Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Introduce Retail Priority, 13729-13734 [2019-06720]
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Federal Register / Vol. 84, No. 66 / Friday, April 5, 2019 / Notices
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Please direct your written comments
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Kenner, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov.
Dated: April 2, 2019.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–06679 Filed 4–4–19; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85482; File No. SR–
CboeEDGX–2019–012]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
of a Proposed Rule Change To
Introduce Retail Priority
April 2, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 18,
2019, Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe EDGX Exchange, Inc. (‘‘EDGX’’
or the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposed rule
change to introduce order book priority
for equity orders submitted on behalf of
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
BILLING CODE 8011–01–P
1 15
retail investors. The text of the proposed
rule change is attached as Exhibit 5
[sic].
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/edgx/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
1. Purpose
The purpose of the proposed rule
change is to introduce order book
priority for equity orders submitted on
behalf of retail investors. Forty three
million U.S. households hold a
retirement or brokerage account,3 and
these investors are increasingly turning
to the equities markets to fund
important life goals. It is therefore
critical that our markets are sensitive to
the needs of the investing public. The
Exchange continuously strives to
innovate and improve market structure
in ways that facilitate ordinary investors
achieving their investment goals. The
proposed introduction of retail priority
is designed with this objective in mind.
The Exchange believes that introducing
retail priority may provide retail
investors with better execution quality
and better position the Exchange as the
‘‘home’’ for retail limit orders. This, in
turn, will further allow retail liquidity
to contribute to overall price formation
and attract more market participants to
the Exchange, creating a richer and
more diverse ecosystem with deeper
liquidity. Retail priority would therefore
be consistent with the goals of the
3 See The Evolving Market for Retail Investment
Services and Forward-Looking Regulation—Adding
Clarity and Investor Protection while Ensuring
Access and Choice, Chairman Jay Clayton,
Commission (May 2, 2018), available at https://
www.sec.gov/news/speech/speech-clayton-2018-0502.
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Commission to encourage markets that
are structured to benefit ordinary
investors,4 while facilitating order
interaction and price discovery to the
benefit of all market participants.
Background
As defined in EDGX Rule 11.21, a
‘‘Retail Order’’ is an agency or riskless
principal order that meets the criteria of
FINRA Rule 5320.03 5 that originates
from a natural person and is submitted
to the Exchange by a Retail Member
Organization, provided that no change
is made to the terms of the order with
respect to price or side of market and
the order does not originate from a
trading algorithm or any other
computerized methodology.6 A ‘‘Retail
Member Organization’’ or ‘‘RMO’’ is a
Member (or a division thereof) that has
been approved by the Exchange under
EDGX Rule 11.21 to submit Retail
Orders. Pursuant to EDGX Rule 11.21(b),
which describes the qualification and
application process for becoming a
Retail Member Organization, any
member may qualify as a Retail Member
Organization if it conducts a retail
business or routes retail orders on behalf
of another broker-dealer.
Today, the Exchange operates based
on a price/display/time priority
execution algorithm that is similar to
those employed by most other U.S.
equities exchanges.7 As such, the first
Displayed 8 order resting on the EDGX
Book 9 at a particular price has priority
over the next order and so on based on
the time of order entry. Non4 See e.g., U.S. Securities and Exchange
Commission, Strategic Plan, Fiscal Years 2018–
2022, available at https://www.sec.gov/files/SEC_
Strategic_Plan_FY18–FY22_FINAL_0.pdf
(‘‘Commission Strategic Plan’’).
5 FINRA Rule 5320.03 clarifies that an RMO may
enter Retail Orders on a riskless principal basis,
provided that (i) the entry of such riskless principal
orders meet the requirements of FINRA Rule
5320.03, including that the RMO maintains
supervisory systems to reconstruct, in a
time-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.
6 Retail Member Organizations will only be able
to designate their orders as Retail Orders on either
an order-by-order basis using FIX ports or by
designating certain of their FIX ports at the
Exchange as ‘‘Retail Order Ports.’’ Unless otherwise
instructed by the Retail Member Organization, a
Retail Order will be identified as Retail when
routed to an away Trading Center. See EDGX Rule
11.21(d).
7 See EDGX Rule 11.12.
8 ‘‘Displayed’’ is an instruction the User may
attach to an order stating that the order is to be
displayed by the System on the EDGX Book. See
EDGX Rule 11.6(e)(1).
9 ‘‘EDGX Book’’ means the System’s electronic file
of orders. See EDGX Rule 1.5(d)
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Displayed 10 orders at that price are
further categorized into a number of
priority bands, with orders within each
priority band prioritized again based on
the time of order entry, as provided in
EDGX Rule 11.9. The generally
applicable allocation bands for orders
executed on the Exchange are described
in EDGX Rule 11.9(a)(2)(A), and similar
allocation bands applicable to orders
executed at the midpoint of the NBBO
are described in EDGX Rule
11.9(a)(2)(B).11 The price time allocation
model has provided significant benefits
to the equities markets as it encourages
increased efficiency by rewarding
market participants that are the first to
provide liquidity at a particular price.
At the same time, because this
allocation methodology preferences
speed, retail investors may have a more
limited ability to secure an execution for
their non-marketable orders under this
model. The Exchange believes that retail
priority would improve trading
outcomes for Retail Orders and could
perhaps encourage even more retail
order flow to be entered into the
displayed market.
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Retail Priority Proposal
The Exchange proposes to introduce
retail priority in order to ensure that
non-marketable orders submitted on
behalf of retail investors can more
readily compete for execution with
orders entered by sophisticated market
participants that may be better equipped
to optimize their place in the
intermarket queue. Retail priority would
be in place during all trading sessions,
and would also be available to orders
entered for participation in the
Exchange’s opening process and the reopening process following a halt.
As proposed, the portion of a Retail
Order with a Displayed instruction
would be given allocation priority ahead
of all other available interest on the
EDGX Book. This would be true of both
orders executed pursuant to the regular
priority bands described in EDGX Rule
11.9(a)(2)(A), and orders priced at the
midpoint of the NBBO pursuant to
EDGX Rule 11.9(a)(2)(B) where Retail
Orders subject to Display-Price
Sliding 12 would have priority ahead of
limit orders entered with such an
instruction as well as any other orders
10 ‘‘Non-Displayed’’ is an instruction the User
may attach to an order stating that the order is not
to be displayed by the System on the EDGX Book.
See EDGX Rule 11.6(e)(2).
11 In addition, EDGX Rule 11.9(a)(2)(C) describes
the sequence in which orders are timestamped
when re-ranked by the System upon clearance of a
locking quotation.
12 Display-Price Sliding is an order instruction
provided for compliance with Rule 610(d) of
Regulation NMS. See EDGX Rule 11.6(l)(B).
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resting at the midpoint of the NBBO.13
In addition, since Reserve Orders
contain a Displayed instruction but
include both Displayed and NonDisplayed shares, the Reserve
Quantity 14 of Retail Orders would be
given priority ahead of the Reserve
Quantity of other limit orders on the
EDGX Book.
Retail Orders that are not willing to be
displayed, or are only willing to be
displayed at a less aggressive price than
the execution price, would not receive
any special priority. For example, a
Retail Order that is entered as a
MidPoint Peg Order,15 which by
definition is Non-Displayed, would be
prioritized along with all other
MidPoint Peg Orders notwithstanding
the fact that it is a Retail Order.
