Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove of a Proposed Rule Change, as Modified by Amendment No. 1, To Introduce Order Book Priority for Equity Orders Submitted on Behalf of Retail Investors, 32808-32816 [2019-14490]
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Federal Register / Vol. 84, No. 131 / Tuesday, July 9, 2019 / Notices
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
At any time within 60 days of the
filing of such 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 shall institute proceedings
under Section 19(b)(2)(B) 9 of the Act 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:
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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–
NYSENAT–2019–15 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–NYSENAT–2019–15. 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,
9 15
U.S.C. 78s(b)(2)(B).
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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
offices 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–NYSENAT–2019–15, and
should be submitted on or before July
30, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–14625 Filed 7–8–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86280 ; File No. SR–
CboeEDGX–2019–012]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
of Amendment No. 1 and Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove of
a Proposed Rule Change, as Modified
by Amendment No. 1, To Introduce
Order Book Priority for Equity Orders
Submitted on Behalf of Retail Investors
July 2, 2019.
On March 18, 2019, Cboe EDGX
Exchange, Inc. (‘‘Exchange’’ or ‘‘EDGX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to introduce order book priority
for equity orders submitted on behalf of
retail investors. The proposed rule
change was published for comment in
the Federal Register on April 5, 2019.3
The Commission received four comment
letters on the proposed rule change.4 On
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 85482
(April 2, 2019), 84 FR 13729 (‘‘Notice’’).
4 See letters to Vanessa Countryman, Acting
Secretary, Commission, from Sean Paylor, Trader,
AJO, L.P., dated April 25, 2019 (‘‘AJO Letter’’);
Joseph Saluzzi and Sal Arnuk, Partners, Themis
Trading LLC, dated May 8, 2019 (‘‘Themis Letter’’);
T. Sean Bennett, Principal Associate General
Counsel, Nasdaq, dated May 9, 2019 (‘‘Nasdaq
Letter’’); letter to Eduardo A. Aleman, Deputy
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10 17
1 15
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May 16, 2019, the Commission extended
the time period within which to
approve, disapprove the proposed rule
change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change to
July 4, 2019.5 On June 18, 2019, the
Exchange filed Amendment No. 1 to the
proposed rule change.6
The Commission is publishing this
notice and to solicit comments on the
proposed rule change, as modified by
Amendment No. 1, from interested
persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the
Act 7 to determine whether to approve
or disapprove the proposed rule change,
as modified by Amendment No. 1.
I. Exchange’s Description of the
Proposal, as Modified by Amendment
No. 1
The Exchange proposes to introduce
order book priority for equity orders
submitted on behalf of retail investors.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/edgx/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
Secretary, Commission from Stephen John Berger,
Global Heady of Government & Regulatory Policy,
Citadel Securities, dated April 26, 2019 (‘‘Citadel
Letter’’). All comments received by the Commission
on the proposed rule change are available at:
https://www.sec.gov/comments/sr-cboeedgx-2019012/srcboeedgx2019012.htm.
5 See Securities Exchange Act Release No. 85879,
84 FR 23591 (May 16, 2019).
6 Amendment No. 1 modifies the proposed rule
change by: (1) Adding a proposed definition of
‘‘Retail Priority Order’’; (2) applying the proposed
enhanced priority to ‘‘Retail Priority Orders’’
instead of ‘‘Retail Orders’’; (3) imposing certain
requirements on Retail Member Organizations that
enter ‘‘Retail Priority Orders’’; (4) removing the
proposed requirement that ‘‘Retail Orders’’ must be
identified as such on the EDGX Book Feed; and (5)
requiring that all ‘‘Retail Priority Orders’’ be
identified as such on the EDGX Book Feed.
Amendment No. 1 is available at: https://
www.sec.gov/comments/sr-cboeedgx-2019-012/
srcboeedgx2019012-5705327-185928.pdf.
7 15 U.S.C. 78s(b)(2)(B).
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to introduce order book
priority for equity orders submitted on
behalf of retail investors. Forty three
million U.S. households hold a
retirement or brokerage account,8 and
these investors are increasingly turning
to the equities markets to fund
important life goals. It is therefore
critical that our markets are sensitive to
the needs of the investing public. The
Exchange continuously strives to
innovate and improve market structure
in ways that facilitate ordinary investors
achieving their investment goals. The
proposed introduction of retail priority
is designed with this objective in mind.
The Exchange believes that introducing
retail priority may provide retail
investors with better execution quality
and better position the Exchange as the
‘‘home’’ for retail limit orders. This, in
turn, will further allow retail liquidity
to contribute to overall price formation
and attract more market participants to
the Exchange, creating a richer and
more diverse ecosystem with deeper
liquidity. Retail priority would therefore
be consistent with the goals of the
Commission to encourage markets that
are structured to benefit ordinary
investors,9 while facilitating order
interaction and price discovery to the
benefit of all market participants.
Background
As defined in EDGX Rule 11.21, a
‘‘Retail Order’’ is an agency or riskless
principal order that meets the criteria of
FINRA Rule 5320.03 10 that originates
from a natural person and is submitted
to the Exchange by a Retail Member
Organization, provided that no change
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8 See
The Evolving Market for Retail Investment
Services and Forward-Looking Regulation—Adding
Clarity and Investor Protection while Ensuring
Access and Choice, Chairman Jay Clayton,
Commission (May 2, 2018), available at https://
www.sec.gov/news/speech/speech-clayton-2018-0502.
9 See e.g., U.S. Securities and Exchange
Commission, Strategic Plan, Fiscal Years 2018–
2022, available at https://www.sec.gov/files/SEC_
Strategic_Plan_FY18-FY22_FINAL_0.pdf
(‘‘Commission Strategic Plan’’).
10 FINRA Rule 5320.03 clarifies that an RMO may
enter Retail Orders on a riskless principal basis,
provided that (i) the entry of such riskless principal
orders meet the requirements of FINRA Rule
5320.03, including that the RMO maintains
supervisory systems to reconstruct, in a
time-sequenced manner, all Retail Orders that are
entered on a riskless principal basis; and (ii) the
RMO submits a report, contemporaneously with the
execution of the facilitated order, that identifies the
trade as riskless principal.
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is made to the terms of the order with
respect to price or side of market and
the order does not originate from a
trading algorithm or any other
computerized methodology.11 A ‘‘Retail
Member Organization’’ or ‘‘RMO’’ is a
Member (or a division thereof) that has
been approved by the Exchange under
EDGX Rule 11.21 to submit Retail
Orders. Pursuant to EDGX Rule 11.21(b),
which describes the qualification and
application process for becoming a
Retail Member Organization, any
member may qualify as a Retail Member
Organization if it conducts a retail
business or routes retail orders on behalf
of another broker-dealer.
Today, the Exchange operates based
on a price/display/time priority
execution algorithm that is similar to
those employed by most other U.S.
equities exchanges.12 As such, the first
Displayed 13 order resting on the EDGX
Book 14 at a particular price has priority
over the next order and so on based on
the time of order entry. NonDisplayed 15 orders at that price are
further categorized into a number of
priority bands, with orders within each
priority band prioritized again based on
the time of order entry, as provided in
EDGX Rule 11.9. The generally
applicable allocation bands for orders
executed on the Exchange are described
in EDGX Rule 11.9(a)(2)(A), and similar
allocation bands applicable to orders
executed at the midpoint of the NBBO
are described in EDGX Rule
11.9(a)(2)(B).16 The price time allocation
model has provided significant benefits
to the equities markets as it encourages
increased efficiency by rewarding
market participants that are the first to
provide liquidity at a particular price.
At the same time, because this
allocation methodology preferences
speed, retail investors may have a more
limited ability to secure an execution for
11 Retail Member Organizations are able to
designate their orders as Retail Orders on either an
order-by-order basis using FIX ports or by
designating certain of their FIX ports at the
Exchange as ‘‘Retail Order Ports.’’ Unless otherwise
instructed by the Retail Member Organization, a
Retail Order will be identified as Retail when
routed to an away Trading Center. See EDGX Rule
11.21(d).
12 See EDGX Rule 11.12.
13 ‘‘Displayed’’ is an instruction the User may
attach to an order stating that the order is to be
displayed by the System on the EDGX Book. See
EDGX Rule 11.6(e)(1).
14 ‘‘EDGX Book’’ means the System’s electronic
file of orders. See EDGX Rule 1.5(d)
15 ‘‘Non-Displayed’’ is an instruction the User
may attach to an order stating that the order is not
to be displayed by the System on the EDGX Book.
See EDGX Rule 11.6(e)(2).
16 In addition, EDGX Rule 11.9(a)(2)(C) describes
the sequence in which orders are timestamped
when re-ranked by the System upon clearance of a
locking quotation.
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32809
their non-marketable orders under this
model. The Exchange believes that retail
priority would improve trading
outcomes for retail investors and could
perhaps encourage even more retail
order flow to be entered into the
displayed market.
Retail Priority Orders
The Exchange would offer priority
benefits exclusively to Retail Orders that
are entered on behalf of retail investors
that enter a limited number of equity
orders each trading day. As such, the
Exchange would define a new term,
‘‘Retail Priority Order’’ to designate
Retail Orders that are eligible for
priority on the EDGX Book. Specifically,
a ‘‘Retail Priority Order’’ would be
defined as a Retail Order, as defined in
Rule 11.21(a)(2), that is entered on
behalf of a person that does not place
more than 390 equity orders per day on
average during a calendar month for its
own beneficial account(s). The selected
390 orders per day threshold to qualify
as a Retail Priority Order is similarly
used for the options industry Priority
Customer definition,17 and represents
one order entered each minute during
regular trading hours—i.e., from 9:30
a.m. ET to 4:00 p.m. ET. All orders
entered on behalf of the retail customer
would be counted to determine whether
a customer’s Retail Orders could be
identified as Retail Priority Orders. This
would therefore include both orders
routed to other exchanges and orders
that are not entered as Retail Orders
(e.g., because the price of such orders is
modified by a broker-dealer algorithm).
The Exchange believes that limiting the
Retail Orders that would be priority
eligible, as described, would assist in
ensuring that these benefits flow only to
retail investors that are not engaged in
trading activity akin to that of a
professional.
Similar to the rules of the Exchange’s
options trading platform (‘‘EDGX
Options’’),18 the EDGX Equities rules
would describe how to count parent/
child orders and cancel/replace orders
when determining whether the 390
order per day threshold has been
exceeded. As proposed, parent/child
orders would be counted as a single
order—i.e., a ‘‘parent’’ order that is
broken into multiple ‘‘child’’ orders by
17 See
e.g., EDGX Rule 16.1(a)(46),(47).
Interpretations and Policies .01 to EDGX
Rule 16.1. Due to differences between equities and
options trading there are some differences between
the proposed methodology and the methodology
used by options exchanges. For example, EDGX
Options rules contain provisions related to complex
orders and pegged orders, and differentiate between
parent orders that are broken up into multiple child
orders on the same side and series or both sides
and/or multiple series.
