Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Cboe BZX Exchange, Inc., 31951-31956 [2019-14159]
Download as PDF
<![CDATA[
Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Notices
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–
NYSEAMER–2019–25 on the subject
line.
Paper Comments
jspears on DSK30JT082PROD with NOTICES
• 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–NYSEAMER–2019–25. 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–NYSEAMER–2019–25 and
should be submitted on or before July
24, 2019.
VerDate Sep<11>2014
19:23 Jul 02, 2019
Jkt 247001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–14158 Filed 7–2–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No 34–86213; File No. SR–
CboeBZX–2019–058]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Related to Fees
for Use on Cboe BZX Exchange, Inc.
June 27, 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 14,
2019, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
fee schedule applicable to its equities
trading platform (‘‘BZX Equities’’) to
replace the rebates applicable to Lead
Market Makers (‘‘LMMs’’) in BZX-listed
securities with daily incentives that are
directly tied to meeting market quality
metrics without regard to transactions
executed.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), 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
PO 00000
24 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
Frm 00120
Fmt 4703
Sfmt 4703
31951
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
fee schedule applicable to its equities
trading platform (‘‘BZX Equities’’) to
replace the rebates applicable to Lead
Market Makers (‘‘LMMs’’) in BZX-listed
securities with daily incentives that are
directly tied to meeting market quality
metrics without regard to transactions
executed. The Exchange believes that
these changes would encourage LMMs
to maintain better market quality in
BZX-listed securities, and, in particular,
in lower volume securities where
transaction-based compensation (i.e.,
rebates) may not be sufficient.
The Exchange currently offers an
LMM Incentive Program in which it
provides LMMs in securities for which
the LMM is a Qualified LMM 3
(‘‘Qualified ETPs’’) with enhanced
rebates,4 reduced fees,5 and free
transactions in closing auctions 6 in its
Qualified ETPs. In addition, the
3 As defined in the fee schedule, the term
‘‘Qualified LMM’’ means an LMM that meets the
Minimum Performance Standards, as defined in
Rule 11.8(e)(1)(D). As defined in Rule 11.8(e)(1)(D),
the term ‘‘Minimum Performance Standards’’ means
a set of standards applicable to an LMM that may
be determined from time to time by the Exchange.
Such standards will vary between LMM Securities
depending on the price, liquidity, and volatility of
the LMM Security in which the LMM is registered.
The performance measurements will include: (A)
Percent of time at the NBBO; (B) percent of
executions better than the NBBO; (C) average
displayed size; and (D) average quoted spread. The
Exchange will share the details of the Minimum
Performance Standards with the Commission prior
to implementation of the amendments proposed
herein and further will provide the Commission
with updates as any of the Minimum Performance
Standards are changed.
4 Currently, the Exchange’s fee schedule provides
that, unless an LMM otherwise qualifies for a higher
rebate, they will receive the following rebates for
securities in which they are a Qualified LMM,
based on the ETP’s consolidated average daily
volume (‘‘CADV’’): where the CADV is less than 1
million, $0.0045 per share; where the CADV is 1
million to 5 million, $0.0040 per share; and where
the CADV is greater than 5 million, $0.0035 per
share.
5 Currently, the Exchange’s fee schedule provides
that LMMs will pay $0.0025 per share to remove
liquidity in securities for which they are a Qualified
LMM.
6 Currently, the Exchange’s fee schedule provides
that LMMs will receive free transactions in closing
auctions in ETPs for which they are a Qualified
LMM.
E:\FR\FM\03JYN1.SGM
03JYN1
31952
Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Notices
Exchange offers LMM Credit Tiers in
which it provides LMMs that have at
least 25 Qualified ETPs with enhanced
rebates for all transactions in which the
LMM adds liquidity to the Exchange.
Such rebates gradually increase as the
LMM’s number of Qualified ETPs
increases.7 Both of these programs offer
incentives to LMMs only on a
transaction by transaction basis. The
Exchange is proposing to eliminate both
the LMM Incentive Program and the
LMM Credit Tiers, although the
Exchange notes that it is not proposing
to eliminate free transactions in closing
auctions to LMMs in each of their
respective Qualified ETPs.
Average aggregate daily auction volume in LMM securities
0–10,000
Daily Incentive for each Qualified ETP 1–5 ....................
Daily Incentive for each Qualified ETP 6–25 ..................
Daily Incentive for each Qualified ETP 26–50 ................
Daily Incentive for each Qualified ETP 51–100 ..............
Daily Incentive for each Qualified ETP Greater Than
100 ................................................................................
As described in the chart above, the
Exchange is proposing to provide LMMs
with a daily incentive per Qualified ETP
which increases along with the average
aggregate daily auction volume in the
LMM’s LMM Securities. For instance, if
an LMM has 30 LMM Securities, each
of which is a Qualified ETP, 10 of which
each have an average daily auction
volume of 5,000 shares (combined
between the opening and closing
auction), 10 of which each have an
average daily auction volume of 50,000
10,001–
100,000
100,001–
500,000
500,001–
1,000,000
1,000,001–
3,000,000
3,000,001
or greater
$10
10
10
10
$25
25
10
10
$40
25
20
15
$50
30
25
20
$150
100
75
50
$200
150
100
75
10
10
15
15
25
50
shares (combined between the opening
and closing auction), and 10 of which
each have an average daily auction
volume of 200,000 shares (combined
between the opening and closing
auction), then the LMM would fall into
the fifth column (10 * 5,000 + 10 *
50,000 + 10 * 200,000 = 2,550,000
average aggregate daily auction volume).
As such, the LMM would receive $150
each for five Qualified ETPs, $100 each
for Qualified ETPs 6–25, and $75 each
for Qualified ETPs 26–30. This would
result in a daily payment of ($150 * 5)
+ ($100 * 20) + ($75 * 5) = $3,125 to
the LMM.
The Exchange is also proposing to
provide an additional daily incentive for
LMMs based on the number of Qualified
ETPs for which the LMM meets a more
stringent set of Minimum Performance
Standards (‘‘Enhanced ETPs’’) and the
average aggregate daily auction volume
in LMM Securities. The Exchange is
proposing to provide such incentives as
follows:
Average aggregate daily auction volume in LMM securities
0–
10,000
jspears on DSK30JT082PROD with NOTICES
Daily Incentive for each Enhanced ETP 1–5 ..................
Daily Incentive for each Enhanced ETP 6–25 ................
Daily Incentive for each Enhanced ETP 26–50 ..............
Daily Incentive for each Enhanced ETP 51–100 ............
Daily Incentive for each Enhanced ETP Greater Than
100 ................................................................................
10,001–
100,000
100,001–
500,000
500,001–
1,000,000
1,000,001–
3,000,000
3,000,001
or greater
$2.50
2.50
2.50
2.50
$6.25
6.25
2.50
2.50
$10
6.25
5
3.75
$12.50
7.50
6.25
5
$37.50
25
18.75
12.50
$50
37.50
25
18.75
2.50
2.50
3.75
3.75
6.25
12.50
Using the same example as above,
where the LMM has 30 LMM Securities,
10 of which are Enhanced ETPs, which
have 2,550,000 shares of average
aggregate daily auction volume in LMM
Securities, the issuer would fall into the
fifth column. As such, the LMM would
receive an additional $37.50 for each of
its first five Enhanced ETPs and an
additional $25 each for Enhanced ETPs
6–10. This would result in an additional
daily payment of ($37.50 * 5) + ($25 *
5) = $312.50 to the LMM.
The Exchange is also proposing to
provide LMMs with free transactions in
closing auctions in ETPs for which they
are the LMM instead of only those
securities for which they are a Qualified
LMM. This will eliminate the current
disincentive for LMMs to provide
liquidity in the closing auction for LMM
Securities where they have not met the
Minimum Performance Standards.
