Self-Regulatory Organizations; Investors Exchange LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Revise the Definitions of Retail Orders and Retail Liquidity Provider Orders and Disseminate a Retail Liquidity Identifier Under the IEX Retail Price Improvement Program, 38166-38171 [2021-15199]
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38166
Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
Framework describes the process by
which the Clearing Agencies identify,
measure, monitor, and manage the risks
associated with the design,
development, implementation, use, and
validation of quantitative models. The
quantitative models covered by the
Framework are utilized by the Clearing
Agencies, as applicable, to manage risks
associated with the safeguarding of
securities and funds that are in their
custody or control or for which they are
responsible, and the proposed rule
change clarifies the applicability of the
Framework to specific models, thereby
better supporting the ability of the
Clearing Agencies to perform these
important risk management functions
and comply with other regulatory
requirements, including Rule 19b–4.
Rule 17Ad–22(e)(4), (e)(6), and
(e)(7) 29 requires, inter alia, that a
covered clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to manage risks
associated with its credit risk
management models, margin models,
and liquidity risk management models,
as applicable. As discussed above, the
proposed rule change clarifies the
applicability of the Framework to such
types of models, thereby better
supporting the ability of the Clearing
Agencies to comply with these
requirements. Therefore, the Clearing
Agencies believe that the proposed
changes to the Framework are consistent
with Rule 17Ad–22(e)(4), (e)(6), and
(e)(7).30
(B) Clearing Agency’s Statement on
Burden on Competition
The Clearing Agencies do not believe
that the proposed rule change would
have any impact, or impose any burden,
on competition because the proposed
rule change simply clarifies the scope
and administration of the Framework by
the Clearing Agencies and would not
effectuate any changes to the Clearing
Agencies’ model risk management tools
as they currently apply to their
respective Members or Participants.
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(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
The Clearing Agencies have not
solicited or received any written
comments relating to this proposal. The
Clearing Agencies will notify the
29 17 CFR 240.17Ad–22(e)(4), (e)(6) and (e)(7).
References to Rule 17Ad–22(e)(6) and compliance
therewith apply to the CCPs only and do not apply
to DTC.
30 Id.
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Commission of any written comments
received by the Clearing Agencies.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A) 31 of the Act and paragraph
(f) 32 of Rule 19b–4 thereunder. At any
time within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2021–008 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–NSCC–2021–008. 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,
PO 00000
31 15
32 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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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
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). 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–NSCC–
2021–008 and should be submitted on
or before August 9, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–15189 Filed 7–16–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92398; File No. SR–IEX–
2021–06]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing of Amendment No. 1 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment No. 1, To Revise the
Definitions of Retail Orders and Retail
Liquidity Provider Orders and
Disseminate a Retail Liquidity Identifier
Under the IEX Retail Price
Improvement Program
July 13, 2021.
I. Introduction
On April 1, 2021, the Investors
Exchange LLC (‘‘IEX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘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 enhance its
Retail Price Improvement Program for
the benefit of retail investors. The
proposed rule change was published for
comment in the Federal Register on
April 15, 2021.3 On May 26, 2021,
pursuant to Section 19(b)(2) of the Act,4
33 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. 91523
(April 9, 2021), 86 FR 19912 (April 15, 2021)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
1 15
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Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
the Commission designated a longer
period within which to either approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
The Commission received two
comment letters regarding the proposed
rule change, and one response to
comments from the Exchange.6 On July
2, 2021, the Exchange filed Amendment
No. 1 to the proposed rule change.7 The
Commission is publishing this notice to
solicit comments on Amendment No. 1
from interested persons, and issuing this
order approving the proposed rule
change, as modified by Amendment No.
1, on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
No. 1
The Exchange proposes several
changes to its Retail Price Improvement
Program (the ‘‘Program’’).8 Under the
Program, IEX members that qualify as
Retail Member Organizations (‘‘RMOs’’)
are eligible to submit certain agency or
riskless principal orders that reflect the
trading interest of a natural person with
a ‘‘Retail order’’ modifier. Retail orders
are only eligible to execute at the
midpoint price of the national best bid
and national best offer (‘‘Midpoint
Price’’) or better. Any IEX member is
able to provide price improvement to
Retail orders by submitting contra-side
orders priced to execute at the Midpoint
Price or better, including Retail
Liquidity Provider (‘‘RLP’’) orders that
are only eligible to execute against a
Retail order at the Midpoint Price.
