Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Introduce a Liquidity Provider Protection on EDGA, 30282-30294 [2019-13537]

Download as PDF 30282 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 50 and Rule 19b–4(f)(6) 51 thereunder.52 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2019–027 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–CBOE–2019–027. 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 (http://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 50 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 52 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. jbell on DSK3GLQ082PROD with NOTICES 51 17 VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 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–CBOE–2019–027 and should be submitted on or before July 17, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.53 Vanessa A. Countryman, Acting Secretary. [FR Doc. 2019–13541 Filed 6–25–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No 34–86168; File No. SR– CboeEDGA–2019–012] Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Introduce a Liquidity Provider Protection on EDGA June 20, 2019. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 7, 2019, Cboe EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe EDGA Exchange, Inc. (‘‘EDGA’’ or the ‘‘Exchange’’) is filing with the 53 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00201 Fmt 4703 Sfmt 4703 Securities and Exchange Commission (the ‘‘Commission’’) a proposed rule change to introduce a Liquidity Provider Protection on EDGA. The text of the proposed rule change is attached [sic] as Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (http://markets.cboe.com/us/ equities/regulation/rule_filings/edga/), 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 a delay mechanism on EDGA that is designed to protect liquidity providers and thereby enable those liquidity providers to make better markets in equity securities traded on the Exchange. The Liquidity Provider Protection (‘‘LP2’’) delay mechanism would function similarly to delay mechanisms adopted by the Investors Exchange LLC (‘‘IEX’’) and NYSE American LLC (‘‘NYSE American’’) in that it is an intentional access delay applied to a subset of order messages in order to allow resting orders to be updated before opportunistic traders can trade with them at stale prices.3 The LP2 delay mechanism, however, is unique in that it is designed primarily to enhance market quality by promoting price forming displayed liquidity in addition to the non-displayed liquidity encouraged by both IEX and NYSE American. Liquidity provision is critical to the proper functioning of the equities markets, and finding ways to enhance 3 See Securities Exchange Act Release Nos. 78101 (June 17, 2016), 81 FR 41141 (June 23, 2016) (File No. 10–222) (‘‘IEX Exchange Approval’’); 80700 (May 16, 2017), 82 FR 23381 (May 22, 2017) (SR– NYSEMKT–2017–05) (‘‘MKT Approval Order’’). E:\FR\FM\26JNN1.SGM 26JNN1 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices the ability of firms to provide that liquidity to investors is one of the central functions of a national securities exchange. The LP2 delay mechanism would provide a market structure that has the potential to increase market quality and provide a fair and orderly market for all market participants that choose to trade on EDGA. jbell on DSK3GLQ082PROD with NOTICES I. Background The increasing speed and efficiency of trading in the U.S. equities markets over the last several years has resulted in significant gains to market participants and investors. These gains in speed, however, are not entirely without cost as they have facilitated certain latency arbitrage techniques that act as a tax on liquidity provision. In adopting Regulation NMS, the Commission emphasized the need to promote greater depth and liquidity in NMS Stocks.4 While the Commission sought to achieve this result largely through the adoption of the Rule 611, i.e., the ‘‘Order Protection Rule,’’ changes in the market since the adoption of Regulation NMS also warrant innovation by the exchanges that are tasked with promoting liquidity in today’s high speed market. The Exchange is therefore proposing to introduce a delay mechanism that is specifically designed to encourage liquidity provision by reducing the ability for firms to engage in latency arbitrage, in general, and cross-asset latency arbitrage, in particular.5 Today, liquidity providers are frequently unable to adjust their displayed quotes based on changes in market information, including cross4 The Commission has stated that ‘‘increased displayed liquidity [is] a principal goal of the Order Protection Rule.’’ See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37514 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). The Commission has also stated that ‘‘[t]o the extent that competition among orders is lessened, the quality of price discovery for all sizes of orders can be compromised. Impaired price discovery could cause market prices to deviate from fundamental values, reduce market depth and liquidity, and create excessive short-term volatility that is harmful to long-term investors and listed companies. More broadly, when market prices do not reflect fundamental values, resources will be misallocated within the economy and economic efficiency—as well as market efficiency—will be impaired.’’ Id. at 37499. 5 The Chicago Stock Exchange, Inc. (‘‘CHX’’) also recently received approval for a delay mechanism that was designed to encourage liquidity provision. See Securities Exchange Act Release No. 81913 (October 19, 2017), 82 FR 49433 (October 25, 2017) (SR–CHX–2017–04) (Approval Order). CHX withdrew that filing after the Commission determined to review the Staff’s approval by delegated authority, and as a result the original Approval Order was set aside. See Securities Exchange Act Release No. 84337 (October 2, 2018), 83 FR 50720 (October 9, 2018) (SR–CHX–2017–04) (Order Setting Aside). VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 asset class signals, before the fastest trading firms can trade against their stale quotes. Market makers and other liquidity providers use sophisticated pricing algorithms to determine how to price securities in the often hundreds or thousands of equity securities that they quote. A single tick of an index futures contract thus often requires firms to adjust their quotes in a number of related equity securities at once.6 The potential for trading at stale prices increases risk for firms that wish to provide liquidity to the market, and harms market quality by causing liquidity providers to enter quotes that are wider or for a smaller size than they may otherwise be willing to trade. At the same time, existing delay mechanisms do not provide any protection to market makers and other participants that primarily post displayed, two-sided markets, despite the critical function that these participants play in the equities markets. The Exchange believes that reducing cross-market latency arbitrage would enable liquidity providers to increase market quality by maintaining tighter spreads, longer inside quote durations, and posting larger size. Furthermore, the expected improvements in market quality have the potential to benefit all market participants, and contribute to the maintenance of a fair and orderly market. II. Delay Mechanism The proposed rule change would introduce the LP2 delay mechanism, which seeks to promote liquidity provision by reducing the opportunity for cross-asset latency arbitrage. Other equities exchanges, i.e., IEX and NYSE American, have recently introduced delay mechanisms that slow down certain incoming and outbound messages. These ‘‘speed bumps’’ are a market reaction to the increased prevalence of opportunistic traders that can react to market signals before slower market participants can update their quoted prices. Both IEX and NYSE American have market structures that are designed to benefit resting nondisplayed orders that are pegged to the national best bid or offer (‘‘NBBO’’) as updates to the prices of these orders do not go through their respective delay mechanisms.7 As a result, market 6 For example, a tick in S&P 500 Index futures on the Chicago Mercantile Exchange (‘‘CME’’) may result in liquidity providers updating quotes in the SPDR S&P 500 ETF and each of the five hundred underlying securities in the S&P 500 Index. 7 See IEX Exchange Approval, supra note 3, 81 FR at 41157; MKT Approval Order, supra note 3, 82 FR at 23384. PO 00000 Frm 00202 Fmt 4703 Sfmt 4703 30283 participants that enter pegged orders can avoid unwanted executions at stale prices because their orders are pegged to new market prices before opportunistic traders are able to ‘‘pick off’’ these orders at the stale price. While delay mechanisms like those currently available on these exchanges are beneficial to a particular subset of market participants, the Exchange believes that there is room for additional improvement. Specifically, the Exchange believes that there is an opportunity to use a similar delay mechanism to promote market quality by excluding all orders that add liquidity from the speed bump. The paragraphs that follow describe the proposed delay mechanism, and how it would be applied to different incoming/ outbound messages processed by the System: 8 Liquidity Removing Orders. The proposed LP2 delay mechanism would subject all incoming executable orders that would remove liquidity from the EDGA Book on entry to a short intentional access delay.9 As mentioned above, this delay is designed to provide an opportunity for liquidity providers to process cross-asset class signals, and update their published quotations accordingly, before trading at stale prices with orders submitted by opportunistic trading firms that benefit from a latency advantage. So as to avoid unnecessarily queueing orders that are not executable when entered, order instructions that could prevent an incoming order from being executed and removing liquidity on entry (e.g., Minimum Quantity and Post Only) would be considered prior to subjecting the order to the delay mechanism. The one exception to this would be the EdgeRisk Self Trade Protection (‘‘ERSTP’’) Modifiers, which are an optional risk protection that prevents the execution of orders originating from the same market participant identifier (‘‘MPID’’), Exchange Member identifier 8 The term ‘‘System’’ refers to the electronic communications and trading facility designated by the Board through which securities orders of Users are consolidated for ranking, execution and, when applicable, routing away. See EDGA Rule 1.5(cc). 9 The term ‘‘EDGA Book’’ refers to the System’s electronic file of orders. See EDGA Rule 1.5(d). An order that, by its terms, is not eligible to be executed on entry would be evaluated for delay when such order is ultimately entered into the EDGA Book for processing. For example, orders entered with a Stop Price or Stop Limit Price are not executable until elected, and would therefore only be eligible for delay after the order is converted to a Market Order or Limit Order, as applicable. Similarly, orders entered with a time-inforce instruction of Regular Hours Only would only be evaluated for delay when entered into the EDGA Book after the opening or re-opening process pursuant to EDGA Rule 11.7. E:\FR\FM\26JNN1.SGM 26JNN1 30284 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES or ERSTP Group identifier. ERSTP Modifiers would be applied after the order is delayed, and would not be considered in evaluating whether an incoming order is deemed executable and therefore subject to the delay mechanism. Based on the geographical latencies currently experienced between the Chicago Mercantile Exchange (‘‘CME’’) data center in Aurora, IL and the Exchange’s primary data center in Secaucus, NJ, the Exchange proposes that the intentional access delay applied to incoming executable orders be four milliseconds. The Exchange believes that this delay would negate the advantages that opportunistic trading firms that use the latest microwave connections have over liquidity providers using traditional fiber connections.10 Once a liquidity taking order enters the LP2 delay mechanism it would wait the full four milliseconds before trading with resting orders on the order book but would be released early if resting orders are cancelled or modified such that the incoming order is no longer executable against such orders.11 Liquidity Providing Orders. In order to encourage liquidity provision from the widest range of possible market participants, the proposed delay would not apply to any non-executable orders that would add liquidity. These orders would instead be immediately ranked on the EDGA Book without executing against resting liquidity. Furthermore, market participants would be able to interact with their resting orders (e.g., by cancelling the order or modifying the order’s size) without being subject to the delay mechanism. As a result, the LP2 delay mechanism would benefit traditional market makers that post price forming displayed liquidity, as well as a range of other market participants, including investors that use hidden pegged orders similar to those that account for a significant portion of volume traded on IEX and NYSE American. 10 Quincy Data advertises a latency of 4.005 milliseconds for its high speed microwave connection, or about half the 7.75 milliseconds of latency experienced over a fiber connection provided by ICE Global Network. See https:// www.quincy-data.com/product-page/#latencies; https://www.theice.com/publicdocs/ICE_Data_ Services_Topology.pdf. 11 After the delay period, incoming orders, cancel, and cancel/replace messages that have been delayed by the delay mechanism would be processed after the System has processed, if applicable, all messages in the security received by the Exchange during such delay period. As a result, a message may be delayed for longer than four milliseconds depending on the volume of messages being processed by the Exchange. VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 Cancel and Cancel/Replace Messages. The LP2 delay mechanism is designed to protect orders that add liquidity to the EDGA Book by giving Users the opportunity to adjust their quotes based on market signals before trading at a stale price. As such, orders resting on the EDGA Book would be eligible for immediate cancellation without being subjected to a delay. Cancel messages for liquidity taking orders that are being processed by the delay mechanism would instead be queued and applied to the remaining quantity of the order after the order has exited the delay mechanism and executed against any resting orders on the EDGA Book. If a User submits a cancel/replace message,12 the cancel portion of that instruction would be applied to the order based on whether the order is resting on the EDGA Book or is being processed by the delay mechanism. Specifically, the cancel portion would be applied immediately in the case of a resting order, or queued in the case of an order that has not exited the delay mechanism. The replace portion would subsequently be handled subject to the same logic as the entry of a new order— i.e., re-evaluated and delayed only if the amended order is executable against the EDGA Book. If a User enters multiple cancel or cancel/replace messages for a liquidity taking order during the four millisecond delay period, the first such cancel or cancel/replace message entered would be queued and all subsequent messages would be ignored. Routable Orders. Since the LP2 delay mechanism is designed to protect resting orders on EDGA, incoming executable orders are processed by the delay mechanism when the order would remove liquidity from the EDGA Book. As such, orders that are routed on entry would not be eligible for delay until entered for execution with resting orders on the EDGA Book. The unrouted balance of a routable order that is entered into the EDGA Book would be treated as a new incoming order and evaluated as such by the delay mechanism. Market Data. The LP2 delay mechanism would not apply to inbound or outbound market data. As such, the System would use current, un-delayed data, for all purposes including regulatory compliance (e.g., tradethrough) and pricing of orders pegged to the NBBO. In addition, quotation and trade data would be disseminated to the applicable securities information processor (‘‘SIP’’) and direct market data feeds immediately without being processed by the delay mechanism, 12 See PO 00000 EDGA Rule 11.10(e). Frm 00203 Fmt 4703 Sfmt 4703 thereby ensuring that the most up to date information about orders and executions on the EDGA Book is shared with investors and other market participants. As described in the section below on protected market status, the Exchange is proposing to disseminate quotation information to the SIP as a ‘‘manual’’ rather than ‘‘automated’’ quotation under Regulation NMS. Manual quotations are not protected pursuant to the Order Protection Rule but are included in the NBBO disseminated by the SIP to ensure that the best available prices for a security are made available to broker-dealers and investors.13 Examples. The examples that follow illustrate the operation of the LP2 delay mechanism: Example 1: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.00 —Order 2: Sell 100 shares @$10.00, t = 12:00:00:000 —The incoming sell order, i.e., Order 2, is executable against the EDGA Book and therefore delayed for 4 milliseconds. —Order 2 would execute against Order 1, selling 100 shares at $10.00, after it exits the delay mechanism at 12:00:00:004. Example 2: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.02, Non-Displayed —Order 2: Sell 100 shares @$10.00, t = 12:00:00:000 —The incoming sell order, i.e., Order 2, is executable against the EDGA Book and therefore delayed for 4 milliseconds. —Order 2 would execute against Order 1, selling 100 shares at $10.02, after it exits the delay mechanism at 12:00:00:004.14 Example 3: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.00 —Order 2: Sell 100 shares @$10.04, t = 12:00:00:000 —The incoming sell order, i.e., Order 2, is not executable against the EDGA Book and therefore posts to the EDGA Book immediately at 12:00:00:000. Example 4: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.00 —Order 2: Sell 100 shares @$10.00, Post Only, t = 12:00:00:000 13 See Regulation NMS Adopting Release, 70 FR at 37537. 14 The System delays all liquidity taking orders, regardless of whether such orders would trade with displayed or non-displayed interest on the EDGA Book. E:\FR\FM\26JNN1.SGM 26JNN1 jbell on DSK3GLQ082PROD with NOTICES Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices —The incoming sell order, i.e., Order 2, is not executable against the EDGA Book because of the Post Only instruction and is cancelled immediately at 12:00:00:000.15 Example 5: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.01 —Order 2: Sell 100 shares @$10.01, t = 12:00:00:000 —Cancel Order 1: t = 12:00:00:001 —The incoming sell order, i.e., Order 2, is executable against the EDGA Book and therefore delayed for 4 milliseconds. —One millisecond after Order 2 enters the delay mechanism, a cancellation message is entered to cancel Order 1. Cancellation messages for resting orders are not delayed so as to permit sufficient time for liquidity providers to update stale quotes, and therefore Order 1 is immediately cancelled at 12:00:00:001. —As Order 2 is no longer executable against any resting orders on the EDGA Book it would be released early from the delay mechanism, and posted to the EDGA Book immediately after the cancellation message for Order 1 is processed. Example 6: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.00 —Order 2: Sell 200 shares @$10.00, t = 12:00:00:000 —Cancel Order 2: t = 12:00:00:001 —The incoming sell order, i.e., Order 2, is executable against the EDGA Book and therefore delayed for 4 milliseconds. —While Order 2 is being processed by the delay mechanism, the entering firm submits a cancellation message. This message is not processed until the order exits the speed bump and trades against resting orders. —Order 2 would execute against Order 1, selling 100 shares at $10.00, after it exits the delay mechanism at 12:00:00:004, at which point the cancellation message would be processed and the remaining quantity of Order 2 would be cancelled. Example 7: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares @$10.00 —Order 2: Sell 100 shares @$10.04 —Cancel/Replace Order 1: Buy 100 shares @$10.04, t = 12:00:00:000 —The cancel portion of the cancel/ replace message is immediately 15 This example is based on amended Post Only behavior described later in this proposal that would prevent a Post Only Order from removing liquidity, including in circumstances where doing so may be economically beneficial for the entering party. VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 applied to Order 1 at 12:00:00:000 but since the modified price would be executable against Order 2, which is resting on EDGA Book, Order 1 would be delayed for 4 milliseconds. —Order 1 would then execute against Order 2, buying 100 shares at $10.04, after it exits the delay mechanism at 12:00:00:004. Example 8: —Protected NBBO: $10.00 × $10.05 —Order 1: Buy 100 shares, Midpoint Peg —Order 2: Sell 100 shares @$10.02, t = 12:00:00:000 —Protected NBBO: $9.98 × 10.02, t = 12:00:00:001 —The incoming sell order, i.e., Order 2, is executable against the Midpoint Peg Order on the EDGA Book, which is ranked at $10.025, and therefore delayed for 4 milliseconds. —One millisecond after Order 2 enters the delay mechanism, the System receives an NBBO update, which is processed immediately to allow resting orders to be re-priced before trading at stale prices. Order 1 is now ranked at $10.00—i.e., the new midpoint. —As Order 2 is no longer executable against any resting orders on the EDGA Book it would be released early from the delay mechanism, and posted to the book immediately after the re-pricing for Order 1 is processed. III. Protected Market Status Rule 611 of Regulation NMS provides intermarket protection against tradethroughs for automated quotations of NMS stocks. Under Regulation NMS, an ‘‘automated’’ quotation is one that, among other things, can be executed ‘‘immediately and automatically’’ against an incoming immediate-orcancel order.16 The Commission has interpreted the word ‘‘immediate’’ in this context as not precluding a de minimis intentional delay—i.e., a delay so short so as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange’s quotations.17 Although the Commission refused to enumerate a numeric latency threshold for a delay that is sufficiently de minimis for the purposes of Rule 611,18 the Staff of the Division of Trading and Markets has issued guidance stating the Staff’s belief that delays of less than one millisecond 16 See Rule 600(a)(3). Securities Exchange Act Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2017) (File No. S7–03–16) (‘‘Commission Interpretation’’). 