The Exchange submits this proposal
because it believes that the LMM
Liquidity Provision Rates will enhance
market quality on all Exchange-listed
ETPs by incentivizing LMMs to meet the
Minimum Performance Standards across
all of their LMM Securities instead of
only those with higher trading volume.
The proposal will accomplish this by: (i)
Compensating LMMs for meeting
Minimum Performance Standards
instead of on a transaction by
transaction basis; (ii) providing LMMs
with a more predictable and reliable
model for anticipating revenue and
costs associated with meeting the
Minimum Performance Standards; (iii)
allowing the Exchange to increase the
Minimum Performance Standards; and
(iv) generally encouraging all
7 Currently, LMMs in BZX-listed securities will
receive the following additional rebates per share
when adding displayed liquidity for adding
liquidity, based on the Member’s number of
Qualified ETPs, capped at a total of $100,000 per
month and not applied to the rebates set forth in
the LMM Incentive Program:
Qualified
Tape A
Tape B
Tape C
ETPs
25
$0.0001
$0.0002
$0.0001
50
$0.0002
$0.0004
$0.0002
75
$0.0003
$0.0006
$0.0003
125
$0.0004
$0.0008
$0.0004
The Exchange is now proposing to implement
daily incentives for LMMs that are not dependent
on the number of transactions in a particular
security, but rather based on whether the LMM
meets the Minimum Performance Standards.
Specifically, the Exchange is proposing to provide
each LMM with a daily incentive based on how
many Qualified ETPs the LMM has and the average
aggregate daily auction volume in the BZX-listed
securities for which the Member is the LMM (the
‘‘LMM Securities’’). The Exchange is proposing to
provide such incentives as follows:
VerDate Sep<11>2014
20:50 Jul 02, 2019
Jkt 247001
Policy Discussion
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
E:\FR\FM\03JYN1.SGM
03JYN1
jspears on DSK30JT082PROD with NOTICES
Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Notices
participants to act as an LMM in
Exchange-listed ETPs.
First, the proposal will allow the
Exchange to compensate LMMs for
providing enhanced market quality in
ETPs listed on the Exchange instead of
on a transaction by transaction basis.
Historically, both on the Exchange and
elsewhere LMMs have been
compensated on a transaction by
transaction basis as long as they meet
the Minimum Performance Standards
for that particular security. While
rebates are an important tool used to
incentivize liquidity provision, the
proposed market quality incentives
would allow the Exchange to provide
more meaningful incentives in ETPs
with lower trading volumes.
Further, for newly listed and other
lower volume ETPs, the cost to a firm
of making a market as an LMM, such as
holding inventory in the security, is
often not fully offset by the revenue
provided through enhanced LMM
rebates that it receives from the
Exchange. In such cases, LMMs often
take on the role as LMM despite the
negative economics based on the hope,
without guarantee, that the costs for
acting as an LMM will eventually be
reduced to a level lower than the
enhanced LMM rebates. Without an
LMM taking this risk to make markets
in these new ETPs, the products would
likely be significantly less liquid, to the
detriment of investors.
Other LMMs may opt to operate at a
loss in new and other lower volume
ETPs in order to maintain relationships
with issuers and hope that such losses
are offset by the compensation for ETPs
with higher trading volume. Even where
an LMM may choose to provide
enhanced market quality in a lower
volume security, the current LMM
rebate structure creates stronger
financial incentives to be an LMM in
higher trading volume securities than in
lower trading volume securities. In
reality, the ETPs that need an LMM
creating a tight and deep market are the
lower volume securities and higher
volume securities generally already
have tight spreads and inside depth.
As proposed, LMMs would be
compensated on a per-ETP basis where
they meet certain market quality
metrics, regardless of the trading
volume in the associated ETP. While the
amount of compensation is dependent
on average aggregate daily auction
volume in the LMM’s LMM Securities
(which generally corresponds to the
trading volume in a security), the
payments are made on a security by
security basis, so an LMM is
incentivized to meet the Minimum
Performance Standards across all ETPs
VerDate Sep<11>2014
19:23 Jul 02, 2019
Jkt 247001
for which they are an LMM and not just
in those ETPs that have higher trading
volume. As such, the economic benefits
to LMMs that previously accrued almost
exclusively to those products with
greater trading volume will immediately
be spread among all of the LMM’s LMM
Securities and the proposed liquidity
provision payments would immediately
eliminate the potential disincentives for
LMMs to meet the Minimum
Performance Standards for lower
volume ETPs.
The Exchange also believes that the
proposal will provide LMMs with a
more predictable and reliable model for
anticipating revenue and expenses
associated with acting as an LMM and
meeting the Minimum Performance
Standards, which will both encourage
existing LMMs to take on additional
ETPs and encourage other market
participants to register with the
Exchange as an LMM. As described
above, LMMs often take on LMM
Securities based on the hope, without
guarantee, that the costs for acting as an
LMM will eventually be reduced to a
level lower than the enhanced LMM
rebates. By providing predictable
revenue for each LMM Security for
which an LMM meets the Minimum
Performance Standards, both existing
and new LMMs will be certain that they
will receive a much more predictable
payment for acting as an LMM and
meeting the Minimum Performance
Standards (as opposed to hoping that
there is enough trading volume in the
LMM Security to sufficiently offset
costs). Further, the more LMM
Securities that an LMM accumulates,
the more auction volume they will have
in their LMM Securities, providing the
LMM with additional revenue potential.
As such, the proposal will encourage
firms to newly register with the
Exchange as an LMM and existing
LMMs to take on more LMM Securities
on the Exchange. This will benefit all
investors by both increasing
competition among LMMs and
encouraging greater market quality in
securities listed on the Exchange.
The proposal will also allow the
Exchange to increase the market quality
requirements necessary to receive the
daily payment. As noted above, the
economics associated with acting as an
LMM in new and lower volume ETPs
can disincentivize LMMs from meeting
the Minimum Performance Standards.
By providing payouts on a per-product
basis, the Exchange is able to increase
the Minimum Performance Standards
and LMMs are able to commit to
providing better market quality in all
LMM Securities. The Exchange believes
that this will result in better market
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
31953
quality across all of its listed ETPs and
enhanced competition among both
LMMs and ETP issuers to the benefit of
investors.
Simply stated, for new ETPs and other
low volume ETPs, providing consistent
payments based on LMMs meeting the
Minimum Performance Standards will
allow LMMs to more reliably anticipate
their revenue for acting as an LMM and
will both incentivize LMMs to meet the
Minimum Performance Standards for
their LMM Securities and encourage
other market participants to participate
in the Exchange’s LMM program.
Further, it will allow the Exchange to
increase the Minimum Performance
Standards and LMMs will be able to
commit to providing better market
quality in all LMM Securities. Because
the Exchange makes the majority of its
revenue from ETP listings based on the
auction volume in its listed ETPs,
basing these payments on the average
aggregate daily auction volume in the
LMM’s LMM Securities will allow the
Exchange to offer incentives to LMMs to
meet the Minimum Performance
Standards commensurate with the
Exchange’s revenue in a particular
LMM’s LMM Securities and provides a
strong incentive for LMMs to meet the
Minimum Performance Standards in all
of their respective LMM Securities
instead of only those with higher
trading volume. While there will be a
range of outcomes for LMMs, the
Exchange generally expects that most
LMMs will receive payments
comparable to what they currently
receive, with the potential for additional
upside where they take on additional
new ETPs and/or existing ETPs that
transfer to the Exchange.