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Retail Order Definition
First, the Exchange proposes to revise
the definition of ‘‘Retail order’’ in IEX
Rule 11.190(b)(15) such that Retail
orders may only be submitted on behalf
of a retail customer that does not place
more than 390 equity orders per day on
average during a calendar month for its
own beneficial account(s) (the ‘‘3905 See Securities Exchange Act Release No. 92029
(May 26, 2021), 86 FR 29608 (June 2, 2021).
6 Comments received on the proposal are
available on the Commission’s website at: https://
www.sec.gov/comments/sr-iex-2021-06/
sriex202106.htm.
7 In Amendment No. 1, the Exchange proposes to
modify the proposal to rank RLP orders (as defined
below) in time priority with non-displayed orders
priced to execute at the Midpoint Price (as defined
below), rather than ahead of such orders as
originally proposed. The full text of Amendment
No. 1 is available on the Commission’s website at:
https://www.sec.gov/comments/sr-iex-2021-06/
sriex202106-9041946-246227.pdf.
8 See Securities Exchange Act Release No. 86619
(August 9, 2019), 84 FR 41769 (August 15, 2019)
(SR–IEX–2019–05) (order approving the IEX Retail
Price Improvement Program).
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Order Limit’’).9 Currently, ‘‘Retail
orders’’ under the Exchange’s Program
must reflect the trading interest of a
natural person and meet other
requirements, but they are not classified
based on a per-day order threshold. The
Exchange’s proposal also specifies the
counting methodology 10 and
supervisory requirements 11 to
determine whether a retail customer has
reached the 390-Order Limit.
Retail Liquidity Identifier
Next, the Exchange proposes to
disseminate a ‘‘Retail Liquidity
Identifier’’ to inform RMOs of the
presence of RLP trading interest on the
Exchange in order to incentivize RMOs
to send Retail orders to the Exchange.12
Specifically, the Exchange proposes
new IEX Rule 11.232(f) to disseminate a
Retail Liquidity Identifier through the
Exchange’s proprietary market data
feeds and the appropriate securities
information processor (‘‘SIP’’) when
resting available RLP order interest
aggregates to form at least one round lot
for a particular security,13 provided that
the RLP order interest is resting at the
Midpoint Price 14 and is priced at least
9 See also proposed IEX Rule 11.190(b)(15),
Supplementary Material .01 (further defining
‘‘Retail order’’).
10 Under the proposal, certain ‘‘parent’’ orders
that are broken into multiple ‘‘child’’ orders will
count as one order even if the ‘‘child’’ orders are
routed across multiple exchanges; with certain
exceptions, any order that cancels and replaces an
existing order will count as a separate order. See
proposed IEX Rule 11.190(b)(15), Supplementary
Material .01.
11 Under the proposal, RMOs (as defined in IEX
Rule 11.232) would be required to have reasonable
policies and procedures in place to ensure that
Retail orders are appropriately represented on the
Exchange. Such policies and procedures would
need to provide for a review of retail customers’
activity on at least a quarterly basis. Orders from
any retail customer that exceeded an average of 390
equity orders per day during any month of a
calendar quarter may not be entered as ‘‘Retail
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 orders but that has
averaged more than 390 equity orders per day
during a month, the Exchange will notify the RMO,
and the RMO will be required to change the manner
in which it is representing the retail customer’s
orders within five business days. See proposed IEX
Rule 11.190(b)(15), Supplementary Material .02.
12 See Notice, supra note 3, at 19914.
13 The Exchange believes the one round lot
requirement is appropriate in order to limit
dissemination to when there is a material amount
of RLP order interest available. See id. at 19915.
14 The Exchange notes that an RLP order could
have a limit price less aggressive than the Midpoint
Price, in which case it would not be eligible to trade
with an incoming Retail order. Such RLP orders
would not be included in the Retail Liquidity
Identifier dissemination. See id.
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38167
$0.001 better 15 than the national best
bid or national best offer. The Retail
Liquidity Identifier will reflect the
symbol and the side (buy or sell) of the
RLP order interest, but will not include
the price or size.16
RLP Order Definition
In conjunction with the proposed
Retail Liquidity Identifier, the Exchange
proposes to revise the definition of
‘‘RLP order’’ in IEX Rule 11.190(b)(14)
so that such orders can only be
midpoint peg orders (as defined in IEX
Rule 11.190(b)(9)) and cannot include a
minimum quantity restriction.