18 Id. 17 See PO 00000 Frm 00204 Fmt 4703 Sfmt 4703 30285 would qualify as de minimis.19 Based on the Staff’s concern about granting protected market status to an exchange with an intentional delay exceeding this threshold, the Exchange has determined to begin disseminating a manual, unprotected, quotation in conjunction with the proposed implementation of its delay mechanism.20 In addition to no longer being eligible for protected market status, marking the EDGA quotation manual instead of automated, would also mean that other Regulation NMS rules on locked and crossed markets would apply differently to EDGA’s disseminated quotations. Specifically, Rule 610(d)(1)(ii) would require that EDGA avoid locking or crossing any quotation in an NMS stock disseminated pursuant to an effective national market system (‘‘NMS’’) plan instead of only protected quotations as required pursuant to Rule 610(d)(1)(i). The Exchange believes that this restriction is unintended and unwarranted when an otherwise automated market is disseminating a manual quotation due solely to its introduction of a short intentional access delay on incoming orders. Concurrent with the submission of this proposed rule change the Exchange is therefore submitting a request for an exemption pursuant to Rule 610(e) of Regulation NMS. The requested exemption would permit the Exchange to continue to lock or cross potentially stale manual quotations disseminated by the New York Stock Exchange LLC (‘‘NYSE’’) pursuant to an effective NMS plan.21 Broadly, the exemption would permit EDGA to continue to operate in the manner that it does today with respect to locked and crossed markets, notwithstanding the proposed dissemination of a manual, unprotected, quotation. In light of the requested exemption, and the fact that EDGA would begin disseminating a manual quotation, the Exchange proposes to amend Rule 11.10(f), which deals with locking or crossing quotations in NMS Stocks. First, Rule 11.10(f)(1) describes the current prohibition on dissemination of locking or crossing quotations. Specifically, the rule discusses the dissemination and display of quotations 19 See Staff Guidance on Automated Quotations under Regulation NMS (June 17, 2016), available at https://www.sec.gov/divisions/marketreg/ automated-quotations-under-regulation-nms.htm. 20 Rule 600(a)(37) defines a ‘‘manual quotation’’ as any quotation other than an automated quotation. 21 NYSE operates a trading floor that may disseminate manual quotations, and is the only equities exchange that does so today. The Exchange expects to file additional exemption requests in the future if other equities exchanges begin disseminating manual quotations. E:\FR\FM\26JNN1.SGM 26JNN1 30286 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES that lock or cross a Protected Quotation, or manual quotations that lock or cross quotations previously disseminated pursuant to an NMS plan during Regular Trading Hours. The Exchange proposes to instead reference the dissemination and display of ‘‘Locking Quotations or Crossing Quotations’’ as defined in EDGA rules.22 This change would increase the clarity of the rule given the Exchange’s exemption request, and the fact that all quotations disseminated by the Exchange would be manual quotations.23 Second, EDGA Rule 11.10(f)(2) explains that, if a User displays a manual quotation that locks or crosses a quotation previously disseminated pursuant to an effective national market system plan, such User shall promptly either withdraw the manual quotation or route an ISO to execute against the full displayed size of the locked or crossed quotation. As EDGA Rule 11.10(f)(1) would already prohibit displaying a Locking Quotation or Crossing Quotation, subject to the exception provided in EDGA Rule 11.10(f)(iv), as amended below, the Exchange proposes to eliminate the redundant language contained in this paragraph. Third, the Exchange proposes to eliminate EDGA Rule 11.10(f)(3)(iii), which applies to automated quotations, and amend EDGA Rule 11.10(f)(3)(iv) to remove specific references to manual quotations, and specify that a User displaying a Locking Quotation or Crossing Quotation would only qualify for this exception if the User simultaneously routed an ISO to execute against the full displayed size of the Locking Quotation or Crossing Quotation, instead of the current language which references only clearing locked or crossed manual quotations. Finally, the Exchange proposes to introduce another exception under 22 A ‘‘Locking Quotation’’ is the display of a bid for an NMS stock at a price that equals the price of an offer for such NMS stock previously disseminated pursuant to an effective national market system plan, or the display of an offer for an NMS stock at a price that equals the price of a bid for such NMS stock previously disseminated pursuant to an effective national market system plan in violation of Rule 610(d) of Regulation NMS. See EDGA Rule 11.6(g). A ‘‘Crossing Quotation’’ is the display of a bid (offer) for an NMS stock at a price that is higher (lower) than the price of an offer (bid) for such NMS stock previously disseminated pursuant to an effective national market system plan in violation of Rule 610(d) of Regulation NMS. See EDGA Rule 11.6(c). 23 For example, as described in the paragraphs that follow, a quotation would not be considered a Locking Quotation or Crossing Quotation if the quotation being locked or crossed is a manual quotation of NYSE that is permitted to be locked or crossed pursuant to the Exchange’s requested exemption pursuant to Rule 610(e) of Regulation NMS. VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 proposed EDGA Rule 11.10(f)(3)(v) that applies when the quotation displayed by the User is not a Locking Quotation or Crossing Quotation in violation of Rule 610(d) of Regulation NMS because the quotation being locked or crossed is a manual quotation that may be locked or crossed under an exemption granted pursuant to Rule 610(e) of Regulation NMS. Locking Quotations and Crossing Quotations are defined in Rule 11.6(c), (g), and reference the display of bids and offers that lock or cross quotations disseminated pursuant to an NMS Plan ‘‘in violation of Rule 610(d).’’ The proposed language being introduced as EDGA Rule 11.10(f)(3)(v) is meant to codify the requested exemption by making clear that a quotation would not be considered a Locking Quotation or Crossing Quotation if the quotation being locked or crossed is a manual quotation that is allowed to be locked or crossed pursuant to the Exchange’s exemption request. In addition, the Order Protection Rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs on that trading center of protected quotations in NMS stocks, unless an exception applies. Rule 611(b)(4) provides such an exception that applies when the markets are crossed but this exception applies solely to situations where a Protected Bid is crossed with a Protected Offer. It does not apply to situations where a Protected Bid or Protected Offer is crossed with the published bid or offer of a manual market. As a result, if an automated quotation were to cross EDGA’s disseminated manual quotation without also crossing another market’s protected quotation, the Exchange would not be permitted to execute incoming orders against its displayed quotation even though that quotation establishes the best price available in the market. The Exchange believes that this could be a disincentive to both providing and accessing liquidity on EDGA as the published quotation may not be executable in such circumstances solely due to the Exchange disseminating a quotation that has been marked ‘‘manual.’’ Furthermore, the quotations that would be impacted are the ones that actually set the best available prices in a security—i.e., the type of liquidity that the proposed delay mechanism is actively seeking to encourage. Based on the Exchange’s analysis, crossed market scenarios are infrequent in today’s highly efficient market, and tend to be short lived, with 99% of crossed markets being resolved within PO 00000 Frm 00205 Fmt 4703 Sfmt 4703 25 milliseconds or less.24 As a result, the Exchange is proposing to implement delayed cancellation behavior to allow an aggressively priced order to remain posted at its limit price for as long as it is executable pursuant to Rule 611(b)(8)—i.e., the ‘‘Flickering Quote Exception.’’ As proposed, a bid (offer) on the EDGA Book would be eligible to remain posted to the EDGA Book for one second after such bid (offer) is crossed by a Protected Offer (Protected Bid). Such bid (offer) would be executable during this one second period pursuant to Rule 611(b)(8) of Regulation NMS, notwithstanding the fact that it is higher (lower) than a Protected Offer (Protected Bid). In turn, the bid (offer) on the EDGA Book would be cancelled if it continues to be higher (lower) than a Protected Offer (Protected Bid) after this one second period. The following example illustrates the proposed behavior. Example 9: —Market is $10.00 × $10.03 (EDGA, BZX, Nasdaq). —Liquidity provider on EDGA tightens quote to $10.02 × $10.03 improving the bid by two cents. —Nasdaq subsequently updates its offer price to $10.01. —Incoming sell order on EDGA seeks to trade with the EDGA bid at $10.02. —The EDGA bid at $10.02 would remain posted at this price for one second, during which time it would be executable against incoming sell orders seeking an execution at the best posted bid price in the market. As is the case today, an incoming sell order would be eligible trade with the EDGA bid at $10.02, securing a favorable execution for the investor seeking liquidity. In the unlikely event that the EDGA bid is still crossed with Nasdaq’s offer after one second, it would be cancelled. Since the proposed flickering quote delayed cancellation behavior would allow bids and offers on EDGA to remain posted and executable for up to one second if crossed by a Protected Bid or Protected Offer of another market, the Exchange would also amend Rule 11.10(a)(2) to ensure that the crossed market collars defined in that rule continue to apply to such aggressively priced bids and offers. Specifically, Rule 11.10(a)(2) generally provides that if a Protected Bid is crossing a Protected Offer, the Exchange will not execute any 24 Based on crossed markets occurring in SPY, IWM, AAPL, GE, C, GS, and XOM on October 5, 2018. Crossed markets present an effective arbitrage opportunity because in a crossed market the spread is inverted and it is therefore possible to purchase a security at a price below the prevailing price to sell. E:\FR\FM\26JNN1.SGM 26JNN1 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices portion of a bid or offer at a price that is more than the greater of five cents or 0.5 percent through the lowest Protected Offer or highest Protected Bid, as applicable. This crossed market collar is designed to constrain the price of executions when there is a crossed market, and the Exchange believes that this protection should continue to be available when EDGA begins disseminating a manual quotation. As a result, the Exchange proposes to amend Rule 11.10(a)(2) to provide that protection is available when a bid (offer) on the EDGA Book is crossed by a Protected Offer (Bid) pursuant to proposed EDGA Rule 11.10(a)(6). As is the case today, a User would be able to instruct the Exchange to cancel an incoming order in such a scenario. The Exchange would therefore also amend the portion of the rule dealing with such an instruction to make clear that it would continue to apply when a bid (offer) on the EDGA Book is crossed by a Protected Offer (Bid). jbell on DSK3GLQ082PROD with NOTICES IV. Order Types The Exchange is also proposing a number of changes to the order types currently offered on EDGA. The proposed changes are designed to ensure that order types offered by the Exchange are consistent with the goals and operation of the LP2 delay mechanism, and would therefore encourage continued participation by members and investors on EDGA. In many cases, the Exchange has decided to eliminate, or adjust the operation of, certain rarely used order types and instructions that could increase System complexity if offered alongside the proposed delay mechanism. In addition, the Exchange has proposed changes to certain order types that the Exchange believes would be desirable for market participants after the implementation of the delay mechanism. The proposed amendments are detailed below: 25 Discretionary Range. Discretionary Range is an optional instruction that a User may attach to an order to buy (sell) a stated amount of a security at a specified, displayed or non-displayed ranked price with discretion to execute up (down) to another specified, nondisplayed price.26 Determining whether an incoming order with this instruction 25 The changes discussed in this section are reflected in EDGA Rules 11.6 and 11.8, which describe the order types and instructions being eliminated or amended, and where those order types or instructions are referenced in other parts of the rulebook, including EDGA Rule 11.7, Opening Process, EDGA Rule 11.9, Priority of Orders, and EDGA Rule 11.21, Compliance with Regulation NMS Plan to Implement a Tick Size Pilot Program. 26 See EDGA Rule 11.6(d). VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 is executable on entry, and hence subject to the delay mechanism, would therefore require the System to take into account both the order’s ranked limit price and its discretionary price. The Exchange believes that this may add unnecessary complexity to the System, and is therefore proposing to eliminate the Discretionary Range instruction. In addition, the Exchange offers MidPoint Discretionary Orders (‘‘MDO’’) that utilize the Discretionary Range instruction.27 Specifically, a Midpoint Discretionary Order is a limit order to buy that is pegged to the NBB, with discretion to execute at prices up to and including the midpoint of the NBBO, or a limit order to sell that is pegged to the NBO, with discretion to execute at prices down to and including the midpoint of the NBBO. The Exchange also proposes to eliminate MidPoint Discretionary Orders. Pegged Orders. Pegged is an instruction to automatically re-price an order in response to changes in the NBBO. A Pegged Order can be entered as either a Market Peg or Primary Peg.28 A Market Peg is an order entered with an instruction to peg to the NBB, for a sell order, or the NBO, for a buy order.29 A Primary Peg is as an order entered with an instruction to peg to the NBB, for a buy order, or the NBO, for a sell order.30 The Exchange proposes to eliminate both Market Pegs and Primary Pegs. MidPoint Pegged Orders (discussed separately) would continue to be offered with minor changes to a few rarely used instructions. The LP2 delay mechanism is designed to delay inbound executable orders to allow liquidity providers sufficient time to adjust their quotes. Orders subject to the delay mechanism would be delayed once on entry, and would not be subject to any additional delays thereafter unless the entering firm were to change the price of the order such that a resting order becomes executable. Pegged Orders automatically re-price based on changes to the NBBO, and the Exchange believes that it is preferable not to subject these orders to another delay every time that the order is re-priced to an executable price, as doing so may hinder the ability of such orders to obtain an execution. At the same time, the Exchange believes that automatic repricing, without any delay, could enable firms using these order types to obtain an execution against a stale quote before the liquidity provider has been provided sufficient time to update their quote, 27 See EDGA Rule 11.8(e). EDGA Rule 11.8(b)(9). 29 See EDGA Rule 11.6(j)(1). 30 See EDGA Rule 11.6(j)(2). 28 See PO 00000 Frm 00206 Fmt 4703 Sfmt 4703 30287 thereby frustrating the goals of the delay mechanism. The Exchange has therefore determined to eliminate Market Pegs and Primary Pegs, which are lightly used, while retaining MidPoint Pegged Orders that the Exchange believes would continue to be useful to market participants seeking to trade at the midpoint. Supplemental Peg Orders. A Supplemental Peg Order is a nondisplayed Limit Order that is eligible for execution at the NBB for a buy order and NBO for a sell order against an order that is in the process of being routed to an away Trading Center if such order that is in the process of being routed away is equal to or less than the aggregate size of the Supplemental Peg Order interest available at that price.31 Although Supplemental Peg Orders differ from the Pegged Orders described above in that they do not remove liquidity,32 the Exchange proposes to eliminate it in conjunction with the proposed changes described above for Pegged Orders. MidPoint Peg Orders. A MidPoint 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. Although a number of order types that contain re-pricing logic would be eliminated with the introduction of the LP2 delay mechanism, the Exchange would continue to offer MidPoint Peg Orders on EDGA as these orders are valuable to a range of market participants seeking an execution at the midpoint of the NBBO.33 MidPoint Peg Orders are the most widely used pegging instruction by a wide margin today. Furthermore, the Exchange believes that MidPoint Peg Orders may be even more useful once the LP2 delay mechanism is implemented as they would be protected from being executed at stale prices when the midpoint is about to change. Notwithstanding the general usefulness of MidPoint Peg Orders, however, the Exchange proposes to eliminate two optional features that account for a small amount of usage today. First, in addition to regular midpoint logic that automatically adjusts the price of a MidPoint Peg Order to the midpoint, the Exchange 31 See EDGA Rule 11.8(g). 32 Id. 33 As discussed earlier in this proposed rule change, the NBBO calculated by the Exchange would include EDGA quotes. As a result, MidPoint Peg Orders would be pegged to the midpoint of the NBBO, including EDGA’s disseminated quotation. E:\FR\FM\26JNN1.SGM 26JNN1 30288 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices currently offers alternative logic that pegs the order to the less aggressive midpoint or one minimum price variation inside the same side of the NBBO.34 The Exchange proposes to amend the operation of this order type such that MidPoint Peg Orders entered on EDGA would not be permitted to alternatively peg to one minimum price variation inside the same side of the NBBO. Second, by default the MidPoint Peg Orders do not execute when the NBBO is locked or crossed, but Users may alternatively specify that they would prefer a MidPoint Peg Order to be executed in a locked market. The Exchange proposes to eliminate the optional feature that would allow a MidPoint Peg Order to be executed in a locked market. Multiple Price Adjust and Multiple Display-Price Sliding. The Exchange offers two instructions that are designed to re-price orders in a manner that complies with Rule 610(d) of Regulation NMS—i.e., locking or crossing quotations. Price Adjust is an order instruction requiring that where an order would be a locking quotation or crossing quotation of an external market if displayed by the System on the EDGA Book at the time of entry, the order will be displayed and ranked at a price that is one minimum price variation lower (higher) than the locking price for orders to buy (sell).35 Similarly, Display-Price Sliding is an order instruction requiring that where an order would be a locking quotation or crossing quotation of an external market if displayed by the System on the EDGA Book at the time of entry, will be ranked at the locking price in the EDGA Book and displayed by the System at one minimum price variation lower (higher) than the locking price for orders to buy (sell).36 Both Price Adjust and Display-Price Sliding instructions allow the User to instruct the Exchange to adjust the order to a more aggressive price either once, or multiple times, in response to changes to the prevailing NBBO.37 The Exchange now proposes to modify these instructions to only permit their default operation, which is to adjust the order on entry and once following a change to the prevailing NBBO.38 34 See EDGA Rule 11.9(c)(9). EDGA Rule 11.6(l)(1)(A). 36 See EDGA Rule 11.6(l)(1)(B). A User may elect to have the System only apply the Display-Price Sliding instruction to the extent a display-eligible order at the time of entry would be a Locking Quotation. For Users that select this portion of the Display-Price Sliding instruction, any order will be cancelled if, upon entry, such order would be a Crossing Quotation of an external market. Id. 37 See EDGA Rule 11.6(l)(1)(A)(i),(B)(iii). 38 EDGA Rule 11.6(l)(1)(B)(2) currently provides that in the event the NBBO changes such that an jbell on DSK3GLQ082PROD with NOTICES 35 See VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 Post Only. Post Only is an instruction that may be attached to an order that is to be ranked and executed on the Exchange or cancelled, as appropriate, without routing away to another trading center except that the order will not remove liquidity from the EDGA Book, other than in instances where economically beneficial to the firm entering the order with a Post Only instruction.39 Specifically, an order with a Post Only instruction and a Display-Price Sliding or Price Adjust instruction will remove contra-side liquidity from the EDGA Book if the order is an order to buy or sell a security priced below $1.00, or if the value of such execution when removing liquidity equals or exceeds the value of such execution if the order instead posted to the EDGA Book and subsequently provided liquidity, including the applicable fees charged or rebates provided.40 With the introduction of the LP2 delay mechanism, the Exchange believes that a more straightforward variant of the Post Only instruction that would never remove liquidity, and would therefore never be subject to the delay mechanism, would be valuable to liquidity providers on EDGA. The Exchange therefore proposes to amend the Post Only instruction such that a Post Only order would never be eligible to remove liquidity.41 Furthermore, to order subject to the Display-Price Sliding instruction would not be a Locking Quotation or Crossing Quotation, the order will receive a new timestamp, and will be displayed at the ‘‘most aggressive permissible price.’’ While the most aggressive permissible price would be up to the original limit price of the order in the case of Multiple Display-Price Sliding, orders subject to Single Display-Price Sliding are limited to being displayed at the original locking price. As such, the Exchange proposes to amend EDGA Rule 11.6(l)(1)(B)(2) to reference the original locking price. Similarly, EDGA Rule 11.6(l)(1)(B)(4) currently provides that in the event the NBBO changes such that an order with a Post Only instruction subject to Display-Price Sliding instruction would be ranked at a price at which it could remove displayed liquidity from the EDGA Book, the order will be executed as set forth in Rule 11.6(n)(4) or cancelled. Orders subject to Single Display-Price Sliding, as opposed to Multiple Display-Price Sliding, are not re-ranked when displayed orders at the original locking price are on the opposite side of the EDGA Book. This scenario is thus impossible for orders subject to Single Display-Price Sliding and the Exchange proposes to delete this text from the rule. 39 See EDGA Rule 11.6(n)(4). 40 Id. To determine at the time of a potential execution whether the value of such execution when removing liquidity equals or exceeds the value of such execution if the order instead posted to the EDGA Book and subsequently provided liquidity, the Exchange will use the highest possible rebate paid and highest possible fee charged for such executions on the Exchange. 41 The Exchange also proposes conforming changes to other rules that reference Post Only functionality that would cause an incoming Post PO 00000 Frm 00207 Fmt 4703 Sfmt 4703 encourage liquidity providers to use this instruction to provide displayed liquidity, the Post Only instruction would be limited to displayed orders, or MidPoint Peg Orders, that, while nondisplayed would provide price improvement all the way up to the midpoint of the NBBO. Non-Displayed Swap and Super Aggressive. The Exchange offers two order instructions that contain a liquidity swap component—i.e., NonDisplayed Swap (‘‘NDS’’) and Super Aggressive. When an order entered with an NDS or Super Aggressive instruction is locked by an incoming order with a Post Only instruction that would not remove liquidity based on the economic impact of removing liquidity on entry compared to resting on the order book and subsequently providing liquidity, the order with the NDS or Super Aggressive instruction is converted to an executable order and will remove liquidity against such incoming order.42 An order entered with an NDS instruction is not eligible for routing pursuant to EDGA Rule 11.11,43 whereas an order entered with a Super Aggressive instruction would be routed if an away trading center locks or crosses the limit price of the order resting on the EDGA Book.44 NDS and Super Aggressive are used by market participants that are very aggressively seeking liquidity and are therefore willing to liquidity swap with an incoming Post Only order, generating an execution when a trade would otherwise not occur by changing the economics for the incoming order. As mentioned in the paragraphs above, the Exchange is proposing to amend its handling of Post Only orders such that an order entered with a Post Only instruction would not trade on entry, regardless of the economics associated with such an execution. As such, the Exchange proposes to eliminate the NDS and Super Aggressive instructions. The Exchange would continue to offer the Aggressive instruction, which does not contain a liquidity swap component but is otherwise identical to the Super Aggressive instruction in that it directs the System to route the order if an away trading center locks or crosses the limit Only Order to be executed on entry. See e.g., EDGA Rule 11.6(l)(A)(4), (B)(4) and EDGA Rule 11.8(c)(5). 42 See EDGA Rule 11.6(n)(2), (n)(7). If an order that does not contain a Super Aggressive instruction maintains higher priority than one or more Super Aggressive eligible orders, the Super Aggressive eligible order(s) with lower priority will not be converted and the incoming order with a Post Only instruction will be posted or cancelled in accordance with Rule 11.6(n)(4). This does not apply to orders entered with an NDS instruction. 43 See EDGA Rule 11.6(n)(7). 44 See EDGA Rule 11.6(n)(2). E:\FR\FM\26JNN1.SGM 26JNN1 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES price of the order resting on the EDGA Book.45 Market Maker Peg Orders. A Market Maker Peg Order is a limit order that is automatically priced by the System at the Designated Percentage away from the then current NBB (in the case of an order to buy) or NBO (in the case of an order to sell), or if there is no NBB or NBO at such time, at the Designated Percentage away from the last reported sale from the responsible single plan processor. This automated pricing is done to assist market makers in maintaining compliance with their continuous quoting obligations, and happens both when the order becomes active in the System, i.e., upon entry or at the beginning of regular trading hours, and at any time the price of the order reaches the Defined Limit or moves a specified number of percentage points away from the Designated Percentage toward the then current NBB or NBO, as applicable. Since this order type is designed to maintain compliance with a market maker’s quoting obligations by providing liquidity at prices that are automatically adjusted to comply with these quoting obligations, the Exchange proposes to modify the Market Maker Peg Order such that all such orders would be entered into the System with a Post Only instruction. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the requirements of Section 6(b) of the Act,46 in general, and Section 6(b)(5) of the Act,47 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. Specifically, the Exchange believes that the proposed LP2 delay mechanism would reduce the opportunity for cross-asset latency arbitrage and thereby protect liquidity providers and encourage better market quality on EDGA. Two registered national securities exchanges, IEX and NYE American, currently operate markets with delay mechanisms. The 350 microsecond delay mechanisms adopted on both of these markets are very similar, and are designed to reduce latency arbitrage opportunities by allowing resting nondisplayed pegged orders to be updated 48 IEX and NYSE American provide discretionary pegged orders that have discretion to execute at prices up to some discretionary price, except when the exchange has detected an unstable quote. See 45 See EDGA Rule 11.6(n)(1). 46 15 U.S.C. 78f(b). 47 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 18:47 Jun 25, 2019 based on changes in the NBBO prior to being picked off by opportunistic traders. Neither of these markets, however, address the critical need to encourage liquidity provision by market makers and other market participants that are vital to the proper functioning of the equities markets. While the LP2 delay mechanism would also protect non-displayed orders pegged to the midpoint of the NBBO, it is designed first and foremost to protect price forming, displayed liquidity. To accomplish this result, the Exchange would implement a four millisecond delay on incoming executable orders that would take liquidity on entry. The delay mechanism is designed to provide liquidity providers sufficient time to update their quotes based on cross-asset signals, primarily from the futures markets. The Exchange has found that, today, liquidity providers are at risk of trading at stale prices when futures prices change as certain opportunistic trading firms that utilize microwave connections, instead of the traditional fiber, can race to the equities markets and trade with resting liquidity before liquidity providers can adjust their quotes appropriately. This effect is further compounded when market makers and other providers of liquidity are quoting in many different securities and may therefore need to simultaneously modify quotes across a number of securities simultaneously. This is a significant disincentive to firms that actively provide liquidity, and often results in those firms being unwilling to display the best possible prices, or size, to the market. As markets evolve, the Exchange believes that it is its responsibility to respond to these changes in a manner that continues to promote a free and open market and national market system. The Exchange has therefore designed a unique delay mechanism to protect liquidity providers, which has the potential to benefit both liquidity providers and the ordinary investors that rely on the liquidity they supply to the market. The Exchange believes that its approach has two important benefits over the delay mechanisms introduced to date. First, it would give liquidity providers the ability to control their own trading interest, rather than requiring that firms use complex pegged order types that cede pricing discretion to the Exchange in order to benefit from the delay mechanism.48 Second, it Jkt 247001 PO 00000 Frm 00208 Fmt 4703 Sfmt 4703 30289 would protect displayed orders in addition to the non-displayed orders that are protected by existing delay mechanisms. When the Commission adopted the Order Protection Rule, it stated its view that ‘‘strengthened protection of displayed limit orders would help reward market participants for displaying their trading interest and thereby promote fairer and more vigorous competition among orders seeking to supply liquidity.’’ 49 The Exchange believes that this statement remains true today. Displayed limit orders are important to the national market system because they inform the prices at which all transactions take place. Even without protected market status, the Exchange believes that more displayed liquidity increases pricing information available to investors and contributes to more robust price formation. The Exchange also believes that these benefits would accrue to market participants without unnecessarily burdening the ability of investors to access displayed liquidity on EDGA. Although the proposed four millisecond delay is longer than the one millisecond delay contemplated by the Staff’s guidance on automated quotations under Regulation NMS, or the 700 millisecond roundtrip delay experienced on IEX and NYSE American, the Exchange believes that this delay is nonetheless sufficiently short so as to not impede the ability of long term investors to access the Exchange’s displayed quotations. Moreover, the Commission’s approval of delay mechanisms on both IEX and NYSE American indicates that a speed bump that is appropriately designed based on geographic latencies between trading venues where latency arbitrage opportunities exist can be a suitable mechanism for addressing that arbitrage, and thereby protecting investors. The LP2 delay mechanism, which is designed to reduce latency arbitrage based on signals that originate from the futures markets in Aurora, IL and must travel to the Exchange’s data center in Secaucus, NJ, would introduce a delay that is shorter than existing geographic latencies between those markets in order to protect liquidity providers.50 IEX Rule 11.190(b)(8),(10); NYSE American Rule 7.31E(h)(C). 49 Regulation NMS Adopting Release, 70 FR at 37501. 50 A fiber connection between Aurora, IL and Secaucus, NJ would be subject to around 7.75 milliseconds of latency. See supra note 10. The proposed four milliseconds of latency would level the playing field between market participants that use a standard fiber connection and opportunistic traders that use the fastest microwave connections. E:\FR\FM\26JNN1.SGM 26JNN1 jbell on DSK3GLQ082PROD with NOTICES 30290 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices In addition, the proposed delay would be shorter than existing geographic latencies within the national market system for equities based on the time it takes for a message to traverse the distance between the Exchange’s data center and the NYSE Chicago, Inc. (‘‘CHX’’) CH2 data center, which is located in Chicago, IL. While CHX trades the vast majority of symbols out of its data center in Secaucus, NJ, it trades a number of ETPs out of the CH2 data center to reduce latency with respect to the related index futures contracts. The proposed LP2 delay mechanism would produce a similar result by delaying incoming messages based on geographical latencies between EDGA’s data center in Secaucus, NJ and CME’s data center for futures trading in Aurora, IL, and, more specifically, the difference in latencies between a high speed microwave connection and a traditional fiber connection. As such, the Exchange believes that the proposed delay mechanism is narrowly tailored to reduce cross-asset latency arbitrage without impairing the proper functioning of the equities markets. Furthermore, in the SEC’s interpretive guidance regarding automated quotations under Regulation NMS, the Commission itself relied, in part, on geographic latencies experienced between data centers located in northern NJ, where the Exchange’s own data center is located, and the CH2 data center in Chicago, IL.51 The proposed LP2 delay mechanism is also consistent with Rule 602 of Regulation NMS (i.e., the ‘‘Quote Rule’’).52 Generally, the firm quote provisions of the Quote Rule require each responsible broker or dealer to execute an order presented to it, other than an odd lot order, at a price at least as favorable as its published bid or published offer, in any amount up to its published quotation size. This obligation does not apply if the responsible broker or dealer has communicated a revised bid or offer before the incoming order is presented to such broker or dealer.53 The LP2 delay mechanism would not result in violations of the firm quote provisions of the Quote Rule because no information is communicated about executable orders until those orders go through the LP2 delay mechanism. As such, those orders would not be ‘‘presented’’ to liquidity providers as contemplated by the Quote Rule until they have gone through the delay 51 See Commission Interpretation, supra note 17, 81 FR at 40789. 52 17 CFR 242.602(b)(2). 53 17 CFR 242.602(b)(3). VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 mechanism and are released for execution. Once the executable order has gone through the delay mechanism and is presented to resting orders on the EDGA Book, no liquidity provider would be given an opportunity to update its prices in response to that information. Furthermore, while the LP2 delay mechanism is designed to improve market quality, firms with executable order flow that believe that their execution quality is harmed by the delay mechanism would be permitted to ignore the Exchange’s manual quotations and route their orders to other trading venues. The Exchange is proposing to give up its protected quote status in conjunction with the introduction of the LP2 delay mechanism. As a result, no market participants would be required to access liquidity on EDGA in order to meet their obligations under the Order Protection Rule, and would only need to trade on EDGA if they see the anticipated benefits, such as lower quoted and effective spreads, or larger size at the inside. Although EDGA would operate without protected quote status, the Exchange believes that expected improvements to market quality would continue to make the Exchange an attractive venue for the trading of NMS stocks.54 Routing orders to EDGA would therefore be consistent with a brokerdealer’s best execution obligations to the extent that the proposal is successful in encouraging improved market quality in the form of better prices, available size, or fill rates. The duty of best execution requires broker-dealers to execute customers’ orders at the most favorable terms reasonably available under the circumstances, i.e., at the best reasonably available price.55 A brokerdealer would therefore be permitted to send orders for execution on EDGA, consistent with this obligation, if it finds that the Exchange offers more favorable execution opportunities to its customers, taking into account the prices and sizes posted by liquidity providers on the Exchange, as well as other factors such as the likelihood of execution. In the absence of such expected improvements to market quality, however, the Order Protection Rule would not obligate firms to access liquidity on a ‘‘manual’’ exchange. The 54 The Order Protection Rule does not supplant or diminish the broker-dealer’s responsibility for achieving best execution, including its duty to evaluate the execution quality of markets to which it routes customer orders. See Regulation NMS Adopting Release, 70 FR at 37538. 55 See Regulation NMS Adopting Release, 70 FR at 37538. PO 00000 Frm 00209 Fmt 4703 Sfmt 4703 Exchange believes that the anticipated improvements to market quality as a result of the proposed delay mechanism would make EDGA a competitive choice for investors seeking liquidity. The Exchange also believes that the proposed approach is not unfairly discriminatory since orders would be subject to the LP2 delay mechanism on an equal basis based solely on whether the incoming order is priced to remove or add liquidity on entry. The Exchange believes that it is appropriate to provide protection for orders that provide liquidity because these orders provide an important service to the market and face asymmetric risks due to the fact that the market may move while they are posted to the order book. Furthermore, in contrast to other delay mechanisms that target very narrow subsets of orders as deserving of protection, the LP2 delay mechanism is designed broadly to protect all liquidity providing orders, and is not limited to protecting either specific order types or specific categories of market participants. The Exchange therefore believes that the LP2 delay mechanism would promote liquidity provision without unfairly discriminating against specific segments of the market. While market makers are the most likely to benefit from the proposed delay mechanism due to their obligations to continuously quote across a number of securities,56 the proposal would protect a wide range of orders that provide liquidity to the market, and thereby promote better market quality. The LP2 delay mechanism is therefore designed to encourage liquidity provision by market makers entering displayed two-sided quotes on a continuous basis throughout the trading day, investors seeking to trade at the midpoint of the NBBO, and any of a wide range of other market participants entering resting limit orders. The Exchange believes that it is preferable to provide this benefit to all liquidity providing orders rather than specific segments of the market because its goal is to broadly encourage liquidity provision. Any market participants that provide liquidity to the market would benefit from the LP2 delay mechanism in relative proportion to the amount of liquidity they provide. The Exchange does not believe that it is unfairly discriminatory to subject orders that would remove liquidity on entry to the proposed delay mechanism. By design, all speed bumps must be applied to certain inbound/outbound messages and not others. For example, the delay mechanisms adopted by both 56 See E:\FR\FM\26JNN1.SGM EDGA Rule 11.20(d)(1). 26JNN1 jbell on DSK3GLQ082PROD with NOTICES Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices IEX and NYSE American do not apply to the repricing of non-displayed orders pegged to the NBBO. This allows those orders to be updated based on their pegging instruction before opportunistic traders can trade with them at the stale price. Similarly, the proposed LP2 delay mechanism would apply only to orders that remove liquidity, while exempting orders that add liquidity so that resting orders can be modified before opportunistic traders can pick off quotes at the stale price. Reducing this form of opportunistic trading is consistent with the protection of investors and the public interest, and removes impediments to and perfects the mechanism of a free and open market and a national market system. The Exchange does not believe that it is unfairly discriminatory to subject all liquidity removing orders to the delay mechanism, including orders entered by market participants not engaged in latency arbitrage. The proposed delay mechanism is designed to give liquidity providers the ability to update their quotes in response to changed market conditions (e.g., a price change in a futures contract) before trading at stale prices. The Exchange believes that this approach is superior to relying on complicated non-displayed pegged orders managed by the exchange operator, as the chosen approach encourages liquidity providers to actually improve displayed prices rather than simply following prices displayed by other equities exchanges. Since the liquidity provider would never be apprised of the existence of an incoming liquidity removing order before it exits the delay mechanism, updated quotations would be more likely to impact latency sensitive market participants attempting to trade at times when the market is about to move to a new price level. In turn, ordinary investors that are not specifically seeking these opportunities would benefit from better price discovery as the price at which their orders are executed would better reflect the current market for a given security, as potentially improved by liquidity providers due to decreased adverse selection risk. The LP2 delay mechanism is designed to encourage liquidity provision, and therefore has the potential to benefit all market participants, including market participants that submit executable orders subject to the delay mechanism. As the Commission explained when it adopted Regulation NMS, the interests of liquidity providers and market participants that submit marketable orders are ‘‘inextricably linked VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 together.’’ 