Tier Discussion
The daily payment amounts are based
specifically on the Exchange’s revenue
model. For ETPs with greater auction
volume, the Exchange generally makes
more money and, thus, is able to offer
LMMs with LMM Securities that have
higher average aggregate daily auction
volume higher payments. As designed,
the Exchange has created six separate
buckets based on auction volume and
five buckets based on how many
Qualified ETPs an LMM has. The
buckets and payments are modeled
based both on current revenue and
product distribution among LMMs as
well as expected revenue and product
distribution in the future including
organic growth among existing
products, ETPs transferring to the
Exchange, and additional participants in
the LMM Program. The Exchange
believes that it is fair and reasonable to
offer different pricing between the
E:\FR\FM\03JYN1.SGM
03JYN1
31954
Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Notices
different auction volume tiers because
those tiers and possible payments are
specifically tailored to the Exchange’s
expected revenue from that auction
volume.
Specifically, the proposed payment
per Qualified ETP (and thus the total
payment to an LMM) generally goes up
as the CADV moves from left to right
because as the average aggregate daily
auction volume in LMM Securities
increases, the Exchange will generate
additional revenue and can thus support
increased payments to LMMs. Similarly,
the proposed payments per Qualified
ETP generally go down as the number
of Qualified ETPs goes up in order to
ensure that the daily incentive
payments do not exceed the Exchange’s
revenue for that LMM’s LMM Securities
while still providing incentives for
LMMs to take on additional ETPs. The
Exchange has designed this program to
be sustainable over the long-term and
generally expects that its expenditures
under the proposed LMM Liquidity
Provision Rates will be very similar to
what it currently provides LMMs under
existing LMM Pricing.
Implementation Date
The Exchange proposes to implement
these amendments to its fee schedule on
August 1, 2019.
jspears on DSK30JT082PROD with NOTICES
2. Statutory Basis
The Exchange believes that the
proposed rule changes are consistent
with the objectives of Section 6 of the
Act,8 in general, and furthers the
objectives of Section 6(b)(4) and
6(b)(5),9 in particular, as it is designed
to provide for the equitable allocation of
reasonable dues, fees and other charges
among its Members and other persons
using its facilities. The Exchange also
notes that its ETP listing business
operates in a highly-competitive market
in which market participants, which
includes both ETP issuers and LMMs,
can readily transfer their listings or opt
not to participate, respectively, if they
deem fee levels, liquidity provision
incentive programs, or any other factor
at a particular venue to be insufficient
or excessive. The proposed rule changes
reflect a competitive pricing structure
designed to incentivize issuers to list
new products and transfer existing
products to the Exchange and market
participants to enroll and participate as
LMMs on the Exchange, which the
Exchange believes will enhance market
quality in all ETPs listed on the
Exchange.
8 15
9 15
U.S.C. 78f.
U.S.C. 78f(b)(4) and (5).
VerDate Sep<11>2014
19:23 Jul 02, 2019
Jkt 247001
The Proposed Incentives Are
Reasonable
The Exchange believes that the
proposal to adopt market quality based
incentives under the LMM Liquidity
Provision Rates is a reasonable means to
incentivize liquidity provision in ETPs
listed on the Exchange. The marketplace
for listings is extremely competitive and
there are several other national
securities exchanges that offer ETP
listings. Transfers between listing
venues occur frequently 10 for numerous
reasons, including market quality. This
proposal is intended to help the
Exchange compete as an ETP listing
venue. Further, the Exchange notes that
the proposed incentives are not
transaction fees, nor are they fees paid
by participants to access the Exchange.
Rather, the proposed payments are
based on achieving certain objective
market quality metrics. As stated above,
providing consistent payments based on
LMMs meeting the Minimum
Performance Standards will allow
LMMs to more reliably anticipate their
revenue for acting as an LMM and will
both incentivize LMMs to meet the
Minimum Performance Standards for
their LMM Securities and encourage
other market participants to participate
in the Exchange’s LMM program. The
Exchange expects the Minimum
Performance Standards to include: (i)
Registration as a market maker in good
standing with the Exchange; (ii) time at
the inside requirements (generally
between 3% and 15% of Regular
Trading Hours for Qualified ETPs and
between 5% to 50% for Enhanced ETPs,
depending on the average daily volume
of the applicable LMM Security); (iii)
auction participation requirements
(generally requiring that the auction
price is between 3% and 5% of the last
Reference Price, as defined in Rule
11.23(a)(19), for a Qualified ETP and
1%–3% for an Enhanced ETP); (iv)
market-wide NBB and NBO spread and
size requirements (generally requiring
between 200 and 750 shares at both the
NBB and NBO for both Qualified ETPs
and Enhanced ETPs with an NBBO
spread between 1% and 10% for a
Qualified ETP and .25% to 4% for
Enhanced ETPs, depending on price of
the ETP and underlying asset class); and
(v) depth of book requirements
(generally requiring between $25,000
and $250,000 of displayed posted
liquidity for both Qualified ETPs and
Enhanced ETPs within 1% to 10% of
both the NBB and NBO for Qualified
10 For example, 16 ETPs transferred their listings
to the Exchange on May 13, 2019. See https://
ir.cboe.com/∼/media/Files/C/CBOE-IR-V2/pressrelease/2019/cboe-welcomes-16-barclays-etns.pdf.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
ETPs and 0.25% and 5% for Enhanced
ETPs, depending on price of the ETP
and underlying asset class). Before
diverging significantly from the ranges
described above, the Exchange will
submit a rule filing to the Commission
describing such proposed changes.
Further, it will allow the Exchange to
increase the Minimum Performance
Standards and LMMs will be able to
commit to providing better market
quality in all LMM Securities. Because
the Exchange makes the majority of its
revenue from ETP listings based on the
auction volume in its listed ETPs,
basing these payments on the average
aggregate daily auction volume in the
LMM’s LMM Securities will allow the
Exchange to offer incentives to LMMs to
meet the Minimum Performance
Standards commensurate with the
Exchange’s revenue in a particular
LMM’s LMM Securities and provides a
strong incentive for LMMs to meet the
Minimum Performance Standards in all
of their respective LMM Securities
instead of only those with higher
trading volume. While there will be a
range of outcomes for LMMs, the
Exchange generally expects that most
LMMs will receive payments
comparable to what they currently
receive, with the potential for additional
upside where they take on additional
new ETPs and/or existing ETPs that
transfer to the Exchange.
The Exchange believes that
eliminating the existing LMM Incentive
Program and LMM Credit Tiers for Tape
B is reasonable because the Exchange is
not required to maintain the program
and the Exchange is proposing to
implement the new LMM Liquidity
Provision Rates in its place, as
discussed above.
The Exchange believes that offering
LMMs free transactions in closing
auctions in ETPs for which they are the
LMM instead of only those securities for
which they are a Qualified LMM is
reasonable because it will eliminate the
current disincentive for LMMs to
provide liquidity in the closing auction
for LMM Securities where they have not
met the Minimum Performance
Standards.11
The Proposed Incentives are an
Equitable Allocation of Payments
The Exchange believes that the
proposal represents an equitable
11 The Exchange notes that, pursuant to Rule
11.8(e)(2)(C), where an LMM does not meet the
Minimum Performance Standards for three out of
four months, such LMM is subject to forfeiture of
LMM status for that LMM Security. As such, an
LMM generally must meet the Minimum
Performance Standards with some regularity in
order to receive such favorable pricing in the
closing auction.
E:\FR\FM\03JYN1.SGM
03JYN1
jspears on DSK30JT082PROD with NOTICES
Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Notices
allocation of payments because, while
the proposed payments apply only to
LMMs, such LMMs must meet rigorous
Minimum Performance Standards in
order to receive the payments, as
outlined above. Where an LMM does
not meet the Minimum Performance
Standards, they will not receive the
payments. Further, registration as an
LMM is available equally to all
Members and allocation of listed ETPs
between LMMs is governed by Exchange
Rule 11.8(e)(2). If an LMM does not
meet the Minimum Performance
Standards for three out of the past four
months, the LMM is subject to forfeiture
of LMM status for that LMM Security,
at the Exchange’s discretion.