18 See
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a broker or dealer, or by an algorithm
housed at a broker or dealer or by an
algorithm licensed from a broker or
dealer, but which is housed with the
customer, would count as one order
even if the ‘‘child’’ orders are routed
across multiple exchanges. Similarly,
with one exception for parent/child
orders, any order that cancels and
replaces an existing order would count
as a separate order. An order that
cancels and replaces any ‘‘child’’ order
resulting from a ‘‘parent’’ order that is
broken into multiple ‘‘child’’ orders,
would not count as a new order. The
Exchange believes that this guidance
would assist RMOs in determining
whether Retail Orders entered on behalf
of a particular retail customer would
qualify to be entered as Retail Priority
Orders. Similar to the implementation
of the Priority Customer designation in
the options industry,19 RMOs that enter
Retail Priority Orders would also be
required to have reasonable policies and
procedures in place to ensure that such
orders are appropriately represented on
the Exchange. Such policies and
procedures should provide for a review
of retail customers’ activity on at least
a quarterly basis. Retail Orders for any
retail customer that had an average of
more than 390 orders per day during
any month of a calendar quarter would
not be eligible to be entered as Retail
Priority Orders for the next calendar
quarter. RMOs would be required to
conduct a quarterly review and make
any appropriate changes to the way in
which they are representing orders
within five business days after the end
of each calendar quarter. While RMOs
would only be required to review their
accounts on a quarterly basis, if during
a quarter the Exchange identifies a retail
customer for which orders are being
represented as Retail Priority Orders but
that has averaged more than 390 orders
per day during a month, the Exchange
would notify the RMO, and the RMO
would be required to change the manner
in which it is representing the retail
customer’s orders within five business
days.
Retail Priority Proposal
The Exchange proposes to introduce
retail priority in order to ensure that
non-marketable orders submitted on
behalf of retail investors can more
readily compete for execution with
orders entered by sophisticated market
participants that may be better equipped
to optimize their place in the
intermarket queue. Retail priority would
19 See
Securities Exchange Act Release No. 78221
(July 1, 2016), 81 FR 44353 (July 7, 2016) (SR–
BatsEDGX–2016–28).
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be in place during all trading sessions,
and would also be available to orders
entered for participation in the
Exchange’s opening process and the reopening process following a halt.
As proposed, the portion of a Retail
Priority Order with a Displayed
instruction would be given allocation
priority ahead of all other available
interest on the EDGX Book. This would
be true of both orders executed pursuant
to the regular priority bands described
in EDGX Rule 11.9(a)(2)(A), and orders
priced at the midpoint of the NBBO
pursuant to EDGX Rule 11.9(a)(2)(B)
where Retail Priority Orders subject to
Display-Price Sliding 20 would have
priority ahead of limit orders entered
with such an instruction as well as any
other orders resting at the midpoint of
the NBBO.21 In addition, since Reserve
Orders contain a Displayed instruction
but include both Displayed and NonDisplayed shares, the Reserve
Quantity 22 of Retail Priority Orders
would be given priority ahead of the
Reserve Quantity of other limit orders
on the EDGX Book.
Retail Priority Orders that are not
willing to be displayed, or are only
willing to be displayed at a less
aggressive price than the execution
price, would not receive any special
priority. For example, a Retail Priority
Order that is entered as a MidPoint Peg
Order,23 which by definition is NonDisplayed, would be prioritized along
with all other MidPoint Peg Orders
notwithstanding the fact that it is a
Retail Priority Order. Similarly, a
MidPoint Discretionary Order
(‘‘MDO’’) 24 executed within its
20 Display-Price Sliding is an order instruction
provided for compliance with Rule 610(d) of
Regulation NMS. See EDGX Rule 11.6(l)(B). While
a significant majority of Retail Orders are entered
into the EDGX Book with a routing instruction, an
RMO may choose to perform its own routing, in
which case those orders may be handled pursuant
to the Display-Price Sliding process, which is the
default handling unless Price Adjust or Cancel Back
is elected. See EDGX Rule 11.8(b)(10).
21 Orders entered with Display-Price Sliding are
ranked at the locking price and are therefore given
priority when executed at the midpoint of the
NBBO pursuant to current EDGX Rule 11.9(a)(2)(B).
22 ‘‘Reserve Quantity’’ is the portion of an order
that includes a Non-Displayed instruction in which
a portion of that order is also displayed on the
EDGX Book. See EDGX Rule 11.6(m).
23 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. See EDGX Rule 11.8(d).
24 A ‘‘MidPoint Discretionary Order’’ is a Limit
Order that is executable at the NBB for an order to
buy or the NBO for an order to sell while resting
on the EDGX Book, with discretion to execute at
prices to and including the midpoint of the NBBO.
See EDGX Rule 11.8(g).
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Discretionary Range would receive the
same priority as other orders entered
with a Discretionary Range instruction,
regardless of whether the MDO is
displayed at its pegged price.
The following examples illustrate the
proposed implementation of retail
priority: 25
Example 1: Displayed Retail Priority
Order Has Priority at a Given Price
NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @$10.00—
Displayed, Non-Retail Priority Order
Order 2: Buy 100 shares @$10.00—
Displayed, Retail Priority Order
Order 3: Sell 100 shares @$10.00
A Retail Priority Order entered with a
Displayed instruction would have
priority over Non-Retail Priority Orders
at the same price. As a result, Order 3
would trade with Order 2 for 100 shares
@$10.00, securing a timely execution for
the retail investor.
Example 2: Better Priced Non-Retail
Priority Order Has Priority
NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @$10.00—
Retail Priority Order
Order 2: Buy 100 shares @$10.01—NonRetail Priority Order
Order 3: Sell 100 shares @$10.00
Allocations would continue to be
prioritized based on price. Although
Retail Priority Orders entered with a
Displayed instruction would have
priority over Non-Retail Priority Orders
at the same price, they would not have
priority over Non-Retail Priority Orders
at a better price. As a result, Order 3
would trade with the better priced
Order 2 for 100 shares @$10.01.
Example 3: No Retail Priority for NonDisplayed Orders
NBBO: $10.00 × $10.10
Order 1: Buy 100 shares @$10.01—NonDisplayed, Non-Retail Priority Order
Order 2: Buy 100 shares @$10.01—NonDisplayed, Retail Priority Order
Order 3: Sell 100 shares @$10.00
A Retail Priority Order entered with a
Non-Displayed instruction is not
eligible for retail priority. As a result,
Order 3 trades with Order 1 for 100
shares @$10.01 based on time priority.
Retail Priority Orders would need to be
submitted with a Displayed or Reserve
instruction to qualify for the benefits of
retail priority, which should encourage
displayed retail liquidity.
Example 4: No Retail Priority in
Discretionary Range
NBBO: $10.00 × $10.10
25 In each example, orders are shown in the order
in which they are entered.
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Order 1: Buy 100 shares @$10.00 +
$0.03 Discretion—Non-Retail Priority
Order
Order 2: Buy 100 shares @$10.00 +
$0.03 Discretion—Retail Priority
Order
Order 3: Sell 100 shares @$10.02
Retail Priority Orders would only
have priority if willing to be displayed
at the execution price. Although orders
entered with a Discretionary Range
instruction may be displayed at their
ranked price, the execution would occur
at a non-displayed price within the
Discretionary Range. As a result, Order
3 trades with Order 1 for 100 shares @
$10.02 based on time priority.26
Example 5: Retail Priority Reserve Order
has Displayed and Non-Displayed
Priority
NBBO: $10.00 × $10.10
Order 1: Buy 500 @$10.00—Non-Retail
Priority Reserve Order, 100 shares
displayed
Order 2: Buy 500 @$10.00—Retail
Priority Reserve Order, 100 shares
displayed
Order 3: Sell 300 @$10.00
A Retail Priority Order entered as a
Reserve Order would have retail priority
for both displayed and non-displayed
size. However, any Reserve Quantity
would be executed after other orders
with a higher priority, including the
displayed size available from Non-Retail
Priority Orders. As a result, Order 3
would trade 100 shares @$10.00 with
Order 2 based on retail priority, then
would trade 100 shares @$10.00 with
Order 1. After exhausting the available
displayed size, Order 3 would trade the
remaining 100 shares @$10.00 with
Order 2 based on retail priority.
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Example 6: Display-Price Sliding Retail
Priority Orders are Eligible for Priority
at Midpoint
NBBO: $10.00 × $10.01
EDGX BBO: $10.00 × $10.02
Order 1: Buy 100 shares @$10.01—Book
Only, Display-Price Sliding, NonRetail Priority Order
Order 2: Buy 100 shares @$10.01—Book
Only, Display-Price Sliding, Retail
Priority Order
Order 3: Sell 100 shares @$10.01—Post
Only
Order 4: Sell 100 shares @$10.00
Due to the Display-Price Sliding
instruction, both Order 1 and Order 2
are ranked at $10.01 and displayed at
$10.00 to avoid locking the National
26 If Order 3 was to sell 100 shares @$10.00 then
retail priority would be observed at the displayed
price and Order 3 would trade with Order 2 for 100
shares @$10.00.
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Best Offer at $10.01.27 Then, because of
the Post Only instruction, Order 3 posts
and displays on the EDGX Book at
$10.01. Since there is displayed interest
now resting on the same side of the
order book, Order 4 is eligible for
execution on entry at the midpoint price
of $10.005—i.e., one-half minimum
price variation better than Order 3.28 At
the midpoint of the NBBO, a Retail
Priority Order subject to Display-Price
Sliding that is willing but unable to
display at or better than the execution
price would have priority over other
orders. As a result, Order 4 would trade
with Order 2 for 100 shares @$10.005,
securing a timely execution for the retail
investor.
Example 7: Reserve and Other Orders on
EDGX Book
NBBO: $10.00 × $10.01
EDGX BBO: $10.00 × $10.02
Order 1: Buy 100 shares @$10.00—NonRetail Priority Order
Order 2: Buy 500 @$10.00—Non-Retail
Priority Reserve Order, 100 shares
displayed
Order 3: Buy 500 @$10.00—Retail
Priority Reserve Order, 100 shares
displayed
Order 4: Buy 100 shares @$10.01—Book
Only, Display-Price Sliding, NonRetail Priority Order
Order 5: Sell 500 shares @$10.00
Due to the Display-Price Sliding
instruction, Order 4 is displayed at
$10.00 to avoid locking the National
Best Offer at $10.01, but ranked and
executable at its $10.01 limit price.
Since allocations would continue to be
prioritized based on price, Order 5
would first trade 100 shares @$10.01
with Order 4. At any given price, the
displayed size of a Retail Priority Order
would have priority over Non-Retail
Priority Orders at the same price. As
such, Order 5 would next trade 100
shares @$10.00 with Order 3. Next, the
displayed size of Non-Retail Priority
Orders would trade in time priority.
Order 5 would therefore trade 100
shares @$10.00 with Order 1, followed
by 100 shares @$10.00 with Order 2.
Finally, after exhausting the available
displayed size, the Reserve Quantity of
the remaining Reserve Orders would
trade, with Retail Priority Orders being
eligible for retail priority. As a result,
Order 5 would trade the remaining 100
shares @$10.00 with Order 3.
order with a Display-Price Sliding
instruction that would be a locking quotation on
entry is instead ranked at the locking price and
displayed at a price that is one minimum price
variation less aggressive than the locking price. See
EDGX Rule 11.6(l)(B).
28 See EDGX Rule 11.6(l)(1)(B)(v); EDGX Rule
11.10(a)(4)(D).
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32811
Example 8: Display-Price Sliding and
Midpoint Peg Orders on EDGX Book
NBBO: $10.00 × $10.01
EDGX BBO: $10.00 × $10.02
Order 1: Buy 100 shares @$10.01—Book
Only, Display-Price Sliding, NonRetail Priority Order
Order 2: Buy 500 shares @$10.01—Book
Only, Display-Price Sliding, Retail
Priority Reserve Order, 100 shares
displayed
Order 3: Buy 100 shares @$10.01—
MidPoint Peg, Non-Retail Priority
Order
Order 4: Sell 100 shares @$10.01—Post
Only
Order 5: Sell 500 shares @$10.00
Due to the Display-Price Sliding
instruction, both Order 1 and Order 2
are ranked at $10.01 and displayed at
$10.00 to avoid locking the National
Best Offer at $10.01. Order 3,
meanwhile is ranked at the midpoint
price of $10.005. Then, because of the
Post Only instruction, Order 4 posts and
displays on the EDGX Book at $10.01.