57 Displayed limit orders, in particular, are responsible for setting the market for a security and are the primary driver of public price discovery in addition to supplying needed liquidity to other market participants. Ultimately, the goal of the LP2 delay mechanism is to protect liquidity providers from opportunistic trading strategies so as to improve execution quality for investors that submit marketable order flow. In fact, the success of the Exchange under the proposed market structure is entirely contingent on providing improved market quality (e.g., quoted spreads, size at the inside, and fill rates) to marketable orders. Because the proposal contemplates disseminating a manual quotation that is not protected under the Order Protection Rule, interaction with resting order flow on the EDGA Book would be entirely voluntary. That is, no market participant would be required to access liquidity on the EDGA under Regulation NMS. Without the protection normally afforded to displayed quotations by the Order Protection Rule, the decision to route order flow to the Exchange would depend on the entering firm’s independent assessment that EDGA offers favorable execution quality when compared to competing markets. As such, the decision to route orders to the Exchange would reflect that firm’s assessment that the economics associated with improved market quality outweigh any perceived costs associated with the delay mechanism. Given the importance of ensuring that liquidity providers can quote aggressively with the introduction of the delay mechanism, the Exchange also believes that the proposed flickering quote functionality would remove impediments to and perfect the mechanism of a free and open market and a national market system. As explained in the purpose section of this proposed rule change, the proposed behavior is designed to ensure that the EDGA quote would remain accessible to investors if the Exchange’s manual quotation is crossed by a protected quotation. This change is necessitated by a difference in rules that apply to automated and manual quotations: Specifically, the fact that the crossed 57 See Regulation NMS Adopting Release, 70 FR at 37527. ‘‘Displayed limit orders are the primary source of public price discovery. They typically set quoted spreads, supply liquidity, and in general establish the public ‘‘market’’ for a stock. The quality of execution for marketable orders, which, in turn, trade with displayed liquidity, depends to a great extent on the quality of markets established by limit orders (i.e., the narrowness of quoted spreads and the available liquidity at various price levels).’’ Id. PO 00000 Frm 00210 Fmt 4703 Sfmt 4703 30291 market exception under Rule 611(b)(4) of Regulation NMS only applies when a Protected Bid is crossed with a Protected Offer. As proposed, if the Exchange’s previously disseminated manual quotation is crossed by a protected quotation, aggressively priced orders on the EDGA Book would remain displayed and executable at EDGA’s quoted price for one second. If the Exchange’s quote is still crossed by a protected quote after this one second period, the System would cancel the crossed order(s), which would no longer be posted at an executable price. In turn, this would ensure that the best quoted prices displayed in the market remain accessible to investors. The Exchange believes that permitting orders to remain posted and executable for the one second period allowed under the Flickering Quote Exception is consistent with the protection of investors and the public interest as it ensures that market participants would be able to access EDGA’s disseminated quotation when EDGA has established the best price available in the market. The Exchange also believes that the proposed changes to its locked and crossed market rules under EDGA Rule 11.10(f), and the changes to its crossed market collars as described in Rule 11.10(a)(2), are necessary and appropriate as these changes would increase transparency around the proposed operation of the Exchange as a ‘‘manual’’ market that would no longer disseminate an automated quotation. Specifically, and as described in more detail in the purpose section of the proposed rule change, these changes are designed to ensure that the Exchange’s rules properly reflect the fact that EDGA would be disseminating a manual quotation, subject to an exemption requested pursuant to Rule 610(e) of Regulation NMS that would allow the Exchange to continue locking or cross manual quotations disseminated by NYSE. The Exchange believes that the proposed changes are consistent with the Exchange’s obligations as an equities exchange disseminating a manual quotation, as modified by the requested exemption. Finally, the Exchange believes that the proposed order type changes are consistent with the protection of investors and the public interest. The Exchange has reviewed the order types offered on EDGA to determine how best to serve the needs of members and investors, while striving to reduce System complexity with the introduction of the delay mechanism. While the Exchange offers a wide array of order types, not all of those order types are frequently used by market E:\FR\FM\26JNN1.SGM 26JNN1 jbell on DSK3GLQ082PROD with NOTICES 30292 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices participants that trade on EDGA. In addition, some of the order types offered today would be more difficult to implement in a way that is consistent with the operation and goals of the proposed LP2 delay mechanism, while others could be made to more useful by making small tweaks to their operation. The Exchange believes the proposed changes to its order types satisfy its twin goals of providing functionality that is the most useful to market participants and investors that trade on EDGA while reducing System complexity surrounding the proposed delay mechanism. Each of the order type changes is discussed in turn below. First, the Exchange has decided to eliminate the Discretionary Range instruction and the related MDO order type as continuing to offer orders that include this instruction would add complexity to the System in the context of a delay mechanism that applies to all liquidity taking orders. Specifically, implementation of the Discretionary Range instruction alongside the proposed LP2 delay mechanism would require that the System consider both an order’s limit price and its discretionary price in determining whether an order would be subject to the speed bump. Based on current usage of this order instruction, the Exchange does not believe at this time that continuing to offer it would provide sufficient benefit to market participants to warrant the increased complexity of building this feature to coexist with the delay mechanism. With respect to MDOs, which contain a Discretionary Range instruction that is pegged to the midpoint of the NBBO, the Exchange notes that investors that desire a midpoint execution would be able to continue using MidPoint Peg Orders. As noted below, while a number of orders with automated re-pricing logic would be eliminated with the proposed introduction of the LP2 delay mechanism, EDGA would continue to offer MidPoint Peg Orders. Second, the Exchange has decided to eliminate a number of order types that would automatically re-price based on changing prices in the prevailing market. These include Pegged Orders (i.e., Primary Peg and Market Peg), and orders that include a Multiple Price Adjust or Multiple Display-Price Sliding instruction. The Exchange believes that eliminating orders that re-price automatically is consistent with the goals of the proposed delay mechanism as these orders could potentially be used to obtain an execution against stale quotes that should have been protected by the delay mechanism. For example, assume the NBBO is $9.98 × $10.00, and VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 the EDGA Book contains a displayed limit order at the NBO of $10.00, and a non-displayed Primary Peg Order entered to buy with an offset of one cent better than the NBB, currently ranked at $9.99. If the NBBO were to update to $9.99 × $10.02, the Primary Peg Order would be immediately re-priced to $10.00 and trade against the contra-side sell order at the stale NBO price without going through the delay mechanism. By contrast, if the buy order were instead a non-displayed limit order and the member had entered a cancel/replace message to update it to $10.00, the price update would be subject to the delay mechanism, allowing the liquidity provider to update its sell price based on changes to the market, as intended. While the Exchange could subject automated re-pricing to the delay mechanism instead, as it has proposed for User initiated modifications, the Exchange believes that the proposed approach better serves the needs of members and investors as continuously subjecting an order that re-prices automatically to a delay may limit the ability of such an order to reasonably obtain an execution. The Exchange therefore believes that it is consistent with the protection of investors and the public interest to eliminate a number of current order types and order instructions that contain automated repricing logic. The Exchange also believes that it is appropriate to eliminate Supplemental Peg Orders in connection with the changes to other Pegged Orders described above. Although Supplemental Peg Orders are designed to not remove liquidity, use of Supplemental Peg Orders is minimal, and removing this order type along with other similar instructions would therefore reduce system complexity without any significant impact to market participants. At the same time, the Exchange has determined to keep MidPoint Peg Orders, which account for a significant portion of pegged volume traded today, and would continue to be valuable to a number of market participants that seek to trade at the midpoint. As explained in the purpose section of this proposed rule change, MidPoint Peg Orders may become even more useful when the Exchange implements the LP2 delay mechanism since these orders would be automatically re-priced to the new midpoint before being accessed at a stale price. In addition, a resting MidPoint Peg Order is willing to provide liquidity at the midpoint of the NBBO, thereby providing price improvement opportunities for investors accessing liquidity on EDGA. PO 00000 Frm 00211 Fmt 4703 Sfmt 4703 Although the Exchange is keeping MidPoint Peg Orders, which are beneficial to members and investors, the Exchange is removing two related instructions. First, the Exchange is eliminating an optional feature that would peg a MidPoint Peg Order to the less aggressive of the midpoint or one minimum price variation inside the same side of the NBBO. These alternative MidPoint Peg Orders function in the same manner as a Primary Peg Order with an offset, except in situations where the market is one tick wide, and therefore would be eliminated along with Primary Peg Orders. The Exchange believes that this is consistent with the goal of reducing executions that result from re-priced orders bypassing the delay mechanism, unless the order is a true midpoint seeking order. Second, the Exchange is eliminating an option that a User has to request that a MidPoint Peg Order be executed when the NBBO is locked. The Exchange believes that this change is consistent with the public interest because avoiding an execution when the midpoint is locked would prevent such orders from trading with displayed orders represented at the NBBO before those orders could be updated by liquidity providers.58 Furthermore, the Exchange believes that the majority of Users of MidPoint Peg Orders do not want their orders executed in a locked market where there is no true midpoint execution. The Exchange has also decided to amend the Post Only instruction such that it would never be eligible to remove liquidity. Currently, the Exchange’s Post Only logic would allow a Post Only order to remove liquidity in certain cases where doing so would be economically beneficial to the party entering the order. The New York Stock Exchange (‘‘NYSE’’) offers a similar but less complicated ‘‘Add Liquidity Only’’ or ‘‘ALO’’ instruction that would not remove liquidity from the NYSE book in such circumstances.59 The Exchange believes that market makers and other liquidity providers would find such an instruction useful as it would allow them to ensure that orders entered to provide liquidity would not inadvertently remove liquidity and thus be subject to a delay. Market makers and similar market participants typically prefer to provide liquidity to the market, entering quotes to capture the spread, and may not desire an execution that 58 MidPoint Peg Orders would be able to re-price and trade with hidden orders resting between the NBB and NBO without going through the delay mechanism. 59 See NYSE Rule 13(e)(1). E:\FR\FM\26JNN1.SGM 26JNN1 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES removes liquidity even when the economics of such an execution would appear to be beneficial to such party. The Exchange therefore believes that it is appropriate to amend its Post Only instruction in connection with the introduction of the LP2 delay mechanism such that a Post Only Order would never remove liquidity from the EDGA Book. Based on the proposed changes to the Post Only instruction, the Exchange is also proposing to eliminate the NDS and Super Aggressive Order instructions. As previously mentioned, NDS and Super Aggressive both contain a built in liquidity swap component that the Exchange believes is inconsistent with the proposed changes to the Post Only instruction. Specifically, NDS and Super Aggressive are instructions that are used to specify the terms under which a resting order would execute with an incoming Post Only order that would not otherwise remove liquidity because the amount of price improvement offered by such an execution was insufficient. Since the Exchange is proposing to never execute an incoming Post Only order with resting liquidity in order to avoid having such orders go through the proposed delay mechanism, these liquidity swap instructions would be rendered obsolete. Finally, the Exchange proposes to modify the operation of Market Maker Peg Orders such that all Market Maker Peg Orders would include a Post Only instruction. The Exchange believes that this change is appropriate because Market Maker Peg Orders are designed to enable market makers to provide liquidity in compliance with their continuous quoting obligations, and are not intended to remove liquidity. Today, Market Maker Peg Orders usually add rather than remove liquidity today since they are priced a designated percentage away from the NBBO when there is an appropriate NBBO. However, it is possible that a Market Maker Peg Order could remove liquidity, for example, when there is no applicable NBB or NBO, in which case such orders are priced based on the last reported sale. The Exchange therefore believes that it is appropriate to systematically enforce the requirement that these orders do not remove liquidity. 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. To the contrary, the proposal is a competitive VerDate Sep<11>2014 18:47 Jun 25, 2019 Jkt 247001 response to delay mechanisms available on other markets such as IEX and NYSE American, and is designed to foster competition between both markets and orders as contemplated by Regulation NMS. The LP2 delay mechanism seeks to enhance available liquidity and optimize price discovery by deemphasizing speed as a key to trading success in order to further serve the interests of all investors. It does this by subjecting all liquidity taking orders to a short delay of a few milliseconds, while exempting all liquidity providing orders from this delay mechanism. Every order entered on EDGA would be subjected, or not subjected, to the delay mechanism based on whether the order adds or removes liquidity, and regardless of the order type used or identity of the entering firm. The Exchange believes that the resulting market structure benefits of the proposal are likely to accrue to a wide range of market participants that add liquidity on the Exchange. This includes market makers that serve a critical function of providing liquidity to the market, as well as a range of other investors, including those that seek to trade at the midpoint of the NBBO. In addition, to the extent that the proposal is successful in reducing risk for liquidity providers, and encouraging those liquidity providers to improve market quality, the expected benefits would also extend to market participants that choose to access liquidity on EDGA. In sum, the Exchange believes that the proposed rule change is designed to promote a more vibrant and competitive market for the vast majority of market participants and investors that do not rely on opportunistic trading strategies that exploit differentials in speed. 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 Exchange consents, the Commission will: A. By order approve or disapprove such proposed rule change, or PO 00000 Frm 00212 Fmt 4703 Sfmt 4703 30293 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CboeEDGA–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–CboeEDGA–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 (http://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–CboeEDGA–2019–012 and should be submitted on or before July 17, 2019. E:\FR\FM\26JNN1.SGM 26JNN1 30294 Federal Register / Vol. 84, No. 123 / Wednesday, June 26, 2019 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.60 Vanessa A. Countryman, Acting Secretary. [FR Doc. 2019–13537 Filed 6–25–19; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #15998 and #15999; Ponca Tribe of Nebraska Disaster Number NE–00076] Presidential Declaration of a Major Disaster for Public Assistance Only for the Ponca Tribe of Nebraska U.S. Small Business Administration. ACTION: Notice. jbell on DSK3GLQ082PROD with NOTICES VerDate Sep<11>2014 18:47 Jun 25, 2019 Primary Counties: Bennington, Essex, Orange, Rutland, Washington, Windsor. The Interest Rates are: Percent 2.750 The number assigned to this disaster for physical damage is 159986 and for economic injury is 159990. (Catalog of Federal Domestic Assistance Number 59008) James Rivera, Associate Administrator for Disaster Assistance. For Physical Damage: Non-Profit Organizations with Credit Available Elsewhere ... Non-Profit Organizations without Credit Available Elsewhere ..................................... For Economic Injury: Non-Profit Organizations without Credit Available Elsewhere ..................................... 2.750 2.750 2.750 The number assigned to this disaster for physical damage is 159966 and for economic injury is 159970. (Catalog of Federal Domestic Assistance Number 59008) This is a Notice of the Presidential declaration of a major disaster for Public Assistance Only for the Ponca Tribe of Nebraska (FEMA– 4446–DR), dated 06/17/2019. Incident: Severe Storms and Flooding. Incident Period: 03/13/2019 through 04/01/2019. DATES: Issued on 06/17/2019. Physical Loan Application Deadline Date: 08/16/2019. Economic Injury (EIDL) Loan Application Deadline Date: 03/17/2020. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW, Suite 6050, Washington, DC 20416, (202) 205–6734. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the President’s major disaster declaration on 06/17/2019, Private Non-Profit organizations that provide essential services of a governmental nature may file disaster loan applications at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Area: Ponca Tribe of Nebraska The Interest Rates are: CFR 200.30–3(a)(12). 2.750 BILLING CODE 8206–03–P SUMMARY: 60 17 Non-Profit Organizations without Credit Available Elsewhere ..................................... For Economic Injury: Non-Profit Organizations Without Credit Available Elsewhere ..................................... [FR Doc. 2019–13572 Filed 6–25–19; 8:45 am] AGENCY: For Physical Damage: Non-Profit Organizations with Credit Available Elsewhere ... Percent SMALL BUSINESS ADMINISTRATION [Disaster Declaration #15996 and #15997; Vermont Disaster Number VT–00036] Presidential Declaration of a Major Disaster for Public Assistance Only for the State of Vermont PO 00000 Frm 00213 Fmt 4703 Sfmt 4703 BILLING CODE 8206–03–P [Disaster Declaration #16000 and #16001; OHIO Disaster Number OH–00057] This is a Notice of the Presidential declaration of a major disaster for Public Assistance Only for the State of Vermont (FEMA–4445–DR), dated 06/14/2019. Incident: Severe Storm and Flooding. Incident Period: 04/15/2019. DATES: Issued on 06/14/2019. Physical Loan Application Deadline Date: 08/13/2019. Economic Injury (EIDL) Loan Application Deadline Date: 03/16/2020. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: Alan Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW, Suite 6050, Washington, DC 20416, (202) 205–6734. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the President’s major disaster declaration on 06/14/2019, Private Non-Profit organizations that provide essential services of a governmental nature may Percent file disaster loan applications at the address listed above or other locally announced locations. 2.750 The following areas have been determined to be adversely affected by the disaster: Jkt 247001 [FR Doc. 2019–13574 Filed 6–25–19; 8:45 am] SMALL BUSINESS ADMINISTRATION U.S. Small Business Administration. ACTION: Notice. AGENCY: SUMMARY: James Rivera, Associate Administrator for Disaster Assistance. Presidential Declaration of a Major Disaster for the State of Ohio U.S. Small Business Administration. ACTION: Notice. AGENCY: This is a Notice of the Presidential declaration of a major disaster for the State of Ohio (FEMA– 4447–DR), dated 06/18/2019. Incident: Severe Storms, Straight-line Winds, Tornadoes, Flooding, and Landslides. Incident Period: 05/27/2019 through 05/29/2019. DATES: Issued on 06/18/2019. Physical Loan Application Deadline Date: 08/19/2019. Economic Injury (EIDL) Loan Application Deadline Date: 03/18/2020. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW, Suite 6050, Washington, DC 20416, (202) 205–6734. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the President’s major disaster declaration on 06/18/2019, applications for disaster SUMMARY: E:\FR\FM\26JNN1.SGM 26JNN1