Further, the daily payment amounts
are based specifically on the Exchange’s
revenue model. For ETPs with greater
auction volume, the Exchange generally
makes more money and, thus, is able to
offer LMMs with LMM Securities that
have higher average aggregate daily
auction volume higher payments. As
designed, the Exchange has created six
separate buckets based on auction
volume and five buckets based on how
many Qualified ETPs an LMM has. The
buckets and payments are modeled
based both on current revenue and
product distribution among LMMs as
well as expected revenue and product
distribution in the future including
organic growth among existing
products, ETPs transferring to the
Exchange, and additional participants in
the LMM Program. The Exchange
believes that it is fair and reasonable to
offer different pricing between the
different auction volume tiers because
those tiers and possible payments are
specifically tailored to the Exchange’s
expected revenue from that auction
volume.
Specifically, the proposed payment
per Qualified ETP (and thus the total
payment to an LMM) generally goes up
as the CADV moves from left to right
because as the average aggregate daily
auction volume in LMM Securities
increases, the Exchange will generate
additional revenue and can thus support
increased payments to LMMs. Similarly,
the proposed payments per Qualified
ETP generally go down as the number
of Qualified ETPs goes up in order to
ensure that the daily incentive
payments do not exceed the Exchange’s
revenue for that LMM’s LMM Securities
while still providing incentives for
LMMs to take on additional ETPs. The
Exchange has designed this program to
be sustainable over the long-term and
generally expects that its expenditures
under the proposed LMM Liquidity
Provision Rates will be very similar to
what it currently provides LMMs under
VerDate Sep<11>2014
19:23 Jul 02, 2019
Jkt 247001
existing LMM Pricing. As such, the
Exchange believes that the proposal
represents an equitable allocation of
payments.
The Exchange believes that
eliminating the existing LMM Incentive
Program and LMM Credit Tiers for Tape
B is equitable because the Exchange is
not required to maintain the program
and the Exchange is eliminating the
program for all Members.
The Exchange believes that offering
LMMs free transactions in closing
auctions in ETPs for which they are the
LMM instead of only those securities for
which they are a Qualified LMM is
equitable because it will eliminate the
current disincentive for LMMs to
provide liquidity in the closing auction
for LMM Securities where they have not
met the Minimum Performance
Standards, which will benefit all
participants by providing an incentive
to enhance liquidity in all closing
auctions for BZX-listed ETPs.12
The Proposed Incentives are not
Unfairly Discriminatory
The Exchange believes that the
proposal is not unfairly discriminatory
because, while the proposed payments
apply only to LMMs, such LMMs must
meet rigorous Minimum Performance
Standards in order to receive the
payments, as described above. Where an
LMM does not meet the Minimum
Performance Standards, they will not
receive the payments. Further,
registration as an LMM is available
equally to all Members and allocation of
listed ETPs between LMMs is governed
by Exchange Rule 11.8(e)(2). If an LMM
does not meet the Minimum
Performance Standards for three out of
the past four months, the LMM is
subject to forfeiture of LMM status for
that LMM Security, at the Exchange’s
discretion.
Further, the daily payment amounts
are based specifically on the Exchange’s
revenue model. For ETPs with greater
auction volume, the Exchange generally
makes more money and, thus, is able to
offer LMMs with LMM Securities that
have higher average aggregate daily
auction volume higher payments. As
designed, the Exchange has created six
separate buckets based on auction
volume and five buckets based on how
many Qualified ETPs an LMM has. The
buckets and payments are modeled
12 As noted above, pursuant to Rule 11.8(e)(2)(C),
where an LMM does not meet the Minimum
Performance Standards for three out of four months,
such LMM is subject to forfeiture of LMM status for
that LMM Security. As such, an LMM generally
must meet the Minimum Performance Standards
with some regularity in order to receive such
favorable pricing in the closing auction.
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
31955
based both on current revenue and
product distribution among LMMs as
well as expected revenue and product
distribution in the future including
organic growth among existing
products, ETPs transferring to the
Exchange, and additional participants in
the LMM Program. The Exchange
believes that it is fair and reasonable to
offer different pricing between the
different auction volume tiers because
those tiers and possible payments are
specifically tailored to the Exchange’s
expected revenue from that auction
volume.
Specifically, the proposed payment
per Qualified ETP (and thus the total
payment to an LMM) generally goes up
as the CADV moves from left to right
because as the average aggregate daily
auction volume in LMM Securities
increases, the Exchange will generate
additional revenue and can thus support
increased payments to LMMs. Similarly,
the proposed payments per Qualified
ETP generally go down as the number
of Qualified ETPs goes up in order to
ensure that the daily incentive
payments do not exceed the Exchange’s
revenue for that LMM’s LMM Securities
while still providing incentives for
LMMs to take on additional ETPs. The
Exchange has designed this program to
be sustainable over the long-term and
generally expects that its expenditures
under the proposed LMM Liquidity
Provision Rates will be very similar to
what it currently provides LMMs under
existing LMM Pricing. As such, the
Exchange believes that the proposal is
not unfairly discriminatory.
The Exchange believes that
eliminating the existing LMM Incentive
Program and LMM Credit Tiers for Tape
B is not unreasonably discriminatory
because the Exchange is not required to
maintain the program and the Exchange
is eliminating the program for all
Members.
The Exchange believes that offering
LMMs free transactions in closing
auctions in ETPs for which they are the
LMM instead of only those securities for
which they are a Qualified LMM is
reasonable because it will eliminate the
current disincentive for LMMs to
provide liquidity in the closing auction
for LMM Securities where they have not
met the Minimum Performance
Standards, which will benefit all
participants by providing an incentive
to enhance liquidity in all closing
auctions for BZX-listed ETPs.13
13 As noted above, pursuant to Rule 11.8(e)(2)(C),
where an LMM does not meet the Minimum
Performance Standards for three out of four months,
such LMM is subject to forfeiture of LMM status for
that LMM Security. As such, an LMM generally
E:\FR\FM\03JYN1.SGM
Continued
03JYN1
31956
Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
change burdens competition, but rather,
enhances competition as it is intended
to increase the competitiveness of BZX
both among Members by incentivizing
Members to become LMMs in BZXlisted ETPs and as a listing venue by
enhancing market quality in BZX-listed
ETPs. The marketplace for listings is
extremely competitive and there are
several other national securities
exchanges that offer ETP listings.
Transfers between listing venues occur
frequently 14 for numerous reasons,
including market quality. This proposal
is intended to help the Exchange
compete as an ETP listing venue.
Accordingly, the Exchange does not
believe that the proposed change will
impair the ability of issuers, LMMs, or
competing ETP listing venues to
maintain their competitive standing.
The Exchange also notes that the
proposed change is intended to enhance
market quality in BZX-listed ETPs, to
the benefit of all investors in BZX-listed
ETPs. The Exchange does not believe
the proposed amendment would burden
intramarket competition as it would be
available to all Members uniformly.
Registration as an LMM is available
equally to all Members and allocation of
listed ETPs between LMMs is governed
by Exchange Rule 11.8(e)(2). Further, if
an LMM does not meet the Minimum
Performance Standards for three out of
the past four months, the LMM is
subject to forfeiture of LMM status for
that LMM Security, at the Exchange’s
discretion.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
jspears on DSK30JT082PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A)(ii) of the Act 15 and
must meet the Minimum Performance Standards
with some regularity in order to receive such
favorable pricing in the closing auction.
14 For example, 16 ETPs transferred their listings
to the Exchange on May 13, 2019. See https://
ir.cboe.com/∼/media/Files/C/CBOE-IR-V2/pressrelease/2019/cboe-welcomes-16-barclays-etns.pdf.
15 15 U.S.C. 78s(b)(3)(A)(ii).