Similarly, a MidPoint Discretionary
Order (‘‘MDO’’) 16 executed within its
Discretionary Range would receive the
same priority as other orders entered
with a Discretionary Range instruction,
regardless of whether the MDO is
displayed at its pegged price.
The following examples illustrate the
proposed implementation of retail
priority: 17
Example 1: Displayed Retail Order
has Priority at a Given Price.
NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @ $10.00—
Displayed, Non-Retail Order
Order 2: Buy 100 shares @ $10.00—
Displayed, Retail Order
Order 3: Sell 100 shares @ $10.00
A Retail Order entered with a
Displayed instruction would have
priority over Non-Retail Orders at the
same price. As a result, Order 3 would
trade with Order 2 for 100 shares @
$10.00, securing a timely execution for
the retail investor.
Example 2: Better Priced Non-Retail
Order has Priority.
13 The midpoint of the NBBO is a non-displayed
price, and therefore orders entered with DisplayPrice Sliding, which are willing to be displayed at
the applicable locking or crossing price are given
priority pursuant to current EDGX Rule
11.9(a)(2)(B).
14 ‘‘Reserve Quantity’’ is the portion of an order
that includes a Non-Displayed instruction in which
a portion of that order is also displayed on the
EDGX Book. See EDGX Rule 11.6(m).
15 A ‘‘MidpPoint Peg Order’’ is a non-displayed
Market Order or Limit Order with an instruction to
execute at the midpoint of the NBBO, or,
alternatively, pegged to the less aggressive of the
midpoint of the NBBO or one minimum price
variation inside the same side of the NBBO as the
order. See EDGX Rule 11.8(d).
16 A ‘‘MidPoint Discretionary Order’’ is a Limit
Order that is executable at the NBB for an order to
buy or the NBO for an order to sell while resting
on the EDGX Book, with discretion to execute at
prices to and including the midpoint of the NBBO.
See EDGX Rule 11.8(g).
17 In each example, orders are shown in the order
in which they are entered.
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NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @ $10.00—
Retail Order
Order 2: Buy 100 shares @ $10.01—NonRetail Order
Order 3: Sell 100 shares @ $10.00
Allocations would continue to be
prioritized based on price. Although
Retail Orders entered with a Displayed
instruction would have priority over
Non-Retail Orders at the same price,
they would not have priority over NonRetail Orders at a better price. As a
result, Order 3 would trade with the
better priced Order 2 for 100 shares @
$10.01.
Example 3: No Retail Priority for NonDisplayed Orders.
NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @ $10.01—NonDisplayed, Non-Retail Order
Order 2: Buy 100 shares @ $10.01—NonDisplayed, Retail Order
Order 3: Sell 100 shares @ $10.00
A Retail Order entered with a NonDisplayed instruction is not eligible for
retail priority. As a result, Order 3
trades with Order 1 for 100 shares @
$10.01 based on time priority. Retail
Orders would need to be submitted with
a Displayed or Reserve instruction to
qualify for the benefits of retail priority,
which should encourage displayed
retail liquidity.
Example 4: No Retail Priority in
Discretionary Range.
NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @ $10.00 +
$0.03 Discretion—Non-Retail Order
Order 2: Buy 100 shares @ $10.00 +
$0.03 Discretion—Retail Order
Order 3: Sell 100 shares @ $10.02
Retail Orders would only have
priority if willing to be displayed at the
execution price. Although orders
entered with a Discretionary Range
instruction may be displayed at their
ranked price, the execution would occur
at a non-displayed price within the
Discretionary Range. As a result, Order
3 trades with Order 1 for 100 shares @
$10.02 based on time priority.18
Example 5: Retail Reserve Order has
Displayed and Non-Displayed Priority.
NBBO: $10.00 × $10.10
Order 1: Buy 500 @ $10.00—Non-Retail
Reserve Order, 100 shares displayed
Order 2: Buy 500 @ $10.00—Retail
Reserve Order, 100 shares displayed
Order 3: Sell 300 @ $10.00
18 If Order 3 was to sell 100 shares @ $10.00 then
retail priority would be observed at the displayed
price and Order 3 would trade with Order 2 for 100
shares @ $10.00.
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A Retail Order entered as a Reserve
Order would have retail priority for both
displayed and non-displayed size.
However, any Reserve Quantity would
be executed after other orders with a
higher priority, including the displayed
size available from Non-Retail Orders.
As a result, Order 3 would trade 100
shares @ $10.00 with Order 2 based on
retail priority, then would trade 100
shares @ $10.00 with Order 1. After
exhausting the available displayed size,
Order 3 would trade the remaining 100
shares @ $10.00 with Order 2 based on
retail priority.
Example 6: Display-Price Sliding
Retail Orders are Eligible for Priority at
Midpoint.
NBBO: $10.00 × $10.01
EDGX BBO: $10.00 × $10.02
Order 1: Buy 100 shares @ $10.01—Book
Only, Display-Price Sliding, NonRetail Order
Order 2: Buy 100 shares @ $10.01—Book
Only, Display-Price Sliding, Retail
Order
Order 3: Sell 100 shares @ $10.01—Post
Only
Order 4: Sell 100 shares @ $10.00
Due to the Display-Price Sliding
instruction, both Order 1 and Order 2
are originally ranked at $10.01 and
displayed at $10.00 to avoid locking the
National Best Offer at $10.01.19 Then,
because of the Post Only instruction,
Order 3 posts and displays on the EDGX
Book at $10.01. Since there is displayed
interest now resting on the same side of
the order book, Order 4 is eligible for
execution on entry at the midpoint price
of $10.005—i.e., one-half minimum
price variation better than Order 3.20 At
the midpoint of the NBBO, a Retail
Order subject to Display-Price Sliding
that is willing but unable to display at
or better than the execution price would
have priority over other orders. As a
result, Order 4 would trade with Order
2 for 100 shares @ $10.005, securing a
timely execution for the retail investor.
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Retail Attribution
A Retail Member Organization on
EDGX has the option of designating
Retail Orders to be identified as such on
the EDGX Book Feed,21 which may
increase potential execution
opportunities for that order. Today,
pursuant to EDGX Rule 11.21(f), this
designation may be made on either an
19 An order with a Display-Price Sliding
instruction that would be a locking quotation on
entry is instead ranked at the locking price and
displayed at a price that is one minimum price
variation less aggressive than the locking price. See
EDGX Rule 11.6(l)(B).
20 See EDGX Rule 11.6(l)(1)(B)(v); EDGX Rule
11.10(a)(4)(D).
21 See EDGX Rule 13.8.
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order-by-order or port-by-port basis,22
thereby giving members flexibility in
how they would like their Retail Orders
attributed on the Exchange. To support
the introduction of retail priority, the
Exchange proposes to instead provide
that Retail Orders will always be
designated as such on the EDGX Book
Feed.23 Although Retail Member
Organizations have the choice today to
determine which Retail Orders would
be marked as such on market data, the
Exchange believes that it is important to
ensure that orders given retail priority
would be considered attributable.
Designating Retail Orders on the EDGX
Book Feed will increase transparency by
informing market participants when
there is retail investor interest available
to trade on the Exchange, thereby
allowing market participants to make
informed routing decisions, including
the decision to route contra-side interest
to trade with such Retail Orders.
