Exchange shall notify the applicant of its decision in writing.
---------------------------------------------------------------------------
\19\ 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.\20\
---------------------------------------------------------------------------
\20\ 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 proposed BX Rule
4780(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
BX Rule 4780(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 proposed BX Rule 4780(d)
and/or reapply for RMO status 90 days after the disqualification notice
is issued by the Exchange.
Appeal of Disapproval or Disqualification
BX Rule 4780(d) provides appeal rights to Members. If a Member
disputes the Exchange's decision to disapprove it as an RMO under BX
Rule 4780(b) or disqualify it under BX Rule 4780(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.
[[Page 54404]]
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 Executive Officer of BX. The RPI Panel reviews
the facts and render 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 BX Rule 4780(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 System, or CTA/CQS, for Tape A and Tape B securities, and the
Nasdaq UTP Plan for Tape C securities) as well as through proprietary
Exchange data feeds.\21\ 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, CQS 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.
---------------------------------------------------------------------------
\21\ The Exchange notes that the Retail Liquidity Identifier for
Tape A and Tape B securities are disseminated pursuant to the CTA/
CQS 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 BX Rule 4780(f), an RMO can designate how a Retail Order
interacts with available contra-side interest as provided in Rule 4702.
A Type 1-designated Retail Order will attempt to execute against
RPI Orders and any other orders on the Exchange Book with a price that
is (i) equal to or better than the price of the Type-1 Retail Order and
(ii) at least $0.001 better than the NBBO. A Type-1 Retail Order is not
routable and will thereafter be cancelled.
A Type 2-designated Retail Order will first attempt to execute
against RPI Orders and any other orders on the Exchange Book with a
price that is (i) equal to or better than the price of the Type-2
Retail Order and (ii) at least $0.001 better than the NBBO and will
then attempt to execute against any other order on the Exchange Book
with a price that is equal to or better than the price of the Type-2
Retail Order, unless such executions would trade through a Protected
Quotation. A Type-2 Retail Order may be designated as routable.
Priority and Order Allocation
Under BX Rule 4780(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 BX
Rule 4757. Any remaining unexecuted RPI interest remain 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 BX Rule 4780(f). The
following example illustrates this method:
Protected NBBO for security ABC is $10.00--$10.05
Member 1 enters an RPI Order to buy ABC at $10.015 for 500
Member 2 then enters an RPI Order to buy ABC at $10.02 for 500
Member 3 then enters an RPI Order to buy ABC at $10.035 for 500
An incoming Retail Order to sell 1,000 shares of ABC for $10.00
executes first against Member 3's bid for 500 at $10.035, because it is
the best priced bid, then against Member 2's bid for 500 at $10.02,
because it is the next best priced bid. Member 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 Member 2's RPI
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to
sell 1,000 executes first against Member 3's bid for 500 at $10.035,
because it is the best priced bid, then against Member 2's bid for 100
at $10.02, because it is the next best priced bid. Member 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
Member 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 Member 3's bid for 500 at
$10.03, because it is the best priced bid, then against Member 2's bid
for 100 at $10.02, because it is the next best priced bid. Member 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.
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
Member'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 non-routable, as described above.
\24\ Given the proposed 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).
---------------------------------------------------------------------------
[[Page 54405]]
Rationale for Making the Program Pilot Permanent
The Exchange established the RPI Program in an attempt to attract
retail order flow to the Exchange by providing an opportunity 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 \25\ to interact with Retail
Orders. BX also believes that 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.
---------------------------------------------------------------------------
\25\ A Retail Price Improvement Order is defined in BX Rule
4780(a)(3) by referencing BX Rule 4702 and BX Rule 4702(b)(5) says
that it is as an order type with a non-display order attribute that
is held on the Exchange Book in order to provide liquidity at a
price at least $0.001 better than the NBBO through a special
execution process described in Rule 4780.
---------------------------------------------------------------------------
The Exchange believes, in accordance with its filing establishing
the pilot Program, which BX 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.'' \26\ The Exchange has fulfilled this
obligation through the reports and assessments it has submitted to the
Commission since the implementation of the pilot Program.
