Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend the Rule Relating to MidPoint Discretionary Orders To Allow Optional Offset or Quote Depletion Protection Instructions, 35454-35457 [2020-12514]
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35454
Federal Register / Vol. 85, No. 112 / Wednesday, June 10, 2020 / Notices
Exchange retained operational
responsibility for a number of regulatory
functions, including real-time
surveillance, qualification of companies
listed on the Exchange, and most
surveillance related to its affiliated
options markets.5 In June 2019, the
Exchange reallocated operational
responsibility from FINRA to BX
Regulation for certain investigative and
enforcement activity, including the
investigation and enforcement
responsibilities for conduct occurring
on The BX Options Market,6 and
investigation and enforcement
responsibilities for conduct occurring
on BX’s equity market only, i.e., not also
on non-Nasdaq-affiliated equities
markets.7 According to the Exchange,
notwithstanding the changes made in
June 2019, FINRA continues to perform
certain functions pursuant to an RSA,8
including the handling of contested
disciplinary proceedings arising out of
BX Regulation-led investigation and
enforcement activities.
The Exchange now proposes to
reallocate operational responsibility
from FINRA to BX Regulation for certain
enforcement activity, specifically, the
handling of certain contested
disciplinary proceedings.9 The
Exchange states that it anticipates
handling those contested disciplinary
proceedings that FINRA is unable or
unwilling to handle due to strained
resources or other similar limitations.10
Furthermore, the Exchange states that in
all cases, the Exchange will continue to
use FINRA’s Office of Hearing Officers
to administer the hearing process, and
that the rules applicable to the
disciplinary process will remain the
same.11
5 See
id.
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6 According
to the Exchange, as appropriate, BX
Regulation coordinates with other SROs to the
extent it is investigating activity occurring on nonNasdaq options markets to ensure no regulatory
duplication occurs. See Release, supra note 3, at
24065 fn.9.
7 Securities Exchange Act Release No. 86051
(June 6, 2019), 84 FR 27387 (June 12, 2019).
8 In addition to work performed pursuant to a
RSA, FINRA also performs work for matters covered
by agreements to allocate regulatory responsibility
under Rule 17d–2 of the Act. See Release, supra
note 3, at 24065 fn.11.
9 See Release, supra note 3, at 24065. The
Exchange states that BX Regulation’s decision to
assume operational responsibility for any given
contested disciplinary proceeding with be made on
a case by case basis. See Release, supra note 3, at
24065 fn.14. Furthermore, the Exchange states that
for those contested disciplinary proceedings that
BX Regulation does not assume operational
responsibility for, the Exchange will continue to use
FINRA to litigate those matters. See Release, supra
note 3, at 24065.
10 See Release, supra note 3, at 24065.
11 See Release, supra note 3, at 24065 fn.12.
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III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange 12 and, in particular,
with Sections 6(b)(5) and 6(b)(7) of the
Act.13 As noted above, since its
acquisition by The NASDAQ OMX
Group, Inc., the Exchange has
contracted with FINRA through various
regulatory services agreements to
perform certain regulatory functions on
its behalf.14 BX General Rule 2, Section
7 requires that, unless BX obtains prior
Commission approval, the regulatory
functions subject to RSAs in effect at the
time when BX executed the FINRA
Regulatory Contract must at all times
continue to be performed by FINRA or
an affiliate thereof or by another
independent self-regulatory
organization. The Exchange now
proposes to reallocate operational
responsibility for the certain contested
disciplinary activities discussed above
from FINRA to BX Regulation.15
The Commission believes that the
Exchange could leverage its knowledge
of its markets and members, its
experience with investigation and
enforcement work, and its surveillance,
investigation, and enforcement staff, in
helping to effectively, efficiently, and
with immediacy, litigate certain
contested disciplinary proceeds.16 The
Commission also notes that, as
discussed above, the proposal would
not change or alter in any way the
disciplinary process around how
contested matters are handled, and
FINRA’s Office of Hearing Officers will
continue to administer the hearing
process for all contested disciplinary
proceedings.17 Furthermore, as the
Exchange states, by assuming
operational responsibility for certain
contested disciplinary proceedings, the
Exchange may be able to deliver
increased efficiencies in the regulation
of its markets and to act promptly and
provide more effective regulation by
enabling timely and more efficient
action.18 Accordingly, the Commission
believes that the proposed rule change,
12 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
13 15 U.S.C. 78f(b)(5), (7).
14 See supra note 4 and accompanying text.
15 See supra notes 9 and 10 and accompanying
text.