Agencies

[Federal Register Volume 84, Number 123 (Wednesday, June 26, 2019)]
[Notices]
[Pages 30282-30294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13537]


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SECURITIES AND EXCHANGE COMMISSION

[Release No 34-86168; File No. SR-CboeEDGA-2019-012]


Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice 
of Filing of a Proposed Rule Change To Introduce a Liquidity Provider 
Protection on EDGA

June 20, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 7, 2019, Cboe EDGA Exchange, Inc. (the ``Exchange'' or 
``EDGA'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGA Exchange, Inc. (``EDGA'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to introduce a Liquidity Provider Protection on 
EDGA. The text of the proposed rule change is attached [sic] as Exhibit 
5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/edga/), 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 a delay 
mechanism on EDGA that is designed to protect liquidity providers and 
thereby enable those liquidity providers to make better markets in 
equity securities traded on the Exchange. The Liquidity Provider 
Protection (``LP\2\'') delay mechanism would function similarly to 
delay mechanisms adopted by the Investors Exchange LLC (``IEX'') and 
NYSE American LLC (``NYSE American'') in that it is an intentional 
access delay applied to a subset of order messages in order to allow 
resting orders to be updated before opportunistic traders can trade 
with them at stale prices.\3\ The LP\2\ delay mechanism, however, is 
unique in that it is designed primarily to enhance market quality by 
promoting price forming displayed liquidity in addition to the non-
displayed liquidity encouraged by both IEX and NYSE American. Liquidity 
provision is critical to the proper functioning of the equities 
markets, and finding ways to enhance

[[Page 30283]]

the ability of firms to provide that liquidity to investors is one of 
the central functions of a national securities exchange. The LP\2\ 
delay mechanism would provide a market structure that has the potential 
to increase market quality and provide a fair and orderly market for 
all market participants that choose to trade on EDGA.
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    \3\ See Securities Exchange Act Release Nos. 78101 (June 17, 
2016), 81 FR 41141 (June 23, 2016) (File No. 10-222) (``IEX Exchange 
Approval''); 80700 (May 16, 2017), 82 FR 23381 (May 22, 2017) (SR-
NYSEMKT-2017-05) (``MKT Approval Order'').
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I. Background
    The increasing speed and efficiency of trading in the U.S. equities 
markets over the last several years has resulted in significant gains 
to market participants and investors. These gains in speed, however, 
are not entirely without cost as they have facilitated certain latency 
arbitrage techniques that act as a tax on liquidity provision. In 
adopting Regulation NMS, the Commission emphasized the need to promote 
greater depth and liquidity in NMS Stocks.\4\ While the Commission 
sought to achieve this result largely through the adoption of the Rule 
611, i.e., the ``Order Protection Rule,'' changes in the market since 
the adoption of Regulation NMS also warrant innovation by the exchanges 
that are tasked with promoting liquidity in today's high speed market. 
The Exchange is therefore proposing to introduce a delay mechanism that 
is specifically designed to encourage liquidity provision by reducing 
the ability for firms to engage in latency arbitrage, in general, and 
cross-asset latency arbitrage, in particular.\5\
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    \4\ The Commission has stated that ``increased displayed 
liquidity [is] a principal goal of the Order Protection Rule.'' See 
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496, 37514 (June 29, 2005) (``Regulation NMS Adopting Release''). 
The Commission has also stated that ``[t]o the extent that 
competition among orders is lessened, the quality of price discovery 
for all sizes of orders can be compromised. Impaired price discovery 
could cause market prices to deviate from fundamental values, reduce 
market depth and liquidity, and create excessive short-term 
volatility that is harmful to long-term investors and listed 
companies. More broadly, when market prices do not reflect 
fundamental values, resources will be misallocated within the 
economy and economic efficiency--as well as market efficiency--will 
be impaired.'' Id. at 37499.
    \5\ The Chicago Stock Exchange, Inc. (``CHX'') also recently 
received approval for a delay mechanism that was designed to 
encourage liquidity provision. See Securities Exchange Act Release 
No. 81913 (October 19, 2017), 82 FR 49433 (October 25, 2017) (SR-
CHX-2017-04) (Approval Order). CHX withdrew that filing after the 
Commission determined to review the Staff's approval by delegated 
authority, and as a result the original Approval Order was set 
aside. See Securities Exchange Act Release No. 84337 (October 2, 
2018), 83 FR 50720 (October 9, 2018) (SR-CHX-2017-04) (Order Setting 
Aside).
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    Today, liquidity providers are frequently unable to adjust their 
displayed quotes based on changes in market information, including 
cross-asset class signals, before the fastest trading firms can trade 
against their stale quotes. Market makers and other liquidity providers 
use sophisticated pricing algorithms to determine how to price 
securities in the often hundreds or thousands of equity securities that 
they quote. A single tick of an index futures contract thus often 
requires firms to adjust their quotes in a number of related equity 
securities at once.\6\ The potential for trading at stale prices 
increases risk for firms that wish to provide liquidity to the market, 
and harms market quality by causing liquidity providers to enter quotes 
that are wider or for a smaller size than they may otherwise be willing 
to trade.
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    \6\ For example, a tick in S&P 500 Index futures on the Chicago 
Mercantile Exchange (``CME'') may result in liquidity providers 
updating quotes in the SPDR S&P 500 ETF and each of the five hundred 
underlying securities in the S&P 500 Index.
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    At the same time, existing delay mechanisms do not provide any 
protection to market makers and other participants that primarily post 
displayed, two-sided markets, despite the critical function that these 
participants play in the equities markets. The Exchange believes that 
reducing cross-market latency arbitrage would enable liquidity 
providers to increase market quality by maintaining tighter spreads, 
longer inside quote durations, and posting larger size. Furthermore, 
the expected improvements in market quality have the potential to 
benefit all market participants, and contribute to the maintenance of a 
fair and orderly market.
II. Delay Mechanism
    The proposed rule change would introduce the LP\2\ delay mechanism, 
which seeks to promote liquidity provision by reducing the opportunity 
for cross-asset latency arbitrage. Other equities exchanges, i.e., IEX 
and NYSE American, have recently introduced delay mechanisms that slow 
down certain incoming and outbound messages. These ``speed bumps'' are 
a market reaction to the increased prevalence of opportunistic traders 
that can react to market signals before slower market participants can 
update their quoted prices. Both IEX and NYSE American have market 
structures that are designed to benefit resting non-displayed orders 
that are pegged to the national best bid or offer (``NBBO'') as updates 
to the prices of these orders do not go through their respective delay 
mechanisms.\7\ As a result, market participants that enter pegged 
orders can avoid unwanted executions at stale prices because their 
orders are pegged to new market prices before opportunistic traders are 
able to ``pick off'' these orders at the stale price. While delay 
mechanisms like those currently available on these exchanges are 
beneficial to a particular subset of market participants, the Exchange 
believes that there is room for additional improvement. Specifically, 
the Exchange believes that there is an opportunity to use a similar 
delay mechanism to promote market quality by excluding all orders that 
add liquidity from the speed bump. The paragraphs that follow describe 
the proposed delay mechanism, and how it would be applied to different 
incoming/outbound messages processed by the System: \8\
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    \7\ See IEX Exchange Approval, supra note 3, 81 FR at 41157; MKT 
Approval Order, supra note 3, 82 FR at 23384.
    \8\ The term ``System'' refers to the electronic communications 
and trading facility designated by the Board through which 
securities orders of Users are consolidated for ranking, execution 
and, when applicable, routing away. See EDGA Rule 1.5(cc).
---------------------------------------------------------------------------

    Liquidity Removing Orders. The proposed LP\2\ delay mechanism would 
subject all incoming executable orders that would remove liquidity from 
the EDGA Book on entry to a short intentional access delay.\9\ As 
mentioned above, this delay is designed to provide an opportunity for 
liquidity providers to process cross-asset class signals, and update 
their published quotations accordingly, before trading at stale prices 
with orders submitted by opportunistic trading firms that benefit from 
a latency advantage. So as to avoid unnecessarily queueing orders that 
are not executable when entered, order instructions that could prevent 
an incoming order from being executed and removing liquidity on entry 
(e.g., Minimum Quantity and Post Only) would be considered prior to 
subjecting the order to the delay mechanism. The one exception to this 
would be the EdgeRisk Self Trade Protection (``ERSTP'') Modifiers, 
which are an optional risk protection that prevents the execution of 
orders originating from the same market participant identifier 
(``MPID''), Exchange Member identifier

[[Page 30284]]

or ERSTP Group identifier. ERSTP Modifiers would be applied after the 
order is delayed, and would not be considered in evaluating whether an 
incoming order is deemed executable and therefore subject to the delay 
mechanism.
---------------------------------------------------------------------------

    \9\ The term ``EDGA Book'' refers to the System's electronic 
file of orders. See EDGA Rule 1.5(d). An order that, by its terms, 
is not eligible to be executed on entry would be evaluated for delay 
when such order is ultimately entered into the EDGA Book for 
processing. For example, orders entered with a Stop Price or Stop 
Limit Price are not executable until elected, and would therefore 
only be eligible for delay after the order is converted to a Market 
Order or Limit Order, as applicable. Similarly, orders entered with 
a time-in-force instruction of Regular Hours Only would only be 
evaluated for delay when entered into the EDGA Book after the 
opening or re-opening process pursuant to EDGA Rule 11.7.
---------------------------------------------------------------------------

    Based on the geographical latencies currently experienced between 
the Chicago Mercantile Exchange (``CME'') data center in Aurora, IL and 
the Exchange's primary data center in Secaucus, NJ, the Exchange 
proposes that the intentional access delay applied to incoming 
executable orders be four milliseconds. The Exchange believes that this 
delay would negate the advantages that opportunistic trading firms that 
use the latest microwave connections have over liquidity providers 
using traditional fiber connections.\10\ Once a liquidity taking order 
enters the LP\2\ delay mechanism it would wait the full four 
milliseconds before trading with resting orders on the order book but 
would be released early if resting orders are cancelled or modified 
such that the incoming order is no longer executable against such 
orders.\11\
---------------------------------------------------------------------------

    \10\ Quincy Data advertises a latency of 4.005 milliseconds for 
its high speed microwave connection, or about half the 7.75 
milliseconds of latency experienced over a fiber connection provided 
by ICE Global Network. See https://www.quincy-data.com/product-page/#latencies; https://www.theice.com/publicdocs/ICE_Data_Services_Topology.pdf.
    \11\ After the delay period, incoming orders, cancel, and 
cancel/replace messages that have been delayed by the delay 
mechanism would be processed after the System has processed, if 
applicable, all messages in the security received by the Exchange 
during such delay period. As a result, a message may be delayed for 
longer than four milliseconds depending on the volume of messages 
being processed by the Exchange.
---------------------------------------------------------------------------

    Liquidity Providing Orders. In order to encourage liquidity 
provision from the widest range of possible market participants, the 
proposed delay would not apply to any non-executable orders that would 
add liquidity. These orders would instead be immediately ranked on the 
EDGA Book without executing against resting liquidity. Furthermore, 
market participants would be able to interact with their resting orders 
(e.g., by cancelling the order or modifying the order's size) without 
being subject to the delay mechanism. As a result, the LP\2\ delay 
mechanism would benefit traditional market makers that post price 
forming displayed liquidity, as well as a range of other market 
participants, including investors that use hidden pegged orders similar 
to those that account for a significant portion of volume traded on IEX 
and NYSE American.
    Cancel and Cancel/Replace Messages. The LP\2\ delay mechanism is 
designed to protect orders that add liquidity to the EDGA Book by 
giving Users the opportunity to adjust their quotes based on market 
signals before trading at a stale price. As such, orders resting on the 
EDGA Book would be eligible for immediate cancellation without being 
subjected to a delay. Cancel messages for liquidity taking orders that 
are being processed by the delay mechanism would instead be queued and 
applied to the remaining quantity of the order after the order has 
exited the delay mechanism and executed against any resting orders on 
the EDGA Book. If a User submits a cancel/replace message,\12\ the 
cancel portion of that instruction would be applied to the order based 
on whether the order is resting on the EDGA Book or is being processed 
by the delay mechanism. Specifically, the cancel portion would be 
applied immediately in the case of a resting order, or queued in the 
case of an order that has not exited the delay mechanism. The replace 
portion would subsequently be handled subject to the same logic as the 
entry of a new order--i.e., re-evaluated and delayed only if the 
amended order is executable against the EDGA Book. If a User enters 
multiple cancel or cancel/replace messages for a liquidity taking order 
during the four millisecond delay period, the first such cancel or 
cancel/replace message entered would be queued and all subsequent 
messages would be ignored.
---------------------------------------------------------------------------

    \12\ See EDGA Rule 11.10(e).
---------------------------------------------------------------------------

    Routable Orders. Since the LP\2\ delay mechanism is designed to 
protect resting orders on EDGA, incoming executable orders are 
processed by the delay mechanism when the order would remove liquidity 
from the EDGA Book. As such, orders that are routed on entry would not 
be eligible for delay until entered for execution with resting orders 
on the EDGA Book. The unrouted balance of a routable order that is 
entered into the EDGA Book would be treated as a new incoming order and 
evaluated as such by the delay mechanism.
    Market Data. The LP\2\ delay mechanism would not apply to inbound 
or outbound market data. As such, the System would use current, un-
delayed data, for all purposes including regulatory compliance (e.g., 
trade-through) and pricing of orders pegged to the NBBO. In addition, 
quotation and trade data would be disseminated to the applicable 
securities information processor (``SIP'') and direct market data feeds 
immediately without being processed by the delay mechanism, thereby 
ensuring that the most up to date information about orders and 
executions on the EDGA Book is shared with investors and other market 
participants. As described in the section below on protected market 
status, the Exchange is proposing to disseminate quotation information 
to the SIP as a ``manual'' rather than ``automated'' quotation under 
Regulation NMS. Manual quotations are not protected pursuant to the 
Order Protection Rule but are included in the NBBO disseminated by the 
SIP to ensure that the best available prices for a security are made 
available to broker-dealers and investors.\13\
---------------------------------------------------------------------------

    \13\ See Regulation NMS Adopting Release, 70 FR at 37537.
---------------------------------------------------------------------------

    Examples. The examples that follow illustrate the operation of the 
LP\2\ delay mechanism:
    Example 1:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.00
--Order 2: Sell 100 shares @$10.00, t = 12:00:00:000
--The incoming sell order, i.e., Order 2, is executable against the 
EDGA Book and therefore delayed for 4 milliseconds.
--Order 2 would execute against Order 1, selling 100 shares at $10.00, 
after it exits the delay mechanism at 12:00:00:004.

    Example 2:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.02, Non-Displayed
--Order 2: Sell 100 shares @$10.00, t = 12:00:00:000
--The incoming sell order, i.e., Order 2, is executable against the 
EDGA Book and therefore delayed for 4 milliseconds.
--Order 2 would execute against Order 1, selling 100 shares at $10.02, 
after it exits the delay mechanism at 12:00:00:004.\14\
---------------------------------------------------------------------------

    \14\ The System delays all liquidity taking orders, regardless 
of whether such orders would trade with displayed or non-displayed 
interest on the EDGA Book.

---------------------------------------------------------------------------
    Example 3:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.00
--Order 2: Sell 100 shares @$10.04, t = 12:00:00:000
--The incoming sell order, i.e., Order 2, is not executable against the 
EDGA Book and therefore posts to the EDGA Book immediately at 
12:00:00:000.

    Example 4:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.00
--Order 2: Sell 100 shares @$10.00, Post Only, t = 12:00:00:000

[[Page 30285]]

--The incoming sell order, i.e., Order 2, is not executable against the 
EDGA Book because of the Post Only instruction and is cancelled 
immediately at 12:00:00:000.\15\
---------------------------------------------------------------------------

    \15\ This example is based on amended Post Only behavior 
described later in this proposal that would prevent a Post Only 
Order from removing liquidity, including in circumstances where 
doing so may be economically beneficial for the entering party.

---------------------------------------------------------------------------
    Example 5:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.01
--Order 2: Sell 100 shares @$10.01, t = 12:00:00:000
--Cancel Order 1: t = 12:00:00:001
--The incoming sell order, i.e., Order 2, is executable against the 
EDGA Book and therefore delayed for 4 milliseconds.
--One millisecond after Order 2 enters the delay mechanism, a 
cancellation message is entered to cancel Order 1. Cancellation 
messages for resting orders are not delayed so as to permit sufficient 
time for liquidity providers to update stale quotes, and therefore 
Order 1 is immediately cancelled at 12:00:00:001.
--As Order 2 is no longer executable against any resting orders on the 
EDGA Book it would be released early from the delay mechanism, and 
posted to the EDGA Book immediately after the cancellation message for 
Order 1 is processed.

    Example 6:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.00
--Order 2: Sell 200 shares @$10.00, t = 12:00:00:000
--Cancel Order 2: t = 12:00:00:001
--The incoming sell order, i.e., Order 2, is executable against the 
EDGA Book and therefore delayed for 4 milliseconds.
--While Order 2 is being processed by the delay mechanism, the entering 
firm submits a cancellation message. This message is not processed 
until the order exits the speed bump and trades against resting orders.
--Order 2 would execute against Order 1, selling 100 shares at $10.00, 
after it exits the delay mechanism at 12:00:00:004, at which point the 
cancellation message would be processed and the remaining quantity of 
Order 2 would be cancelled.

    Example 7:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares @$10.00
--Order 2: Sell 100 shares @$10.04
--Cancel/Replace Order 1: Buy 100 shares @$10.04, t = 12:00:00:000
--The cancel portion of the cancel/replace message is immediately 
applied to Order 1 at 12:00:00:000 but since the modified price would 
be executable against Order 2, which is resting on EDGA Book, Order 1 
would be delayed for 4 milliseconds.
--Order 1 would then execute against Order 2, buying 100 shares at 
$10.04, after it exits the delay mechanism at 12:00:00:004.