---------------------------------------------------------------------------
\26\ See Securities Exchange Act Release No. 73410 (October 23,
2014), 79 FR 64447 at 64450 (SR-BX-2014-048).
---------------------------------------------------------------------------
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.\27\ The Exchange believes that the Program does not harm
retail investors and so far has provided price improvement of more than
$4 million since inception to retail investors that they may not
otherwise have received. The data demonstrates that the Program has
continued to grow over time and the Exchange has not detected any
negative impact to market quality. The Exchange also has not received
any complaints or negative feedback concerning the Program.
---------------------------------------------------------------------------
\27\ RPI Approval Order, 79 FR at 72053.
---------------------------------------------------------------------------
As seen in the table below, RMO orders and shares executed have
continued to rise since the introduction of the Program in December
2014. RMO executed share volume on BX accounted for 0.05% of total
consolidated volume in eligible U.S. listed securities in Q4 2017.
Despite its size relative to total consolidated trading, however, the
Program has continued to provide some price improvement to RMO orders
each month with total price improvement during market hours from the
start of the Program through May 2018 totaling over $4.3 million.
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 retail orders.
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.
----------------------------------------------------------------------------------------------------------------
RMO shares Total RMO price
Month Total RMO orders executed (market improvement
(market hours) hours) (market hours)
----------------------------------------------------------------------------------------------------------------
Sep-14................................................. 0 0 $0
Oct-14................................................. 0 0 0
Nov-14................................................. 0 0 0
Dec-14................................................. 4,003 521,587 6,572
Jan-15................................................. 66,903 9,723,791 55,480
Feb-15................................................. 71,204 12,948,664 54,769
Mar-15................................................. 62,216 10,818,042 49,232
Apr-15................................................. 75,558 12,121,577 63,247
May-15................................................. 98,859 16,723,281 81,268
Jun-15................................................. 116,570 20,341,305 100,520
Jul-15................................................. 133,917 22,310,364 111,657
Aug-15................................................. 192,546 30,011,636 194,706
Sep-15................................................. 141,496 23,199,937 110,415
Oct-15................................................. 148,414 25,745,772 128,838
Nov-15................................................. 123,267 20,788,967 120,037
Dec-15................................................. 145,022 24,414,783 140,444
Jan-16................................................. 162,025 30,010,815 181,781
Feb-16................................................. 135,409 27,794,644 173,988
Mar-16................................................. 93,729 17,688,230 88,900
Apr-16................................................. 82,819 15,269,513 78,241
May-16................................................. 70,192 13,336,738 71,145
Jun-16................................................. 76,092 15,356,152 74,035
Jul-16................................................. 65,121 13,532,803 59,305
Aug-16................................................. 78,611 16,412,113 64,231
Sep-16................................................. 84,240 17,368,907 46,792
Oct-16................................................. 146,207 30,827,361 60,624
Nov-16................................................. 103,046 19,744,407 60,391
Dec-16................................................. 168,638 31,003,843 76,025
Jan-17................................................. 140,203 23,474,999 58,887
Feb-17................................................. 139,447 26,643,083 59,372
Mar-17................................................. 161,154 30,595,963 73,250
Apr-17................................................. 126,665 26,587,486 59,141
May-17................................................. 143,927 31,368,371 78,979
Jun-17................................................. 332,266 71,569,426 405,933
Jul-17................................................. 210,309 39,061,892 155,669
[[Page 54406]]
Aug-17................................................. 266,762 51,442,492 255,999
Sep-17................................................. 154,846 29,831,646 69,634
Oct-17................................................. 205,399 39,409,251 95,051
Nov-17................................................. 370,064 94,703,209 169,738
Dec-17................................................. 219,528 49,424,240 102,082
Jan-18................................................. 248,419 47,080,453 113,956
Feb-18................................................. 263,576 40,979,066 100,148
Mar-18................................................. 597,460 40,896,277 98,779
Apr-18................................................. 1,095,396 41,067,806 97,015
May-18................................................. 1,031,527 31,843,167 81,199
--------------------------------------------------------
Total.............................................. 8,353,052 1,193,994,059 4,327,477
----------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TN29OC18.003
The table below shows that between April 2017 and May 2018, roughly
50% of RMO orders were for 100 shares or less and around 70% of orders
were for 300 shares or less. Larger orders of 7,500 shares or more
accounted for approximately 2%, ranging from 0.62% to 3.09%. Although
large order were a small percentage of total orders, they make up a
significant portion of total shares ordered, ranging from 21.11% to
46.22%. Orders of 300 shares or less, which accounted for the vast
majority of total RMO orders, accounted for only between 4.81% and
15.38% of total shares ordered.