Although the Exchange would remove
the optionality previously available
under EDGX Rule 11.21(f), based on the
Exchange’s experience with attribution,
this approach has the potential to
increase execution opportunities for
Retail Orders (and other non-marketable
orders) by encouraging additional order
flow to be routed to the Exchange to
trade with resting Retail Orders.24
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act,25 in general, and Section 6(b)(5) of
the Act,26 in particular, in that it is
designed to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest
and not to permit unfair discrimination
22 A Retail Member Organization that instructs
the Exchange to identify all its Retail Orders as
Retail on a Retail Order Port is able to override such
setting and designate any individual Retail Order
from that port as Attributable or as NonAttributable, as set forth in Rule 11.6(a). See EDGX
Rule 11.21(f).
23 The retail indicator on the EDGX Book Feed
would indicate that the order is a Retail Order and
would not provide the market participant identifier
(‘‘MPID’’) of the entering firm. Members may
separately include an Attributable instruction on
their orders pursuant to Rule 11.6(a) if they would
also like MPID attribution.
24 Prior to the original introduction of retail
attribution, the Exchange conducted a study that
found that Retail Orders received an 18% higher
execution rate when members used Attributable
Orders to include their MPID in the published
quote on the EDGX Book Feed. See Securities
Exchange Act Release No. 72016 (April 24, 2014),
79 FR 24463 (April 30, 2014) (SR–EDGX–2014–13).
25 15 U.S.C. 78f(b).
26 15 U.S.C. 78f(b)(5).
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between customers, issuers, brokers, or
dealers.
The Commission has consistently
emphasized the need to ensure that the
U.S. capital markets are structured with
the interests of retail investors in mind,
and recently highlighted its focus on the
‘‘long-term interest of Main Street
Investors’’ as the agency’s number one
strategic goal for fiscal years 2018 to
2022.27 The Exchange believes that
retail priority is consistent with the
goals of the Commission to ensure that
the equities markets continue to serve
the needs of the investing public.
Specifically, introducing retail priority
would protect investors and the public
interest by giving retail investors the
tools needed to compete for executions
on non-marketable order flow submitted
to a national securities exchange. The
Exchange is committed to innovation
that improves the quality of the equities
markets, and believes that retail priority
may increase the attractiveness of the
Exchange for the execution of Retail
Orders submitted on behalf of the
millions of ordinary investors that rely
on these markets for their investment
needs.
Although the Commission has
approved other allocation
methodologies for equities trading,28
most equities exchanges, including
EDGX, continue to determine priority
based on a price/display/time allocation
model today. This has contributed to
deep and liquid markets for equity
securities as liquidity providers
compete to be the first to establish a
particular price. At the same time,
ordinary investors may not be able to
compete with market makers and other
automated liquidity providers to be the
first to set a new price. Importantly,
retail investors, in contrast to their
professional counterparts, tend to have
longer investment time horizons and are
not in the business of optimizing queue
placement under a time based allocation
model. Thus, in order to facilitate the
needs of these ordinary investors, the
Exchange believes that an alternative
approach is needed.
The proposed introduction of retail
priority is designed, first and foremost,
to benefit retail investors by increasing
both the likelihood and speed with
which their non-marketable orders are
executed. Unlike marketable retail order
flow that is routinely executed in full on
27 See
Commission Strategic Plan, supra note 4.
PSX, for example, operates with a price
setter pro rata model that rewards liquidity
providers that set the best price and then rewards
other market participants that enter larger sized
orders. See Securities Exchange Act Release No.
72250 (May 23, 2014), 79 FR 31147 (May 30, 2014)
(SR–Phlx–2014–24).
28 Nasdaq
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entry at the national best bid or offer or
better, non-marketable retail order flow
has to compete for execution with
orders entered by sophisticated market
participants that may be quicker to
establish a new price. As shown in the
chart below,29 the Exchange has found
that in 2018, of volume executed from
retail limit orders, 28.3% joined the
national best bid or offer (‘‘NBBO’’) on
entry, 17.8% were priced better than the
inside, and 49.4% were priced worse
than the inside.
Although potentially beneficial for all
Retail Orders that do not trade
immediately on entry, the Exchange
believes that retail priority would be
particularly beneficial to Retail Orders
that join the NBBO, as there would often
already be a queue at this price.
Introducing retail priority would thus
give retail investors the ability to
compete for an execution for these
orders, and may therefore improve
trading outcomes. As such, the
Exchange believes that the proposed
rule change is consistent with the goals
of the Exchange, and of the
Commission, to ensure that market
structure evolves in ways that protect
ordinary investors that participate in the
capital markets. Furthermore, since
retail priority is designed to improve
trading outcomes for ordinary investors,
the Exchange also believes that it may
encourage retail brokers to route
additional non-marketable retail order
flow to the EDGX Book, which may
broaden execution opportunities for
other market participants. If successful
in attracting retail order flow to the
Exchange, the proposed rule change
would benefit market participants by
increasing the diversity of order flow
with which other they can interact on a
national securities exchange, thereby
increasing order interaction and
contributing to price formation.
Giving queue priority to ordinary
investors is not a novel concept in the
securities markets. In fact, customer
priority has a long tradition in the
options market where orders entered on
behalf of non-broker dealer public
customers have historically been
afforded priority over orders submitted
by registered broker dealers. Today,
most options exchanges, including the
Exchange’s equity options platform
(‘‘EDGX Options’’),30 employ a customer
priority execution algorithm where
orders submitted by a subset of public
customers with more limited trading
activity (i.e., ‘‘Priority Customers’’) 31
are provided order book priority ahead
of orders submitted by broker-dealers or
other market professionals at the same
price. This allocation model, which was
first introduced by the International
Securities Exchange LLC (‘‘ISE’’) in its
current retail focused form a decade
ago,32 ensures that orders from Priority
Customers are executed ahead of
similarly priced interest from
sophisticated market participants. The
Exchange believes that the time has
come to introduce a similar concept for
the equities market in order to facilitate
the needs of retail investors that
increasingly rely on these markets.
The Commission has approved other
equities proposals to introduce
meaningful market structure benefits for
retail investors in recent years. For
example, in 2012, the Commission
approved proposals filed by the New
York Stock Exchange LLC (‘‘NYSE’’) and
its affiliate NYSE Amex LLC (‘‘Amex’’)
to introduce retail price improvement
programs.33 Those programs were
designed to provide price improvement
opportunities for retail investors on a
national securities exchange by allowing
liquidity providers to give sub-penny
price improvement to their orders
pursuant to an exemption granted from
Rule 612 of Regulation NMS. Similar
programs now exist on a number of
exchanges, including the Exchange’s
affiliate, Cboe BYX Exchange, Inc.
29 Based on Retail Orders entered by members
that have completed a retail attestation.
30 See EDGX Rule 21.8(d)(1).
31 The term ‘‘Priority Customer’’ refers to any
person or entity that is not a broker or dealer in
securities and does not otherwise qualify as a
‘‘Professional’’ by virtue of placing more than 390
orders in listed options per day on average during
a calendar month for its own beneficial account(s).
See e.g., EDGX Rules 16.1(a)(46),(47).
32 See Securities Exchange Act Release No. 59287
(January 23, 2009), 74 FR 5694 (January 30, 2009)
(SR–ISE–2006–26).
33 See Securities Exchange Act Release No. 67347
(July 3, 2012), 77 FR 40673 (July 10, 2012) (SR–
NYSE–2011–55; SR–NYSEAmex–2011–84).