Currently, an RLP order is a
discretionary peg order (as defined in
IEX Rule 11.190(b)(10)). The Exchange
believes that continuing to have RLP
orders be discretionary peg orders
would unnecessarily complicate the
Retail Liquidity Identifier because,
under the Exchange’s rules,
discretionary peg orders do not
explicitly post to the Exchange’s order
book (‘‘Order Book’’) at the Midpoint
Price.17 The Exchange further notes that
permitting an RLP order to include a
minimum quantity restriction would
reduce the determinism of the order’s
availability to trade at the Midpoint
Price; the Exchange believes that
prohibiting quantity restrictions will
increase execution rates for Retail
orders.18
RLP Order Priority
As originally proposed, the revised
RLP orders would have been given
Order Book priority over non-displayed
orders priced to execute at the Midpoint
Price.19 However, in Amendment No. 1,
the Exchange revised its proposal so
that the Exchange’s regular priority
rules (i.e., price/time) would apply
equally to RLP orders and non-RLP
orders at the midpoint, thus eliminating
the originally proposed Order Book
priority for RLP orders. Accordingly,
under the revised proposal set forth in
Amendment No. 1, RLP orders resting at
the Midpoint Price will be ranked
against resting non-displayed orders
priced to execute at the Midpoint Price
15 The Exchange notes that, because the RLP
orders will be resting at the Midpoint Price, IEX’s
Retail Liquidity Identifier will reflect at least $0.005
of price improvement for any orders priced at or
above $1.00 per share, unless the national best bid
or offer is locked or crossed. See id.
16 The Exchange notes that, while an explicit
price will not be disseminated, because RLP orders
are only eligible to trade at the Midpoint Price,
dissemination will thus reflect the availability of
price improvement at the Midpoint Price. See id. at
19914–15.
17 See id. at 19915.
18 See id.
19 See id. at 19914.
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Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
based on time priority since all such
prices will be at the Midpoint Price.20
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.21 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,22 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, 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; and with
Section 6(b)(8) of the Act,23 which
requires that the rules of a national
securities exchange not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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Retail Order Definition
First, the Exchange proposes to
amend the definition of Retail order by
adopting the 390-Order Limit and
setting forth criteria to determine when
this limit is reached and how it is
enforced. The Exchange notes that one
other equities exchange, Cboe EDGX
Exchange, Inc. (‘‘EDGX’’), uses the same
390 orders-per-day average in its retail
liquidity program to delineate EDGX
Retail Priority Orders, and applies a
counting methodology and supervisory
requirements that are substantially
similar to those being proposed by
IEX.24 The Exchange believes that the
390-Order Limit is reasonable and not
overly restrictive because it
contemplates active trading, while not
reaching a level to indicate one is a
professional trader.25 The Exchange
further believes that limiting the types
of investors on whose behalf Retail
orders can be submitted to those who
are less likely to be professional market
participants, will expand the pool of
20 See
supra note 7.
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).
22 15 U.S.C. 78f(b)(5).
23 15 U.S.C. 78f(b)(8).
24 See Notice, supra note 3, at 19914.
25 See id.
21 In
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market participants willing to provide
contra-side liquidity because of the
Retail orders’ non-professional
characteristics, thereby increasing price
improvement opportunities for Retail
orders at midpoint prices.26
The Commission received two letters
from one commenter, both of which
focus on the 390-Order Limit,27 and the
Exchange submitted a single response to
both letters.28 The commenter expresses
concern with the 390-Order Limit based
on his experience with the use of
‘‘professional’’ customer rules in the
options market. Specifically, the
commenter states that, in the presentday options market, there is low
likelihood that customer origin code
orders enjoy a meaningful priority
advantage over market makers, and the
390-order threshold effectively limits
competition between non-professional
liquidity providers and market
makers.29 The commenter suggests that
the ‘‘professional’’ customer designation
in the options market has over time
created a ‘‘two-tiered’’ market that
benefits market makers and limits how
many orders a ‘‘secondary’’ liquidity
provider will be willing to display
(before they trip the ‘‘professional’’
customer threshold), and thus detracts
from the incentive for market makers to
display their best price, which leads to
wider bid/ask spreads for options.30 In
addition, the commenter believes that
the ‘‘professional’’ customer designation
in options limits the probability of
customer-to-customer trades, especially
when accounting for the likelihood of
make vs. take orders posting on different
exchanges because of differing fee and
rebate incentives.31 The commenter
further states that applying a 390-order
threshold to equities, as IEX proposes to
do for its Program, would cater to
preferred members by giving them a
more attractive pool of order flow to
trade against, and will provide a ‘‘short
lived’’ benefit of better prices to retail
customers.32 The commenter is critical
of payment for order flow and the small
amount of price improvement it often
provides to customers, and recommends
that the quality of an execution should
id.