16 See Release, supra note 3, at 24065.
17 See id.
18 See id.
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as modified by Amendment No. 1, is
consistent with the Act.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,19 that the
proposed rule change (SR–BX–2020–
007), as modified by Amendment No. 1
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–12516 Filed 6–9–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89007; File No. SR–
CboeEDGX–2020–010]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
of Amendment No. 1 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the Rule
Relating to MidPoint Discretionary
Orders To Allow Optional Offset or
Quote Depletion Protection
Instructions
June 4, 2020.
I. Introduction
On February 19, 2020, Cboe EDGX
Exchange, Inc. (the ‘‘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 amend EDGX
Rule 11.8(g), which describes the
handling of MidPoint Discretionary
Orders entered on the Exchange. The
proposed rule change was published for
comment in the Federal Register on
March 6, 2020.3 On April 16, 2020,
pursuant to Section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
19 Id.
20 17
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. 88309
(March 2, 2020), 85 FR 13193.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 88663,
85 FR 22474 (April 22, 2020). The Commission
designated June 4, 2020 as the date by which the
Commission shall approve or disapprove, or
1 15
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Federal Register / Vol. 85, No. 112 / Wednesday, June 10, 2020 / Notices
On May 19, 2020, the Exchange filed
Amendment No. 1 to the proposed rule
change, which replaced and superseded
the proposed rule change as originally
filed.6 The Commission received no
comment letters on the proposal. The
Commission is publishing this notice to
solicit comments on Amendment No. 1
from interested persons, and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
II. Description of the Proposal, as
Modified by Amendment No. 1
A MidPoint Discretionary Order
(‘‘MDO’’) is a limit order that is
executable at the national best bid
(‘‘NBB’’) for an order to buy or the
national best offer (‘‘NBO’’) for an order
to sell while resting on the EDGX Book,7
with discretion to execute at prices to
and including the midpoint of the
national best bid or offer (‘‘NBBO’’).8
The Exchange proposes to amend EDGX
Rule 11.8(g) to introduce two optional
instructions that Users 9 would be able
to include on MDOs entered on the
Exchange. First, the Exchange would
allow Users to enter MDOs with an
offset to the NBBO, similar to orders
entered with a Primary Peg Instruction
today.10 Second, the Exchange would
allow Users to enter MDOs that include
a Quote Depletion Protection (‘‘QDP’’)
instruction that would disable
discretion (i.e., the order’s ability to
execute at a more aggressive price than
its ranked price) for a limited period in
certain circumstances where the best
bid or offer displayed on the EDGX
Book is executed below one round lot.
Offset Instruction
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As proposed, MDOs entered with an
offset would function in the same
manner as currently implemented for
Primary Peg orders entered with an
offset pursuant to Rule 11.6(j)(2). First,
a User entering an MDO would be able
institute proceedings to determine whether to
disapprove, the proposed rule change.
6 In Amendment No. 1, the Exchange revised the
proposal to: (1) Modify the circumstances that
would enable or refresh a QDP active period (see
infra note 15); (2) set the QDP active period as 2
milliseconds; (3) include additional justification in
support of the proposed rule change, including data
in support of the QDP functionality; and (4) make
technical and conforming changes. Amendment No.
1 is available at https://www.sec.gov/comments/srcboeedgx-2020-010/srcboeedgx2020010-7240756217167.pdf.
7 The ‘‘EDGX Book’’ is the electronic file of orders
for the Exchange’s trading system. See EDGX Rule
1.5(d).
8 See EDGX Rule 11.8(g).
9 A ‘‘User’’ is any member or sponsored
participant who is authorized to obtain access to the
Exchange’s trading system. See EDGX Rule 1.5(ee).
10 See EDGX Rule 11.6(j)(2).
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to select an offset equal to or greater
than one minimum price variation
(‘‘MPV’’) above or below the NBB or
NBO to which the order is pegged
(‘‘Offset Amount’’). Second, the Offset
Amount for an MDO that is to be
displayed on the EDGX Book would
need to result in the price of such order
being inferior to or equal to the inside
quote on the same side of the market.11
The offset functionality would be an
optional feature that Users could
include when entering an MDO for
trading on the Exchange.