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(‘‘BYX’’),34 and have provided millions
of dollars of price improvement to
ordinary investors.35 When approving
such retail price improvement programs
on a pilot basis, the Commission
consistently found that the pilots were
consistent with the Act because they
were ‘‘reasonably designed to benefit
retail investors’’ and could ‘‘promote
competition for retail order flow among
execution venues.’’ The benefits to retail
investors in the form of meaningful
price improvement opportunities
similarly animated the Commission’s
recent approval of the NYSE retail
liquidity program on a permanent
basis.36 Although retail priority is
designed to increase fill rates and speed
of execution rather than price
improvement, the Exchange believes
that it could have a similarly
meaningful impact on execution quality
for ordinary investors that trade in the
public market. Furthermore, retail
priority would complement existing
retail price improvement programs by
offering market structure benefits to
non-marketable retail order flow that
cannot participate in those programs.
Similarly, in 2017, the Commission
approved a proposed rule change by
The Nasdaq Stock Market LLC
(‘‘Nasdaq’’) to introduce the ‘‘Extended
Life Priority Order Attribute’’ for Retail
Orders that were willing to remain on
the book unaltered for a period of one
second (‘‘Retail Extended Life Order’’ or
‘‘Retail ELO’’).37 As proposed, displayed
orders entered on Nasdaq with the
Retail ELO attribute were to be provided
a higher priority than other orders
resting on the Nasdaq order book. When
the Commission approved this proposed
rule change, it opined that the proposal
‘‘should benefit retail investors by
providing enhanced order book priority
to retail order flow that is not
marketable upon entry,’’ and that
‘‘[s]uch enhanced order book priority
could result in additional or more
immediate execution opportunities on
34 See Securities Exchange Act Release No. 68303
(November 27, 2012), 77 FR 71652 (December 3,
2012) (SR–BYX–2012–019). Nasdaq BX Inc. (‘‘BX’’)
similarly operates its own retail price improvement
program. See Securities Exchange Act Release No.
73702 (November 28, 2014), 79 FR 72049
(December 4, 2014) (SR–BX–2014–048).
35 See e.g. Securities Exchange Act Release No.
83831 (August 13, 2018), 83 FR 41128 (August 17,
2018) (SR–CboeBYX–2018–014).
36 See Securities Exchange Act Release No. 85160
(February 15, 2019), 84 FR 5754 (February 22, 2019)
(SR–NYSE–2018–28).
37 See Securities Exchange Act Release No. 81097
(July 7, 2017), 82 FR 32386 (July 13, 2017) (SR–
NASDAQ–2016–161) (‘‘Retail ELO Approval’’).
Nasdaq ultimately decided not to implement Retail
ELO following Commission approval, and has since
introduced a ‘‘Midpoint Extended Life Order’’ that
is not limited to retail participation.
VerDate Sep<11>2014
18:46 Apr 04, 2019
Jkt 247001
the [e]xchange for resting retail orders
that otherwise would be farther down in
the order book queue, and thereby
enhance execution opportunities for
retail investors.’’ 38 The same is true of
the Exchange’s retail priority proposal,
which would provide similar benefits to
retail investors without the additional
complexity of requiring that the order be
willing to exist unaltered on the order
book for a specified period of time.
While the Exchange believes that the
majority of retail investors have a longer
investment time horizon and therefore
do not actively manage their trading
interest at sub-second time intervals, the
Exchange believes that a broader
principle of retail priority may be more
effective in encouraging retail brokers to
route order flow to the Exchange.
The Exchange also believes that it is
appropriate and not unfairly
discriminatory to provide enhanced
priority benefits solely to Retail Orders
as the proposal is designed specifically
to ensure that retail investors can
compete for executions with
sophisticated market participants. In
today’s highly automated and efficient
market, retail investors have a more
limited opportunity to compete for an
execution based purely on the time an
order is placed. While sophisticated,
latency sensitive market participants
can compete to be the first at any
particular price, retail investors with
longer investment horizons cannot
compete in the same fashion. The
proposed introduction of retail priority
would ensure that non-marketable
Retail Orders get filled first when there
is available contra-side interest, and
thereby improve investment outcomes
for ordinary investors. The Commission
has consistently held that it is
consistent with the Act to offer certain
advantages to retail customers,39 and the
proposal follows a line of other
initiatives to improve the retail investor
experience in the public markets. The
Exchange believes that it is an important
goal of both the Exchange and the
Commission to ensure that our market
structure continues to benefit retail
investors by providing the tools that
they need to invest in the capital
markets. Although there are many ways
to achieve that goal, the Exchange
believes that doing so requires
38 Id.
39 Where the interest of long-term investors, such
as the retail investors whose experience this filing
is attempting to improve, diverges from that of
short-term professional traders, the Commission
‘‘repeatedly has emphasized that its duty is to
uphold the interests of long-term investors.’’ See
Securities Exchange Act Release No. 61358 (January
14, 2010), 75 FR 3593 (January 21, 2010) (File No.
S7–02–10) (‘‘Concept Release on Equity Market
Structure’’).
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
13733
innovation in how Retail Orders are
handled on the national securities
exchanges in order to attract that order
flow back to the displayed market.
The Exchange also believes that it is
consistent with the public interest and
the protection of investors to provide
retail priority exclusively to those
orders that contain a Displayed or
Reserve instruction. The goals of the
proposed rule change are twofold. First,
the proposed change is designed to
facilitate better trading outcomes for
retail investors, which may encourage
retail brokers to send additional retail
order flow to the Exchange. Second, the
proposed change is designed to
encourage additional displayed retail
liquidity, which could contribute to
price discovery and encourage
additional order flow and liquidity from
other market participants. Although the
first purpose could be achieved without
limiting retail priority to orders that
contain a Displayed component at a
particular price, the second is only
achieved when such orders are
displayed to the broader market. For
that reason, recent priority
enhancements for retail investors, such
as Nasdaq’s Retail ELO, have also
focused on displayed interest that could
improve quote quality and contribute to
a vibrant market.
Finally, the Exchange believes that it
is consistent with just and equitable
principles of trade to require that all
Retail Orders that are eligible for retail
priority be considered retail attributable
as this would allow other market
participants to gauge the available size
in orders that would be eligible for retail
priority. Today, Retail Member
Organizations are given the choice as to
whether to designate an order on the
EDGX Book Feed as attributable to a
retail investor, which may improve the
chance of securing an execution.
Although Retail Member Organizations
would no longer have the option to
submit eligible Retail Orders as nonattributable, the transparency achieved
by so designating these orders is
important to the proper functioning of a
market where such orders would be
eligible for priority. Furthermore,
members would ultimately be able to
decide which orders to designate into
the EDGX Book as Retail Orders, thereby
retaining the ability to control which
orders are publicly attributed to retail
investors. Priority Customer orders
entered on the EDGX Options platform
are similarly designated as such on the
Exchange’s market data feeds today, and
the Exchange believes that this has
contributed positively to the overall
market environment.
E:\FR\FM\05APN1.SGM
05APN1
13734
Federal Register / Vol. 84, No. 66 / Friday, April 5, 2019 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Rather, the
proposed rule change is designed to
increase inter-market competition for
retail order flow, and intra-market
competition for orders as market
participants compete to transact with
Retail Orders entered on the EDGX
Book. The proposed rule change
represents an effort by the Exchange to
enhance the ability for retail investors to
participate effectively on a national
securities exchange without
unnecessarily burdening competition.