Since there is displayed interest now
resting on the same side of the order
book, Order 5 is eligible for execution
on entry at the midpoint price of
$10.005—i.e., one-half minimum price
variation better than Order 4. At the
midpoint of the NBBO, a Retail Priority
Order subject to Display-Price Sliding
that is willing but unable to display at
or better than the execution price would
have priority over other orders. As a
result, Order 5 would first trade with
Order 2 for 100 shares @$10.005. NonRetail Priority Orders with Display-Price
Sliding would be next in priority, and
Order 5 would therefore next trade 100
shares @$10.005 with Order 1. Finally,
Order 5 would trade the remaining 300
shares @10.005 with Order 2. Order 3
would not receive an execution since its
ranked price of $10.005 is worse than
the ranked price of Orders 1 and 2,
which are both ranked at the locking
price of $10.01.29
Retail Attribution
A Retail Member Organization on
EDGX has the option of designating
Retail Orders to be identified as such on
the EDGX Book Feed,30 which may
increase potential execution
opportunities for that order. Today,
pursuant to EDGX Rule 11.21(f), this
designation may be made on either an
29 Pursuant to EDGA Rule 11.9(a)(1), the bestpriced orders to buy or sell have priority on the
EDGA Book in all cases. Although executable at the
midpoint, Orders 1 and 2 are the highest-priced buy
orders based on the $10.01 ranked price. As such,
the full size of those orders would trade before
orders that are both ranked and executable at the
midpoint.
30 See EDGX Rule 13.8.
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order-by-order or port-by-port basis,31
thereby giving members flexibility in
how they would like their Retail Orders
attributed on the Exchange. To support
the introduction of retail priority, the
Exchange proposes to provide that
Retail Priority Orders will always be
designated as such on the EDGX Book
Feed—i.e., Retail Priority Orders would
be identified as having been entered
with a priority designation.32 Retail
Orders that are not designated as Retail
Priority Orders could continue to be
attributed, or not, at the discretion of the
RMO entering the order. Although
RMOs have the choice to determine
which Retail Orders would be marked
as retail on market data, the Exchange
believes that it is important to ensure
that Retail Priority Orders would be
attributable as priority eligible.
Designating Retail Priority Orders on the
EDGX Book Feed will increase
transparency by informing market
participants when there is priority
eligible retail investor interest available
to trade on the Exchange, thereby
allowing market participants to make
informed routing decisions, including
the decision to route contra-side interest
to trade with such orders. Based on the
Exchange’s experience with Retail Order
attribution, this approach has the
potential to increase execution
opportunities for Retail Priority Orders
(and other non-marketable orders) by
encouraging additional order flow to be
routed to the Exchange to trade with
resting Retail Priority Orders.33
In addition, since only Retail Priority
Orders would be required to be
attributed, RMOs would retain the
option of not attributing Retail Orders
entered into the EDGX Book. While
Retail Orders not entered with the Retail
Priority Order designation would not be
31 A Retail Member Organization that instructs
the Exchange to identify all its Retail Orders as
Retail on a Retail Order Port is able to override such
setting and designate any individual Retail Order
from that port as Attributable or as NonAttributable, as set forth in Rule 11.6(a). See EDGX
Rule 11.21(f).
32 The retail indicator on the EDGX Book Feed
would indicate that the order is a Retail Priority
Order and would not provide the market participant
identifier (‘‘MPID’’) of the entering firm. Members
may separately include an Attributable instruction
on their orders pursuant to Rule 11.6(a) if they
would also like MPID attribution.
33 Prior to the original introduction of retail
attribution, the Exchange conducted a study that
found that Retail Orders received an 18% higher
execution rate when members used Attributable
Orders to include their MPID in the published
quote on the EDGX Book Feed. See Securities
Exchange Act Release No. 72016 (April 24, 2014),
79 FR 24463 (April 30, 2014) (SR–EDGX–2014–13).
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eligible for priority, they would retain
all other benefits associated with Retail
Orders today, including the materially
enhanced rebates that are made
available to such orders.34 The purpose
of requiring attribution of Retail Priority
Orders is, first and foremost, to ensure
that market participants can ascertain
their priority on the order book.
Although the Exchange believes that
RMOs are comfortable attributing their
orders, if a specific RMO would prefer
not to have one or more of their orders
attributed, the member would be able to
choose not to enter such orders as Retail
Priority Orders without losing any of the
benefits that they are provided today.
Customer indicators are widely-used in
the options industry, and the Exchange
believes that they would be equally
appropriate on EDGX with the
introduction of retail priority.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act,35 in general, and Section 6(b)(5) of
the Act,36 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.
The Commission has consistently
emphasized the need to ensure that the
U.S. capital markets are structured with
the interests of retail investors in mind,
and recently highlighted its focus on the
‘‘long-term interest of Main Street
Investors’’ as the agency’s number one
strategic goal for fiscal years 2018 to
2022.37 The Exchange believes that
retail priority is consistent with the
goals of the Commission to ensure that
the equities markets continue to serve
the needs of the investing public.
Specifically, introducing retail priority
would protect investors and the public
interest by giving retail investors the
34 The equities industry is highly competitive,
and competition for retail order flow is particularly
fierce as the equities exchanges compete vigorously
with each other, and with wholesale market makers
that execute this order flow off-exchange. As a
result, the Exchange provides a rebate of $0.0032
per share to all Retail Orders. This rebate applies
irrespective of whether the RMO attributes Retail
Orders on the EDGX Book Feed.
35 15 U.S.C. 78f(b).
36 15 U.S.C. 78f(b)(5).
37 See Commission Strategic Plan, supra note 4.
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tools needed to compete for executions
on non-marketable order flow submitted
to a national securities exchange. The
Exchange is committed to innovation
that improves the quality of the equities
markets, and believes that retail priority
may increase the attractiveness of the
Exchange for the execution of orders
submitted on behalf of the millions of
ordinary investors that rely on these
markets for their investment needs.
Although the Commission has
approved other allocation
methodologies for equities trading,38
most equities exchanges, including
EDGX, continue to determine priority
based on a price/display/time allocation
model today. This has contributed to
deep and liquid markets for equity
securities as liquidity providers
compete to be the first to establish a
particular price. At the same time,
ordinary investors may not be able to
compete with market makers and other
automated liquidity providers to be the
first to set a new price. Importantly,
retail investors, in contrast to their
professional counterparts, tend to have
longer investment time horizons and are
not in the business of optimizing queue
placement under a time based allocation
model. Thus, in order to facilitate the
needs of these ordinary investors, the
Exchange believes that an alternative
approach is needed.
The proposed introduction of retail
priority is designed, first and foremost,
to benefit retail investors by increasing
both the likelihood and speed with
which their non-marketable orders are
executed. Unlike marketable retail order
flow that is routinely executed in full on
entry at the national best bid or offer or
better, non-marketable retail order flow
has to compete for execution with
orders entered by sophisticated market
participants that may be quicker to
establish a new price. As shown in the
chart below,39 the Exchange has found
that in 2018, of volume executed from
retail limit orders, 28.3% joined the
national best bid or offer (‘‘NBBO’’) on
entry, 17.8% were priced better than the
inside, and 49.4% were priced worse
than the inside.
38 Nasdaq PSX, for example, operates with a price
setter pro rata model that rewards liquidity
providers that set the best price and then rewards
other market participants that enter larger sized
orders. See Securities Exchange Act Release No.
72250 (May 23, 2014), 79 FR 31147 (May 30, 2014)
(SR-Phlx–2014–24).
39 Based on Retail Orders entered by members
that have completed a retail attestation.
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Although potentially beneficial for all
Retail Priority Orders that do not trade
immediately on entry, the Exchange
believes that retail priority would be
particularly beneficial to Retail Priority
Orders that join the NBBO, as there
would often already be a queue at this
price. Introducing retail priority would
thus give retail investors the ability to
compete for an execution for these
orders, and may therefore improve
trading outcomes. As such, the
Exchange believes that the proposed
rule change is consistent with the goals
of the Exchange, and of the
Commission, to ensure that market
structure evolves in ways that protect
ordinary investors that participate in the
capital markets. Furthermore, since
retail priority is designed to improve
trading outcomes for ordinary investors,
the Exchange also believes that it may
encourage retail brokers to route
additional non-marketable retail order
flow to the EDGX Book, which may
broaden execution opportunities for
other market participants. If successful
in attracting retail order flow to the
Exchange, the proposed rule change
would benefit market participants by
increasing the diversity of order flow
with which they can interact on a
national securities exchange, thereby
increasing order interaction and
contributing to price formation.
Giving queue priority to ordinary
investors is not a novel concept in the
securities markets. In fact, customer
priority has a long tradition in the
options market where orders entered on
behalf of non-broker dealer public
customers have historically been
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afforded priority over orders submitted
by registered broker dealers. Today,
most options exchanges, including the
Exchange’s equity options platform
(‘‘EDGX Options’’),40 employ a customer
priority execution algorithm where
orders submitted by a subset of public
customers with more limited trading
activity (i.e., ‘‘Priority Customers’’) 41
are provided order book priority ahead
of orders submitted by broker-dealers or
other market professionals at the same
price. This allocation model, which was
first introduced by the International
Securities Exchange LLC (‘‘ISE’’) in its
current retail focused form a decade
ago,42 ensures that orders from Priority
Customers are executed ahead of
similarly priced interest from
sophisticated market participants. The
Exchange believes that the time has
come to introduce a similar concept for
the equities market in order to facilitate
the needs of retail investors that
increasingly rely on these markets.
Similar to the options market Priority
Customer definition, the Exchange
proposes to introduce a new definition
of ‘‘Retail Priority Orders’’ that would
allow the Exchange to differentiate
between more and less active retail
investors. Although the Exchange
EDGX Rule 21.8(d)(1).
term ‘‘Priority Customer’’ refers to any
person or entity that is not a broker or dealer in
securities and does not otherwise qualify as a
‘‘Professional’’ by virtue of placing more than 390
orders in listed options per day on average during
a calendar month for its own beneficial account(s).
See e.g., EDGX Rules 16.1(a)(46),(47).
42 See Securities Exchange Act Release No. 59287
(January 23, 2009), 74 FR 5694 (January 30, 2009)
(SR–ISE–2006–26).
PO 00000
40 See
32813
currently has a robust regulatory
program for Retail Orders that includes
a number of safeguards to prevent
misuse,43 some equities market
participants have expressed concerns
that the current definition of Retail
Order could provide market structure
advantages to a subset of investors that
are more akin to market professionals.
The Exchange believes that limiting
retail priority to Retail Orders that are
entered on behalf of less active investors
would alleviate any potential concerns
while ensuring that retail investors
would be able to reap the proposed
priority benefits. As such, Retail Orders
entered on the EDGX Book would be
priority eligible only if the end investor
submits fewer than 390 orders per day
on average, or the equivalent of one
order per minute during regular trading
hours. The Exchange believes that this
approach is consistent with the public
interest and the protection of investors
as an investor that enters more than one
order per minute is effectively engaged
in active trading activity that is more
akin to a professional trader. A similar
approach is used to differentiate
between Priority and Professional
Customers in the options industry
today. Thus, identifying Retail Priority
Orders based on the average number of
orders entered for a beneficial account
41 The
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43 The current Retail Order definition is enforced
through an established process for approving the
RMOs that are permitted to enter Retail Orders; an
attestation that such RMOs must provide about the
retail quality of their order flow; policies and
procedures to ensure the effectiveness of that
attestation; surveillance conducted by Exchange
staff; and an exam process implemented by the
Financial Industry Regulatory Authority.
