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]
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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 (https://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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
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.
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51 17
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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
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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 (https://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’’).
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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.
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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
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).
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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.
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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.
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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.
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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
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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.
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—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.
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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
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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.
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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.
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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
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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.
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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).
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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).
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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
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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.
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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
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35 See
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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
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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).
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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).
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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
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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.
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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).
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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.
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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
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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
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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.
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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
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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
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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.
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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).
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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
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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 (https://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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGA–2019–012 and
should be submitted on or before July
17, 2019.
E:\FR\FM\26JNN1.SGM
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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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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 (https://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.
---------------------------------------------------------------------------
\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'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
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\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.
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\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.
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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\
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\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.
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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\
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\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).
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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\
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\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.
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\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\
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\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).
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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.
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\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.
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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\
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\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.
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[[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.
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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).
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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.
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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.
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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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\59\ See NYSE Rule 13(e)(1).
---------------------------------------------------------------------------
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 (https://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 (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-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