    Example 8:

--Protected NBBO: $10.00 x $10.05
--Order 1: Buy 100 shares, Midpoint Peg
--Order 2: Sell 100 shares @$10.02, t = 12:00:00:000
--Protected NBBO: $9.98 x 10.02, t = 12:00:00:001
--The incoming sell order, i.e., Order 2, is executable against the 
Midpoint Peg Order on the EDGA Book, which is ranked at $10.025, and 
therefore delayed for 4 milliseconds.
--One millisecond after Order 2 enters the delay mechanism, the System 
receives an NBBO update, which is processed immediately to allow 
resting orders to be re-priced before trading at stale prices. Order 1 
is now ranked at $10.00--i.e., the new midpoint.
--As Order 2 is no longer executable against any resting orders on the 
EDGA Book it would be released early from the delay mechanism, and 
posted to the book immediately after the re-pricing for Order 1 is 
processed.
III. Protected Market Status
    Rule 611 of Regulation NMS provides intermarket protection against 
trade-throughs for automated quotations of NMS stocks. Under Regulation 
NMS, an ``automated'' quotation is one that, among other things, can be 
executed ``immediately and automatically'' against an incoming 
immediate-or-cancel order.\16\ The Commission has interpreted the word 
``immediate'' in this context as not precluding a de minimis 
intentional delay--i.e., a delay so short so as to not frustrate the 
purposes of Rule 611 by impairing fair and efficient access to an 
exchange's quotations.\17\ Although the Commission refused to enumerate 
a numeric latency threshold for a delay that is sufficiently de minimis 
for the purposes of Rule 611,\18\ the Staff of the Division of Trading 
and Markets has issued guidance stating the Staff's belief that delays 
of less than one millisecond would qualify as de minimis.\19\ Based on 
the Staff's concern about granting protected market status to an 
exchange with an intentional delay exceeding this threshold, the 
Exchange has determined to begin disseminating a manual, un-protected, 
quotation in conjunction with the proposed implementation of its delay 
mechanism.\20\
---------------------------------------------------------------------------

    \16\ See Rule 600(a)(3).
    \17\ See Securities Exchange Act Release No. 78102 (June 17, 
2016), 81 FR 40785 (June 23, 2017) (File No. S7-03-16) (``Commission 
Interpretation'').
    \18\ Id.
    \19\ See Staff Guidance on Automated Quotations under Regulation 
NMS (June 17, 2016), available at https://www.sec.gov/divisions/marketreg/automated-quotations-under-regulation-nms.htm.
    \20\ Rule 600(a)(37) defines a ``manual quotation'' as any 
quotation other than an automated quotation.
---------------------------------------------------------------------------

    In addition to no longer being eligible for protected market 
status, marking the EDGA quotation manual instead of automated, would 
also mean that other Regulation NMS rules on locked and crossed markets 
would apply differently to EDGA's disseminated quotations. 
Specifically, Rule 610(d)(1)(ii) would require that EDGA avoid locking 
or crossing any quotation in an NMS stock disseminated pursuant to an 
effective national market system (``NMS'') plan instead of only 
protected quotations as required pursuant to Rule 610(d)(1)(i). The 
Exchange believes that this restriction is unintended and unwarranted 
when an otherwise automated market is disseminating a manual quotation 
due solely to its introduction of a short intentional access delay on 
incoming orders. Concurrent with the submission of this proposed rule 
change the Exchange is therefore submitting a request for an exemption 
pursuant to Rule 610(e) of Regulation NMS. The requested exemption 
would permit the Exchange to continue to lock or cross potentially 
stale manual quotations disseminated by the New York Stock Exchange LLC 
(``NYSE'') pursuant to an effective NMS plan.\21\ Broadly, the 
exemption would permit EDGA to continue to operate in the manner that 
it does today with respect to locked and crossed markets, 
notwithstanding the proposed dissemination of a manual, un-protected, 
quotation.
---------------------------------------------------------------------------

    \21\ NYSE operates a trading floor that may disseminate manual 
quotations, and is the only equities exchange that does so today. 
The Exchange expects to file additional exemption requests in the 
future if other equities exchanges begin disseminating manual 
quotations.
---------------------------------------------------------------------------

    In light of the requested exemption, and the fact that EDGA would 
begin disseminating a manual quotation, the Exchange proposes to amend 
Rule 11.10(f), which deals with locking or crossing quotations in NMS 
Stocks. First, Rule 11.10(f)(1) describes the current prohibition on 
dissemination of locking or crossing quotations. Specifically, the rule 
discusses the dissemination and display of quotations

[[Page 30286]]

that lock or cross a Protected Quotation, or manual quotations that 
lock or cross quotations previously disseminated pursuant to an NMS 
plan during Regular Trading Hours. The Exchange proposes to instead 
reference the dissemination and display of ``Locking Quotations or 
Crossing Quotations'' as defined in EDGA rules.\22\ This change would 
increase the clarity of the rule given the Exchange's exemption 
request, and the fact that all quotations disseminated by the Exchange 
would be manual quotations.\23\
---------------------------------------------------------------------------

    \22\ A ``Locking Quotation'' is the display of a bid for an NMS 
stock at a price that equals the price of an offer for such NMS 
stock previously disseminated pursuant to an effective national 
market system plan, or the display of an offer for an NMS stock at a 
price that equals the price of a bid for such NMS stock previously 
disseminated pursuant to an effective national market system plan in 
violation of Rule 610(d) of Regulation NMS. See EDGA Rule 11.6(g). A 
``Crossing Quotation'' is the display of a bid (offer) for an NMS 
stock at a price that is higher (lower) than the price of an offer 
(bid) for such NMS stock previously disseminated pursuant to an 
effective national market system plan in violation of Rule 610(d) of 
Regulation NMS. See EDGA Rule 11.6(c).
    \23\ For example, as described in the paragraphs that follow, a 
quotation would not be considered a Locking Quotation or Crossing 
Quotation if the quotation being locked or crossed is a manual 
quotation of NYSE that is permitted to be locked or crossed pursuant 
to the Exchange's requested exemption pursuant to Rule 610(e) of 
Regulation NMS.
---------------------------------------------------------------------------

    Second, EDGA Rule 11.10(f)(2) explains that, if a User displays a 
manual quotation that locks or crosses a quotation previously 
disseminated pursuant to an effective national market system plan, such 
User shall promptly either withdraw the manual quotation or route an 
ISO to execute against the full displayed size of the locked or crossed 
quotation. As EDGA Rule 11.10(f)(1) would already prohibit displaying a 
Locking Quotation or Crossing Quotation, subject to the exception 
provided in EDGA Rule 11.10(f)(iv), as amended below, the Exchange 
proposes to eliminate the redundant language contained in this 
paragraph.
    Third, the Exchange proposes to eliminate EDGA Rule 
11.10(f)(3)(iii), which applies to automated quotations, and amend EDGA 
Rule 11.10(f)(3)(iv) to remove specific references to manual 
quotations, and specify that a User displaying a Locking Quotation or 
Crossing Quotation would only qualify for this exception if the User 
simultaneously routed an ISO to execute against the full displayed size 
of the Locking Quotation or Crossing Quotation, instead of the current 
language which references only clearing locked or crossed manual 
quotations.
    Finally, the Exchange proposes to introduce another exception under 
proposed EDGA Rule 11.10(f)(3)(v) that applies when the quotation 
displayed by the User is not a Locking Quotation or Crossing Quotation 
in violation of Rule 610(d) of Regulation NMS because the quotation 
being locked or crossed is a manual quotation that may be locked or 
crossed under an exemption granted pursuant to Rule 610(e) of 
Regulation NMS. Locking Quotations and Crossing Quotations are defined 
in Rule 11.6(c), (g), and reference the display of bids and offers that 
lock or cross quotations disseminated pursuant to an NMS Plan ``in 
violation of Rule 610(d).'' The proposed language being introduced as 
EDGA Rule 11.10(f)(3)(v) is meant to codify the requested exemption by 
making clear that a quotation would not be considered a Locking 
Quotation or Crossing Quotation if the quotation being locked or 
crossed is a manual quotation that is allowed to be locked or crossed 
pursuant to the Exchange's exemption request.
    In addition, the Order Protection Rule requires trading centers to 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to prevent trade-throughs on that trading 
center of protected quotations in NMS stocks, unless an exception 
applies. Rule 611(b)(4) provides such an exception that applies when 
the markets are crossed but this exception applies solely to situations 
where a Protected Bid is crossed with a Protected Offer. It does not 
apply to situations where a Protected Bid or Protected Offer is crossed 
with the published bid or offer of a manual market. As a result, if an 
automated quotation were to cross EDGA's disseminated manual quotation 
without also crossing another market's protected quotation, the 
Exchange would not be permitted to execute incoming orders against its 
displayed quotation even though that quotation establishes the best 
price available in the market. The Exchange believes that this could be 
a disincentive to both providing and accessing liquidity on EDGA as the 
published quotation may not be executable in such circumstances solely 
due to the Exchange disseminating a quotation that has been marked 
``manual.'' Furthermore, the quotations that would be impacted are the 
ones that actually set the best available prices in a security--i.e., 
the type of liquidity that the proposed delay mechanism is actively 
seeking to encourage.
    Based on the Exchange's analysis, crossed market scenarios are 
infrequent in today's highly efficient market, and tend to be short 
lived, with 99% of crossed markets being resolved within 25 
milliseconds or less.\24\ As a result, the Exchange is proposing to 
implement delayed cancellation behavior to allow an aggressively priced 
order to remain posted at its limit price for as long as it is 
executable pursuant to Rule 611(b)(8)--i.e., the ``Flickering Quote 
Exception.'' As proposed, a bid (offer) on the EDGA Book would be 
eligible to remain posted to the EDGA Book for one second after such 
bid (offer) is crossed by a Protected Offer (Protected Bid). Such bid 
(offer) would be executable during this one second period pursuant to 
Rule 611(b)(8) of Regulation NMS, notwithstanding the fact that it is 
higher (lower) than a Protected Offer (Protected Bid). In turn, the bid 
(offer) on the EDGA Book would be cancelled if it continues to be 
higher (lower) than a Protected Offer (Protected Bid) after this one 
second period. The following example illustrates the proposed behavior.
---------------------------------------------------------------------------

    \24\ Based on crossed markets occurring in SPY, IWM, AAPL, GE, 
C, GS, and XOM on October 5, 2018. Crossed markets present an 
effective arbitrage opportunity because in a crossed market the 
spread is inverted and it is therefore possible to purchase a 
security at a price below the prevailing price to sell.
---------------------------------------------------------------------------

    Example 9:

--Market is $10.00 x $10.03 (EDGA, BZX, Nasdaq).
--Liquidity provider on EDGA tightens quote to $10.02 x $10.03 
improving the bid by two cents.
--Nasdaq subsequently updates its offer price to $10.01.
--Incoming sell order on EDGA seeks to trade with the EDGA bid at 
$10.02.
--The EDGA bid at $10.02 would remain posted at this price for one 
second, during which time it would be executable against incoming sell 
orders seeking an execution at the best posted bid price in the market. 
As is the case today, an incoming sell order would be eligible trade 
with the EDGA bid at $10.02, securing a favorable execution for the 
investor seeking liquidity. In the unlikely event that the EDGA bid is 
still crossed with Nasdaq's offer after one second, it would be 
cancelled.

    Since the proposed flickering quote delayed cancellation behavior 
would allow bids and offers on EDGA to remain posted and executable for 
up to one second if crossed by a Protected Bid or Protected Offer of 
another market, the Exchange would also amend Rule 11.10(a)(2) to 
ensure that the crossed market collars defined in that rule continue to 
apply to such aggressively priced bids and offers. Specifically, Rule 
11.10(a)(2) generally provides that if a Protected Bid is crossing a 
Protected Offer, the Exchange will not execute any

[[Page 30287]]

portion of a bid or offer at a price that is more than the greater of 
five cents or 0.5 percent through the lowest Protected Offer or highest 
Protected Bid, as applicable. This crossed market collar is designed to 
constrain the price of executions when there is a crossed market, and 
the Exchange believes that this protection should continue to be 
available when EDGA begins disseminating a manual quotation. As a 
result, the Exchange proposes to amend Rule 11.10(a)(2) to provide that 
protection is available when a bid (offer) on the EDGA Book is crossed 
by a Protected Offer (Bid) pursuant to proposed EDGA Rule 11.10(a)(6). 
As is the case today, a User would be able to instruct the Exchange to 
cancel an incoming order in such a scenario. The Exchange would 
therefore also amend the portion of the rule dealing with such an 
instruction to make clear that it would continue to apply when a bid 
(offer) on the EDGA Book is crossed by a Protected Offer (Bid).
IV. Order Types
    The Exchange is also proposing a number of changes to the order 
types currently offered on EDGA. The proposed changes are designed to 
ensure that order types offered by the Exchange are consistent with the 
goals and operation of the LP\2\ delay mechanism, and would therefore 
encourage continued participation by members and investors on EDGA. In 
many cases, the Exchange has decided to eliminate, or adjust the 
operation of, certain rarely used order types and instructions that 
could increase System complexity if offered alongside the proposed 
delay mechanism. In addition, the Exchange has proposed changes to 
certain order types that the Exchange believes would be desirable for 
market participants after the implementation of the delay mechanism. 
The proposed amendments are detailed below: \25\
---------------------------------------------------------------------------

    \25\ The changes discussed in this section are reflected in EDGA 
Rules 11.6 and 11.8, which describe the order types and instructions 
being eliminated or amended, and where those order types or 
instructions are referenced in other parts of the rulebook, 
including EDGA Rule 11.7, Opening Process, EDGA Rule 11.9, Priority 
of Orders, and EDGA Rule 11.21, Compliance with Regulation NMS Plan 
to Implement a Tick Size Pilot Program.
---------------------------------------------------------------------------

    Discretionary Range. Discretionary Range is an optional instruction 
that a User may attach to an order to buy (sell) a stated amount of a 
security at a specified, displayed or non-displayed ranked price with 
discretion to execute up (down) to another specified, non-displayed 
price.\26\ Determining whether an incoming order with this instruction 
is executable on entry, and hence subject to the delay mechanism, would 
therefore require the System to take into account both the order's 
ranked limit price and its discretionary price. The Exchange believes 
that this may add unnecessary complexity to the System, and is 
therefore proposing to eliminate the Discretionary Range instruction. 
In addition, the Exchange offers MidPoint Discretionary Orders 
(``MDO'') that utilize the Discretionary Range instruction.\27\ 
Specifically, a Midpoint Discretionary Order is a limit order to buy 
that is pegged to the NBB, with discretion to execute at prices up to 
and including the midpoint of the NBBO, or a limit order to sell that 
is pegged to the NBO, with discretion to execute at prices down to and 
including the midpoint of the NBBO. The Exchange also proposes to 
eliminate MidPoint Discretionary Orders.
---------------------------------------------------------------------------

    \26\ See EDGA Rule 11.6(d).
    \27\ See EDGA Rule 11.8(e).
---------------------------------------------------------------------------

    Pegged Orders. Pegged is an instruction to automatically re-price 
an order in response to changes in the NBBO. A Pegged Order can be 
entered as either a Market Peg or Primary Peg.\28\ A Market Peg is an 
order entered with an instruction to peg to the NBB, for a sell order, 
or the NBO, for a buy order.\29\ A Primary Peg is as an order entered 
with an instruction to peg to the NBB, for a buy order, or the NBO, for 
a sell order.\30\ The Exchange proposes to eliminate both Market Pegs 
and Primary Pegs. MidPoint Pegged Orders (discussed separately) would 
continue to be offered with minor changes to a few rarely used 
instructions.
---------------------------------------------------------------------------

    \28\ See EDGA Rule 11.8(b)(9).
    \29\ See EDGA Rule 11.6(j)(1).
    \30\ See EDGA Rule 11.6(j)(2).
---------------------------------------------------------------------------

    The LP\2\ delay mechanism is designed to delay inbound executable 
orders to allow liquidity providers sufficient time to adjust their 
quotes. Orders subject to the delay mechanism would be delayed once on 
entry, and would not be subject to any additional delays thereafter 
unless the entering firm were to change the price of the order such 
that a resting order becomes executable. Pegged Orders automatically 
re-price based on changes to the NBBO, and the Exchange believes that 
it is preferable not to subject these orders to another delay every 
time that the order is re-priced to an executable price, as doing so 
may hinder the ability of such orders to obtain an execution. At the 
same time, the Exchange believes that automatic re-pricing, without any 
delay, could enable firms using these order types to obtain an 
execution against a stale quote before the liquidity provider has been 
provided sufficient time to update their quote, thereby frustrating the 
goals of the delay mechanism. The Exchange has therefore determined to 
eliminate Market Pegs and Primary Pegs, which are lightly used, while 
retaining MidPoint Pegged Orders that the Exchange believes would 
continue to be useful to market participants seeking to trade at the 
midpoint.
    Supplemental Peg Orders. A Supplemental Peg Order is a non-
displayed Limit Order that is eligible for execution at the NBB for a 
buy order and NBO for a sell order against an order that is in the 
process of being routed to an away Trading Center if such order that is 
in the process of being routed away is equal to or less than the 
aggregate size of the Supplemental Peg Order interest available at that 
price.\31\ Although Supplemental Peg Orders differ from the Pegged 
Orders described above in that they do not remove liquidity,\32\ the 
Exchange proposes to eliminate it in conjunction with the proposed 
changes described above for Pegged Orders.
---------------------------------------------------------------------------

    \31\ See EDGA Rule 11.8(g).
    \32\ Id.
---------------------------------------------------------------------------

    MidPoint Peg Orders. A MidPoint 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. Although a number of order types that 
contain re-pricing logic would be eliminated with the introduction of 
the LP\2\ delay mechanism, the Exchange would continue to offer 
MidPoint Peg Orders on EDGA as these orders are valuable to a range of 
market participants seeking an execution at the midpoint of the 
NBBO.\33\ MidPoint Peg Orders are the most widely used pegging 
instruction by a wide margin today. Furthermore, the Exchange believes 
that MidPoint Peg Orders may be even more useful once the LP\2\ delay 
mechanism is implemented as they would be protected from being executed 
at stale prices when the midpoint is about to change.
---------------------------------------------------------------------------

    \33\ As discussed earlier in this proposed rule change, the NBBO 
calculated by the Exchange would include EDGA quotes. As a result, 
MidPoint Peg Orders would be pegged to the midpoint of the NBBO, 
including EDGA's disseminated quotation.
---------------------------------------------------------------------------

    Notwithstanding the general usefulness of MidPoint Peg Orders, 
however, the Exchange proposes to eliminate two optional features that 
account for a small amount of usage today. First, in addition to 
regular midpoint logic that automatically adjusts the price of a 
MidPoint Peg Order to the midpoint, the Exchange