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is both a familiar and appropriately
objective approach that would
reasonably distinguish between
ordinary retail investors from more
active traders that may compete with
market professionals.
The Commission has approved other
equities proposals to introduce
meaningful market structure benefits for
retail investors in recent years. For
example, in 2012, the Commission
approved proposals filed by the New
York Stock Exchange LLC (‘‘NYSE’’) and
its affiliate NYSE Amex LLC (‘‘Amex’’)
to introduce retail price improvement
programs.44 Those programs were
designed to provide price improvement
opportunities for retail investors on a
national securities exchange by allowing
liquidity providers to give sub-penny
price improvement to their orders
pursuant to an exemption granted from
Rule 612 of Regulation NMS. Similar
programs now exist on a number of
exchanges, including the Exchange’s
affiliate, Cboe BYX Exchange, Inc.
(‘‘BYX’’),45 and have provided millions
of dollars of price improvement to
ordinary investors.46 When approving
such retail price improvement programs
on a pilot basis, the Commission
consistently found that the pilots were
consistent with the Act because they
were ‘‘reasonably designed to benefit
retail investors’’ and could ‘‘promote
competition for retail order flow among
execution venues.’’ The benefits to retail
investors in the form of meaningful
price improvement opportunities
similarly animated the Commission’s
recent approval of the NYSE retail
liquidity program on a permanent
basis.47 Although retail priority is
designed to increase fill rates and speed
of execution rather than price
improvement, the Exchange believes
that it could have a similarly
meaningful impact on execution quality
for ordinary investors that trade in the
public market. Furthermore, retail
priority would complement existing
retail price improvement programs by
offering market structure benefits to
44 See Securities Exchange Act Release No. 67347
(July 3, 2012), 77 FR 40673 (July 10, 2012) (SR–
NYSE–2011–55; SR–NYSEAmex–2011–84).
45 See Securities Exchange Act Release No. 68303
(November 27, 2012), 77 FR 71652 (December 3,
2012) (SR–BYX–2012–019). Nasdaq BX Inc. (‘‘BX’’)
similarly operates its own retail price improvement
program. See Securities Exchange Act Release No.
73702 (November 28, 2014), 79 FR 72049
(December 4, 2014) (SR–BX–2014–048).
46 See, e.g., Securities Exchange Act Release No.
83831 (August 13, 2018), 83 FR 41128 (August 17,
2018) (SR–CboeBYX–2018–014).
47 See Securities Exchange Act Release No. 85160
(February 15, 2019), 84 FR 5754 (February 22, 2019)
(SR–NYSE–2018–28).
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non-marketable retail order flow that
cannot participate in those programs.
Similarly, in 2017, the Commission
approved a proposed rule change by
The Nasdaq Stock Market LLC
(‘‘Nasdaq’’) to introduce the ‘‘Extended
Life Priority Order Attribute’’ for Retail
Orders that were willing to remain on
the book unaltered for a period of one
second (‘‘Retail Extended Life Order’’ or
‘‘Retail ELO’’).48 As proposed, displayed
orders entered on Nasdaq with the
Retail ELO attribute were to be provided
a higher priority than other orders
resting on the Nasdaq order book. When
the Commission approved this proposed
rule change, it opined that the proposal
‘‘should benefit retail investors by
providing enhanced order book priority
to retail order flow that is not
marketable upon entry,’’ and that
‘‘[s]uch enhanced order book priority
could result in additional or more
immediate execution opportunities on
the [e]xchange for resting retail orders
that otherwise would be farther down in
the order book queue, and thereby
enhance execution opportunities for
retail investors.’’ 49 The same is true of
the Exchange’s retail priority proposal,
which would provide similar benefits to
retail investors without the additional
complexity of requiring that the order be
willing to exist unaltered on the order
book for a specified period of time.
While the Exchange believes that the
majority of retail investors have a longer
investment time horizon and therefore
do not actively manage their trading
interest at sub-second time intervals, the
Exchange believes that giving retail
priority broadly to orders entered on
behalf of less active retail investors may
be more effective in encouraging retail
brokers to route order flow to the
Exchange.
The Exchange also believes that it is
appropriate and not unfairly
discriminatory to provide enhanced
priority benefits solely to retail investor
orders as the proposal is designed
specifically to ensure that retail
investors can compete for executions
with sophisticated market participants.
In today’s highly automated and
efficient market, retail investors have a
more limited opportunity to compete for
an execution based purely on the time
an order is placed. While sophisticated,
latency sensitive market participants
can compete to be the first at any
48 See Securities Exchange Act Release No. 81097
(July 7, 2017), 82 FR 32386 (July 13, 2017) (SR–
NASDAQ–2016–161) (‘‘Retail ELO Approval’’).
Nasdaq ultimately decided not to implement Retail
ELO following Commission approval, and has since
introduced a ‘‘Midpoint Extended Life Order’’ that
is not limited to retail participation.
49 Id.
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particular price, retail investors with
longer investment horizons cannot
compete in the same fashion. The
proposed introduction of retail priority
would ensure that non-marketable
Retail Priority Orders get filled first
when there is available contra-side
interest, and thereby improve
investment outcomes for ordinary
investors. The Commission has
consistently held that it is consistent
with the Act to offer certain advantages
to retail customers,50 and the proposal
follows a line of other initiatives to
improve the retail investor experience
in the public markets. The Exchange
believes that it is an important goal of
both the Exchange and the Commission
to ensure that our market structure
continues to benefit retail investors by
providing the tools that they need to
invest in the capital markets. Although
there are many ways to achieve that
goal, the Exchange believes that doing
so requires innovation in how retail
investor orders are handled on the
national securities exchanges in order to
attract that order flow back to the
displayed market.
The Exchange also believes that it is
consistent with the public interest and
the protection of investors to provide
retail priority exclusively to those
orders that contain a Displayed or
Reserve instruction. The goals of the
proposed rule change are twofold. First,
the proposed change is designed to
facilitate better trading outcomes for
retail investors, which may encourage
retail brokers to send additional retail
order flow to the Exchange. Second, the
proposed change is designed to
encourage additional displayed retail
liquidity, which could contribute to
price discovery and encourage
additional order flow and liquidity from
other market participants. Although the
first purpose could be achieved without
limiting retail priority to orders that
contain a Displayed component at a
particular price, the second is only
achieved when such orders are
displayed to the broader market. For
that reason, recent priority
enhancements for retail investors, such
as Nasdaq’s Retail ELO, have also
focused on displayed interest that could
improve quote quality and contribute to
a vibrant market.
50 Where the interest of long-term investors, such
as the retail investors whose experience this filing
is attempting to improve, diverges from that of
short-term professional traders, the Commission
‘‘repeatedly has emphasized that its duty is to
uphold the interests of long-term investors.’’ See
Securities Exchange Act Release No. 61358 (January
14, 2010), 75 FR 3593 (January 21, 2010) (File No.
S7–02–10) (‘‘Concept Release on Equity Market
Structure’’).
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Finally, the Exchange believes that it
is consistent with just and equitable
principles of trade to require that Retail
Priority Orders be attributable as this
would allow other market participants
to gauge the available size in orders that
would be eligible for retail priority.
Although RMOs would not have the
option to submit eligible Retail Priority
Orders as non-attributable, the
transparency achieved by so designating
these orders is important to the proper
functioning of a market where such
orders would be eligible for priority. As
explained in the purpose section of this
proposed rule change, RMOs would
retain the ability to enter an order
without a priority designation, and in
doing so would ultimately retain the
ability to control which orders are
publicly attributed to retail investors.
Priority Customer orders entered on the
EDGX Options platform are similarly
designated as such on the Exchange’s
market data feeds today, and the
Exchange believes that this has
contributed positively to the overall
market environment.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Rather, the
proposed rule change is designed to
increase inter-market competition for
retail order flow, and intra-market
competition for orders as market
participants compete to transact with
retail investor orders entered on the
EDGX Book. The proposed rule change
represents an effort by the Exchange to
enhance the ability for retail investors to
participate effectively on a national
securities exchange without
unnecessarily burdening competition.
Although retail priority would be
limited to retail investors, the Exchange
does not believe that this produces an
unnecessary burden on competition as
these changes are necessary to attract
retail order flow to a national securities
exchange where they may interact with
a wide range of market participants. If
successful, the Exchange believes that
retail priority would enhance
competition by encouraging retail
brokers to route increased order flow to
the public markets, creating a more
vibrant and competitive trading
environment that benefits all market
participants.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No comments were solicited or
received on the proposed rule change.
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
CboeEDGX–2019–012 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 51 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Act,52 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Section
6(b)(5) of the Act, which requires,
among other things, that the rules of a
national securities exchange be
‘‘designed to perfect the operation of a
free and open market and a national
market system’’ and ‘‘protect investors
and the public interest,’’ and not be
‘‘designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers,’’ 53 and
Section 6(b)(8) of the Act, which
requires that the rules of a national
securities exchange ‘‘not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of [the Act].’’ 54
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Section
51 15
53 15
54 15
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U.S.C. 78s(b)(2)(B).
52 Id.
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(8).
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32815
6(b)(5), 6(b)(8) or any other provision of
the Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval that would be
facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.55
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by July 30, 2019. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by August 13, 2019. The
Commission asks that commenters
address the sufficiency of the
Exchange’s statements in support of the
proposal, which are set forth in
Amendment No. 1,56 in addition to any
other comments they may wish to
submit about the proposed rule change.
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–
CboeEDGX–2019–012 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeEDGX–2019–012. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
55 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
56 See supra note 6.
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Federal Register / Vol. 84, No. 131 / Tuesday, July 9, 2019 / Notices
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2019–012 and
should be submitted on or before July
30, 2019. Rebuttal comments should be
submitted by August 13, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–14490 Filed 7–8–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86296; File No. SR–OCC–
2019–005]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Related to the Options Clearing
Corporation’s Vanilla Option Model
and Smoothing Algorithm
khammond on DSKBBV9HB2PROD with NOTICES
July 3, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule
19b–4 thereunder,2 notice is hereby
given that on June 28, 2019, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by OCC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change is filed in
connection with proposed changes to
formalize and update OCC’s models for:
(1) Generating theoretical values,
implied volatilities and certain risk
sensitivities for plain vanilla listed
options (‘‘Vanilla Option Model’’) and
(2) estimating fair or ‘‘smoothed’’ prices
of plain vanilla listed options based on
their bid and ask price quotes
(‘‘Smoothing Algorithm’’). The proposed
changes are discussed in detail in Item
II below.
The proposed changes to Chapter 17
(Vanilla Option Model) and Chapter 18
(Smoothing Algorithm) of OCC’s
Margins Methodology are contained in
confidential Exhibits 5A and 5B of the
filing. Material proposed to be added is
marked by underlining and material
proposed to be deleted is marked by
strikethrough text. OCC also has
included backtesting and impact
analysis of the proposed model changes
in confidential Exhibit 3.