VerDate Sep<11>2014
19:23 Jul 02, 2019
Jkt 247001
subparagraph (f)(2) of Rule 19b–416
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
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
under Section 19(b)(2)(B) of the Act 17 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:
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–CboeBZX–2019–058, and
should be submitted on or before July
24, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–14159 Filed 7–2–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
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–
CboeBZX–2019–058 on the subject line.
[Release No 34–86226; File No. SR–CFE–
2019–001]
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–CboeBZX–2019–058. 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,
June 27, 2019.
PO 00000
Self-Regulatory Organizations; Cboe
Futures Exchange, LLC; Notice of a
Filing of a Proposed Rule Change
Regarding Trading Conduct
Pursuant to Section 19(b)(7) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 notice is hereby given that on
June 18, 2019 Cboe Futures Exchange,
LLC (‘‘CFE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change described in
Items I, II, and III below, which Items
have been prepared by CFE. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons. CFE
also has filed this proposed rule change
with the Commodity Futures Trading
Commission (‘‘CFTC’’). CFE filed a
written certification with the CFTC
under Section 5c(c) of the Commodity
Exchange Act (‘‘CEA’’) 2 on June 18,
2019.
I. Self-Regulatory Organization’s
Description of the Proposed Rule
Change
The Exchange proposes to update,
clarify, and amend certain CFE rule
provisions primarily relating to trading
conduct as well as to the use of Order
18 17
16 17
CFR 240.19b–4(f)(2).
17 15 U.S.C. 78s(b)(2)(B).
Frm 00125
Fmt 4703
Sfmt 4703
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(7).
2 7 U.S.C. 7a–2(c).
1 15
E:\FR\FM\03JYN1.SGM
03JYN1
]]>Agencies
[Federal Register Volume 84, Number 128 (Wednesday, July 3, 2019)]
[Notices]
[Pages 31951-31956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14159]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No 34-86213; File No. SR-CboeBZX-2019-058]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Related to
Fees for Use on Cboe BZX Exchange, Inc.
June 27, 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 14, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the fee schedule applicable to its
equities trading platform (``BZX Equities'') to replace the rebates
applicable to Lead Market Makers (``LMMs'') in BZX-listed securities
with daily incentives that are directly tied to meeting market quality
metrics without regard to transactions executed.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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 Exchange proposes to amend the fee schedule applicable to its
equities trading platform (``BZX Equities'') to replace the rebates
applicable to Lead Market Makers (``LMMs'') in BZX-listed securities
with daily incentives that are directly tied to meeting market quality
metrics without regard to transactions executed. The Exchange believes
that these changes would encourage LMMs to maintain better market
quality in BZX-listed securities, and, in particular, in lower volume
securities where transaction-based compensation (i.e., rebates) may not
be sufficient.
The Exchange currently offers an LMM Incentive Program in which it
provides LMMs in securities for which the LMM is a Qualified LMM \3\
(``Qualified ETPs'') with enhanced rebates,\4\ reduced fees,\5\ and
free transactions in closing auctions \6\ in its Qualified ETPs. In
addition, the
[[Page 31952]]
Exchange offers LMM Credit Tiers in which it provides LMMs that have at
least 25 Qualified ETPs with enhanced rebates for all transactions in
which the LMM adds liquidity to the Exchange. Such rebates gradually
increase as the LMM's number of Qualified ETPs increases.\7\ Both of
these programs offer incentives to LMMs only on a transaction by
transaction basis. The Exchange is proposing to eliminate both the LMM
Incentive Program and the LMM Credit Tiers, although the Exchange notes
that it is not proposing to eliminate free transactions in closing
auctions to LMMs in each of their respective Qualified ETPs.
---------------------------------------------------------------------------
\3\ As defined in the fee schedule, the term ``Qualified LMM''
means an LMM that meets the Minimum Performance Standards, as
defined in Rule 11.8(e)(1)(D). As defined in Rule 11.8(e)(1)(D), the
term ``Minimum Performance Standards'' means a set of standards
applicable to an LMM that may be determined from time to time by the
Exchange. Such standards will vary between LMM Securities depending
on the price, liquidity, and volatility of the LMM Security in which
the LMM is registered. The performance measurements will include:
(A) Percent of time at the NBBO; (B) percent of executions better
than the NBBO; (C) average displayed size; and (D) average quoted
spread. The Exchange will share the details of the Minimum
Performance Standards with the Commission prior to implementation of
the amendments proposed herein and further will provide the
Commission with updates as any of the Minimum Performance Standards
are changed.
\4\ Currently, the Exchange's fee schedule provides that, unless
an LMM otherwise qualifies for a higher rebate, they will receive
the following rebates for securities in which they are a Qualified
LMM, based on the ETP's consolidated average daily volume
(``CADV''): where the CADV is less than 1 million, $0.0045 per
share; where the CADV is 1 million to 5 million, $0.0040 per share;
and where the CADV is greater than 5 million, $0.0035 per share.
\5\ Currently, the Exchange's fee schedule provides that LMMs
will pay $0.0025 per share to remove liquidity in securities for
which they are a Qualified LMM.
\6\ Currently, the Exchange's fee schedule provides that LMMs
will receive free transactions in closing auctions in ETPs for which
they are a Qualified LMM.
\7\ Currently, LMMs in BZX-listed securities will receive the
following additional rebates per share when adding displayed
liquidity for adding liquidity, based on the Member's number of
Qualified ETPs, capped at a total of $100,000 per month and not
applied to the rebates set forth in the LMM Incentive Program:
Qualified Tape A Tape B Tape C
ETPs
25 $0.0001 $0.0002 $0.0001
50 $0.0002 $0.0004 $0.0002
75 $0.0003 $0.0006 $0.0003
125 $0.0004 $0.0008 $0.0004
The Exchange is now proposing to implement daily incentives for
LMMs that are not dependent on the number of transactions in a
particular security, but rather based on whether the LMM meets the
Minimum Performance Standards. Specifically, the Exchange is
proposing to provide each LMM with a daily incentive based on how
many Qualified ETPs the LMM has and the average aggregate daily
auction volume in the BZX-listed securities for which the Member is
the LMM (the ``LMM Securities''). The Exchange is proposing to
provide such incentives as follows:
----------------------------------------------------------------------------------------------------------------
Average aggregate daily auction volume in LMM securities
-----------------------------------------------------------------------------
10,001- 100,001- 500,001- 1,000,001- 3,000,001
0-10,000 100,000 500,000 1,000,000 3,000,000 or greater
----------------------------------------------------------------------------------------------------------------
Daily Incentive for each Qualified $10 $25 $40 $50 $150 $200
ETP 1-5..........................
Daily Incentive for each Qualified 10 25 25 30 100 150
ETP 6-25.........................
Daily Incentive for each Qualified 10 10 20 25 75 100
ETP 26-50........................
Daily Incentive for each Qualified 10 10 15 20 50 75
ETP 51-100.......................
Daily Incentive for each Qualified 10 10 15 15 25 50
ETP Greater Than 100.............
----------------------------------------------------------------------------------------------------------------
As described in the chart above, the Exchange is proposing to
provide LMMs with a daily incentive per Qualified ETP which increases
along with the average aggregate daily auction volume in the LMM's LMM
Securities. For instance, if an LMM has 30 LMM Securities, each of
which is a Qualified ETP, 10 of which each have an average daily
auction volume of 5,000 shares (combined between the opening and
closing auction), 10 of which each have an average daily auction volume
of 50,000 shares (combined between the opening and closing auction),
and 10 of which each have an average daily auction volume of 200,000
shares (combined between the opening and closing auction), then the LMM
would fall into the fifth column (10 * 5,000 + 10 * 50,000 + 10 *
200,000 = 2,550,000 average aggregate daily auction volume). As such,
the LMM would receive $150 each for five Qualified ETPs, $100 each for
Qualified ETPs 6-25, and $75 each for Qualified ETPs 26-30. This would
result in a daily payment of ($150 * 5) + ($100 * 20) + ($75 * 5) =
$3,125 to the LMM.