Although retail priority would be
limited to retail investors, the Exchange
does not believe that this produces an
unnecessary burden on competition as
these changes are necessary to attract
Retail Orders to a national securities
exchange where they may interact with
a wide range of market participants. If
successful, the Exchange believes that
retail priority would enhance
competition by encouraging retail
brokers to route increased order flow to
the public markets, creating a more
vibrant and competitive trading
environment that benefits all market
participants.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No comments were solicited or
received on the proposed rule change.
khammond on DSKBBV9HB2PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
VerDate Sep<11>2014
18:46 Apr 04, 2019
Jkt 247001
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–
CboeEDGX–2019–012 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeEDGX–2019–012. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2019–012 and
should be submitted on or before April
26, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–06720 Filed 4–4–19; 8:45 am]
BILLING CODE 8011–01–P
40 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00110
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Extension:
Industry Guides, SEC File No. 270–069,
OMB Control No. 3235–0069.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Industry Guides are used by
registrants in certain industries as
disclosure guidelines to be followed in
presenting information to investors in
Securities Act (15 U.S.C. 77a et seq.)
and Exchange Act (15 U.S.C. 78a et seq.)
registration statements and certain other
Exchange Act filings. The paperwork
burden from the Industry Guides is
imposed through the forms that are
subject to the disclosure requirements in
the Industry Guides and is reflected in
the analysis of these documents. To
avoid a Paperwork Reduction Act
inventory reflecting duplicative
burdens, for administrative convenience
the Commission estimates the total
annual burden imposed by the Industry
Guides to be one hour.
Written comments are invited on: (a)
Whether this proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden imposed by the collection
of information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
E:\FR\FM\05APN1.SGM
05APN1
]]>Agencies
[Federal Register Volume 84, Number 66 (Friday, April 5, 2019)]
[Notices]
[Pages 13729-13734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06720]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85482; File No. SR-CboeEDGX-2019-012]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing of a Proposed Rule Change To Introduce Retail Priority
April 2, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 18, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposed rule change to introduce order book priority for equity orders
submitted on behalf of retail investors. The text of the proposed rule
change is attached as Exhibit 5 [sic].
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to introduce order book
priority for equity orders submitted on behalf of retail investors.
Forty three million U.S. households hold a retirement or brokerage
account,\3\ and these investors are increasingly turning to the
equities markets to fund important life goals. It is therefore critical
that our markets are sensitive to the needs of the investing public.
The Exchange continuously strives to innovate and improve market
structure in ways that facilitate ordinary investors achieving their
investment goals. The proposed introduction of retail priority is
designed with this objective in mind. The Exchange believes that
introducing retail priority may provide retail investors with better
execution quality and better position the Exchange as the ``home'' for
retail limit orders. This, in turn, will further allow retail liquidity
to contribute to overall price formation and attract more market
participants to the Exchange, creating a richer and more diverse
ecosystem with deeper liquidity. Retail priority would therefore be
consistent with the goals of the Commission to encourage markets that
are structured to benefit ordinary investors,\4\ while facilitating
order interaction and price discovery to the benefit of all market
participants.
---------------------------------------------------------------------------
\3\ See The Evolving Market for Retail Investment Services and
Forward-Looking Regulation--Adding Clarity and Investor Protection
while Ensuring Access and Choice, Chairman Jay Clayton, Commission
(May 2, 2018), available at https://www.sec.gov/news/speech/speech-clayton-2018-05-02.
\4\ See e.g., U.S. Securities and Exchange Commission, Strategic
Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf (``Commission
Strategic Plan'').
---------------------------------------------------------------------------
Background
As defined in EDGX Rule 11.21, a ``Retail Order'' is an agency or
riskless principal order that meets the criteria of FINRA Rule 5320.03
\5\ that originates from a natural person and is submitted to the
Exchange by a Retail Member Organization, provided that no change is
made to the terms of the order with respect to price or side of market
and the order does not originate from a trading algorithm or any other
computerized methodology.\6\ A ``Retail Member Organization'' or
``RMO'' is a Member (or a division thereof) that has been approved by
the Exchange under EDGX Rule 11.21 to submit Retail Orders. Pursuant to
EDGX Rule 11.21(b), which describes the qualification and application
process for becoming a Retail Member Organization, any member may
qualify as a Retail Member Organization if it conducts a retail
business or routes retail orders on behalf of another broker-dealer.
---------------------------------------------------------------------------
\5\ FINRA Rule 5320.03 clarifies that an RMO may enter Retail
Orders on a riskless principal basis, provided that (i) the entry of
such riskless principal orders meet the requirements of FINRA Rule
5320.03, including that the RMO maintains supervisory systems to
reconstruct, in a time[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.
\6\ Retail Member Organizations will only be able to designate
their orders as Retail Orders on either an order-by-order basis
using FIX ports or by designating certain of their FIX ports at the
Exchange as ``Retail Order Ports.'' Unless otherwise instructed by
the Retail Member Organization, a Retail Order will be identified as
Retail when routed to an away Trading Center. See EDGX Rule
11.21(d).
---------------------------------------------------------------------------
Today, the Exchange operates based on a price/display/time priority
execution algorithm that is similar to those employed by most other
U.S. equities exchanges.\7\ As such, the first Displayed \8\ order
resting on the EDGX Book \9\ at a particular price has priority over
the next order and so on based on the time of order entry. Non-
[[Page 13730]]
Displayed \10\ orders at that price are further categorized into a
number of priority bands, with orders within each priority band
prioritized again based on the time of order entry, as provided in EDGX
Rule 11.9. The generally applicable allocation bands for orders
executed on the Exchange are described in EDGX Rule 11.9(a)(2)(A), and
similar allocation bands applicable to orders executed at the midpoint
of the NBBO are described in EDGX Rule 11.9(a)(2)(B).\11\ The price
time allocation model has provided significant benefits to the equities
markets as it encourages increased efficiency by rewarding market
participants that are the first to provide liquidity at a particular
price. At the same time, because this allocation methodology
preferences speed, retail investors may have a more limited ability to
secure an execution for their non-marketable orders under this model.
The Exchange believes that retail priority would improve trading
outcomes for Retail Orders and could perhaps encourage even more retail
order flow to be entered into the displayed market.
---------------------------------------------------------------------------
\7\ See EDGX Rule 11.12.
\8\ ``Displayed'' is an instruction the User may attach to an
order stating that the order is to be displayed by the System on the
EDGX Book. See EDGX Rule 11.6(e)(1).
\9\ ``EDGX Book'' means the System's electronic file of orders.
See EDGX Rule 1.5(d)
\10\ ``Non-Displayed'' is an instruction the User may attach to
an order stating that the order is not to be displayed by the System
on the EDGX Book. See EDGX Rule 11.6(e)(2).
\11\ In addition, EDGX Rule 11.9(a)(2)(C) describes the sequence
in which orders are timestamped when re-ranked by the System upon
clearance of a locking quotation.
---------------------------------------------------------------------------
Retail Priority Proposal
The Exchange proposes to introduce retail priority in order to
ensure that non-marketable orders submitted on behalf of retail
investors can more readily compete for execution with orders entered by
sophisticated market participants that may be better equipped to
optimize their place in the intermarket queue. Retail priority would be
in place during all trading sessions, and would also be available to
orders entered for participation in the Exchange's opening process and
the re-opening process following a halt.
As proposed, the portion of a Retail Order with a Displayed
instruction would be given allocation priority ahead of all other
available interest on the EDGX Book. This would be true of both orders
executed pursuant to the regular priority bands described in EDGX Rule
11.9(a)(2)(A), and orders priced at the midpoint of the NBBO pursuant
to EDGX Rule 11.9(a)(2)(B) where Retail Orders subject to Display-Price
Sliding \12\ would have priority ahead of limit orders entered with
such an instruction as well as any other orders resting at the midpoint
of the NBBO.\13\ In addition, since Reserve Orders contain a Displayed
instruction but include both Displayed and Non-Displayed shares, the
Reserve Quantity \14\ of Retail Orders would be given priority ahead of
the Reserve Quantity of other limit orders on the EDGX Book.