[[Page 30288]]

currently offers alternative logic that pegs the order to the less 
aggressive midpoint or one minimum price variation inside the same side 
of the NBBO.\34\ The Exchange proposes to amend the operation of this 
order type such that MidPoint Peg Orders entered on EDGA would not be 
permitted to alternatively peg to one minimum price variation inside 
the same side of the NBBO. Second, by default the MidPoint Peg Orders 
do not execute when the NBBO is locked or crossed, but Users may 
alternatively specify that they would prefer a MidPoint Peg Order to be 
executed in a locked market. The Exchange proposes to eliminate the 
optional feature that would allow a MidPoint Peg Order to be executed 
in a locked market.
---------------------------------------------------------------------------

    \34\ See EDGA Rule 11.9(c)(9).
---------------------------------------------------------------------------

    Multiple Price Adjust and Multiple Display-Price Sliding. The 
Exchange offers two instructions that are designed to re-price orders 
in a manner that complies with Rule 610(d) of Regulation NMS--i.e., 
locking or crossing quotations. Price Adjust is an order instruction 
requiring that where an order would be a locking quotation or crossing 
quotation of an external market if displayed by the System on the EDGA 
Book at the time of entry, the order will be displayed and ranked at a 
price that is one minimum price variation lower (higher) than the 
locking price for orders to buy (sell).\35\ Similarly, Display-Price 
Sliding is an order instruction requiring that where an order would be 
a locking quotation or crossing quotation of an external market if 
displayed by the System on the EDGA Book at the time of entry, will be 
ranked at the locking price in the EDGA Book and displayed by the 
System at one minimum price variation lower (higher) than the locking 
price for orders to buy (sell).\36\ Both Price Adjust and Display-Price 
Sliding instructions allow the User to instruct the Exchange to adjust 
the order to a more aggressive price either once, or multiple times, in 
response to changes to the prevailing NBBO.\37\ The Exchange now 
proposes to modify these instructions to only permit their default 
operation, which is to adjust the order on entry and once following a 
change to the prevailing NBBO.\38\
---------------------------------------------------------------------------

    \35\ See EDGA Rule 11.6(l)(1)(A).
    \36\ See EDGA Rule 11.6(l)(1)(B). A User may elect to have the 
System only apply the Display-Price Sliding instruction to the 
extent a display-eligible order at the time of entry would be a 
Locking Quotation. For Users that select this portion of the 
Display-Price Sliding instruction, any order will be cancelled if, 
upon entry, such order would be a Crossing Quotation of an external 
market. Id.
    \37\ See EDGA Rule 11.6(l)(1)(A)(i),(B)(iii).
    \38\ EDGA Rule 11.6(l)(1)(B)(2) currently provides that in the 
event the NBBO changes such that an order subject to the Display-
Price Sliding instruction would not be a Locking Quotation or 
Crossing Quotation, the order will receive a new timestamp, and will 
be displayed at the ``most aggressive permissible price.'' While the 
most aggressive permissible price would be up to the original limit 
price of the order in the case of Multiple Display-Price Sliding, 
orders subject to Single Display-Price Sliding are limited to being 
displayed at the original locking price. As such, the Exchange 
proposes to amend EDGA Rule 11.6(l)(1)(B)(2) to reference the 
original locking price.
    Similarly, EDGA Rule 11.6(l)(1)(B)(4) currently provides that in 
the event the NBBO changes such that an order with a Post Only 
instruction subject to Display-Price Sliding instruction would be 
ranked at a price at which it could remove displayed liquidity from 
the EDGA Book, the order will be executed as set forth in Rule 
11.6(n)(4) or cancelled. Orders subject to Single Display-Price 
Sliding, as opposed to Multiple Display-Price Sliding, are not re-
ranked when displayed orders at the original locking price are on 
the opposite side of the EDGA Book. This scenario is thus impossible 
for orders subject to Single Display-Price Sliding and the Exchange 
proposes to delete this text from the rule.
---------------------------------------------------------------------------

    Post Only. Post Only is an instruction that may be attached to an 
order that is to be ranked and executed on the Exchange or cancelled, 
as appropriate, without routing away to another trading center except 
that the order will not remove liquidity from the EDGA Book, other than 
in instances where economically beneficial to the firm entering the 
order with a Post Only instruction.\39\ Specifically, an order with a 
Post Only instruction and a Display-Price Sliding or Price Adjust 
instruction will remove contra-side liquidity from the EDGA Book if the 
order is an order to buy or sell a security priced below $1.00, or if 
the value of such execution when removing liquidity equals or exceeds 
the value of such execution if the order instead posted to the EDGA 
Book and subsequently provided liquidity, including the applicable fees 
charged or rebates provided.\40\ With the introduction of the LP\2\ 
delay mechanism, the Exchange believes that a more straightforward 
variant of the Post Only instruction that would never remove liquidity, 
and would therefore never be subject to the delay mechanism, would be 
valuable to liquidity providers on EDGA. The Exchange therefore 
proposes to amend the Post Only instruction such that a Post Only order 
would never be eligible to remove liquidity.\41\ Furthermore, to 
encourage liquidity providers to use this instruction to provide 
displayed liquidity, the Post Only instruction would be limited to 
displayed orders, or MidPoint Peg Orders, that, while non-displayed 
would provide price improvement all the way up to the midpoint of the 
NBBO.
---------------------------------------------------------------------------

    \39\ See EDGA Rule 11.6(n)(4).
    \40\ Id. To determine at the time of a potential execution 
whether the value of such execution when removing liquidity equals 
or exceeds the value of such execution if the order instead posted 
to the EDGA Book and subsequently provided liquidity, the Exchange 
will use the highest possible rebate paid and highest possible fee 
charged for such executions on the Exchange.
    \41\ The Exchange also proposes conforming changes to other 
rules that reference Post Only functionality that would cause an 
incoming Post Only Order to be executed on entry. See e.g., EDGA 
Rule 11.6(l)(A)(4), (B)(4) and EDGA Rule 11.8(c)(5).
---------------------------------------------------------------------------

    Non-Displayed Swap and Super Aggressive. The Exchange offers two 
order instructions that contain a liquidity swap component--i.e., Non-
Displayed Swap (``NDS'') and Super Aggressive. When an order entered 
with an NDS or Super Aggressive instruction is locked by an incoming 
order with a Post Only instruction that would not remove liquidity 
based on the economic impact of removing liquidity on entry compared to 
resting on the order book and subsequently providing liquidity, the 
order with the NDS or Super Aggressive instruction is converted to an 
executable order and will remove liquidity against such incoming 
order.\42\ An order entered with an NDS instruction is not eligible for 
routing pursuant to EDGA Rule 11.11,\43\ whereas an order entered with 
a Super Aggressive instruction would be routed if an away trading 
center locks or crosses the limit price of the order resting on the 
EDGA Book.\44\ NDS and Super Aggressive are used by market participants 
that are very aggressively seeking liquidity and are therefore willing 
to liquidity swap with an incoming Post Only order, generating an 
execution when a trade would otherwise not occur by changing the 
economics for the incoming order. As mentioned in the paragraphs above, 
the Exchange is proposing to amend its handling of Post Only orders 
such that an order entered with a Post Only instruction would not trade 
on entry, regardless of the economics associated with such an 
execution. As such, the Exchange proposes to eliminate the NDS and 
Super Aggressive instructions. The Exchange would continue to offer the 
Aggressive instruction, which does not contain a liquidity swap 
component but is otherwise identical to the Super Aggressive 
instruction in that it directs the System to route the order if an away 
trading center locks or crosses the limit

[[Page 30289]]

price of the order resting on the EDGA Book.\45\
---------------------------------------------------------------------------

    \42\ See EDGA Rule 11.6(n)(2), (n)(7). If an order that does not 
contain a Super Aggressive instruction maintains higher priority 
than one or more Super Aggressive eligible orders, the Super 
Aggressive eligible order(s) with lower priority will not be 
converted and the incoming order with a Post Only instruction will 
be posted or cancelled in accordance with Rule 11.6(n)(4). This does 
not apply to orders entered with an NDS instruction.
    \43\ See EDGA Rule 11.6(n)(7).
    \44\ See EDGA Rule 11.6(n)(2).
    \45\ See EDGA Rule 11.6(n)(1).
---------------------------------------------------------------------------

    Market Maker Peg Orders. A Market Maker Peg Order is a limit order 
that is automatically priced by the System at the Designated Percentage 
away from the then current NBB (in the case of an order to buy) or NBO 
(in the case of an order to sell), or if there is no NBB or NBO at such 
time, at the Designated Percentage away from the last reported sale 
from the responsible single plan processor. This automated pricing is 
done to assist market makers in maintaining compliance with their 
continuous quoting obligations, and happens both when the order becomes 
active in the System, i.e., upon entry or at the beginning of regular 
trading hours, and at any time the price of the order reaches the 
Defined Limit or moves a specified number of percentage points away 
from the Designated Percentage toward the then current NBB or NBO, as 
applicable. Since this order type is designed to maintain compliance 
with a market maker's quoting obligations by providing liquidity at 
prices that are automatically adjusted to comply with these quoting 
obligations, the Exchange proposes to modify the Market Maker Peg Order 
such that all such orders would be entered into the System with a Post 
Only instruction.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\46\ in general, and 
Section 6(b)(5) of the Act,\47\ 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. Specifically, the Exchange 
believes that the proposed LP\2\ delay mechanism would reduce the 
opportunity for cross-asset latency arbitrage and thereby protect 
liquidity providers and encourage better market quality on EDGA.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b).
    \47\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Two registered national securities exchanges, IEX and NYE American, 
currently operate markets with delay mechanisms. The 350 microsecond 
delay mechanisms adopted on both of these markets are very similar, and 
are designed to reduce latency arbitrage opportunities by allowing 
resting non-displayed pegged orders to be updated based on changes in 
the NBBO prior to being picked off by opportunistic traders. Neither of 
these markets, however, address the critical need to encourage 
liquidity provision by market makers and other market participants that 
are vital to the proper functioning of the equities markets. While the 
LP\2\ delay mechanism would also protect non-displayed orders pegged to 
the midpoint of the NBBO, it is designed first and foremost to protect 
price forming, displayed liquidity.
    To accomplish this result, the Exchange would implement a four 
millisecond delay on incoming executable orders that would take 
liquidity on entry. The delay mechanism is designed to provide 
liquidity providers sufficient time to update their quotes based on 
cross-asset signals, primarily from the futures markets. The Exchange 
has found that, today, liquidity providers are at risk of trading at 
stale prices when futures prices change as certain opportunistic 
trading firms that utilize microwave connections, instead of the 
traditional fiber, can race to the equities markets and trade with 
resting liquidity before liquidity providers can adjust their quotes 
appropriately. This effect is further compounded when market makers and 
other providers of liquidity are quoting in many different securities 
and may therefore need to simultaneously modify quotes across a number 
of securities simultaneously. This is a significant disincentive to 
firms that actively provide liquidity, and often results in those firms 
being unwilling to display the best possible prices, or size, to the 
market. As markets evolve, the Exchange believes that it is its 
responsibility to respond to these changes in a manner that continues 
to promote a free and open market and national market system. The 
Exchange has therefore designed a unique delay mechanism to protect 
liquidity providers, which has the potential to benefit both liquidity 
providers and the ordinary investors that rely on the liquidity they 
supply to the market.
    The Exchange believes that its approach has two important benefits 
over the delay mechanisms introduced to date. First, it would give 
liquidity providers the ability to control their own trading interest, 
rather than requiring that firms use complex pegged order types that 
cede pricing discretion to the Exchange in order to benefit from the 
delay mechanism.\48\ Second, it would protect displayed orders in 
addition to the non-displayed orders that are protected by existing 
delay mechanisms. When the Commission adopted the Order Protection 
Rule, it stated its view that ``strengthened protection of displayed 
limit orders would help reward market participants for displaying their 
trading interest and thereby promote fairer and more vigorous 
competition among orders seeking to supply liquidity.'' \49\ The 
Exchange believes that this statement remains true today. Displayed 
limit orders are important to the national market system because they 
inform the prices at which all transactions take place. Even without 
protected market status, the Exchange believes that more displayed 
liquidity increases pricing information available to investors and 
contributes to more robust price formation.
---------------------------------------------------------------------------

    \48\ IEX and NYSE American provide discretionary pegged orders 
that have discretion to execute at prices up to some discretionary 
price, except when the exchange has detected an unstable quote. See 
IEX Rule 11.190(b)(8),(10); NYSE American Rule 7.31E(h)(C).
    \49\ Regulation NMS Adopting Release, 70 FR at 37501.
---------------------------------------------------------------------------

    The Exchange also believes that these benefits would accrue to 
market participants without unnecessarily burdening the ability of 
investors to access displayed liquidity on EDGA. Although the proposed 
four millisecond delay is longer than the one millisecond delay 
contemplated by the Staff's guidance on automated quotations under 
Regulation NMS, or the 700 millisecond roundtrip delay experienced on 
IEX and NYSE American, the Exchange believes that this delay is 
nonetheless sufficiently short so as to not impede the ability of long 
term investors to access the Exchange's displayed quotations. Moreover, 
the Commission's approval of delay mechanisms on both IEX and NYSE 
American indicates that a speed bump that is appropriately designed 
based on geographic latencies between trading venues where latency 
arbitrage opportunities exist can be a suitable mechanism for 
addressing that arbitrage, and thereby protecting investors. The LP\2\ 
delay mechanism, which is designed to reduce latency arbitrage based on 
signals that originate from the futures markets in Aurora, IL and must 
travel to the Exchange's data center in Secaucus, NJ, would introduce a 
delay that is shorter than existing geographic latencies between those 
markets in order to protect liquidity providers.\50\
---------------------------------------------------------------------------

    \50\ A fiber connection between Aurora, IL and Secaucus, NJ 
would be subject to around 7.75 milliseconds of latency. See supra 
note 10. The proposed four milliseconds of latency would level the 
playing field between market participants that use a standard fiber 
connection and opportunistic traders that use the fastest microwave 
connections.

---------------------------------------------------------------------------

[[Page 30290]]

    In addition, the proposed delay would be shorter than existing 
geographic latencies within the national market system for equities 
based on the time it takes for a message to traverse the distance 
between the Exchange's data center and the NYSE Chicago, Inc. (``CHX'') 
CH2 data center, which is located in Chicago, IL. While CHX trades the 
vast majority of symbols out of its data center in Secaucus, NJ, it 
trades a number of ETPs out of the CH2 data center to reduce latency 
with respect to the related index futures contracts. The proposed LP\2\ 
delay mechanism would produce a similar result by delaying incoming 
messages based on geographical latencies between EDGA's data center in 
Secaucus, NJ and CME's data center for futures trading in Aurora, IL, 
and, more specifically, the difference in latencies between a high 
speed microwave connection and a traditional fiber connection. As such, 
the Exchange believes that the proposed delay mechanism is narrowly 
tailored to reduce cross-asset latency arbitrage without impairing the 
proper functioning of the equities markets. Furthermore, in the SEC's 
interpretive guidance regarding automated quotations under Regulation 
NMS, the Commission itself relied, in part, on geographic latencies 
experienced between data centers located in northern NJ, where the 
Exchange's own data center is located, and the CH2 data center in 
Chicago, IL.\51\
---------------------------------------------------------------------------

    \51\ See Commission Interpretation, supra note 17, 81 FR at 
40789.
---------------------------------------------------------------------------

    The proposed LP\2\ delay mechanism is also consistent with Rule 602 
of Regulation NMS (i.e., the ``Quote Rule'').\52\ Generally, the firm 
quote provisions of the Quote Rule require each responsible broker or 
dealer to execute an order presented to it, other than an odd lot 
order, at a price at least as favorable as its published bid or 
published offer, in any amount up to its published quotation size. This 
obligation does not apply if the responsible broker or dealer has 
communicated a revised bid or offer before the incoming order is 
presented to such broker or dealer.\53\ The LP\2\ delay mechanism would 
not result in violations of the firm quote provisions of the Quote Rule 
because no information is communicated about executable orders until 
those orders go through the LP\2\ delay mechanism. As such, those 
orders would not be ``presented'' to liquidity providers as 
contemplated by the Quote Rule until they have gone through the delay 
mechanism and are released for execution. Once the executable order has 
gone through the delay mechanism and is presented to resting orders on 
the EDGA Book, no liquidity provider would be given an opportunity to 
update its prices in response to that information.
---------------------------------------------------------------------------

    \52\ 17 CFR 242.602(b)(2).
    \53\ 17 CFR 242.602(b)(3).
---------------------------------------------------------------------------

    Furthermore, while the LP\2\ delay mechanism is designed to improve 
market quality, firms with executable order flow that believe that 
their execution quality is harmed by the delay mechanism would be 
permitted to ignore the Exchange's manual quotations and route their 
orders to other trading venues. The Exchange is proposing to give up 
its protected quote status in conjunction with the introduction of the 
LP\2\ delay mechanism. As a result, no market participants would be 
required to access liquidity on EDGA in order to meet their obligations 
under the Order Protection Rule, and would only need to trade on EDGA 
if they see the anticipated benefits, such as lower quoted and 
effective spreads, or larger size at the inside.
    Although EDGA would operate without protected quote status, the 
Exchange believes that expected improvements to market quality would 
continue to make the Exchange an attractive venue for the trading of 
NMS stocks.\54\ Routing orders to EDGA would therefore be consistent 
with a broker-dealer's best execution obligations to the extent that 
the proposal is successful in encouraging improved market quality in 
the form of better prices, available size, or fill rates. The duty of 
best execution requires broker-dealers to execute customers' orders at 
the most favorable terms reasonably available under the circumstances, 
i.e., at the best reasonably available price.\55\ A broker-dealer would 
therefore be permitted to send orders for execution on EDGA, consistent 
with this obligation, if it finds that the Exchange offers more 
favorable execution opportunities to its customers, taking into account 
the prices and sizes posted by liquidity providers on the Exchange, as 
well as other factors such as the likelihood of execution. In the 
absence of such expected improvements to market quality, however, the 
Order Protection Rule would not obligate firms to access liquidity on a 
``manual'' exchange. The Exchange believes that the anticipated 
improvements to market quality as a result of the proposed delay 
mechanism would make EDGA a competitive choice for investors seeking 
liquidity.
---------------------------------------------------------------------------