Distribution of RMO Orders by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Month <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Apr-17............................ 49.50 18.53 8.67 9.47 5.69 3.84 2.24 1.38 0.69
May-17............................ 46.55 23.79 8.25 8.42 5.26 3.71 2.12 1.29 0.62
Jun-17............................ 59.60 13.26 6.62 7.91 4.75 3.48 2.36 1.52 0.51
Jul-17............................ 57.30 14.61 7.32 8.50 5.17 3.28 2.00 1.19 0.65
Aug-17............................ 56.38 15.19 7.54 8.49 5.23 3.41 1.91 1.22 0.63
Sep-17............................ 53.16 16.29 7.69 8.79 5.71 4.05 2.22 1.38 0.70
Oct-17............................ 54.28 16.00 7.46 8.65 5.64 3.84 2.15 1.33 0.66
Nov-17............................ 47.76 15.30 8.19 10.23 7.38 5.10 2.95 2.04 1.06
Dec-17............................ 48.66 15.30 8.27 10.34 6.99 4.82 2.79 1.87 0.98
Jan-18............................ 53.60 14.93 7.73 9.20 5.98 4.04 2.28 1.53 0.71
Feb-18............................ 58.44 14.58 7.14 8.02 4.93 3.29 1.91 1.14 0.55
Mar-18............................ 55.29 17.97 8.63 8.38 5.12 2.64 1.07 0.61 0.28
Apr-18............................ 54.52 19.12 9.04 8.31 5.02 2.50 0.87 0.42 0.19
May-18............................ 50.44 20.21 9.89 9.10 5.77 2.88 0.96 0.50 0.26
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 54407]]
Distribution of RMO Shares Ordered by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Month <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Apr-17............................ 3.04 4.63 4.42 8.78 10.06 12.89 13.89 16.06 26.23
May-17............................ 3.28 6.49 4.49 8.34 9.98 13.38 14.28 16.05 23.71
Jun-17............................ 2.47 3.78 3.95 8.89 10.15 13.74 17.06 20.07 19.88
Jul-17............................ 2.82 4.20 4.36 9.31 10.78 12.94 14.44 16.47 24.67
Aug-17............................ 2.80 4.28 4.42 9.21 10.84 13.21 13.55 16.63 25.08
Sep-17............................ 2.88 4.16 3.98 8.36 10.50 14.04 14.17 16.78 25.14
Oct-17............................ 2.89 4.31 4.09 8.73 11.02 14.04 14.49 17.11 23.32
Nov-17............................ 1.80 3.01 3.26 7.48 10.45 13.51 14.27 18.89 27.33
Dec-17............................ 2.00 3.17 3.48 8.02 10.45 13.46 14.18 18.35 26.91
Jan-18............................ 2.50 3.78 4.01 8.82 11.05 13.94 14.30 18.35 23.26
Feb-18............................ 3.25 4.52 4.52 9.34 11.08 13.87 14.53 16.86 22.02
Mar-18............................ 5.73 6.96 6.80 12.44 14.90 14.65 11.00 12.34 15.17
Apr-18............................ 7.27 8.11 7.84 13.68 16.23 15.46 10.29 9.51 11.61
May-18............................ 6.31 7.54 7.50 13.09 16.40 15.66 10.00 9.80 13.70
--------------------------------------------------------------------------------------------------------------------------------------------------------
Distribution of RMO Shares Executed by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
501-1,000 1,001-2,000 2,001-4,000 4,001-7,500 7,500-15,000
Month <=100 (%) 101-300 (%) 301-500 (%) (%) (%) (%) (%) (%) >15,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Apr-17............................ 11.39 15.32 11.28 16.25 12.77 10.87 9.27 9.25 3.61
May-17............................ 10.86 20.10 10.47 13.77 11.37 10.58 8.96 9.44 4.45
Jun-17............................ 7.65 10.05 8.48 14.31 11.28 11.85 12.00 18.69 5.68
Jul-17............................ 10.07 12.67 10.18 15.57 12.94 11.79 9.97 10.27 6.56
Aug-17............................ 9.93 12.98 10.89 17.05 14.16 11.94 9.38 8.23 5.45
Sep-17............................ 11.36 13.46 10.12 16.01 13.80 13.07 8.60 8.61 4.97