---------------------------------------------------------------------------
\12\ Display-Price Sliding is an order instruction provided for
compliance with Rule 610(d) of Regulation NMS. See EDGX Rule
11.6(l)(B).
\13\ The midpoint of the NBBO is a non-displayed price, and
therefore orders entered with Display-Price Sliding, which are
willing to be displayed at the applicable locking or crossing price
are given priority pursuant to current EDGX Rule 11.9(a)(2)(B).
\14\ ``Reserve Quantity'' is the portion of an order that
includes a Non-Displayed instruction in which a portion of that
order is also displayed on the EDGX Book. See EDGX Rule 11.6(m).
---------------------------------------------------------------------------
Retail Orders that are not willing to be displayed, or are only
willing to be displayed at a less aggressive price than the execution
price, would not receive any special priority. For example, a Retail
Order that is entered as a MidPoint Peg Order,\15\ which by definition
is Non-Displayed, would be prioritized along with all other MidPoint
Peg Orders notwithstanding the fact that it is a Retail Order.
Similarly, a MidPoint Discretionary Order (``MDO'') \16\ executed
within its Discretionary Range would receive the same priority as other
orders entered with a Discretionary Range instruction, regardless of
whether the MDO is displayed at its pegged price.
---------------------------------------------------------------------------
\15\ A ``MidpPoint Peg Order'' is a non-displayed Market Order
or Limit Order with an instruction to execute at the midpoint of the
NBBO, or, alternatively, pegged to the less aggressive of the
midpoint of the NBBO or one minimum price variation inside the same
side of the NBBO as the order. See EDGX Rule 11.8(d).
\16\ A ``MidPoint Discretionary Order'' is a Limit Order that is
executable at the NBB for an order to buy or the NBO for an order to
sell while resting on the EDGX Book, with discretion to execute at
prices to and including the midpoint of the NBBO. See EDGX Rule
11.8(g).
---------------------------------------------------------------------------
The following examples illustrate the proposed implementation of
retail priority: \17\
---------------------------------------------------------------------------
\17\ In each example, orders are shown in the order in which
they are entered.
---------------------------------------------------------------------------
Example 1: Displayed Retail Order has Priority at a Given Price.
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.00--Displayed, Non-Retail Order
Order 2: Buy 100 shares @ $10.00--Displayed, Retail Order
Order 3: Sell 100 shares @ $10.00
A Retail Order entered with a Displayed instruction would have
priority over Non-Retail Orders at the same price. As a result, Order 3
would trade with Order 2 for 100 shares @ $10.00, securing a timely
execution for the retail investor.
Example 2: Better Priced Non-Retail Order has Priority.
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.00--Retail Order
Order 2: Buy 100 shares @ $10.01--Non-Retail Order
Order 3: Sell 100 shares @ $10.00
Allocations would continue to be prioritized based on price.
Although Retail Orders entered with a Displayed instruction would have
priority over Non-Retail Orders at the same price, they would not have
priority over Non-Retail Orders at a better price. As a result, Order 3
would trade with the better priced Order 2 for 100 shares @$10.01.
Example 3: No Retail Priority for Non-Displayed Orders.
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.01--Non-Displayed, Non-Retail Order
Order 2: Buy 100 shares @ $10.01--Non-Displayed, Retail Order
Order 3: Sell 100 shares @ $10.00
A Retail Order entered with a Non-Displayed instruction is not
eligible for retail priority. As a result, Order 3 trades with Order 1
for 100 shares @ $10.01 based on time priority. Retail Orders would
need to be submitted with a Displayed or Reserve instruction to qualify
for the benefits of retail priority, which should encourage displayed
retail liquidity.
Example 4: No Retail Priority in Discretionary Range.
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.00 + $0.03 Discretion--Non-Retail Order
Order 2: Buy 100 shares @ $10.00 + $0.03 Discretion--Retail Order
Order 3: Sell 100 shares @ $10.02
Retail Orders would only have priority if willing to be displayed
at the execution price. Although orders entered with a Discretionary
Range instruction may be displayed at their ranked price, the execution
would occur at a non-displayed price within the Discretionary Range. As
a result, Order 3 trades with Order 1 for 100 shares @$10.02 based on
time priority.\18\
---------------------------------------------------------------------------
\18\ If Order 3 was to sell 100 shares @ $10.00 then retail
priority would be observed at the displayed price and Order 3 would
trade with Order 2 for 100 shares @ $10.00.
---------------------------------------------------------------------------
Example 5: Retail Reserve Order has Displayed and Non-Displayed
Priority.
NBBO: $10.00 x $10.10
Order 1: Buy 500 @ $10.00--Non-Retail Reserve Order, 100 shares
displayed
Order 2: Buy 500 @ $10.00--Retail Reserve Order, 100 shares displayed
Order 3: Sell 300 @ $10.00
[[Page 13731]]
A Retail Order entered as a Reserve Order would have retail
priority for both displayed and non-displayed size. However, any
Reserve Quantity would be executed after other orders with a higher
priority, including the displayed size available from Non-Retail
Orders. As a result, Order 3 would trade 100 shares @ $10.00 with Order
2 based on retail priority, then would trade 100 shares @ $10.00 with
Order 1. After exhausting the available displayed size, Order 3 would
trade the remaining 100 shares @ $10.00 with Order 2 based on retail
priority.
Example 6: Display-Price Sliding Retail Orders are Eligible for
Priority at Midpoint.
NBBO: $10.00 x $10.01
EDGX BBO: $10.00 x $10.02
Order 1: Buy 100 shares @ $10.01--Book Only, Display-Price Sliding,
Non-Retail Order
Order 2: Buy 100 shares @ $10.01--Book Only, Display-Price Sliding,
Retail Order
Order 3: Sell 100 shares @ $10.01--Post Only
Order 4: Sell 100 shares @ $10.00
Due to the Display-Price Sliding instruction, both Order 1 and
Order 2 are originally ranked at $10.01 and displayed at $10.00 to
avoid locking the National Best Offer at $10.01.\19\ Then, because of
the Post Only instruction, Order 3 posts and displays on the EDGX Book
at $10.01. Since there is displayed interest now resting on the same
side of the order book, Order 4 is eligible for execution on entry at
the midpoint price of $10.005--i.e., one-half minimum price variation
better than Order 3.\20\ At the midpoint of the NBBO, a Retail Order
subject to Display-Price Sliding that is willing but unable to display
at or better than the execution price would have priority over other
orders. As a result, Order 4 would trade with Order 2 for 100 shares @
$10.005, securing a timely execution for the retail investor.
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\19\ An order with a Display-Price Sliding instruction that
would be a locking quotation on entry is instead ranked at the
locking price and displayed at a price that is one minimum price
variation less aggressive than the locking price. See EDGX Rule
11.6(l)(B).
\20\ See EDGX Rule 11.6(l)(1)(B)(v); EDGX Rule 11.10(a)(4)(D).