The Exchange is also proposing to provide an additional daily
incentive for LMMs based on the number of Qualified ETPs for which the
LMM meets a more stringent set of Minimum Performance Standards
(``Enhanced ETPs'') and the average aggregate daily auction volume in
LMM Securities. The Exchange is proposing to provide such incentives as
follows:
----------------------------------------------------------------------------------------------------------------
Average aggregate daily auction volume in LMM securities
-----------------------------------------------------------------------------
10,001- 100,001- 500,001- 1,000,001- 3,000,001
0- 10,000 100,000 500,000 1,000,000 3,000,000 or greater
----------------------------------------------------------------------------------------------------------------
Daily Incentive for each Enhanced $2.50 $6.25 $10 $12.50 $37.50 $50
ETP 1-5..........................
Daily Incentive for each Enhanced 2.50 6.25 6.25 7.50 25 37.50
ETP 6-25.........................
Daily Incentive for each Enhanced 2.50 2.50 5 6.25 18.75 25
ETP 26-50........................
Daily Incentive for each Enhanced 2.50 2.50 3.75 5 12.50 18.75
ETP 51-100.......................
Daily Incentive for each Enhanced 2.50 2.50 3.75 3.75 6.25 12.50
ETP Greater Than 100.............
----------------------------------------------------------------------------------------------------------------
Using the same example as above, where the LMM has 30 LMM
Securities, 10 of which are Enhanced ETPs, which have 2,550,000 shares
of average aggregate daily auction volume in LMM Securities, the issuer
would fall into the fifth column. As such, the LMM would receive an
additional $37.50 for each of its first five Enhanced ETPs and an
additional $25 each for Enhanced ETPs 6-10. This would result in an
additional daily payment of ($37.50 * 5) + ($25 * 5) = $312.50 to the
LMM.
The Exchange is also proposing to provide LMMs with free
transactions in closing auctions in ETPs for which they are the LMM
instead of only those securities for which they are a Qualified LMM.
This will eliminate the current disincentive for LMMs to provide
liquidity in the closing auction for LMM Securities where they have not
met the Minimum Performance Standards.
Policy Discussion
The Exchange submits this proposal because it believes that the LMM
Liquidity Provision Rates will enhance market quality on all Exchange-
listed ETPs by incentivizing LMMs to meet the Minimum Performance
Standards across all of their LMM Securities instead of only those with
higher trading volume. The proposal will accomplish this by: (i)
Compensating LMMs for meeting Minimum Performance Standards instead of
on a transaction by transaction basis; (ii) providing LMMs with a more
predictable and reliable model for anticipating revenue and costs
associated with meeting the Minimum Performance Standards; (iii)
allowing the Exchange to increase the Minimum Performance Standards;
and (iv) generally encouraging all
[[Page 31953]]
participants to act as an LMM in Exchange-listed ETPs.
First, the proposal will allow the Exchange to compensate LMMs for
providing enhanced market quality in ETPs listed on the Exchange
instead of on a transaction by transaction basis. Historically, both on
the Exchange and elsewhere LMMs have been compensated on a transaction
by transaction basis as long as they meet the Minimum Performance
Standards for that particular security. While rebates are an important
tool used to incentivize liquidity provision, the proposed market
quality incentives would allow the Exchange to provide more meaningful
incentives in ETPs with lower trading volumes.
Further, for newly listed and other lower volume ETPs, the cost to
a firm of making a market as an LMM, such as holding inventory in the
security, is often not fully offset by the revenue provided through
enhanced LMM rebates that it receives from the Exchange. In such cases,
LMMs often take on the role as LMM despite the negative economics based
on the hope, without guarantee, that the costs for acting as an LMM
will eventually be reduced to a level lower than the enhanced LMM
rebates. Without an LMM taking this risk to make markets in these new
ETPs, the products would likely be significantly less liquid, to the
detriment of investors.
Other LMMs may opt to operate at a loss in new and other lower
volume ETPs in order to maintain relationships with issuers and hope
that such losses are offset by the compensation for ETPs with higher
trading volume. Even where an LMM may choose to provide enhanced market
quality in a lower volume security, the current LMM rebate structure
creates stronger financial incentives to be an LMM in higher trading
volume securities than in lower trading volume securities. In reality,
the ETPs that need an LMM creating a tight and deep market are the
lower volume securities and higher volume securities generally already
have tight spreads and inside depth.
As proposed, LMMs would be compensated on a per-ETP basis where
they meet certain market quality metrics, regardless of the trading
volume in the associated ETP. While the amount of compensation is
dependent on average aggregate daily auction volume in the LMM's LMM
Securities (which generally corresponds to the trading volume in a
security), the payments are made on a security by security basis, so an
LMM is incentivized to meet the Minimum Performance Standards across
all ETPs for which they are an LMM and not just in those ETPs that have
higher trading volume. As such, the economic benefits to LMMs that
previously accrued almost exclusively to those products with greater
trading volume will immediately be spread among all of the LMM's LMM
Securities and the proposed liquidity provision payments would
immediately eliminate the potential disincentives for LMMs to meet the
Minimum Performance Standards for lower volume ETPs.
The Exchange also believes that the proposal will provide LMMs with
a more predictable and reliable model for anticipating revenue and
expenses associated with acting as an LMM and meeting the Minimum
Performance Standards, which will both encourage existing LMMs to take
on additional ETPs and encourage other market participants to register
with the Exchange as an LMM. As described above, LMMs often take on LMM
Securities based on the hope, without guarantee, that the costs for
acting as an LMM will eventually be reduced to a level lower than the
enhanced LMM rebates. By providing predictable revenue for each LMM
Security for which an LMM meets the Minimum Performance Standards, both
existing and new LMMs will be certain that they will receive a much
more predictable payment for acting as an LMM and meeting the Minimum
Performance Standards (as opposed to hoping that there is enough
trading volume in the LMM Security to sufficiently offset costs).
Further, the more LMM Securities that an LMM accumulates, the more
auction volume they will have in their LMM Securities, providing the
LMM with additional revenue potential. As such, the proposal will
encourage firms to newly register with the Exchange as an LMM and
existing LMMs to take on more LMM Securities on the Exchange. This will
benefit all investors by both increasing competition among LMMs and
encouraging greater market quality in securities listed on the
Exchange.
The proposal will also allow the Exchange to increase the market
quality requirements necessary to receive the daily payment. As noted
above, the economics associated with acting as an LMM in new and lower
volume ETPs can disincentivize LMMs from meeting the Minimum
Performance Standards. By providing payouts on a per-product basis, the
Exchange is able to increase the Minimum Performance Standards and LMMs
are able to commit to providing better market quality in all LMM
Securities. The Exchange believes that this will result in better
market quality across all of its listed ETPs and enhanced competition
among both LMMs and ETP issuers to the benefit of investors.
Simply stated, for new ETPs and other low volume ETPs, providing
consistent payments based on LMMs meeting the Minimum Performance
Standards will allow LMMs to more reliably anticipate their revenue for
acting as an LMM and will both incentivize LMMs to meet the Minimum
Performance Standards for their LMM Securities and encourage other
market participants to participate in the Exchange's LMM program.
Further, it will allow the Exchange to increase the Minimum Performance
Standards and LMMs will be able to commit to providing better market
quality in all LMM Securities. Because the Exchange makes the majority
of its revenue from ETP listings based on the auction volume in its
listed ETPs, basing these payments on the average aggregate daily
auction volume in the LMM's LMM Securities will allow the Exchange to
offer incentives to LMMs to meet the Minimum Performance Standards
commensurate with the Exchange's revenue in a particular LMM's LMM
Securities and provides a strong incentive for LMMs to meet the Minimum
Performance Standards in all of their respective LMM Securities instead
of only those with higher trading volume. While there will be a range
of outcomes for LMMs, the Exchange generally expects that most LMMs
will receive payments comparable to what they currently receive, with
the potential for additional upside where they take on additional new
ETPs and/or existing ETPs that transfer to the Exchange.