In addition, the Exchange proposes to
make conforming changes to EDGX Rule
11.8(g) to account for the offset
functionality. Specifically, the Exchange
proposes to amend language in the
introductory paragraph to Rule 11.8(g)
and subparagraphs (g)(6) and (8).12
According to the Exchange, these
changes reflect the proposed operation
of MDOs entered with an offset and
would not otherwise impact the
handling of MDOs entered on the
Exchange.13
35455
of the best bid (offer) then displayed on
the EDGX Book, it would remain
enabled for two milliseconds.17 During
this QDP Active Period, an MDO
entered with a QDP instruction would
not exercise discretion. Instead, such an
order would be only be executable at its
ranked price.18 The ranked price is
always executable unless the User
cancels the order from the book.
Unless the User chooses otherwise, an
MDO to buy (sell) entered with a QDP
instruction would default to a nondisplayed instruction and would
include an Offset Amount equal to one
MPV below (above) the NBB (NBO).19
Quote Depletion Protection
The Exchange also proposes to
introduce QDP, an optional instruction
that Users could enable on an MDO to
limit the order’s ability to exercise
discretion in certain circumstances.14
The QDP feature would do this by
tracking significant executions of orders
that constitute the best bid or offer on
EDGX.15 As proposed, a ‘‘QDP Active
Period’’ would be enabled or refreshed
for buy (sell) MDOs if the best bid (offer)
displayed on the EDGX Book is
executed below one round lot.16 When
a QDP Active Period is initially enabled,
or refreshed by a subsequent execution
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.20 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,21 which requires, among
other things, that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest, and
not be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
EDGX proposes to introduce optional
instructions that (1) would allow Users
to enter MDOs with an offset to the NBB
11 An MDO defaults to a displayed instruction
unless the User includes a non-displayed
instruction on the order. See EDGX Rule 11.8(g)(4).
Similar to the current handling of orders entered
with a Primary Peg instruction, the Exchange is not
proposing to accept displayed MDOs with an
aggressive offset at this time. See Amendment 1,
supra note 6, at 5 n.6.
12 For a detailed description of these proposed
changes, see Amendment 1, supra note 6, at 6–7.
13 See Amendment 1, supra note 6, at 7.
14 Proposed changes related to the introduction of
the QDP instruction are reflected in proposed
subparagraph (10) under EDGX Rule 11.8(g).
15 The Exchange initially proposed that the QDP
Active Period also could be enabled or refreshed in
certain circumstances by significant cancellations.
Amendment No. 1 removed this aspect of the
proposal.
16 Rule 611 of Regulation NMS generally limits
executions to prices that are at or better than the
protected best bid or offer. However, there are
circumstances, such as the use of intermarket sweep
orders, where an order may be executed at an
inferior price. In these circumstances, an execution
of the EDGX BBO below one round lot would
trigger a QDP Active Period even though that
quotation is inferior to the NBBO. See Amendment
1, supra note 6, at 8 n.10.
17 The QDP Active Period would always last for
at least two milliseconds. If the QDP Active Period
is refreshed by a subsequent execution, such
execution would result in a new two millisecond
timer being started. Although the MDO would not
exercise discretion during the QDP Active Period,
its priority would not be impacted, and any
applicable priority at its pegged price would be
retained when QDP is enabled. See Amendment 1,
supra note 6, at 8 n.12.
18 An MDO’s ranked price is the order’s displayed
or non-displayed pegged price, which may or may
not include an offset, as proposed, or the order’s
limit price if that limit price is less aggressive than
the applicable pegged price. See Amendment 1,
supra note 6, at 8 n.11.
19 The Exchange also proposes to amend EDGX
Rule 11.8(g)(4) to reflect the fact that MDOs entered
with a QDP instruction would default to nondisplayed. MDOs that are not entered with the QDP
instruction would continue to default to a displayed
instruction, as currently provided in EDGX Rule
11.8(g)(4). See Amendment 1, supra note 6, at 9
n.13.
20 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
21 15 U.S.C. 78f(b)(5).
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35456
Federal Register / Vol. 85, No. 112 / Wednesday, June 10, 2020 / Notices
or NBO and (2) enter MDOs with a QDP
instruction that would disable
discretion for 2 milliseconds where the
best bid or offer displayed on the EDGX
Book is executed below one round lot.
The Exchange asserts that similar offset
functionality is already available on the
Exchange in both the Primary Peg order
type and the Discretionary Range
instruction. EDGX further believes that
the flexibility to specify an offset would
be beneficial for market participants that
require additional discretion to manage
their order flow on the Exchange.