Oct-17............................ 10.83 13.37 10.07 16.40 14.46 12.48 9.47 7.96 4.96
Nov-17............................ 7.04 10.64 10.14 19.81 18.19 13.96 9.04 7.10 4.09
Dec-17............................ 8.25 11.27 10.37 19.49 17.05 13.33 8.82 7.13 4.28
Jan-18............................ 9.93 12.43 10.92 19.37 16.07 12.66 8.49 6.49 3.64
Feb-18............................ 12.63 14.31 11.81 19.45 15.07 11.22 6.81 5.55 3.16
Mar-18............................ 13.92 15.35 11.92 19.14 14.77 10.05 6.35 5.49 3.00
Apr-18............................ 14.81 15.76 11.86 18.35 13.47 10.21 6.75 5.41 3.39
May-18............................ 13.65 15.78 12.38 18.77 13.92 10.57 6.25 5.27 3.40
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table below shows the average and median sizes of RMO removing
orders.
Average and Median RMO Sizes
------------------------------------------------------------------------
RMO taking order
size
Year ---------------------
Avg Median
------------------------------------------------------------------------
Apr-17............................................ 863 111
May-17............................................ 802 180
Jun-17............................................ 743 82
Jul-17............................................ 739 100
Aug-17............................................ 753 100
Sep-17............................................ 841 100
Oct-17............................................ 793 100
Nov-17............................................ 1,103 150
Dec-17............................................ 1,044 132
Jan-18............................................ 844 100
Feb-18............................................ 690 100
Mar-18............................................ 512 100
Apr-18............................................ 454 100
May-18............................................ 517 100
------------------------------------------------------------------------
The data provided by the Exchange describes a valuable service that
delivers some 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. BX
found no data or received any customer feedback that indicated any
negative impact of the Program on overall market quality or for retail
investors.
As discussed more fully below, the reports and assessments provided
by the Exchange to the SEC have covered (i) the economic impact of the
Program on the entire market; (ii) the economic impact of the Program
on execution quality; (iii) whether only eligible participants are
accessing Program liquidity; (iv) whether the Program is attracting
retail participants; (v) the net benefits of the Program on
participants; (vi) the overall success in achieving intended benefits;
and (vii) whether the Program can be improved.
1. Economic Impact of the RPI Program on the Entire Market
The Exchange sees no way to detect a market-wide impact from a
Program of this size. The entire size of the Program is smaller than
the normal day-to-day fluctuations of market share between different
venues. Any positive or negative impact of this Program is eclipsed by
much larger forces affecting order flow, execution quality and quote
competition. For example, during the time that the Program has been in
effect, off-exchange trading has varied from 33%-40% of consolidated
volume, with much larger variation in individual stocks. Meanwhile the
Program averages less than 0.1% of consolidated volume. The combination
of substantial variation in other market factors and very little
variation in the Program eliminates the ability of statistical tests to
indicate causation.