The proposed rule change is available
on OCC’s website at https://
www.theocc.com/about/publications/
bylaws.jsp. All terms with initial
capitalization that are not otherwise
defined herein have the same meaning
as set forth in the OCC By-Laws and
Rules.3
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC 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. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(A) Clearing Agency’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 enhancements to
OCC’s Vanilla Option Model, which is
used to generate theoretical values,
implied volatilities and risk sensitives
for plain vanilla listed options, and to
the Smoothing Algorithm, which is used
to estimate fair prices of listed option
57 17
VerDate Sep<11>2014
17:47 Jul 08, 2019
Jkt 247001
3 OCC’s By-Laws and Rules can be found on
OCC’s public website: https://optionsclearing.com/
about/publications/bylaws.jsp.
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
contracts cased on their bid and ask
price quotes. Specifically, the proposed
methodology enhancements to the
Vanilla Option Model would include:
(1) Replacing use of an interest rate
yield curve with constant interest rates;
(2) replacing use of the last paid
dividends with a schedule of forecasted
dividends; (3) using borrowing costs as
an input in valuations; (4) replacing the
binomial tree used to price Americanstyle options with a binomial tree that
has a higher rate of convergence; and (5)
using additional ‘‘Greeks’’ as inputs in
valuations. Proposed enhancements to
the Smoothing Algorithm would
include: (1) Aligning the binomial tree
using in the Vanilla Option Model with
the binomial tree used in the Smoothing
Algorithm; (2) using basis futures prices
which close at the same time as the
underlying indices to prevent price
discrepancies; (3) capping unacceptably
high volatilities in out-of-the-money
regions more gradually to make
convexity in pricing changes more
continuous and eliminate associated
arbitrage opportunities; (4) using current
market prices of plain vanilla listed
options to generate prices for shortdated FLEX options; and (5) using
borrowing costs as an independent
input in the pricing of plain vanilla
listed options.
Background
OCC’s margin methodology, the
System for Theoretical Analysis and
Numerical Simulations (‘‘STANS’’), is
OCC’s proprietary risk management
system that calculates Clearing Member
margin requirements.4 STANS utilizes
large-scale Monte Carlo simulations to
forecast price and volatility movements
in determining a Clearing Member’s
margin requirement.5 The STANS
margin requirement is calculated at the
portfolio level of Clearing Member legal
entity marginable net positions tier
account (tiers can be customer, firm, or
market marker) and consists of an
estimate of a 99% two-day expected
shortfall (‘‘99% Expected Shortfall’’)
and an add-on for model risk (the
concentration/dependence stress test
charge). The STANS methodology is
used to measure the exposure of
portfolios of options and futures cleared
by OCC and cash instruments in margin
collateral.
STANS margin requirements are
comprised of the sum of several
components, each reflecting a different
4 See Securities Exchange Act Release No. 53322
(February 15, 2006), 71 FR 9403 (February 23, 2006)
(SR–OCC–2004–20). A detailed description of the
STANS methodology is available at https://
optionsclearing.com/risk-management/margins/.
5 See OCC Rule 601.
E:\FR\FM\09JYN1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 131 (Tuesday, July 9, 2019)]
[Notices]
[Pages 32808-32816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14490]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86280 ; File No. SR-CboeEDGX-2019-012]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing of Amendment No. 1 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove of a Proposed Rule Change,
as Modified by Amendment No. 1, To Introduce Order Book Priority for
Equity Orders Submitted on Behalf of Retail Investors
July 2, 2019.
On March 18, 2019, Cboe EDGX Exchange, Inc. (``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to introduce order book priority for equity orders
submitted on behalf of retail investors. The proposed rule change was
published for comment in the Federal Register on April 5, 2019.\3\ The
Commission received four comment letters on the proposed rule
change.\4\ On May 16, 2019, the Commission extended the time period
within which to approve, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change to July 4, 2019.\5\ On June 18, 2019, the Exchange
filed Amendment No. 1 to the proposed rule change.\6\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85482 (April 2,
2019), 84 FR 13729 (``Notice'').
\4\ See letters to Vanessa Countryman, Acting Secretary,
Commission, from Sean Paylor, Trader, AJO, L.P., dated April 25,
2019 (``AJO Letter''); Joseph Saluzzi and Sal Arnuk, Partners,
Themis Trading LLC, dated May 8, 2019 (``Themis Letter''); T. Sean
Bennett, Principal Associate General Counsel, Nasdaq, dated May 9,
2019 (``Nasdaq Letter''); letter to Eduardo A. Aleman, Deputy
Secretary, Commission from Stephen John Berger, Global Heady of
Government & Regulatory Policy, Citadel Securities, dated April 26,
2019 (``Citadel Letter''). All comments received by the Commission
on the proposed rule change are available at: https://www.sec.gov/comments/sr-cboeedgx-2019-012/srcboeedgx2019012.htm.
\5\ See Securities Exchange Act Release No. 85879, 84 FR 23591
(May 16, 2019).
\6\ Amendment No. 1 modifies the proposed rule change by: (1)
Adding a proposed definition of ``Retail Priority Order''; (2)
applying the proposed enhanced priority to ``Retail Priority
Orders'' instead of ``Retail Orders''; (3) imposing certain
requirements on Retail Member Organizations that enter ``Retail
Priority Orders''; (4) removing the proposed requirement that
``Retail Orders'' must be identified as such on the EDGX Book Feed;
and (5) requiring that all ``Retail Priority Orders'' be identified
as such on the EDGX Book Feed. Amendment No. 1 is available at:
https://www.sec.gov/comments/sr-cboeedgx-2019-012/srcboeedgx2019012-5705327-185928.pdf.
---------------------------------------------------------------------------
The Commission is publishing this notice and to solicit comments on
the proposed rule change, as modified by Amendment No. 1, from
interested persons and to institute proceedings pursuant to Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Exchange's Description of the Proposal, as Modified by Amendment No.
1
The Exchange proposes to introduce order book priority for equity
orders submitted on behalf of retail investors.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 32809]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to introduce order book
priority for equity orders submitted on behalf of retail investors.
Forty three million U.S. households hold a retirement or brokerage
account,\8\ and these investors are increasingly turning to the
equities markets to fund important life goals. It is therefore critical
that our markets are sensitive to the needs of the investing public.
The Exchange continuously strives to innovate and improve market
structure in ways that facilitate ordinary investors achieving their
investment goals. The proposed introduction of retail priority is
designed with this objective in mind. The Exchange believes that
introducing retail priority may provide retail investors with better
execution quality and better position the Exchange as the ``home'' for
retail limit orders. This, in turn, will further allow retail liquidity
to contribute to overall price formation and attract more market
participants to the Exchange, creating a richer and more diverse
ecosystem with deeper liquidity. Retail priority would therefore be
consistent with the goals of the Commission to encourage markets that
are structured to benefit ordinary investors,\9\ while facilitating
order interaction and price discovery to the benefit of all market
participants.
---------------------------------------------------------------------------
\8\ See The Evolving Market for Retail Investment Services and
Forward-Looking Regulation--Adding Clarity and Investor Protection
while Ensuring Access and Choice, Chairman Jay Clayton, Commission
(May 2, 2018), available at https://www.sec.gov/news/speech/speech-clayton-2018-05-02.
\9\ See e.g., U.S. Securities and Exchange Commission, Strategic
Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf (``Commission
Strategic Plan'').
---------------------------------------------------------------------------
Background
As defined in EDGX Rule 11.21, a ``Retail Order'' is an agency or
riskless principal order that meets the criteria of FINRA Rule 5320.03
\10\ that originates from a natural person and is submitted to the
Exchange by a Retail Member Organization, provided that no change is
made to the terms of the order with respect to price or side of market
and the order does not originate from a trading algorithm or any other
computerized methodology.\11\ A ``Retail Member Organization'' or
``RMO'' is a Member (or a division thereof) that has been approved by
the Exchange under EDGX Rule 11.21 to submit Retail Orders. Pursuant to
EDGX Rule 11.21(b), which describes the qualification and application
process for becoming a Retail Member Organization, any member may
qualify as a Retail Member Organization if it conducts a retail
business or routes retail orders on behalf of another broker-dealer.
---------------------------------------------------------------------------
\10\ FINRA Rule 5320.03 clarifies that an RMO may enter Retail
Orders on a riskless principal basis, provided that (i) the entry of
such riskless principal orders meet the requirements of FINRA Rule
5320.03, including that the RMO maintains supervisory systems to
reconstruct, in a time[hyphen]sequenced manner, all Retail Orders
that are entered on a riskless principal basis; and (ii) the RMO
submits a report, contemporaneously with the execution of the
facilitated order, that identifies the trade as riskless principal.
\11\ Retail Member Organizations are able to designate their
orders as Retail Orders on either an order-by-order basis using FIX
ports or by designating certain of their FIX ports at the Exchange
as ``Retail Order Ports.'' Unless otherwise instructed by the Retail
Member Organization, a Retail Order will be identified as Retail
when routed to an away Trading Center. See EDGX Rule 11.21(d).
---------------------------------------------------------------------------
Today, the Exchange operates based on a price/display/time priority
execution algorithm that is similar to those employed by most other
U.S. equities exchanges.\12\ As such, the first Displayed \13\ order
resting on the EDGX Book \14\ at a particular price has priority over
the next order and so on based on the time of order entry. Non-
Displayed \15\ orders at that price are further categorized into a
number of priority bands, with orders within each priority band
prioritized again based on the time of order entry, as provided in EDGX
Rule 11.9. The generally applicable allocation bands for orders
executed on the Exchange are described in EDGX Rule 11.9(a)(2)(A), and
similar allocation bands applicable to orders executed at the midpoint
of the NBBO are described in EDGX Rule 11.9(a)(2)(B).\16\ The price
time allocation model has provided significant benefits to the equities
markets as it encourages increased efficiency by rewarding market
participants that are the first to provide liquidity at a particular
price. At the same time, because this allocation methodology
preferences speed, retail investors may have a more limited ability to
secure an execution for their non-marketable orders under this model.
The Exchange believes that retail priority would improve trading
outcomes for retail investors and could perhaps encourage even more
retail order flow to be entered into the displayed market.
---------------------------------------------------------------------------
\12\ See EDGX Rule 11.12.
\13\ ``Displayed'' is an instruction the User may attach to an
order stating that the order is to be displayed by the System on the
EDGX Book. See EDGX Rule 11.6(e)(1).
\14\ ``EDGX Book'' means the System's electronic file of orders.
See EDGX Rule 1.5(d)
\15\ ``Non-Displayed'' is an instruction the User may attach to
an order stating that the order is not to be displayed by the System
on the EDGX Book. See EDGX Rule 11.6(e)(2).
\16\ In addition, EDGX Rule 11.9(a)(2)(C) describes the sequence
in which orders are timestamped when re-ranked by the System upon
clearance of a locking quotation.
---------------------------------------------------------------------------
Retail Priority Orders
The Exchange would offer priority benefits exclusively to Retail
Orders that are entered on behalf of retail investors that enter a
limited number of equity orders each trading day. As such, the Exchange
would define a new term, ``Retail Priority Order'' to designate Retail
Orders that are eligible for priority on the EDGX Book. Specifically, a
``Retail Priority Order'' would be defined as a Retail Order, as
defined in Rule 11.21(a)(2), that is entered on behalf of a person that
does not place more than 390 equity orders per day on average during a
calendar month for its own beneficial account(s). The selected 390
orders per day threshold to qualify as a Retail Priority Order is
similarly used for the options industry Priority Customer
definition,\17\ and represents one order entered each minute during
regular trading hours--i.e., from 9:30 a.m. ET to 4:00 p.m. ET. All
orders entered on behalf of the retail customer would be counted to
determine whether a customer's Retail Orders could be identified as
Retail Priority Orders. This would therefore include both orders routed
to other exchanges and orders that are not entered as Retail Orders
(e.g., because the price of such orders is modified by a broker-dealer
algorithm). The Exchange believes that limiting the Retail Orders that
would be priority eligible, as described, would assist in ensuring that
these benefits flow only to retail investors that are not engaged in
trading activity akin to that of a professional.