The Exchange states that the QDP
instruction is intended to provide Users
with a protective feature that limits an
order’s ability to exercise discretion in
certain circumstances that may indicate
that the market is moving against the
resting MDO.22 The Exchange provided
data for a ten day period that tested the
potential performance of the proposed
QDP instruction in protecting Users
from a potential negative price move by
observing market movements in the two
milliseconds following instances where
QDP would have been enabled due to
the execution of the EDGX best bid or
offer. The Exchange concluded that the
data showed: (1) MDOs entered with a
QDP instruction could benefit from
avoiding potentially impactful
executions within the order’s
discretionary range when there are
impending price moves; and (2) even
though the market might remain static
after QDP is enabled, the opportunity
cost for disabling discretion in those
circumstances is small as QDP would
only be enabled for a limited period of
time during the trading day.
The Commission believes that the
QDP feature is reasonably designed to
allow market participants who utilize
MDOs the opportunity to avoid an
unfavorable execution when the market
moves against a resting MDO. In
reaching this conclusion, the
Commission evaluated the proposed
rule change and the data provided by
the Exchange demonstrating correlation
between the operation of the QDP
feature and price instability on the
EDGX market. In particular, the data
indicates that: (i) There is a reasonable
likelihood that the market will move
against a resting MDO or remain static
during a QDP Active Period; and (ii) a
QDP Active Period would be active on
average less than a half second per
trading day per symbol. In addition, the
QDP instruction is designed so that,
during the QDP Active Period, only the
discretion to execute at a more
aggressive price would be suppressed
and therefore an MDO, whether
22 See
Amendment No. 1, supra note 6, at 17–18.
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displayed or non-displayed, would still
be accessible to liquidity takers at its
ranked price. Finally, no User would be
required to use either of the two
proposed order instructions for the
MDO (i.e., NBBO offset and QDP); it is
optional functionality that would be
available to Users who believe it may
better effect their trading strategies.
Therefore, the Commission believes that
providing market participants the ability
to use this optional tool to potentially
improve the quality of their executions
would promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and
protect investors and the public interest.
The Commission also notes that there
is current, existing functionality for
discretionary orders that is similar,
although not identical, to both the offset
and QDP instructions on the
Exchange 23 and other national
securities exchanges.24 For the NBBO
offset in particular, the Commission
notes that the proposed offset
instruction is a close variant of the
discretion and pegging functionality
that the Commission has approved
under past exchange proposals.25 These
functionalities continue to exist on the
Exchange and on other exchanges.26
Accordingly, for the foregoing
reasons, the Commission believes that
this proposed rule change, as modified
by Amendment No. 1, is consistent with
the Exchange Act. The Commission
believes that the proposed rule change
is reasonably designed to promote fair
and orderly markets, promote just and
equitable principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market, and, in general,
to protect investors and the public
interest.
23 See,
24 See,
e.g., EDGX Rule 11.6(j)(2).
e.g., IEX Rule 11.190(b)(10), Nasdaq Rule
4703(g).
25 See, e.g., Securities Exchange Act Release No.
73468 (Oct. 29, 2014), 79 FR 65450 (Nov. 4, 2014).
26 See, e.g., EDGX Rule 11.6(d); EDGX Rule
11.6(j)(2); Nasdaq Rule 4703(g). The Commission
notes that the Exchange and other exchanges offer
order types or instructions that would permit an
order with discretion or an order with pegging
functionality (or both, in some cases) to rest more
passively on the exchange’s book (e.g., further away
from the NBB or NBO). As noted above, the
Exchange offers both a Discretionary Range
instruction (which would allow a discretionary
order to rest passively) and a Primary Peg
instruction (which would allow an order to be
pegged one or more MPVs away from the NBB or
NBO). Other exchange rules permit a discretionary
order to be combined with a pegged order and
would allow for a passive offset. See, e.g., Nasdaq
Rule 4703(g).
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IV. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1 is consistent with the
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeEDGX–2020–010 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–2020–010. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2020–010, and
should be submitted on or before July 1,
2020.
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Federal Register / Vol. 85, No. 112 / Wednesday, June 10, 2020 / Notices
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
SECURITIES AND EXCHANGE
COMMISSION
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 1 in the Federal
Register In Amendment No. 1, the
Exchange further revised the proposal
to: (1) Modify the circumstances that
would enable or refresh a QDP active
period; (2) set the QDP active period as
2 milliseconds; (3) include additional
justification in support of the proposed
rule change, including data in support
of the QDP functionality; and (4) make
technical and conforming changes. The
changes and additional information in
Amendment No. 1 add additional clarity
to the original substance of the proposed
rule change. In addition, the content of
Amendment No. 1 assists the
Commission’s determination of whether
the proposed rule change is consistent
with the Act. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,27 to
approve the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,28 that the
proposed rule change (SR–CboeEDGX–
2020–010), as modified by Amendment
No. 1, be, and hereby is, approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–12514 Filed 6–9–20; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–89015; File No. SR–
NYSEAMER–2020–29]
Self-Regulatory Organizations; NYSE
American LLC; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 2, To Modify Rule
967NY Regarding the Treatment of
Orders Subject to Trade Collar
Protection
June 4, 2020.