The Program is intended to attract off-exchange order flow back to
transparent and well-regulated exchange trading systems. Given current
market structure, BX believes that the Program does not harm retail
investors and it so far has provided price improvement of more than $4
million since inception to retail investors that they may not otherwise
have received. The Program may also improve overall market quality by
attracting desirable order flow and liquidity-providers back to the
vigorous order competition available on-exchange.
Using correlation tests and visualization the Exchange failed to
detect a significant relationship between the amount of RMO volume
traded on BX and measurements of overall market quality. The results of
correlation tests against 30-second realized spreads show minimal to no
correlation.
[[Page 54408]]
Additionally, through time series visualization BX detects no
significant changes in BX market quality measures during the life of
the pilot Program. Metrics including quoted spreads, volatility,
realized spreads, and depth were examined using executions on BX and
the NBBO weighted by volume executed on BX. Both quoted and realized
spreads did not show any dramatic changes following the implementation
of the Program or as it gained traction over time. Consolidated trade-
to-trade volatility appears to have decreased slightly in the middle of
the Program.
2. Economic Impact of the BX RPI Program on Execution Quality
To assess the execution quality of the Program, BX focused on
symbol-day combinations when during market hours: (i) An RMO execution
occurred on BX, (ii) a non-RMO execution occurred on BX, and (iii) a
tape-eligible trade occurred on BX. Symbol day combinations are
aggregated to overall daily statistics by either a simple average or by
volume weighting by RMO executed volume during market hours.\28\ This
results in the number and identity of symbols captured in each daily
average changing from day to day. Using this data, the Exchange
examined whether the economic outcomes for RMO trades differs from non-
RMO trades and/or all trades.
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\28\ Both RMO and non-RMO execution quality values are weighted
by RMO volume and a very small number of extreme outlier symbol-day
stats have been removed from the analysis.
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When comparing average price improvement for RMO and non-RMO
executions for a subset of 100 stocks with the largest number of RMO
shares executed, the price improvement seen in RMO and non-RMO trades
is comparable over the life of the Program. When volume weighting the
average price improvement by RMO volume to emphasize those stock/day
combinations with the highest volume traded in RMO, average price
improvement on BX for both RMO and non-RMO trades appear generally
comparable over time, with RMO price improvement generally beating non-
RMO. Note that this price improvement measure does not take rebates
into account.
In the subset of active RMO symbols, RMO volume-weighted effective
and realized spreads for RMO and all executions, which includes RMO
executions, are generally comparable throughout the duration of the
Program.
Similar to regular, liquidity-taking orders on BX, the Program
offers inverted pricing where RMO orders receive a rebate (on top of
the price improvement they receive) when executing against RPI
liquidity, while there is a fee associated with RPI orders which post
non-displayed, price-improving liquidity. RPI orders are charged
$0.0025 per share. Retail Orders currently receive a rebate of $0.0021
per share when executing against RPI liquidity, a rebate of $0.0000 per
share when executing against other hidden, price-improvising liquidity,
and a rebate of $0.0017 per share when executing against other
displayed liquidity on the BX book.
3. Are Only Eligible Participants Accessing Program Liquidity
Only RMOs that have been approved by BX can enter RMO orders that
access the Program liquidity, and the BX trading system does not allow
non-RMO orders to access RPI providing orders. The BX trading system
does not allow non-RMO orders to access RPI providing orders. BX Rule
4780(c) enables BX at its sole discretion to disqualify RMO members
that submit orders that fail to meet any of the requirements of the
rule.
4. Is the Program Attracting Retail Participation
The Program has attracted some retail orders to the Exchange and
participation in the Program has continued to increase over time. The
Exchange believes that the Program provided tangible price improvement
and transparency to retail investors through a competitive pricing
process.
Brokers route retail orders to a wide range of different trading
systems. The Program offers a transparent and well-regulated option
providing competition and price improvement. BX believes that it has
achieved its goal of attracting retail order flow to BX and, as stated
above, it has resulted in a significant price improvement to retail
investors through a competitive pricing process. The Exchange also has
not detected any negative impact to market quality or to retail
investors as the Program has continued to grow over time.