---------------------------------------------------------------------------
\17\ See e.g., EDGX Rule 16.1(a)(46),(47).
---------------------------------------------------------------------------
Similar to the rules of the Exchange's options trading platform
(``EDGX Options''),\18\ the EDGX Equities rules would describe how to
count parent/child orders and cancel/replace orders when determining
whether the 390 order per day threshold has been exceeded. As proposed,
parent/child orders would be counted as a single order--i.e., a
``parent'' order that is broken into multiple ``child'' orders by
[[Page 32810]]
a broker or dealer, or by an algorithm housed at a broker or dealer or
by an algorithm licensed from a broker or dealer, but which is housed
with the customer, would count as one order even if the ``child''
orders are routed across multiple exchanges. Similarly, with one
exception for parent/child orders, any order that cancels and replaces
an existing order would count as a separate order. An order that
cancels and replaces any ``child'' order resulting from a ``parent''
order that is broken into multiple ``child'' orders, would not count as
a new order. The Exchange believes that this guidance would assist RMOs
in determining whether Retail Orders entered on behalf of a particular
retail customer would qualify to be entered as Retail Priority Orders.
Similar to the implementation of the Priority Customer designation in
the options industry,\19\ RMOs that enter Retail Priority Orders would
also be required to have reasonable policies and procedures in place to
ensure that such orders are appropriately represented on the Exchange.
Such policies and procedures should provide for a review of retail
customers' activity on at least a quarterly basis. Retail Orders for
any retail customer that had an average of more than 390 orders per day
during any month of a calendar quarter would not be eligible to be
entered as Retail Priority Orders for the next calendar quarter. RMOs
would be required to conduct a quarterly review and make any
appropriate changes to the way in which they are representing orders
within five business days after the end of each calendar quarter. While
RMOs would only be required to review their accounts on a quarterly
basis, if during a quarter the Exchange identifies a retail customer
for which orders are being represented as Retail Priority Orders but
that has averaged more than 390 orders per day during a month, the
Exchange would notify the RMO, and the RMO would be required to change
the manner in which it is representing the retail customer's orders
within five business days.
---------------------------------------------------------------------------
\18\ See Interpretations and Policies .01 to EDGX Rule 16.1. Due
to differences between equities and options trading there are some
differences between the proposed methodology and the methodology
used by options exchanges. For example, EDGX Options rules contain
provisions related to complex orders and pegged orders, and
differentiate between parent orders that are broken up into multiple
child orders on the same side and series or both sides and/or
multiple series.
\19\ See Securities Exchange Act Release No. 78221 (July 1,
2016), 81 FR 44353 (July 7, 2016) (SR-BatsEDGX-2016-28).
---------------------------------------------------------------------------
Retail Priority Proposal
The Exchange proposes to introduce retail priority in order to
ensure that non-marketable orders submitted on behalf of retail
investors can more readily compete for execution with orders entered by
sophisticated market participants that may be better equipped to
optimize their place in the intermarket queue. Retail priority would be
in place during all trading sessions, and would also be available to
orders entered for participation in the Exchange's opening process and
the re-opening process following a halt.
As proposed, the portion of a Retail Priority Order with a
Displayed instruction would be given allocation priority ahead of all
other available interest on the EDGX Book. This would be true of both
orders executed pursuant to the regular priority bands described in
EDGX Rule 11.9(a)(2)(A), and orders priced at the midpoint of the NBBO
pursuant to EDGX Rule 11.9(a)(2)(B) where Retail Priority Orders
subject to Display-Price Sliding \20\ would have priority ahead of
limit orders entered with such an instruction as well as any other
orders resting at the midpoint of the NBBO.\21\ In addition, since
Reserve Orders contain a Displayed instruction but include both
Displayed and Non-Displayed shares, the Reserve Quantity \22\ of Retail
Priority Orders would be given priority ahead of the Reserve Quantity
of other limit orders on the EDGX Book.
---------------------------------------------------------------------------
\20\ Display-Price Sliding is an order instruction provided for
compliance with Rule 610(d) of Regulation NMS. See EDGX Rule
11.6(l)(B). While a significant majority of Retail Orders are
entered into the EDGX Book with a routing instruction, an RMO may
choose to perform its own routing, in which case those orders may be
handled pursuant to the Display-Price Sliding process, which is the
default handling unless Price Adjust or Cancel Back is elected. See
EDGX Rule 11.8(b)(10).
\21\ Orders entered with Display-Price Sliding are ranked at the
locking price and are therefore given priority when executed at the
midpoint of the NBBO pursuant to current EDGX Rule 11.9(a)(2)(B).
\22\ ``Reserve Quantity'' is the portion of an order that
includes a Non-Displayed instruction in which a portion of that
order is also displayed on the EDGX Book. See EDGX Rule 11.6(m).
---------------------------------------------------------------------------
Retail Priority Orders that are not willing to be displayed, or are
only willing to be displayed at a less aggressive price than the
execution price, would not receive any special priority. For example, a
Retail Priority Order that is entered as a MidPoint Peg Order,\23\
which by definition is Non-Displayed, would be prioritized along with
all other MidPoint Peg Orders notwithstanding the fact that it is a
Retail Priority Order. Similarly, a MidPoint Discretionary Order
(``MDO'') \24\ executed within its Discretionary Range would receive
the same priority as other orders entered with a Discretionary Range
instruction, regardless of whether the MDO is displayed at its pegged
price.
---------------------------------------------------------------------------
\23\ 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. See EDGX Rule 11.8(d).
\24\ A ``MidPoint Discretionary Order'' is a Limit Order that is
executable at the NBB for an order to buy or the NBO for an order to
sell while resting on the EDGX Book, with discretion to execute at
prices to and including the midpoint of the NBBO. See EDGX Rule
11.8(g).
---------------------------------------------------------------------------
The following examples illustrate the proposed implementation of
retail priority: \25\
---------------------------------------------------------------------------
\25\ In each example, orders are shown in the order in which
they are entered.
---------------------------------------------------------------------------
Example 1: Displayed Retail Priority Order Has Priority at a Given
Price
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @$10.00--Displayed, Non-Retail Priority Order
Order 2: Buy 100 shares @$10.00--Displayed, Retail Priority Order
Order 3: Sell 100 shares @$10.00
A Retail Priority Order entered with a Displayed instruction would
have priority over Non-Retail Priority Orders at the same price. As a
result, Order 3 would trade with Order 2 for 100 shares @$10.00,
securing a timely execution for the retail investor.
Example 2: Better Priced Non-Retail Priority Order Has Priority
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @$10.00--Retail Priority Order
Order 2: Buy 100 shares @$10.01--Non-Retail Priority Order
Order 3: Sell 100 shares @$10.00
Allocations would continue to be prioritized based on price.
Although Retail Priority Orders entered with a Displayed instruction
would have priority over Non-Retail Priority Orders at the same price,
they would not have priority over Non-Retail Priority Orders at a
better price. As a result, Order 3 would trade with the better priced
Order 2 for 100 shares @$10.01.
Example 3: No Retail Priority for Non-Displayed Orders
NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @$10.01--Non-Displayed, Non-Retail Priority
Order
Order 2: Buy 100 shares @$10.01--Non-Displayed, Retail Priority Order
Order 3: Sell 100 shares @$10.00
A Retail Priority Order entered with a Non-Displayed instruction is
not eligible for retail priority. As a result, Order 3 trades with
Order 1 for 100 shares @$10.01 based on time priority. Retail Priority
Orders would need to be submitted with a Displayed or Reserve
instruction to qualify for the benefits of retail priority, which
should encourage displayed retail liquidity.
Example 4: No Retail Priority in Discretionary Range
NBBO: $10.00 x $10.10
[[Page 32811]]
Order 1: Buy 100 shares @$10.00 + $0.03 Discretion--Non-Retail Priority
Order
Order 2: Buy 100 shares @$10.00 + $0.03 Discretion--Retail Priority
Order
Order 3: Sell 100 shares @$10.02
Retail Priority Orders would only have priority if willing to be
displayed at the execution price. Although orders entered with a
Discretionary Range instruction may be displayed at their ranked price,
the execution would occur at a non-displayed price within the
Discretionary Range. As a result, Order 3 trades with Order 1 for 100
shares @$10.02 based on time priority.\26\
---------------------------------------------------------------------------
\26\ If Order 3 was to sell 100 shares @$10.00 then retail
priority would be observed at the displayed price and Order 3 would
trade with Order 2 for 100 shares @$10.00.
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Example 5: Retail Priority Reserve Order has Displayed and Non-
Displayed Priority
NBBO: $10.00 x $10.10
Order 1: Buy 500 @$10.00--Non-Retail Priority Reserve Order, 100 shares
displayed
Order 2: Buy 500 @$10.00--Retail Priority Reserve Order, 100 shares
displayed
Order 3: Sell 300 @$10.00
A Retail Priority Order entered as a Reserve Order would have
retail priority for both displayed and non-displayed size. However, any
Reserve Quantity would be executed after other orders with a higher
priority, including the displayed size available from Non-Retail
Priority Orders. As a result, Order 3 would trade 100 shares @$10.00
with Order 2 based on retail priority, then would trade 100 shares
@$10.00 with Order 1. After exhausting the available displayed size,
Order 3 would trade the remaining 100 shares @$10.00 with Order 2 based
on retail priority.
Example 6: Display-Price Sliding Retail Priority Orders are Eligible
for Priority at Midpoint
NBBO: $10.00 x $10.01
EDGX BBO: $10.00 x $10.02
Order 1: Buy 100 shares @$10.01--Book Only, Display-Price Sliding, Non-
Retail Priority Order
Order 2: Buy 100 shares @$10.01--Book Only, Display-Price Sliding,
Retail Priority Order
Order 3: Sell 100 shares @$10.01--Post Only
Order 4: Sell 100 shares @$10.00
Due to the Display-Price Sliding instruction, both Order 1 and
Order 2 are ranked at $10.01 and displayed at $10.00 to avoid locking
the National Best Offer at $10.01.\27\ Then, because of the Post Only
instruction, Order 3 posts and displays on the EDGX Book at $10.01.
Since there is displayed interest now resting on the same side of the
order book, Order 4 is eligible for execution on entry at the midpoint
price of $10.005--i.e., one-half minimum price variation better than
Order 3.\28\ At the midpoint of the NBBO, a Retail Priority Order
subject to Display-Price Sliding that is willing but unable to display
at or better than the execution price would have priority over other
orders. As a result, Order 4 would trade with Order 2 for 100 shares
@$10.005, securing a timely execution for the retail investor.
---------------------------------------------------------------------------
\27\ An order with a Display-Price Sliding instruction that
would be a locking quotation on entry is instead ranked at the
locking price and displayed at a price that is one minimum price
variation less aggressive than the locking price. See EDGX Rule
11.6(l)(B).
\28\ See EDGX Rule 11.6(l)(1)(B)(v); EDGX Rule 11.10(a)(4)(D).