I. Introduction
On April 9, 2020, NYSE American
LLC (‘‘NYSE American’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’), pursuant to Section
19(b)(1) 1 of the Securities Exchange Act
of 1934 (the ‘‘Act’’) 2 and Rule 19b–4
thereunder,3 a proposed rule change to
modify Exchange Rule 967NY regarding
the treatment of orders subject to Trade
Collar Protection. The Exchange
submitted Amendment No. 2, which
superseded and replaced the proposed
rule change, on April 23, 2020.4 The
proposed rule change was published for
comment in the Federal Register on
April 30, 2020.5 The Commission
received no comments on the proposal.
This order approves the proposed rule
change, as modified by Amendment No.
2.
II. Description of the Proposal, as
Modified by Amendment No. 2
The Exchange states that it proposes
changes to Rule 967NY(a) to modify
functionality and to adopt
enhancements to the operation of the
Trading Collars.6 The Exchange applies
Trade Collar Protection to incoming
market orders and marketable limit
orders (each a ‘‘collared order’’ and,
collectively, ‘‘Marketable Orders’’) if the
width of the NBBO is greater than one
Trading Collar. As described more fully
in the Notice, the Exchange states that
Trading Collars mitigate the risks
associated with orders sweeping
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 Amendment No. 2 is available at https://
www.sec.gov/comments/sr-nyseamer-2020-29/
srnyseamer202029-7108449-215907.pdf. The
Exchange submitted Amendment No. 1 on April 22,
2020, and withdrew it on April 23, 2020.
5 Securities Exchange Act Release No. 88740
(April 24, 2020), 85 FR 24057 (‘‘Notice’’).
6 See Notice, supra note 5, 85 FR at 24058.
‘‘Trading Collars’’ are determined by the Exchange
on a class-by-class basis and, unless announced
otherwise via Trader Update, are the same value as
the bid-ask differential guidelines established
pursuant to Rule 925NY(b)(4). See Rule
967NY(a)(2).
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2 15
27 15
U.S.C. 78s(b)(2).
28 Id.
29 17
CFR 200.30–3(a)(12).
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35457
through multiple price points (including
during extreme market volatility) and
resulting in executions at prices that are
potentially erroneous.7 According to the
Exchange, by applying Trading Collars
to incoming orders, the Exchange
provides an opportunity to attract
additional liquidity at tighter spreads
and it ‘‘collars’’ affected orders at
successive price points until the bid and
offer are equal to the bid-ask differential
guideline for that option (i.e., equal to
the Trading Collar).8 Similarly, by
applying Trading Collars to partially
executed orders, the Exchange states
that it prevents the balance of such
orders from executing away from the
prevailing market after exhausting
interest at or near the top of book on
arrival.9
Accordingly, the Exchange proposes
to modify the treatment of incoming
market orders when the width of the
NBBO is greater than one Trading Collar
(i.e., a ‘‘wide market’’) and there is an
existing contra-side collared order.
Currently, an incoming market order
would immediately execute against an
existing contra-side collared order in a
wide market.10 The Exchange proposes
to reject a market order to buy (sell)
received in a wide market if there is
already a collared Marketable Order to
sell (buy).11 The Exchange states that
the proposed rule change would prevent
the execution of the market order at a
potential erroneous price and provide
the collared order greater opportunity to
receive execution.12
The Exchange also proposes to amend
the operation of the Trading Collar so
that the display price would be the last
execution price of the collared order.13
Currently, the display price of a collared
Marketable Order could be based on
either the available contra-side trading
interest within (or outside of) one
Trading Collar or the Collar Range 14 of
the collared order.15 The Exchange
states that the proposed rule change
would simplify the method of selecting
the display price (i.e., the current collar
execution price) thereby enabling
investors to gauge market interest, and,
by using a single standard to determine
7 See
Notice, supra note 5, 85 FR at 24058.
id.