[[Page 54409]]
[GRAPHIC] [TIFF OMITTED] TN29OC18.004
On average, an RMO execution continues to get more price
improvement than the minimum $0.001 price improvement required of an
RPI liquidity-providing order in the Program, and over time the price
improvement seen on BX in non-RMO orders does not appear to be
negatively impacted by the introduction of the Program.
5. Net Benefits of the Program on Participants
From the beginning of 2017 through January 2018, 97.9% of RMO
shares ordered and 98.5% of RMO shares executed were RMO Type 1 orders,
while the remainder were RMO Type 2 orders. Type 1 orders had an
aggregated fill rate of 19.2%, while Type 2 orders had a fill rate of
4.1% in this timeframe.
Of the RMO Type 1 executions, 94.9% of shares were executed against
RPI liquidity and 5.1% against other non-RPI price-improving hidden
liquidity. Of the RMO Type 2 executions, 23.7% of shares were executed
against RPI liquidity, 14% against other non-RPI price-improving hidden
liquidity, and 62.3% against other liquidity on the BX book. None of
the Type 2 orders entered included routing instructions to allow for
executions away from BX.
The Exchange believes that the Program through retail order
segmentation does create greater retail order flow competition and
thereby increases the amount of this flow to BX. This helps to ensure
that retail investors benefit from the price improvement that liquidity
providers are willing to provide. The Program promotes 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.
The Program also promotes competition for retail order flow among
execution venues, and this benefits retail investors by creating
additional price improvement opportunities for marketable retail order
flow, most of which is currently executed in the OTC markets without
ever reaching a public exchange. The Exchange believes that it has
achieved its goal of attracting retail order flow to BX, and has
resulted in price improvement to retail investors through a competitive
pricing process. The data also demonstrates that the Program has
continued to grow over time and the Exchange has not detected any
negative impact to market quality or to retail investors.
6. Overall Success in Achieving Intended Benefits
The Program has demonstrated the effectiveness of a transparent,
on-exchange retail order price improvement functionality, and while
small relative to total consolidated volume, has achieved its goals of
attracting retail order flow and providing those orders with price
improvement totaling tens of thousands of dollars each month.
The Program provides additional competition to the handling of
retail orders. The added opportunity for price improvement provides
pressure on other more established venues to increase the price
improvement that they provide. By doing this, the Exchange believes
that the Program may have a greater positive effect than the market
share would directly indicate.
7. Can the Program Be Improved
The Program provides a transparent, well-regulated, and competitive
venue for retail orders to receive price improvement. The size of the
Program is somewhat limited by the rules that prevent BX from matching
features offered by non-exchange trading venues. Nonetheless, the
Exchange believes the Program is worthwhile and it will continue to
look for ways to further innovate and improve the Program. The Exchange
believes that making the pilot permanent is appropriate and through
this filing seeks to make permanent the current operation of the
Program.
[[Page 54410]]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\29\ in general, and with
Section 6(b)(5) of the Act,\30\ in particular, in that it is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, 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.
\30\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that making the pilot Program 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, BX has provided data and analysis to the Commission,
and this data and analysis, as well as the further analysis in this
filing, shows that the Program has operated as intended and is
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 the competition promoted by the
Program facilitates the price discovery process and potentially
generate additional investor interest in trading securities. Making the
pilot Program permanent will allow the Exchange to continue to provide
the Program's benefits to retail investors on a permanent basis and
maintain the improvements to public price discovery and the broader
market structure. The data provided by BX to the SEC staff demonstrates
that the Program provided tangible price improvement and transparency
to retail investors through a competitive pricing process.
As described below in BX's statement regarding the burden on
competition, the Exchange also believes that it is subject to
significant competitive forces. For all of these reasons, the Exchange
believes that the proposal 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, as amended. BX
believes that making the Program permanent would continue to enhance
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. BX 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.
Additionally, 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, BX 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
No written comments were either solicited or received.