Tier Discussion
The daily payment amounts are based specifically on the Exchange's
revenue model. For ETPs with greater auction volume, the Exchange
generally makes more money and, thus, is able to offer LMMs with LMM
Securities that have higher average aggregate daily auction volume
higher payments. As designed, the Exchange has created six separate
buckets based on auction volume and five buckets based on how many
Qualified ETPs an LMM has. The buckets and payments are modeled based
both on current revenue and product distribution among LMMs as well as
expected revenue and product distribution in the future including
organic growth among existing products, ETPs transferring to the
Exchange, and additional participants in the LMM Program. The Exchange
believes that it is fair and reasonable to offer different pricing
between the
[[Page 31954]]
different auction volume tiers because those tiers and possible
payments are specifically tailored to the Exchange's expected revenue
from that auction volume.
Specifically, the proposed payment per Qualified ETP (and thus the
total payment to an LMM) generally goes up as the CADV moves from left
to right because as the average aggregate daily auction volume in LMM
Securities increases, the Exchange will generate additional revenue and
can thus support increased payments to LMMs. Similarly, the proposed
payments per Qualified ETP generally go down as the number of Qualified
ETPs goes up in order to ensure that the daily incentive payments do
not exceed the Exchange's revenue for that LMM's LMM Securities while
still providing incentives for LMMs to take on additional ETPs. The
Exchange has designed this program to be sustainable over the long-term
and generally expects that its expenditures under the proposed LMM
Liquidity Provision Rates will be very similar to what it currently
provides LMMs under existing LMM Pricing.
Implementation Date
The Exchange proposes to implement these amendments to its fee
schedule on August 1, 2019.
2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent
with the objectives of Section 6 of the Act,\8\ in general, and
furthers the objectives of Section 6(b)(4) and 6(b)(5),\9\ in
particular, as it is designed to provide for the equitable allocation
of reasonable dues, fees and other charges among its Members and other
persons using its facilities. The Exchange also notes that its ETP
listing business operates in a highly-competitive market in which
market participants, which includes both ETP issuers and LMMs, can
readily transfer their listings or opt not to participate,
respectively, if they deem fee levels, liquidity provision incentive
programs, or any other factor at a particular venue to be insufficient
or excessive. The proposed rule changes reflect a competitive pricing
structure designed to incentivize issuers to list new products and
transfer existing products to the Exchange and market participants to
enroll and participate as LMMs on the Exchange, which the Exchange
believes will enhance market quality in all ETPs listed on the
Exchange.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Proposed Incentives Are Reasonable
The Exchange believes that the proposal to adopt market quality
based incentives under the LMM Liquidity Provision Rates is a
reasonable means to incentivize liquidity provision in ETPs listed on
the Exchange. The marketplace for listings is extremely competitive and
there are several other national securities exchanges that offer ETP
listings. Transfers between listing venues occur frequently \10\ for
numerous reasons, including market quality. This proposal is intended
to help the Exchange compete as an ETP listing venue. Further, the
Exchange notes that the proposed incentives are not transaction fees,
nor are they fees paid by participants to access the Exchange. Rather,
the proposed payments are based on achieving certain objective market
quality metrics. As stated above, providing consistent payments based
on LMMs meeting the Minimum Performance Standards will allow LMMs to
more reliably anticipate their revenue for acting as an LMM and will
both incentivize LMMs to meet the Minimum Performance Standards for
their LMM Securities and encourage other market participants to
participate in the Exchange's LMM program. The Exchange expects the
Minimum Performance Standards to include: (i) Registration as a market
maker in good standing with the Exchange; (ii) time at the inside
requirements (generally between 3% and 15% of Regular Trading Hours for
Qualified ETPs and between 5% to 50% for Enhanced ETPs, depending on
the average daily volume of the applicable LMM Security); (iii) auction
participation requirements (generally requiring that the auction price
is between 3% and 5% of the last Reference Price, as defined in Rule
11.23(a)(19), for a Qualified ETP and 1%-3% for an Enhanced ETP); (iv)
market-wide NBB and NBO spread and size requirements (generally
requiring between 200 and 750 shares at both the NBB and NBO for both
Qualified ETPs and Enhanced ETPs with an NBBO spread between 1% and 10%
for a Qualified ETP and .25% to 4% for Enhanced ETPs, depending on
price of the ETP and underlying asset class); and (v) depth of book
requirements (generally requiring between $25,000 and $250,000 of
displayed posted liquidity for both Qualified ETPs and Enhanced ETPs
within 1% to 10% of both the NBB and NBO for Qualified ETPs and 0.25%
and 5% for Enhanced ETPs, depending on price of the ETP and underlying
asset class). Before diverging significantly from the ranges described
above, the Exchange will submit a rule filing to the Commission
describing such proposed changes.
---------------------------------------------------------------------------
\10\ For example, 16 ETPs transferred their listings to the
Exchange on May 13, 2019. See https://ir.cboe.com/~/media/Files/C/
CBOE-IR-V2/press-release/2019/cboe-welcomes-16-barclays-etns.pdf.
---------------------------------------------------------------------------
Further, it will allow the Exchange to increase the Minimum
Performance Standards and LMMs will be able to commit to providing
better market quality in all LMM Securities. Because the Exchange makes
the majority of its revenue from ETP listings based on the auction
volume in its listed ETPs, basing these payments on the average
aggregate daily auction volume in the LMM's LMM Securities will allow
the Exchange to offer incentives to LMMs to meet the Minimum
Performance Standards commensurate with the Exchange's revenue in a
particular LMM's LMM Securities and provides a strong incentive for
LMMs to meet the Minimum Performance Standards in all of their
respective LMM Securities instead of only those with higher trading
volume. While there will be a range of outcomes for LMMs, the Exchange
generally expects that most LMMs will receive payments comparable to
what they currently receive, with the potential for additional upside
where they take on additional new ETPs and/or existing ETPs that
transfer to the Exchange.
The Exchange believes that eliminating the existing LMM Incentive
Program and LMM Credit Tiers for Tape B is reasonable because the
Exchange is not required to maintain the program and the Exchange is
proposing to implement the new LMM Liquidity Provision Rates in its
place, as discussed above.
The Exchange believes that offering LMMs free transactions in
closing auctions in ETPs for which they are the LMM instead of only
those securities for which they are a Qualified LMM is reasonable
because it will eliminate the current disincentive for LMMs to provide
liquidity in the closing auction for LMM Securities where they have not
met the Minimum Performance Standards.\11\
---------------------------------------------------------------------------
\11\ The Exchange notes that, pursuant to Rule 11.8(e)(2)(C),
where an LMM does not meet the Minimum Performance Standards for
three out of four months, such LMM is subject to forfeiture of LMM
status for that LMM Security. As such, an LMM generally must meet
the Minimum Performance Standards with some regularity in order to
receive such favorable pricing in the closing auction.
---------------------------------------------------------------------------
The Proposed Incentives are an Equitable Allocation of Payments
The Exchange believes that the proposal represents an equitable
[[Page 31955]]
allocation of payments because, while the proposed payments apply only
to LMMs, such LMMs must meet rigorous Minimum Performance Standards in
order to receive the payments, as outlined above. Where an LMM does not
meet the Minimum Performance Standards, they will not receive the
payments. Further, registration as an LMM is available equally to all
Members and allocation of listed ETPs between LMMs is governed by
Exchange Rule 11.8(e)(2). If an LMM does not meet the Minimum
Performance Standards for three out of the past four months, the LMM is
subject to forfeiture of LMM status for that LMM Security, at the
Exchange's discretion.