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Retail Attribution
A Retail Member Organization on EDGX has the option of designating
Retail Orders to be identified as such on the EDGX Book Feed,\21\ which
may increase potential execution opportunities for that order. Today,
pursuant to EDGX Rule 11.21(f), this designation may be made on either
an order-by-order or port-by-port basis,\22\ thereby giving members
flexibility in how they would like their Retail Orders attributed on
the Exchange. To support the introduction of retail priority, the
Exchange proposes to instead provide that Retail Orders will always be
designated as such on the EDGX Book Feed.\23\ Although Retail Member
Organizations have the choice today to determine which Retail Orders
would be marked as such on market data, the Exchange believes that it
is important to ensure that orders given retail priority would be
considered attributable. Designating Retail Orders on the EDGX Book
Feed will increase transparency by informing market participants when
there is retail investor interest available to trade on the Exchange,
thereby allowing market participants to make informed routing
decisions, including the decision to route contra-side interest to
trade with such Retail Orders. Although the Exchange would remove the
optionality previously available under EDGX Rule 11.21(f), based on the
Exchange's experience with attribution, this approach has the potential
to increase execution opportunities for Retail Orders (and other non-
marketable orders) by encouraging additional order flow to be routed to
the Exchange to trade with resting Retail Orders.\24\
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\21\ See EDGX Rule 13.8.
\22\ A Retail Member Organization that instructs the Exchange to
identify all its Retail Orders as Retail on a Retail Order Port is
able to override such setting and designate any individual Retail
Order from that port as Attributable or as Non-Attributable, as set
forth in Rule 11.6(a). See EDGX Rule 11.21(f).
\23\ The retail indicator on the EDGX Book Feed would indicate
that the order is a Retail Order and would not provide the market
participant identifier (``MPID'') of the entering firm. Members may
separately include an Attributable instruction on their orders
pursuant to Rule 11.6(a) if they would also like MPID attribution.
\24\ Prior to the original introduction of retail attribution,
the Exchange conducted a study that found that Retail Orders
received an 18% higher execution rate when members used Attributable
Orders to include their MPID in the published quote on the EDGX Book
Feed. See Securities Exchange Act Release No. 72016 (April 24,
2014), 79 FR 24463 (April 30, 2014) (SR-EDGX-2014-13).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\25\ in general, and
Section 6(b)(5) of the Act,\26\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
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The Commission has consistently emphasized the need to ensure that
the U.S. capital markets are structured with the interests of retail
investors in mind, and recently highlighted its focus on the ``long-
term interest of Main Street Investors'' as the agency's number one
strategic goal for fiscal years 2018 to 2022.\27\ The Exchange believes
that retail priority is consistent with the goals of the Commission to
ensure that the equities markets continue to serve the needs of the
investing public. Specifically, introducing retail priority would
protect investors and the public interest by giving retail investors
the tools needed to compete for executions on non-marketable order flow
submitted to a national securities exchange. The Exchange is committed
to innovation that improves the quality of the equities markets, and
believes that retail priority may increase the attractiveness of the
Exchange for the execution of Retail Orders submitted on behalf of the
millions of ordinary investors that rely on these markets for their
investment needs.
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\27\ See Commission Strategic Plan, supra note 4.
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Although the Commission has approved other allocation methodologies
for equities trading,\28\ most equities exchanges, including EDGX,
continue to determine priority based on a price/display/time allocation
model today. This has contributed to deep and liquid markets for equity
securities as liquidity providers compete to be the first to establish
a particular price. At the same time, ordinary investors may not be
able to compete with market makers and other automated liquidity
providers to be the first to set a new price. Importantly, retail
investors, in contrast to their professional counterparts, tend to have
longer investment time horizons and are not in the business of
optimizing queue placement under a time based allocation model. Thus,
in order to facilitate the needs of these ordinary investors, the
Exchange believes that an alternative approach is needed.
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\28\ Nasdaq PSX, for example, operates with a price setter pro
rata model that rewards liquidity providers that set the best price
and then rewards other market participants that enter larger sized
orders. See Securities Exchange Act Release No. 72250 (May 23,
2014), 79 FR 31147 (May 30, 2014) (SR-Phlx-2014-24).
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The proposed introduction of retail priority is designed, first and
foremost, to benefit retail investors by increasing both the likelihood
and speed with which their non-marketable orders are executed. Unlike
marketable retail order flow that is routinely executed in full on
[[Page 13732]]
entry at the national best bid or offer or better, non-marketable
retail order flow has to compete for execution with orders entered by
sophisticated market participants that may be quicker to establish a
new price. As shown in the chart below,\29\ the Exchange has found that
in 2018, of volume executed from retail limit orders, 28.3% joined the
national best bid or offer (``NBBO'') on entry, 17.8% were priced
better than the inside, and 49.4% were priced worse than the inside.
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\29\ Based on Retail Orders entered by members that have
completed a retail attestation.
[GRAPHIC] [TIFF OMITTED] TN05AP19.001
Although potentially beneficial for all Retail Orders that do not
trade immediately on entry, the Exchange believes that retail priority
would be particularly beneficial to Retail Orders that join the NBBO,
as there would often already be a queue at this price. Introducing
retail priority would thus give retail investors the ability to compete
for an execution for these orders, and may therefore improve trading
outcomes. As such, the Exchange believes that the proposed rule change
is consistent with the goals of the Exchange, and of the Commission, to
ensure that market structure evolves in ways that protect ordinary
investors that participate in the capital markets. Furthermore, since
retail priority is designed to improve trading outcomes for ordinary
investors, the Exchange also believes that it may encourage retail
brokers to route additional non-marketable retail order flow to the
EDGX Book, which may broaden execution opportunities for other market
participants. If successful in attracting retail order flow to the
Exchange, the proposed rule change would benefit market participants by
increasing the diversity of order flow with which other they can
interact on a national securities exchange, thereby increasing order
interaction and contributing to price formation.
Giving queue priority to ordinary investors is not a novel concept
in the securities markets. In fact, customer priority has a long
tradition in the options market where orders entered on behalf of non-
broker dealer public customers have historically been afforded priority
over orders submitted by registered broker dealers. Today, most options
exchanges, including the Exchange's equity options platform (``EDGX
Options''),\30\ employ a customer priority execution algorithm where
orders submitted by a subset of public customers with more limited
trading activity (i.e., ``Priority Customers'') \31\ are provided order
book priority ahead of orders submitted by broker-dealers or other
market professionals at the same price. This allocation model, which
was first introduced by the International Securities Exchange LLC
(``ISE'') in its current retail focused form a decade ago,\32\ ensures
that orders from Priority Customers are executed ahead of similarly
priced interest from sophisticated market participants. The Exchange
believes that the time has come to introduce a similar concept for the
equities market in order to facilitate the needs of retail investors
that increasingly rely on these markets.
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\30\ See EDGX Rule 21.8(d)(1).
\31\ The term ``Priority Customer'' refers to any person or
entity that is not a broker or dealer in securities and does not
otherwise qualify as a ``Professional'' by virtue of placing more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See e.g., EDGX
Rules 16.1(a)(46),(47).
\32\ See Securities Exchange Act Release No. 59287 (January 23,
2009), 74 FR 5694 (January 30, 2009) (SR-ISE-2006-26).
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The Commission has approved other equities proposals to introduce
meaningful market structure benefits for retail investors in recent
years. For example, in 2012, the Commission approved proposals filed by
the New York Stock Exchange LLC (``NYSE'') and its affiliate NYSE Amex
LLC (``Amex'') to introduce retail price improvement programs.\33\
Those programs were designed to provide price improvement opportunities
for retail investors on a national securities exchange by allowing
liquidity providers to give sub-penny price improvement to their orders
pursuant to an exemption granted from Rule 612 of Regulation NMS.