III. Proceedings To Determine Whether To Approve or Disapprove SR-BX-
2018-025, as Modified by Amendment No.1, and Grounds for Disapproval
Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \31\ to determine whether the proposed rule
change, as modified by Amendment No. 1, should be approved or
disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the proposed rule
change. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described below, the Commission seeks and
encourages interested persons to provide comments on the proposed rule
change, as modified by Amendment No. 1.
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\31\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\32\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Sections
6(b)(5) \33\ and 6(b)(8) \34\ of the Act. Section 6(b)(5) of the Act
requires that the rules of a national securities exchange be designed,
among other things, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers. Section
6(b)(8) of the Act requires that the rules of a national securities
exchange not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
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\32\ Id.
\33\ 15 U.S.C. 78f(b)(5).
\34\ 15 U.S.C. 78f(b)(8).
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In Amendment No. 1, the Exchange provides an analysis of what it
considers to be the economic benefits for retail investors and the
marketplace flowing from operation of the Program. With regard to the
effect of the Program on the broader market, the Exchange states that
it has not detected any negative impact to market quality, that it
``sees no way to detect a market-wide impact'' from the Program given
the Program's size, and that ``substantial variation in other market
factors and very little variation in the Program eliminates [sic] the
ability of statistical tests to indicate causation.'' \35\
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\35\ See supra Secton II.A.1.1, Economic Impact of the RPI
Program on the Entire Market.
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the [SRO]
that proposed the rule change.'' \36\ The description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative Commission
finding,\37\ and any failure of an SRO to provide this information may
result in the Commission not having a sufficient basis to make an
affirmative finding that
[[Page 54411]]
a proposed rule change is consistent with the Act and the applicable
rules and regulations.\38\ Moreover, ``unquestioning reliance'' on an
SRO's representations in a proposed rule change would not be sufficient
to justify Commission approval of a proposed rule change.\39\
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\36\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\37\ See id.
\38\ See id.
\39\ See Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the
Commission's reliance on an SRO's own determinations without
sufficient evidence of the basis for such determinations).
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The Commission believes that it should seek public comment on
Amendment No. 1. The Commission questions whether the information and
analysis provided by the Exchange in Amendment No. 1 support the
Exchange's conclusions that the Program ``has demonstrated the
effectiveness of a transparent, on-exchange retail order price
improvement functionality, and while small relative to total
consolidated volume, has achieved its goals of attracting retail order
flow and providing those orders with price improvement totaling tens of
thousands of dollars each month.'' The Commission also questions
whether the Exchange has provided sufficient information and analysis
concerning the Program's impact on the broader market; for example
whether the Program has not had a material adverse impact on market
quality. As noted above, the Exchange states that it has not detected
any negative impact to market quality, and suggests that the size of
the Program prevents the Exchange from providing additional information
to support the view that the Program has not had a material adverse
impact on market quality. The Commission believes it is appropriate to
institute proceedings to allow for public comment on Amendment No. 1,
sufficient consideration and comment on the issues raised herein, any
potential response to comments or supplemental information provided by
the Exchange, and any additional independent analysis by the
Commission. The Commission believes that these issues raise questions
as to whether the Exchange has met its burden to demonstrate, based on
the data and analysis provided, that permanent approval of the Program
is consistent with the Act, and specifically, with its requirements
that the Program be designed to perfect the mechanism of a free and
open market and the national market system, protect investors and the
public interest, and not be unfairly discriminatory; or not impose an
unnecessary or inappropriate burden on competition.\40\
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\40\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of
the Exchange Act, or the rules and regulations thereunder. Although
there do not appear to be any issues relevant to approval or
disapproval that would be facilitated by an oral presentation of views,
data, and arguments, the Commission will consider, pursuant to Rule
19b-4, any request for an opportunity to make an oral presentation.\41\
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\41\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by November 19, 2018. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 3, 2018.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BX-2018-025 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Numbers SR-BX-2018-025. 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 these filings also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BX-2018-025 and should be submitted on
or before November 19, 2018. Rebuttal comments should be submitted by
December 3, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23505 Filed 10-26-18; 8:45 am]
BILLING CODE 8011-01-P