Further, the daily payment amounts are based specifically on the
Exchange's revenue model. For ETPs with greater auction volume, the
Exchange generally makes more money and, thus, is able to offer LMMs
with LMM Securities that have higher average aggregate daily auction
volume higher payments. As designed, the Exchange has created six
separate buckets based on auction volume and five buckets based on how
many Qualified ETPs an LMM has. The buckets and payments are modeled
based both on current revenue and product distribution among LMMs as
well as expected revenue and product distribution in the future
including organic growth among existing products, ETPs transferring to
the Exchange, and additional participants in the LMM Program. The
Exchange believes that it is fair and reasonable to offer different
pricing between the different auction volume tiers because those tiers
and possible payments are specifically tailored to the Exchange's
expected revenue from that auction volume.
Specifically, the proposed payment per Qualified ETP (and thus the
total payment to an LMM) generally goes up as the CADV moves from left
to right because as the average aggregate daily auction volume in LMM
Securities increases, the Exchange will generate additional revenue and
can thus support increased payments to LMMs. Similarly, the proposed
payments per Qualified ETP generally go down as the number of Qualified
ETPs goes up in order to ensure that the daily incentive payments do
not exceed the Exchange's revenue for that LMM's LMM Securities while
still providing incentives for LMMs to take on additional ETPs. The
Exchange has designed this program to be sustainable over the long-term
and generally expects that its expenditures under the proposed LMM
Liquidity Provision Rates will be very similar to what it currently
provides LMMs under existing LMM Pricing. As such, the Exchange
believes that the proposal represents an equitable allocation of
payments.
The Exchange believes that eliminating the existing LMM Incentive
Program and LMM Credit Tiers for Tape B is equitable because the
Exchange is not required to maintain the program and the Exchange is
eliminating the program for all Members.
The Exchange believes that offering LMMs free transactions in
closing auctions in ETPs for which they are the LMM instead of only
those securities for which they are a Qualified LMM is equitable
because it will eliminate the current disincentive for LMMs to provide
liquidity in the closing auction for LMM Securities where they have not
met the Minimum Performance Standards, which will benefit all
participants by providing an incentive to enhance liquidity in all
closing auctions for BZX-listed ETPs.\12\
---------------------------------------------------------------------------
\12\ As noted above, pursuant to Rule 11.8(e)(2)(C), where an
LMM does not meet the Minimum Performance Standards for three out of
four months, such LMM is subject to forfeiture of LMM status for
that LMM Security. As such, an LMM generally must meet the Minimum
Performance Standards with some regularity in order to receive such
favorable pricing in the closing auction.
---------------------------------------------------------------------------
The Proposed Incentives are not Unfairly Discriminatory
The Exchange believes that the proposal is not unfairly
discriminatory because, while the proposed payments apply only to LMMs,
such LMMs must meet rigorous Minimum Performance Standards in order to
receive the payments, as described above. Where an LMM does not meet
the Minimum Performance Standards, they will not receive the payments.
Further, registration as an LMM is available equally to all Members and
allocation of listed ETPs between LMMs is governed by Exchange Rule
11.8(e)(2). If an LMM does not meet the Minimum Performance Standards
for three out of the past four months, the LMM is subject to forfeiture
of LMM status for that LMM Security, at the Exchange's discretion.
Further, the daily payment amounts are based specifically on the
Exchange's revenue model. For ETPs with greater auction volume, the
Exchange generally makes more money and, thus, is able to offer LMMs
with LMM Securities that have higher average aggregate daily auction
volume higher payments. As designed, the Exchange has created six
separate buckets based on auction volume and five buckets based on how
many Qualified ETPs an LMM has. The buckets and payments are modeled
based both on current revenue and product distribution among LMMs as
well as expected revenue and product distribution in the future
including organic growth among existing products, ETPs transferring to
the Exchange, and additional participants in the LMM Program. The
Exchange believes that it is fair and reasonable to offer different
pricing between the different auction volume tiers because those tiers
and possible payments are specifically tailored to the Exchange's
expected revenue from that auction volume.
Specifically, the proposed payment per Qualified ETP (and thus the
total payment to an LMM) generally goes up as the CADV moves from left
to right because as the average aggregate daily auction volume in LMM
Securities increases, the Exchange will generate additional revenue and
can thus support increased payments to LMMs. Similarly, the proposed
payments per Qualified ETP generally go down as the number of Qualified
ETPs goes up in order to ensure that the daily incentive payments do
not exceed the Exchange's revenue for that LMM's LMM Securities while
still providing incentives for LMMs to take on additional ETPs. The
Exchange has designed this program to be sustainable over the long-term
and generally expects that its expenditures under the proposed LMM
Liquidity Provision Rates will be very similar to what it currently
provides LMMs under existing LMM Pricing. As such, the Exchange
believes that the proposal is not unfairly discriminatory.
The Exchange believes that eliminating the existing LMM Incentive
Program and LMM Credit Tiers for Tape B is not unreasonably
discriminatory because the Exchange is not required to maintain the
program and the Exchange is eliminating the program for all Members.
The Exchange believes that offering LMMs free transactions in
closing auctions in ETPs for which they are the LMM instead of only
those securities for which they are a Qualified LMM is reasonable
because it will eliminate the current disincentive for LMMs to provide
liquidity in the closing auction for LMM Securities where they have not
met the Minimum Performance Standards, which will benefit all
participants by providing an incentive to enhance liquidity in all
closing auctions for BZX-listed ETPs.\13\
---------------------------------------------------------------------------
\13\ As noted above, pursuant to Rule 11.8(e)(2)(C), where an
LMM does not meet the Minimum Performance Standards for three out of
four months, such LMM is subject to forfeiture of LMM status for
that LMM Security. As such, an LMM generally must meet the Minimum
Performance Standards with some regularity in order to receive such
favorable pricing in the closing auction.
---------------------------------------------------------------------------
[[Page 31956]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
the proposed change burdens competition, but rather, enhances
competition as it is intended to increase the competitiveness of BZX
both among Members by incentivizing Members to become LMMs in BZX-
listed ETPs and as a listing venue by enhancing market quality in BZX-
listed ETPs. The marketplace for listings is extremely competitive and
there are several other national securities exchanges that offer ETP
listings. Transfers between listing venues occur frequently \14\ for
numerous reasons, including market quality. This proposal is intended
to help the Exchange compete as an ETP listing venue. Accordingly, the
Exchange does not believe that the proposed change will impair the
ability of issuers, LMMs, or competing ETP listing venues to maintain
their competitive standing. The Exchange also notes that the proposed
change is intended to enhance market quality in BZX-listed ETPs, to the
benefit of all investors in BZX-listed ETPs. The Exchange does not
believe the proposed amendment would burden intramarket competition as
it would be available to all Members uniformly. Registration as an LMM
is available equally to all Members and allocation of listed ETPs
between LMMs is governed by Exchange Rule 11.8(e)(2). Further, if an
LMM does not meet the Minimum Performance Standards for three out of
the past four months, the LMM is subject to forfeiture of LMM status
for that LMM Security, at the Exchange's discretion.
---------------------------------------------------------------------------
\14\ For example, 16 ETPs transferred their listings to the
Exchange on May 13, 2019. See https://ir.cboe.com/~/media/Files/C/
CBOE-IR-V2/press-release/2019/cboe-welcomes-16-barclays-etns.pdf.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A)(ii) of the Act \15\ and subparagraph (f)(2) of Rule
19b-4\16\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A)(ii).
\16\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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 under
Section 19(b)(2)(B) of the Act \17\ to determine whether the proposed
rule change should be approved or disapproved.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
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-CboeBZX-2019-058 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-CboeBZX-2019-058. 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-CboeBZX-2019-058, and should be
submitted on or before July 24, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14159 Filed 7-2-19; 8:45 am]
BILLING CODE 8011-01-P