---------------------------------------------------------------------------
Example 7: Reserve and Other Orders on EDGX Book
NBBO: $10.00 x $10.01
EDGX BBO: $10.00 x $10.02
Order 1: Buy 100 shares @$10.00--Non-Retail Priority Order
Order 2: Buy 500 @$10.00--Non-Retail Priority Reserve Order, 100 shares
displayed
Order 3: Buy 500 @$10.00--Retail Priority Reserve Order, 100 shares
displayed
Order 4: Buy 100 shares @$10.01--Book Only, Display-Price Sliding, Non-
Retail Priority Order
Order 5: Sell 500 shares @$10.00
Due to the Display-Price Sliding instruction, Order 4 is displayed
at $10.00 to avoid locking the National Best Offer at $10.01, but
ranked and executable at its $10.01 limit price. Since allocations
would continue to be prioritized based on price, Order 5 would first
trade 100 shares @$10.01 with Order 4. At any given price, the
displayed size of a Retail Priority Order would have priority over Non-
Retail Priority Orders at the same price. As such, Order 5 would next
trade 100 shares @$10.00 with Order 3. Next, the displayed size of Non-
Retail Priority Orders would trade in time priority. Order 5 would
therefore trade 100 shares @$10.00 with Order 1, followed by 100 shares
@$10.00 with Order 2. Finally, after exhausting the available displayed
size, the Reserve Quantity of the remaining Reserve Orders would trade,
with Retail Priority Orders being eligible for retail priority. As a
result, Order 5 would trade the remaining 100 shares @$10.00 with Order
3.
Example 8: Display-Price Sliding and Midpoint Peg Orders on EDGX Book
NBBO: $10.00 x $10.01
EDGX BBO: $10.00 x $10.02
Order 1: Buy 100 shares @$10.01--Book Only, Display-Price Sliding, Non-
Retail Priority Order
Order 2: Buy 500 shares @$10.01--Book Only, Display-Price Sliding,
Retail Priority Reserve Order, 100 shares displayed
Order 3: Buy 100 shares @$10.01--MidPoint Peg, Non-Retail Priority
Order
Order 4: Sell 100 shares @$10.01--Post Only
Order 5: Sell 500 shares @$10.00
Due to the Display-Price Sliding instruction, both Order 1 and
Order 2 are ranked at $10.01 and displayed at $10.00 to avoid locking
the National Best Offer at $10.01. Order 3, meanwhile is ranked at the
midpoint price of $10.005. Then, because of the Post Only instruction,
Order 4 posts and displays on the EDGX Book at $10.01. Since there is
displayed interest now resting on the same side of the order book,
Order 5 is eligible for execution on entry at the midpoint price of
$10.005--i.e., one-half minimum price variation better than Order 4. At
the midpoint of the NBBO, a Retail Priority Order subject to Display-
Price Sliding that is willing but unable to display at or better than
the execution price would have priority over other orders. As a result,
Order 5 would first trade with Order 2 for 100 shares @$10.005. Non-
Retail Priority Orders with Display-Price Sliding would be next in
priority, and Order 5 would therefore next trade 100 shares @$10.005
with Order 1. Finally, Order 5 would trade the remaining 300 shares
@10.005 with Order 2. Order 3 would not receive an execution since its
ranked price of $10.005 is worse than the ranked price of Orders 1 and
2, which are both ranked at the locking price of $10.01.\29\
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\29\ Pursuant to EDGA Rule 11.9(a)(1), the best-priced orders to
buy or sell have priority on the EDGA Book in all cases. Although
executable at the midpoint, Orders 1 and 2 are the highest-priced
buy orders based on the $10.01 ranked price. As such, the full size
of those orders would trade before orders that are both ranked and
executable at the midpoint.
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Retail Attribution
A Retail Member Organization on EDGX has the option of designating
Retail Orders to be identified as such on the EDGX Book Feed,\30\ which
may increase potential execution opportunities for that order. Today,
pursuant to EDGX Rule 11.21(f), this designation may be made on either
an
[[Page 32812]]
order-by-order or port-by-port basis,\31\ thereby giving members
flexibility in how they would like their Retail Orders attributed on
the Exchange. To support the introduction of retail priority, the
Exchange proposes to provide that Retail Priority Orders will always be
designated as such on the EDGX Book Feed--i.e., Retail Priority Orders
would be identified as having been entered with a priority
designation.\32\ Retail Orders that are not designated as Retail
Priority Orders could continue to be attributed, or not, at the
discretion of the RMO entering the order. Although RMOs have the choice
to determine which Retail Orders would be marked as retail on market
data, the Exchange believes that it is important to ensure that Retail
Priority Orders would be attributable as priority eligible. Designating
Retail Priority Orders on the EDGX Book Feed will increase transparency
by informing market participants when there is priority eligible retail
investor interest available to trade on the Exchange, thereby allowing
market participants to make informed routing decisions, including the
decision to route contra-side interest to trade with such orders. Based
on the Exchange's experience with Retail Order attribution, this
approach has the potential to increase execution opportunities for
Retail Priority Orders (and other non-marketable orders) by encouraging
additional order flow to be routed to the Exchange to trade with
resting Retail Priority Orders.\33\
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\30\ See EDGX Rule 13.8.
\31\ A Retail Member Organization that instructs the Exchange to
identify all its Retail Orders as Retail on a Retail Order Port is
able to override such setting and designate any individual Retail
Order from that port as Attributable or as Non-Attributable, as set
forth in Rule 11.6(a). See EDGX Rule 11.21(f).
\32\ The retail indicator on the EDGX Book Feed would indicate
that the order is a Retail Priority Order and would not provide the
market participant identifier (``MPID'') of the entering firm.
Members may separately include an Attributable instruction on their
orders pursuant to Rule 11.6(a) if they would also like MPID
attribution.
\33\ Prior to the original introduction of retail attribution,
the Exchange conducted a study that found that Retail Orders
received an 18% higher execution rate when members used Attributable
Orders to include their MPID in the published quote on the EDGX Book
Feed. See Securities Exchange Act Release No. 72016 (April 24,
2014), 79 FR 24463 (April 30, 2014) (SR-EDGX-2014-13).
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In addition, since only Retail Priority Orders would be required to
be attributed, RMOs would retain the option of not attributing Retail
Orders entered into the EDGX Book. While Retail Orders not entered with
the Retail Priority Order designation would not be eligible for
priority, they would retain all other benefits associated with Retail
Orders today, including the materially enhanced rebates that are made
available to such orders.\34\ The purpose of requiring attribution of
Retail Priority Orders is, first and foremost, to ensure that market
participants can ascertain their priority on the order book. Although
the Exchange believes that RMOs are comfortable attributing their
orders, if a specific RMO would prefer not to have one or more of their
orders attributed, the member would be able to choose not to enter such
orders as Retail Priority Orders without losing any of the benefits
that they are provided today. Customer indicators are widely-used in
the options industry, and the Exchange believes that they would be
equally appropriate on EDGX with the introduction of retail priority.
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\34\ The equities industry is highly competitive, and
competition for retail order flow is particularly fierce as the
equities exchanges compete vigorously with each other, and with
wholesale market makers that execute this order flow off-exchange.
As a result, the Exchange provides a rebate of $0.0032 per share to
all Retail Orders. This rebate applies irrespective of whether the
RMO attributes Retail Orders on the EDGX Book Feed.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\35\ in general, and
Section 6(b)(5) of the Act,\36\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\35\ 15 U.S.C. 78f(b).
\36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has consistently emphasized the need to ensure that
the U.S. capital markets are structured with the interests of retail
investors in mind, and recently highlighted its focus on the ``long-
term interest of Main Street Investors'' as the agency's number one
strategic goal for fiscal years 2018 to 2022.\37\ The Exchange believes
that retail priority is consistent with the goals of the Commission to
ensure that the equities markets continue to serve the needs of the
investing public. Specifically, introducing retail priority would
protect investors and the public interest by giving retail investors
the tools needed to compete for executions on non-marketable order flow
submitted to a national securities exchange. The Exchange is committed
to innovation that improves the quality of the equities markets, and
believes that retail priority may increase the attractiveness of the
Exchange for the execution of orders submitted on behalf of the
millions of ordinary investors that rely on these markets for their
investment needs.
---------------------------------------------------------------------------
\37\ See Commission Strategic Plan, supra note 4.
---------------------------------------------------------------------------
Although the Commission has approved other allocation methodologies
for equities trading,\38\ most equities exchanges, including EDGX,
continue to determine priority based on a price/display/time allocation
model today. This has contributed to deep and liquid markets for equity
securities as liquidity providers compete to be the first to establish
a particular price. At the same time, ordinary investors may not be
able to compete with market makers and other automated liquidity
providers to be the first to set a new price. Importantly, retail
investors, in contrast to their professional counterparts, tend to have
longer investment time horizons and are not in the business of
optimizing queue placement under a time based allocation model. Thus,
in order to facilitate the needs of these ordinary investors, the
Exchange believes that an alternative approach is needed.
---------------------------------------------------------------------------
\38\ Nasdaq PSX, for example, operates with a price setter pro
rata model that rewards liquidity providers that set the best price
and then rewards other market participants that enter larger sized
orders. See Securities Exchange Act Release No. 72250 (May 23,
2014), 79 FR 31147 (May 30, 2014) (SR-Phlx-2014-24).
---------------------------------------------------------------------------
The proposed introduction of retail priority is designed, first and
foremost, to benefit retail investors by increasing both the likelihood
and speed with which their non-marketable orders are executed. Unlike
marketable retail order flow that is routinely executed in full on
entry at the national best bid or offer or better, non-marketable
retail order flow has to compete for execution with orders entered by
sophisticated market participants that may be quicker to establish a
new price. As shown in the chart below,\39\ the Exchange has found that
in 2018, of volume executed from retail limit orders, 28.3% joined the
national best bid or offer (``NBBO'') on entry, 17.8% were priced
better than the inside, and 49.4% were priced worse than the inside.
---------------------------------------------------------------------------
\39\ Based on Retail Orders entered by members that have
completed a retail attestation.
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[[Page 32813]]
[GRAPHIC] [TIFF OMITTED] TN09JY19.000
Although potentially beneficial for all Retail Priority Orders that
do not trade immediately on entry, the Exchange believes that retail
priority would be particularly beneficial to Retail Priority Orders
that join the NBBO, as there would often already be a queue at this
price. Introducing retail priority would thus give retail investors the
ability to compete for an execution for these orders, and may therefore
improve trading outcomes. As such, the Exchange believes that the
proposed rule change is consistent with the goals of the Exchange, and
of the Commission, to ensure that market structure evolves in ways that
protect ordinary investors that participate in the capital markets.
Furthermore, since retail priority is designed to improve trading
outcomes for ordinary investors, the Exchange also believes that it may
encourage retail brokers to route additional non-marketable retail
order flow to the EDGX Book, which may broaden execution opportunities
for other market participants. If successful in attracting retail order
flow to the Exchange, the proposed rule change would benefit market
participants by increasing the diversity of order flow with which they
can interact on a national securities exchange, thereby increasing
order interaction and contributing to price formation.