9 See id.
10 See Rule 967NY(a)(1)(A).
11 See proposed Rule 967NY(a)(1)(B).
12 See Notice, supra note 5, 85 FR at 24059.
13 See proposed Rule 967NY(a)(5).
14 A ‘‘Collar Range’’ is within one Trading Collar
above (for buy orders) or below (for sell orders) the
collar execution price. See Rule 967NY(a)(4)(D).
15 See Rule 967NY(a)(5)(A)–(B).
8 See
E:\FR\FM\10JNN1.SGM
10JNN1
]]>Agencies
[Federal Register Volume 85, Number 112 (Wednesday, June 10, 2020)]
[Notices]
[Pages 35454-35457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12514]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89007; File No. SR-CboeEDGX-2020-010]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 1, To Amend the
Rule Relating to MidPoint Discretionary Orders To Allow Optional Offset
or Quote Depletion Protection Instructions
June 4, 2020.
I. Introduction
On February 19, 2020, Cboe EDGX Exchange, Inc. (the ``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 amend EDGX Rule 11.8(g), which describes the
handling of MidPoint Discretionary Orders entered on the Exchange. The
proposed rule change was published for comment in the Federal Register
on March 6, 2020.\3\ On April 16, 2020, pursuant to Section 19(b)(2) of
the Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\
[[Page 35455]]
On May 19, 2020, the Exchange filed Amendment No. 1 to the proposed
rule change, which replaced and superseded the proposed rule change as
originally filed.\6\ The Commission received no comment letters on the
proposal. The Commission is publishing this notice to solicit comments
on Amendment No. 1 from interested persons, and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 88309 (March 2,
2020), 85 FR 13193.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 88663, 85 FR 22474
(April 22, 2020). The Commission designated June 4, 2020 as the date
by which the Commission shall approve or disapprove, or institute
proceedings to determine whether to disapprove, the proposed rule
change.
\6\ In Amendment No. 1, the Exchange revised the proposal to:
(1) Modify the circumstances that would enable or refresh a QDP
active period (see infra note 15); (2) set the QDP active period as
2 milliseconds; (3) include additional justification in support of
the proposed rule change, including data in support of the QDP
functionality; and (4) make technical and conforming changes.
Amendment No. 1 is available at https://www.sec.gov/comments/sr-cboeedgx-2020-010/srcboeedgx2020010-7240756-217167.pdf.
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II. Description of the Proposal, as Modified by Amendment No. 1
A MidPoint Discretionary Order (``MDO'') is a limit order that is
executable at the national best bid (``NBB'') for an order to buy or
the national best offer (``NBO'') for an order to sell while resting on
the EDGX Book,\7\ with discretion to execute at prices to and including
the midpoint of the national best bid or offer (``NBBO'').\8\ The
Exchange proposes to amend EDGX Rule 11.8(g) to introduce two optional
instructions that Users \9\ would be able to include on MDOs entered on
the Exchange. First, the Exchange would allow Users to enter MDOs with
an offset to the NBBO, similar to orders entered with a Primary Peg
Instruction today.\10\ Second, the Exchange would allow Users to enter
MDOs that include a Quote Depletion Protection (``QDP'') instruction
that would disable discretion (i.e., the order's ability to execute at
a more aggressive price than its ranked price) for a limited period in
certain circumstances where the best bid or offer displayed on the EDGX
Book is executed below one round lot.
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\7\ The ``EDGX Book'' is the electronic file of orders for the
Exchange's trading system. See EDGX Rule 1.5(d).
\8\ See EDGX Rule 11.8(g).
\9\ A ``User'' is any member or sponsored participant who is
authorized to obtain access to the Exchange's trading system. See
EDGX Rule 1.5(ee).
\10\ See EDGX Rule 11.6(j)(2).
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Offset Instruction
As proposed, MDOs entered with an offset would function in the same
manner as currently implemented for Primary Peg orders entered with an
offset pursuant to Rule 11.6(j)(2). First, a User entering an MDO would
be able to select an offset equal to or greater than one minimum price
variation (``MPV'') above or below the NBB or NBO to which the order is
pegged (``Offset Amount''). Second, the Offset Amount for an MDO that
is to be displayed on the EDGX Book would need to result in the price
of such order being inferior to or equal to the inside quote on the
same side of the market.\11\ The offset functionality would be an
optional feature that Users could include when entering an MDO for
trading on the Exchange.
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\11\ An MDO defaults to a displayed instruction unless the User
includes a non-displayed instruction on the order. See EDGX Rule
11.8(g)(4). Similar to the current handling of orders entered with a
Primary Peg instruction, the Exchange is not proposing to accept
displayed MDOs with an aggressive offset at this time. See Amendment
1, supra note 6, at 5 n.6.