Similar programs now exist on a number of exchanges, including the
Exchange's affiliate, Cboe BYX Exchange, Inc.
[[Page 13733]]
(``BYX''),\34\ and have provided millions of dollars of price
improvement to ordinary investors.\35\ When approving such retail price
improvement programs on a pilot basis, the Commission consistently
found that the pilots were consistent with the Act because they were
``reasonably designed to benefit retail investors'' and could ``promote
competition for retail order flow among execution venues.'' The
benefits to retail investors in the form of meaningful price
improvement opportunities similarly animated the Commission's recent
approval of the NYSE retail liquidity program on a permanent basis.\36\
Although retail priority is designed to increase fill rates and speed
of execution rather than price improvement, the Exchange believes that
it could have a similarly meaningful impact on execution quality for
ordinary investors that trade in the public market. Furthermore, retail
priority would complement existing retail price improvement programs by
offering market structure benefits to non-marketable retail order flow
that cannot participate in those programs.
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\33\ See Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-
2011-84).
\34\ See Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019). Nasdaq BX
Inc. (``BX'') similarly operates its own retail price improvement
program. See Securities Exchange Act Release No. 73702 (November 28,
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048).
\35\ See e.g. Securities Exchange Act Release No. 83831 (August
13, 2018), 83 FR 41128 (August 17, 2018) (SR-CboeBYX-2018-014).
\36\ See Securities Exchange Act Release No. 85160 (February 15,
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28).
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Similarly, in 2017, the Commission approved a proposed rule change
by The Nasdaq Stock Market LLC (``Nasdaq'') to introduce the ``Extended
Life Priority Order Attribute'' for Retail Orders that were willing to
remain on the book unaltered for a period of one second (``Retail
Extended Life Order'' or ``Retail ELO'').\37\ As proposed, displayed
orders entered on Nasdaq with the Retail ELO attribute were to be
provided a higher priority than other orders resting on the Nasdaq
order book. When the Commission approved this proposed rule change, it
opined that the proposal ``should benefit retail investors by providing
enhanced order book priority to retail order flow that is not
marketable upon entry,'' and that ``[s]uch enhanced order book priority
could result in additional or more immediate execution opportunities on
the [e]xchange for resting retail orders that otherwise would be
farther down in the order book queue, and thereby enhance execution
opportunities for retail investors.'' \38\ The same is true of the
Exchange's retail priority proposal, which would provide similar
benefits to retail investors without the additional complexity of
requiring that the order be willing to exist unaltered on the order
book for a specified period of time. While the Exchange believes that
the majority of retail investors have a longer investment time horizon
and therefore do not actively manage their trading interest at sub-
second time intervals, the Exchange believes that a broader principle
of retail priority may be more effective in encouraging retail brokers
to route order flow to the Exchange.
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\37\ See Securities Exchange Act Release No. 81097 (July 7,
2017), 82 FR 32386 (July 13, 2017) (SR-NASDAQ-2016-161) (``Retail
ELO Approval''). Nasdaq ultimately decided not to implement Retail
ELO following Commission approval, and has since introduced a
``Midpoint Extended Life Order'' that is not limited to retail
participation.
\38\ Id.
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The Exchange also believes that it is appropriate and not unfairly
discriminatory to provide enhanced priority benefits solely to Retail
Orders as the proposal is designed specifically to ensure that retail
investors can compete for executions with sophisticated market
participants. In today's highly automated and efficient market, retail
investors have a more limited opportunity to compete for an execution
based purely on the time an order is placed. While sophisticated,
latency sensitive market participants can compete to be the first at
any particular price, retail investors with longer investment horizons
cannot compete in the same fashion. The proposed introduction of retail
priority would ensure that non-marketable Retail Orders get filled
first when there is available contra-side interest, and thereby improve
investment outcomes for ordinary investors. The Commission has
consistently held that it is consistent with the Act to offer certain
advantages to retail customers,\39\ and the proposal follows a line of
other initiatives to improve the retail investor experience in the
public markets. The Exchange believes that it is an important goal of
both the Exchange and the Commission to ensure that our market
structure continues to benefit retail investors by providing the tools
that they need to invest in the capital markets. Although there are
many ways to achieve that goal, the Exchange believes that doing so
requires innovation in how Retail Orders are handled on the national
securities exchanges in order to attract that order flow back to the
displayed market.
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\39\ Where the interest of long-term investors, such as the
retail investors whose experience this filing is attempting to
improve, diverges from that of short-term professional traders, the
Commission ``repeatedly has emphasized that its duty is to uphold
the interests of long-term investors.'' See Securities Exchange Act
Release No. 61358 (January 14, 2010), 75 FR 3593 (January 21, 2010)
(File No. S7-02-10) (``Concept Release on Equity Market
Structure'').
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The Exchange also believes that it is consistent with the public
interest and the protection of investors to provide retail priority
exclusively to those orders that contain a Displayed or Reserve
instruction. The goals of the proposed rule change are twofold. First,
the proposed change is designed to facilitate better trading outcomes
for retail investors, which may encourage retail brokers to send
additional retail order flow to the Exchange. Second, the proposed
change is designed to encourage additional displayed retail liquidity,
which could contribute to price discovery and encourage additional
order flow and liquidity from other market participants. Although the
first purpose could be achieved without limiting retail priority to
orders that contain a Displayed component at a particular price, the
second is only achieved when such orders are displayed to the broader
market. For that reason, recent priority enhancements for retail
investors, such as Nasdaq's Retail ELO, have also focused on displayed
interest that could improve quote quality and contribute to a vibrant
market.
Finally, the Exchange believes that it is consistent with just and
equitable principles of trade to require that all Retail Orders that
are eligible for retail priority be considered retail attributable as
this would allow other market participants to gauge the available size
in orders that would be eligible for retail priority. Today, Retail
Member Organizations are given the choice as to whether to designate an
order on the EDGX Book Feed as attributable to a retail investor, which
may improve the chance of securing an execution. Although Retail Member
Organizations would no longer have the option to submit eligible Retail
Orders as non-attributable, the transparency achieved by so designating
these orders is important to the proper functioning of a market where
such orders would be eligible for priority. Furthermore, members would
ultimately be able to decide which orders to designate into the EDGX
Book as Retail Orders, thereby retaining the ability to control which
orders are publicly attributed to retail investors. Priority Customer
orders entered on the EDGX Options platform are similarly designated as
such on the Exchange's market data feeds today, and the Exchange
believes that this has contributed positively to the overall market
environment.
[[Page 13734]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the proposed rule
change is designed to increase inter-market competition for retail
order flow, and intra-market competition for orders as market
participants compete to transact with Retail Orders entered on the EDGX
Book. The proposed rule change represents an effort by the Exchange to
enhance the ability for retail investors to participate effectively on
a national securities exchange without unnecessarily burdening
competition. Although retail priority would be limited to retail
investors, the Exchange does not believe that this produces an
unnecessary burden on competition as these changes are necessary to
attract Retail Orders to a national securities exchange where they may
interact with a wide range of market participants. If successful, the
Exchange believes that retail priority would enhance competition by
encouraging retail brokers to route increased order flow to the public
markets, creating a more vibrant and competitive trading environment
that benefits all market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No comments were solicited or received on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 r[email protected]. Please include
File Number SR-CboeEDGX-2019-012 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeEDGX-2019-012. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeEDGX-2019-012 and should be
submitted on or before April 26, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06720 Filed 4-4-19; 8:45 am]
BILLING CODE 8011-01-P