Giving queue priority to ordinary investors is not a novel concept
in the securities markets. In fact, customer priority has a long
tradition in the options market where orders entered on behalf of non-
broker dealer public customers have historically been afforded priority
over orders submitted by registered broker dealers. Today, most options
exchanges, including the Exchange's equity options platform (``EDGX
Options''),\40\ employ a customer priority execution algorithm where
orders submitted by a subset of public customers with more limited
trading activity (i.e., ``Priority Customers'') \41\ are provided order
book priority ahead of orders submitted by broker-dealers or other
market professionals at the same price. This allocation model, which
was first introduced by the International Securities Exchange LLC
(``ISE'') in its current retail focused form a decade ago,\42\ ensures
that orders from Priority Customers are executed ahead of similarly
priced interest from sophisticated market participants. The Exchange
believes that the time has come to introduce a similar concept for the
equities market in order to facilitate the needs of retail investors
that increasingly rely on these markets.
---------------------------------------------------------------------------
\40\ See EDGX Rule 21.8(d)(1).
\41\ The term ``Priority Customer'' refers to any person or
entity that is not a broker or dealer in securities and does not
otherwise qualify as a ``Professional'' by virtue of placing more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See e.g., EDGX
Rules 16.1(a)(46),(47).
\42\ See Securities Exchange Act Release No. 59287 (January 23,
2009), 74 FR 5694 (January 30, 2009) (SR-ISE-2006-26).
---------------------------------------------------------------------------
Similar to the options market Priority Customer definition, the
Exchange proposes to introduce a new definition of ``Retail Priority
Orders'' that would allow the Exchange to differentiate between more
and less active retail investors. Although the Exchange currently has a
robust regulatory program for Retail Orders that includes a number of
safeguards to prevent misuse,\43\ some equities market participants
have expressed concerns that the current definition of Retail Order
could provide market structure advantages to a subset of investors that
are more akin to market professionals. The Exchange believes that
limiting retail priority to Retail Orders that are entered on behalf of
less active investors would alleviate any potential concerns while
ensuring that retail investors would be able to reap the proposed
priority benefits. As such, Retail Orders entered on the EDGX Book
would be priority eligible only if the end investor submits fewer than
390 orders per day on average, or the equivalent of one order per
minute during regular trading hours. The Exchange believes that this
approach is consistent with the public interest and the protection of
investors as an investor that enters more than one order per minute is
effectively engaged in active trading activity that is more akin to a
professional trader. A similar approach is used to differentiate
between Priority and Professional Customers in the options industry
today. Thus, identifying Retail Priority Orders based on the average
number of orders entered for a beneficial account
[[Page 32814]]
is both a familiar and appropriately objective approach that would
reasonably distinguish between ordinary retail investors from more
active traders that may compete with market professionals.
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\43\ The current Retail Order definition is enforced through an
established process for approving the RMOs that are permitted to
enter Retail Orders; an attestation that such RMOs must provide
about the retail quality of their order flow; policies and
procedures to ensure the effectiveness of that attestation;
surveillance conducted by Exchange staff; and an exam process
implemented by the Financial Industry Regulatory Authority.
---------------------------------------------------------------------------
The Commission has approved other equities proposals to introduce
meaningful market structure benefits for retail investors in recent
years. For example, in 2012, the Commission approved proposals filed by
the New York Stock Exchange LLC (``NYSE'') and its affiliate NYSE Amex
LLC (``Amex'') to introduce retail price improvement programs.\44\
Those programs were designed to provide price improvement opportunities
for retail investors on a national securities exchange by allowing
liquidity providers to give sub-penny price improvement to their orders
pursuant to an exemption granted from Rule 612 of Regulation NMS.
Similar programs now exist on a number of exchanges, including the
Exchange's affiliate, Cboe BYX Exchange, Inc. (``BYX''),\45\ and have
provided millions of dollars of price improvement to ordinary
investors.\46\ When approving such retail price improvement programs on
a pilot basis, the Commission consistently found that the pilots were
consistent with the Act because they were ``reasonably designed to
benefit retail investors'' and could ``promote competition for retail
order flow among execution venues.'' The benefits to retail investors
in the form of meaningful price improvement opportunities similarly
animated the Commission's recent approval of the NYSE retail liquidity
program on a permanent basis.\47\ Although retail priority is designed
to increase fill rates and speed of execution rather than price
improvement, the Exchange believes that it could have a similarly
meaningful impact on execution quality for ordinary investors that
trade in the public market. Furthermore, retail priority would
complement existing retail price improvement programs by offering
market structure benefits to non-marketable retail order flow that
cannot participate in those programs.
---------------------------------------------------------------------------
\44\ See Securities Exchange Act Release No. 67347 (July 3,
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-
2011-84).
\45\ See Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019). Nasdaq BX
Inc. (``BX'') similarly operates its own retail price improvement
program. See Securities Exchange Act Release No. 73702 (November 28,
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048).
\46\ See, e.g., Securities Exchange Act Release No. 83831
(August 13, 2018), 83 FR 41128 (August 17, 2018) (SR-CboeBYX-2018-
014).
\47\ See Securities Exchange Act Release No. 85160 (February 15,
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28).
---------------------------------------------------------------------------
Similarly, in 2017, the Commission approved a proposed rule change
by The Nasdaq Stock Market LLC (``Nasdaq'') to introduce the ``Extended
Life Priority Order Attribute'' for Retail Orders that were willing to
remain on the book unaltered for a period of one second (``Retail
Extended Life Order'' or ``Retail ELO'').\48\ As proposed, displayed
orders entered on Nasdaq with the Retail ELO attribute were to be
provided a higher priority than other orders resting on the Nasdaq
order book. When the Commission approved this proposed rule change, it
opined that the proposal ``should benefit retail investors by providing
enhanced order book priority to retail order flow that is not
marketable upon entry,'' and that ``[s]uch enhanced order book priority
could result in additional or more immediate execution opportunities on
the [e]xchange for resting retail orders that otherwise would be
farther down in the order book queue, and thereby enhance execution
opportunities for retail investors.'' \49\ The same is true of the
Exchange's retail priority proposal, which would provide similar
benefits to retail investors without the additional complexity of
requiring that the order be willing to exist unaltered on the order
book for a specified period of time. While the Exchange believes that
the majority of retail investors have a longer investment time horizon
and therefore do not actively manage their trading interest at sub-
second time intervals, the Exchange believes that giving retail
priority broadly to orders entered on behalf of less active retail
investors may be more effective in encouraging retail brokers to route
order flow to the Exchange.
---------------------------------------------------------------------------
\48\ See Securities Exchange Act Release No. 81097 (July 7,
2017), 82 FR 32386 (July 13, 2017) (SR-NASDAQ-2016-161) (``Retail
ELO Approval''). Nasdaq ultimately decided not to implement Retail
ELO following Commission approval, and has since introduced a
``Midpoint Extended Life Order'' that is not limited to retail
participation.
\49\ Id.
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The Exchange also believes that it is appropriate and not unfairly
discriminatory to provide enhanced priority benefits solely to retail
investor orders as the proposal is designed specifically to ensure that
retail investors can compete for executions with sophisticated market
participants. In today's highly automated and efficient market, retail
investors have a more limited opportunity to compete for an execution
based purely on the time an order is placed. While sophisticated,
latency sensitive market participants can compete to be the first at
any particular price, retail investors with longer investment horizons
cannot compete in the same fashion. The proposed introduction of retail
priority would ensure that non-marketable Retail Priority Orders get
filled first when there is available contra-side interest, and thereby
improve investment outcomes for ordinary investors. The Commission has
consistently held that it is consistent with the Act to offer certain
advantages to retail customers,\50\ and the proposal follows a line of
other initiatives to improve the retail investor experience in the
public markets. The Exchange believes that it is an important goal of
both the Exchange and the Commission to ensure that our market
structure continues to benefit retail investors by providing the tools
that they need to invest in the capital markets. Although there are
many ways to achieve that goal, the Exchange believes that doing so
requires innovation in how retail investor orders are handled on the
national securities exchanges in order to attract that order flow back
to the displayed market.
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\50\ Where the interest of long-term investors, such as the
retail investors whose experience this filing is attempting to
improve, diverges from that of short-term professional traders, the
Commission ``repeatedly has emphasized that its duty is to uphold
the interests of long-term investors.'' See Securities Exchange Act
Release No. 61358 (January 14, 2010), 75 FR 3593 (January 21, 2010)
(File No. S7-02-10) (``Concept Release on Equity Market
Structure'').
---------------------------------------------------------------------------
The Exchange also believes that it is consistent with the public
interest and the protection of investors to provide retail priority
exclusively to those orders that contain a Displayed or Reserve
instruction. The goals of the proposed rule change are twofold. First,
the proposed change is designed to facilitate better trading outcomes
for retail investors, which may encourage retail brokers to send
additional retail order flow to the Exchange. Second, the proposed
change is designed to encourage additional displayed retail liquidity,
which could contribute to price discovery and encourage additional
order flow and liquidity from other market participants. Although the
first purpose could be achieved without limiting retail priority to
orders that contain a Displayed component at a particular price, the
second is only achieved when such orders are displayed to the broader
market. For that reason, recent priority enhancements for retail
investors, such as Nasdaq's Retail ELO, have also focused on displayed
interest that could improve quote quality and contribute to a vibrant
market.
[[Page 32815]]
Finally, the Exchange believes that it is consistent with just and
equitable principles of trade to require that Retail Priority Orders be
attributable as this would allow other market participants to gauge the
available size in orders that would be eligible for retail priority.
Although RMOs would not have the option to submit eligible Retail
Priority Orders as non-attributable, the transparency achieved by so
designating these orders is important to the proper functioning of a
market where such orders would be eligible for priority. As explained
in the purpose section of this proposed rule change, RMOs would retain
the ability to enter an order without a priority designation, and in
doing so would ultimately retain the ability to control which orders
are publicly attributed to retail investors. Priority Customer orders
entered on the EDGX Options platform are similarly designated as such
on the Exchange's market data feeds today, and the Exchange believes
that this has contributed positively to the overall market environment.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the proposed rule
change is designed to increase inter-market competition for retail
order flow, and intra-market competition for orders as market
participants compete to transact with retail investor orders entered on
the EDGX Book. The proposed rule change represents an effort by the
Exchange to enhance the ability for retail investors to participate
effectively on a national securities exchange without unnecessarily
burdening competition. Although retail priority would be limited to
retail investors, the Exchange does not believe that this produces an
unnecessary burden on competition as these changes are necessary to
attract retail order flow to a national securities exchange where they
may interact with a wide range of market participants. If successful,
the Exchange believes that retail priority would enhance competition by
encouraging retail brokers to route increased order flow to the public
markets, creating a more vibrant and competitive trading environment
that benefits all market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No comments were solicited or received on the proposed rule change.
III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeEDGX-2019-012 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \51\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
---------------------------------------------------------------------------
\51\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\52\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to perfect the operation of
a free and open market and a national market system'' and ``protect
investors and the public interest,'' and not be ``designed to permit
unfair discrimination between customers, issuers, brokers, or
dealers,'' \53\ and Section 6(b)(8) of the Act, which requires that the
rules of a national securities exchange ``not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of [the Act].'' \54\
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\52\ Id.
\53\ 15 U.S.C. 78f(b)(5).
\54\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5), 6(b)(8) or any other provision of the
Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\55\
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\55\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by July 30, 2019. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by August 13,
2019. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, which are set
forth in Amendment No. 1,\56\ in addition to any other comments they
may wish to submit about the proposed rule change.
---------------------------------------------------------------------------
\56\ See supra note 6.
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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-CboeEDGX-2019-012 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeEDGX-2019-012. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written
[[Page 32816]]
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549 on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
CboeEDGX-2019-012 and should be submitted on or before July 30, 2019.
Rebuttal comments should be submitted by August 13, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14490 Filed 7-8-19; 8:45 am]
BILLING CODE 8011-01-P