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In addition, the Exchange proposes to make conforming changes to
EDGX Rule 11.8(g) to account for the offset functionality.
Specifically, the Exchange proposes to amend language in the
introductory paragraph to Rule 11.8(g) and subparagraphs (g)(6) and
(8).\12\ According to the Exchange, these changes reflect the proposed
operation of MDOs entered with an offset and would not otherwise impact
the handling of MDOs entered on the Exchange.\13\
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\12\ For a detailed description of these proposed changes, see
Amendment 1, supra note 6, at 6-7.
\13\ See Amendment 1, supra note 6, at 7.
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Quote Depletion Protection
The Exchange also proposes to introduce QDP, an optional
instruction that Users could enable on an MDO to limit the order's
ability to exercise discretion in certain circumstances.\14\ The QDP
feature would do this by tracking significant executions of orders that
constitute the best bid or offer on EDGX.\15\ As proposed, a ``QDP
Active Period'' would be enabled or refreshed for buy (sell) MDOs if
the best bid (offer) displayed on the EDGX Book is executed below one
round lot.\16\ When a QDP Active Period is initially enabled, or
refreshed by a subsequent execution of the best bid (offer) then
displayed on the EDGX Book, it would remain enabled for two
milliseconds.\17\ During this QDP Active Period, an MDO entered with a
QDP instruction would not exercise discretion. Instead, such an order
would be only be executable at its ranked price.\18\ The ranked price
is always executable unless the User cancels the order from the book.
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\14\ Proposed changes related to the introduction of the QDP
instruction are reflected in proposed subparagraph (10) under EDGX
Rule 11.8(g).
\15\ The Exchange initially proposed that the QDP Active Period
also could be enabled or refreshed in certain circumstances by
significant cancellations. Amendment No. 1 removed this aspect of
the proposal.
\16\ Rule 611 of Regulation NMS generally limits executions to
prices that are at or better than the protected best bid or offer.
However, there are circumstances, such as the use of intermarket
sweep orders, where an order may be executed at an inferior price.
In these circumstances, an execution of the EDGX BBO below one round
lot would trigger a QDP Active Period even though that quotation is
inferior to the NBBO. See Amendment 1, supra note 6, at 8 n.10.
\17\ The QDP Active Period would always last for at least two
milliseconds. If the QDP Active Period is refreshed by a subsequent
execution, such execution would result in a new two millisecond
timer being started. Although the MDO would not exercise discretion
during the QDP Active Period, its priority would not be impacted,
and any applicable priority at its pegged price would be retained
when QDP is enabled. See Amendment 1, supra note 6, at 8 n.12.
\18\ An MDO's ranked price is the order's displayed or non-
displayed pegged price, which may or may not include an offset, as
proposed, or the order's limit price if that limit price is less
aggressive than the applicable pegged price. See Amendment 1, supra
note 6, at 8 n.11.
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Unless the User chooses otherwise, an MDO to buy (sell) entered
with a QDP instruction would default to a non-displayed instruction and
would include an Offset Amount equal to one MPV below (above) the NBB
(NBO).\19\
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\19\ The Exchange also proposes to amend EDGX Rule 11.8(g)(4) to
reflect the fact that MDOs entered with a QDP instruction would
default to non-displayed. MDOs that are not entered with the QDP
instruction would continue to default to a displayed instruction, as
currently provided in EDGX Rule 11.8(g)(4). See Amendment 1, supra
note 6, at 9 n.13.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\20\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\21\
which requires, among other things, that the rules of a national
securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
to protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\20\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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EDGX proposes to introduce optional instructions that (1) would
allow Users to enter MDOs with an offset to the NBB
[[Page 35456]]
or NBO and (2) enter MDOs with a QDP instruction that would disable
discretion for 2 milliseconds where the best bid or offer displayed on
the EDGX Book is executed below one round lot. The Exchange asserts
that similar offset functionality is already available on the Exchange
in both the Primary Peg order type and the Discretionary Range
instruction. EDGX further believes that the flexibility to specify an
offset would be beneficial for market participants that require
additional discretion to manage their order flow on the Exchange.