    \54\ The Order Protection Rule does not supplant or diminish the 
broker-dealer's responsibility for achieving best execution, 
including its duty to evaluate the execution quality of markets to 
which it routes customer orders. See Regulation NMS Adopting 
Release, 70 FR at 37538.
    \55\ See Regulation NMS Adopting Release, 70 FR at 37538.
---------------------------------------------------------------------------

    The Exchange also believes that the proposed approach is not 
unfairly discriminatory since orders would be subject to the LP\2\ 
delay mechanism on an equal basis based solely on whether the incoming 
order is priced to remove or add liquidity on entry. The Exchange 
believes that it is appropriate to provide protection for orders that 
provide liquidity because these orders provide an important service to 
the market and face asymmetric risks due to the fact that the market 
may move while they are posted to the order book. Furthermore, in 
contrast to other delay mechanisms that target very narrow subsets of 
orders as deserving of protection, the LP\2\ delay mechanism is 
designed broadly to protect all liquidity providing orders, and is not 
limited to protecting either specific order types or specific 
categories of market participants. The Exchange therefore believes that 
the LP\2\ delay mechanism would promote liquidity provision without 
unfairly discriminating against specific segments of the market.
    While market makers are the most likely to benefit from the 
proposed delay mechanism due to their obligations to continuously quote 
across a number of securities,\56\ the proposal would protect a wide 
range of orders that provide liquidity to the market, and thereby 
promote better market quality. The LP\2\ delay mechanism is therefore 
designed to encourage liquidity provision by market makers entering 
displayed two-sided quotes on a continuous basis throughout the trading 
day, investors seeking to trade at the midpoint of the NBBO, and any of 
a wide range of other market participants entering resting limit 
orders. The Exchange believes that it is preferable to provide this 
benefit to all liquidity providing orders rather than specific segments 
of the market because its goal is to broadly encourage liquidity 
provision. Any market participants that provide liquidity to the market 
would benefit from the LP\2\ delay mechanism in relative proportion to 
the amount of liquidity they provide.
---------------------------------------------------------------------------

    \56\ See EDGA Rule 11.20(d)(1).
---------------------------------------------------------------------------

    The Exchange does not believe that it is unfairly discriminatory to 
subject orders that would remove liquidity on entry to the proposed 
delay mechanism. By design, all speed bumps must be applied to certain 
inbound/outbound messages and not others. For example, the delay 
mechanisms adopted by both

[[Page 30291]]

IEX and NYSE American do not apply to the repricing of non-displayed 
orders pegged to the NBBO. This allows those orders to be updated based 
on their pegging instruction before opportunistic traders can trade 
with them at the stale price. Similarly, the proposed LP\2\ delay 
mechanism would apply only to orders that remove liquidity, while 
exempting orders that add liquidity so that resting orders can be 
modified before opportunistic traders can pick off quotes at the stale 
price. Reducing this form of opportunistic trading is consistent with 
the protection of investors and the public interest, and removes 
impediments to and perfects the mechanism of a free and open market and 
a national market system.
    The Exchange does not believe that it is unfairly discriminatory to 
subject all liquidity removing orders to the delay mechanism, including 
orders entered by market participants not engaged in latency arbitrage. 
The proposed delay mechanism is designed to give liquidity providers 
the ability to update their quotes in response to changed market 
conditions (e.g., a price change in a futures contract) before trading 
at stale prices. The Exchange believes that this approach is superior 
to relying on complicated non-displayed pegged orders managed by the 
exchange operator, as the chosen approach encourages liquidity 
providers to actually improve displayed prices rather than simply 
following prices displayed by other equities exchanges. Since the 
liquidity provider would never be apprised of the existence of an 
incoming liquidity removing order before it exits the delay mechanism, 
updated quotations would be more likely to impact latency sensitive 
market participants attempting to trade at times when the market is 
about to move to a new price level. In turn, ordinary investors that 
are not specifically seeking these opportunities would benefit from 
better price discovery as the price at which their orders are executed 
would better reflect the current market for a given security, as 
potentially improved by liquidity providers due to decreased adverse 
selection risk. The LP\2\ delay mechanism is designed to encourage 
liquidity provision, and therefore has the potential to benefit all 
market participants, including market participants that submit 
executable orders subject to the delay mechanism. As the Commission 
explained when it adopted Regulation NMS, the interests of liquidity 
providers and market participants that submit marketable orders are 
``inextricably linked together.'' \57\ Displayed limit orders, in 
particular, are responsible for setting the market for a security and 
are the primary driver of public price discovery in addition to 
supplying needed liquidity to other market participants. Ultimately, 
the goal of the LP\2\ delay mechanism is to protect liquidity providers 
from opportunistic trading strategies so as to improve execution 
quality for investors that submit marketable order flow.
---------------------------------------------------------------------------

    \57\ See Regulation NMS Adopting Release, 70 FR at 37527. 
``Displayed limit orders are the primary source of public price 
discovery. They typically set quoted spreads, supply liquidity, and 
in general establish the public ``market'' for a stock. The quality 
of execution for marketable orders, which, in turn, trade with 
displayed liquidity, depends to a great extent on the quality of 
markets established by limit orders (i.e., the narrowness of quoted 
spreads and the available liquidity at various price levels).'' Id.
---------------------------------------------------------------------------

    In fact, the success of the Exchange under the proposed market 
structure is entirely contingent on providing improved market quality 
(e.g., quoted spreads, size at the inside, and fill rates) to 
marketable orders. Because the proposal contemplates disseminating a 
manual quotation that is not protected under the Order Protection Rule, 
interaction with resting order flow on the EDGA Book would be entirely 
voluntary. That is, no market participant would be required to access 
liquidity on the EDGA under Regulation NMS. Without the protection 
normally afforded to displayed quotations by the Order Protection Rule, 
the decision to route order flow to the Exchange would depend on the 
entering firm's independent assessment that EDGA offers favorable 
execution quality when compared to competing markets. As such, the 
decision to route orders to the Exchange would reflect that firm's 
assessment that the economics associated with improved market quality 
outweigh any perceived costs associated with the delay mechanism.
    Given the importance of ensuring that liquidity providers can quote 
aggressively with the introduction of the delay mechanism, the Exchange 
also believes that the proposed flickering quote functionality would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. As explained in the purpose 
section of this proposed rule change, the proposed behavior is designed 
to ensure that the EDGA quote would remain accessible to investors if 
the Exchange's manual quotation is crossed by a protected quotation. 
This change is necessitated by a difference in rules that apply to 
automated and manual quotations: Specifically, the fact that the 
crossed market exception under Rule 611(b)(4) of Regulation NMS only 
applies when a Protected Bid is crossed with a Protected Offer. As 
proposed, if the Exchange's previously disseminated manual quotation is 
crossed by a protected quotation, aggressively priced orders on the 
EDGA Book would remain displayed and executable at EDGA's quoted price 
for one second. If the Exchange's quote is still crossed by a protected 
quote after this one second period, the System would cancel the crossed 
order(s), which would no longer be posted at an executable price. In 
turn, this would ensure that the best quoted prices displayed in the 
market remain accessible to investors. The Exchange believes that 
permitting orders to remain posted and executable for the one second 
period allowed under the Flickering Quote Exception is consistent with 
the protection of investors and the public interest as it ensures that 
market participants would be able to access EDGA's disseminated 
quotation when EDGA has established the best price available in the 
market.
    The Exchange also believes that the proposed changes to its locked 
and crossed market rules under EDGA Rule 11.10(f), and the changes to 
its crossed market collars as described in Rule 11.10(a)(2), are 
necessary and appropriate as these changes would increase transparency 
around the proposed operation of the Exchange as a ``manual'' market 
that would no longer disseminate an automated quotation. Specifically, 
and as described in more detail in the purpose section of the proposed 
rule change, these changes are designed to ensure that the Exchange's 
rules properly reflect the fact that EDGA would be disseminating a 
manual quotation, subject to an exemption requested pursuant to Rule 
610(e) of Regulation NMS that would allow the Exchange to continue 
locking or cross manual quotations disseminated by NYSE. The Exchange 
believes that the proposed changes are consistent with the Exchange's 
obligations as an equities exchange disseminating a manual quotation, 
as modified by the requested exemption.
    Finally, the Exchange believes that the proposed order type changes 
are consistent with the protection of investors and the public 
interest. The Exchange has reviewed the order types offered on EDGA to 
determine how best to serve the needs of members and investors, while 
striving to reduce System complexity with the introduction of the delay 
mechanism. While the Exchange offers a wide array of order types, not 
all of those order types are frequently used by market

[[Page 30292]]

participants that trade on EDGA. In addition, some of the order types 
offered today would be more difficult to implement in a way that is 
consistent with the operation and goals of the proposed LP\2\ delay 
mechanism, while others could be made to more useful by making small 
tweaks to their operation. The Exchange believes the proposed changes 
to its order types satisfy its twin goals of providing functionality 
that is the most useful to market participants and investors that trade 
on EDGA while reducing System complexity surrounding the proposed delay 
mechanism. Each of the order type changes is discussed in turn below.
    First, the Exchange has decided to eliminate the Discretionary 
Range instruction and the related MDO order type as continuing to offer 
orders that include this instruction would add complexity to the System 
in the context of a delay mechanism that applies to all liquidity 
taking orders. Specifically, implementation of the Discretionary Range 
instruction alongside the proposed LP\2\ delay mechanism would require 
that the System consider both an order's limit price and its 
discretionary price in determining whether an order would be subject to 
the speed bump. Based on current usage of this order instruction, the 
Exchange does not believe at this time that continuing to offer it 
would provide sufficient benefit to market participants to warrant the 
increased complexity of building this feature to coexist with the delay 
mechanism. With respect to MDOs, which contain a Discretionary Range 
instruction that is pegged to the midpoint of the NBBO, the Exchange 
notes that investors that desire a midpoint execution would be able to 
continue using MidPoint Peg Orders. As noted below, while a number of 
orders with automated re-pricing logic would be eliminated with the 
proposed introduction of the LP\2\ delay mechanism, EDGA would continue 
to offer MidPoint Peg Orders.
    Second, the Exchange has decided to eliminate a number of order 
types that would automatically re-price based on changing prices in the 
prevailing market. These include Pegged Orders (i.e., Primary Peg and 
Market Peg), and orders that include a Multiple Price Adjust or 
Multiple Display-Price Sliding instruction. The Exchange believes that 
eliminating orders that re-price automatically is consistent with the 
goals of the proposed delay mechanism as these orders could potentially 
be used to obtain an execution against stale quotes that should have 
been protected by the delay mechanism. For example, assume the NBBO is 
$9.98 x $10.00, and the EDGA Book contains a displayed limit order at 
the NBO of $10.00, and a non-displayed Primary Peg Order entered to buy 
with an offset of one cent better than the NBB, currently ranked at 
$9.99. If the NBBO were to update to $9.99 x $10.02, the Primary Peg 
Order would be immediately re-priced to $10.00 and trade against the 
contra-side sell order at the stale NBO price without going through the 
delay mechanism. By contrast, if the buy order were instead a non-
displayed limit order and the member had entered a cancel/replace 
message to update it to $10.00, the price update would be subject to 
the delay mechanism, allowing the liquidity provider to update its sell 
price based on changes to the market, as intended. While the Exchange 
could subject automated re-pricing to the delay mechanism instead, as 
it has proposed for User initiated modifications, the Exchange believes 
that the proposed approach better serves the needs of members and 
investors as continuously subjecting an order that re-prices 
automatically to a delay may limit the ability of such an order to 
reasonably obtain an execution. The Exchange therefore believes that it 
is consistent with the protection of investors and the public interest 
to eliminate a number of current order types and order instructions 
that contain automated re-pricing logic. The Exchange also believes 
that it is appropriate to eliminate Supplemental Peg Orders in 
connection with the changes to other Pegged Orders described above. 
Although Supplemental Peg Orders are designed to not remove liquidity, 
use of Supplemental Peg Orders is minimal, and removing this order type 
along with other similar instructions would therefore reduce system 
complexity without any significant impact to market participants.
    At the same time, the Exchange has determined to keep MidPoint Peg 
Orders, which account for a significant portion of pegged volume traded 
today, and would continue to be valuable to a number of market 
participants that seek to trade at the midpoint. As explained in the 
purpose section of this proposed rule change, MidPoint Peg Orders may 
become even more useful when the Exchange implements the LP\2\ delay 
mechanism since these orders would be automatically re-priced to the 
new midpoint before being accessed at a stale price. In addition, a 
resting MidPoint Peg Order is willing to provide liquidity at the 
midpoint of the NBBO, thereby providing price improvement opportunities 
for investors accessing liquidity on EDGA.
    Although the Exchange is keeping MidPoint Peg Orders, which are 
beneficial to members and investors, the Exchange is removing two 
related instructions. First, the Exchange is eliminating an optional 
feature that would peg a MidPoint Peg Order to the less aggressive of 
the midpoint or one minimum price variation inside the same side of the 
NBBO. These alternative MidPoint Peg Orders function in the same manner 
as a Primary Peg Order with an offset, except in situations where the 
market is one tick wide, and therefore would be eliminated along with 
Primary Peg Orders. The Exchange believes that this is consistent with 
the goal of reducing executions that result from re-priced orders 
bypassing the delay mechanism, unless the order is a true midpoint 
seeking order. Second, the Exchange is eliminating an option that a 
User has to request that a MidPoint Peg Order be executed when the NBBO 
is locked. The Exchange believes that this change is consistent with 
the public interest because avoiding an execution when the midpoint is 
locked would prevent such orders from trading with displayed orders 
represented at the NBBO before those orders could be updated by 
liquidity providers.\58\ Furthermore, the Exchange believes that the 
majority of Users of MidPoint Peg Orders do not want their orders 
executed in a locked market where there is no true midpoint execution.
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    \58\ MidPoint Peg Orders would be able to re-price and trade 
with hidden orders resting between the NBB and NBO without going 
through the delay mechanism.
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    The Exchange has also decided to amend the Post Only instruction 
such that it would never be eligible to remove liquidity. Currently, 
the Exchange's Post Only logic would allow a Post Only order to remove 
liquidity in certain cases where doing so would be economically 
beneficial to the party entering the order. The New York Stock Exchange 
(``NYSE'') offers a similar but less complicated ``Add Liquidity Only'' 
or ``ALO'' instruction that would not remove liquidity from the NYSE 
book in such circumstances.\59\ The Exchange believes that market 
makers and other liquidity providers would find such an instruction 
useful as it would allow them to ensure that orders entered to provide 
liquidity would not inadvertently remove liquidity and thus be subject 
to a delay. Market makers and similar market participants typically 
prefer to provide liquidity to the market, entering quotes to capture 
the spread, and may not desire an execution that

[[Page 30293]]

removes liquidity even when the economics of such an execution would 
appear to be beneficial to such party. The Exchange therefore believes 
that it is appropriate to amend its Post Only instruction in connection 
with the introduction of the LP\2\ delay mechanism such that a Post 
Only Order would never remove liquidity from the EDGA Book.
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    \59\ See NYSE Rule 13(e)(1).
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    Based on the proposed changes to the Post Only instruction, the 
Exchange is also proposing to eliminate the NDS and Super Aggressive 
Order instructions. As previously mentioned, NDS and Super Aggressive 
both contain a built in liquidity swap component that the Exchange 
believes is inconsistent with the proposed changes to the Post Only 
instruction. Specifically, NDS and Super Aggressive are instructions 
that are used to specify the terms under which a resting order would 
execute with an incoming Post Only order that would not otherwise 
remove liquidity because the amount of price improvement offered by 
such an execution was insufficient. Since the Exchange is proposing to 
never execute an incoming Post Only order with resting liquidity in 
order to avoid having such orders go through the proposed delay 
mechanism, these liquidity swap instructions would be rendered 
obsolete.
    Finally, the Exchange proposes to modify the operation of Market 
Maker Peg Orders such that all Market Maker Peg Orders would include a 
Post Only instruction. The Exchange believes that this change is 
appropriate because Market Maker Peg Orders are designed to enable 
market makers to provide liquidity in compliance with their continuous 
quoting obligations, and are not intended to remove liquidity. Today, 
Market Maker Peg Orders usually add rather than remove liquidity today 
since they are priced a designated percentage away from the NBBO when 
there is an appropriate NBBO. However, it is possible that a Market 
Maker Peg Order could remove liquidity, for example, when there is no 
applicable NBB or NBO, in which case such orders are priced based on 
the last reported sale. The Exchange therefore believes that it is 
appropriate to systematically enforce the requirement that these orders 
do not remove liquidity.

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. To the contrary, the 
proposal is a competitive response to delay mechanisms available on 
other markets such as IEX and NYSE American, and is designed to foster 
competition between both markets and orders as contemplated by 
Regulation NMS. The LP\2\ delay mechanism seeks to enhance available 
liquidity and optimize price discovery by deemphasizing speed as a key 
to trading success in order to further serve the interests of all 
investors. It does this by subjecting all liquidity taking orders to a 
short delay of a few milliseconds, while exempting all liquidity 
providing orders from this delay mechanism. Every order entered on EDGA 
would be subjected, or not subjected, to the delay mechanism based on 
whether the order adds or removes liquidity, and regardless of the 
order type used or identity of the entering firm.
    The Exchange believes that the resulting market structure benefits 
of the proposal are likely to accrue to a wide range of market 
participants that add liquidity on the Exchange. This includes market 
makers that serve a critical function of providing liquidity to the 
market, as well as a range of other investors, including those that 
seek to trade at the midpoint of the NBBO. In addition, to the extent 
that the proposal is successful in reducing risk for liquidity 
providers, and encouraging those liquidity providers to improve market 
quality, the expected benefits would also extend to market participants 
that choose to access liquidity on EDGA. In sum, the Exchange believes 
that the proposed rule change is designed to promote a more vibrant and 
competitive market for the vast majority of market participants and 
investors that do not rely on opportunistic trading strategies that 
exploit differentials in speed.

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 Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGA-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-CboeEDGA-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 (http://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-CboeEDGA-2019-012 and should be 
submitted on or before July 17, 2019.


[[Page 30294]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
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    \60\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-13537 Filed 6-25-19; 8:45 am]
BILLING CODE 8011-01-P