The Exchange states that the QDP instruction is intended to provide
Users with a protective feature that limits an order's ability to
exercise discretion in certain circumstances that may indicate that the
market is moving against the resting MDO.\22\ The Exchange provided
data for a ten day period that tested the potential performance of the
proposed QDP instruction in protecting Users from a potential negative
price move by observing market movements in the two milliseconds
following instances where QDP would have been enabled due to the
execution of the EDGX best bid or offer. The Exchange concluded that
the data showed: (1) MDOs entered with a QDP instruction could benefit
from avoiding potentially impactful executions within the order's
discretionary range when there are impending price moves; and (2) even
though the market might remain static after QDP is enabled, the
opportunity cost for disabling discretion in those circumstances is
small as QDP would only be enabled for a limited period of time during
the trading day.
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\22\ See Amendment No. 1, supra note 6, at 17-18.
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The Commission believes that the QDP feature is reasonably designed
to allow market participants who utilize MDOs the opportunity to avoid
an unfavorable execution when the market moves against a resting MDO.
In reaching this conclusion, the Commission evaluated the proposed rule
change and the data provided by the Exchange demonstrating correlation
between the operation of the QDP feature and price instability on the
EDGX market. In particular, the data indicates that: (i) There is a
reasonable likelihood that the market will move against a resting MDO
or remain static during a QDP Active Period; and (ii) a QDP Active
Period would be active on average less than a half second per trading
day per symbol. In addition, the QDP instruction is designed so that,
during the QDP Active Period, only the discretion to execute at a more
aggressive price would be suppressed and therefore an MDO, whether
displayed or non-displayed, would still be accessible to liquidity
takers at its ranked price. Finally, no User would be required to use
either of the two proposed order instructions for the MDO (i.e., NBBO
offset and QDP); it is optional functionality that would be available
to Users who believe it may better effect their trading strategies.
Therefore, the Commission believes that providing market participants
the ability to use this optional tool to potentially improve the
quality of their executions would promote just and equitable principles
of trade, remove impediments to and perfect the mechanism of a free and
open market and a national market system, and protect investors and the
public interest.
The Commission also notes that there is current, existing
functionality for discretionary orders that is similar, although not
identical, to both the offset and QDP instructions on the Exchange \23\
and other national securities exchanges.\24\ For the NBBO offset in
particular, the Commission notes that the proposed offset instruction
is a close variant of the discretion and pegging functionality that the
Commission has approved under past exchange proposals.\25\ These
functionalities continue to exist on the Exchange and on other
exchanges.\26\
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\23\ See, e.g., EDGX Rule 11.6(j)(2).
\24\ See, e.g., IEX Rule 11.190(b)(10), Nasdaq Rule 4703(g).
\25\ See, e.g., Securities Exchange Act Release No. 73468 (Oct.
29, 2014), 79 FR 65450 (Nov. 4, 2014).
\26\ See, e.g., EDGX Rule 11.6(d); EDGX Rule 11.6(j)(2); Nasdaq
Rule 4703(g). The Commission notes that the Exchange and other
exchanges offer order types or instructions that would permit an
order with discretion or an order with pegging functionality (or
both, in some cases) to rest more passively on the exchange's book
(e.g., further away from the NBB or NBO). As noted above, the
Exchange offers both a Discretionary Range instruction (which would
allow a discretionary order to rest passively) and a Primary Peg
instruction (which would allow an order to be pegged one or more
MPVs away from the NBB or NBO). Other exchange rules permit a
discretionary order to be combined with a pegged order and would
allow for a passive offset. See, e.g., Nasdaq Rule 4703(g).
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Accordingly, for the foregoing reasons, the Commission believes
that this proposed rule change, as modified by Amendment No. 1, is
consistent with the Exchange Act. The Commission believes that the
proposed rule change is reasonably designed to promote fair and orderly
markets, promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market, and, in general, to protect investors and the public
interest.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeEDGX-2020-010 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-2020-010. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeEDGX-2020-010, and should be
submitted on or before July 1, 2020.
[[Page 35457]]
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register In Amendment No. 1, the Exchange further
revised the proposal to: (1) Modify the circumstances that would enable
or refresh a QDP active period; (2) set the QDP active period as 2
milliseconds; (3) include additional justification in support of the
proposed rule change, including data in support of the QDP
functionality; and (4) make technical and conforming changes. The
changes and additional information in Amendment No. 1 add additional
clarity to the original substance of the proposed rule change. In
addition, the content of Amendment No. 1 assists the Commission's
determination of whether the proposed rule change is consistent with
the Act. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\27\ to approve the proposed rule change,
as modified by Amendment No. 1, on an accelerated basis.
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\27\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-CboeEDGX-2020-010), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\28\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12514 Filed 6-9-20; 8:45 am]
BILLING CODE 8011-01-P