letters to Vanessa Countryman, Secretary,
Commission, from Mike Ianni, dated May 5, 2021
(‘‘Ianni Letter 1’’) and May 30, 2021 (‘‘Ianni Letter
2’’).
28 See letter to Vanessa Countryman, Secretary,
Commission, from Claudia Crowley, Chief
Regulatory Officer, IEX, dated June 29, 2021 (‘‘IEX
Response’’).
29 See Ianni Letter 1, supra note 27, at 2–3; and
Ianni Letter 2, supra note 27, at 2.
30 See Ianni Letter 1, supra note 27, at 4; and
Ianni Letter 2, supra note 27, at 4 and 7–8.
31 See Ianni Letter 2, supra note 27, at 2.
32 See Ianni Letter 1, supra note 27, at 3.
PO 00000
26 See
27 See
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be based on all liquidity in the market
(including hidden liquidity) and not just
displayed liquidity that can be
negatively impacted by competitive
dynamics.33 Further, the commenter is
critical of the ambiguity inherent in the
application of the 390-order threshold
across broker-dealers in the options
market, and believes similar interpretive
questions could be present in the
equities context.34
In its response letter, IEX states its
belief that the commenter’s concerns
about options market practices ‘‘cannot
be reasonably extrapolated to the use of
retail liquidity provider programs for
equity exchanges, or to IEX’s Retail
Program in particular.’’ 35 IEX points out
that the commenter focuses on the
impact of the 390-order threshold on
options orders seeking to provide
liquidity, but IEX explains that the 390Order Limit only applies to Retail orders
under the Program, which are never
displayed and can only take resting
liquidity.36 Accordingly, Retail orders
will never post to the Order Book, will
never be flagged as Retail orders in any
market data, and do not directly
contribute to or impact IEX’s bid/ask
spread.37 Thus, IEX argues that the
commenter’s concerns with the 390Order Limit ‘‘are not at issue in our
proposal.’’ 38
Further in response to the
commenter’s concerns about how the
390-order threshold in options can harm
non-professionals who limit their
trading to avoid crossing the threshold,
the Exchange argues that the market for
retail order flow is already ‘‘two-tiered’’
in that the preponderance of retail
orders are executed on non-exchange
venues, and that this proposal seeks to
enhance IEX’s ability to compete for
retail order flow while providing
meaningful price improvement to retail
customers.39
The Commission believes that the
commenter raises concerns that merit
further consideration about the
application of a 390-order threshold for
‘‘professional’’ customer status in the
options market, particularly as that
market has continued to evolve since
those designations were first
introduced. In the options market,
33 See
id.
Ianni Letter 2, supra note 27, at 6.
35 See IEX Response, supra note 28, at 3.
36 See id. at 4.
37 See id. at 4–5.
38 See id. at 4.
39 See id. at 5–6. The Exchange also points to
existing precedent for applying the 390-Order Limit
to an equity exchange. See id. at 5 (citing Securities
Exchange Act Release No. 87200 (October 2, 2019),
84 FR 53788 (October 8, 2019) (SR–CboeEDGX–
2019–012)).
34 See
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Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
particularly those that offer to the
‘‘customer’’ origin code the highest
priority (including over market makers)
and often low or no fees, there can
potentially be a meaningful difference
between being classified as a
‘‘customer’’ or a ‘‘professional’’
customer, as the latter is typically
subject to the same priority and fee
levels as other broker-dealers, including
those with the most sophisticated and
costly trading resources. Thus, in the
options market, crossing the 390-order
threshold and being labeled as a
‘‘professional’’ customer can potentially
matter to some frequent traders.
However, IEX is not proposing to use
the 390-Order Limit to classify order
origin codes into ‘‘customer’’ and
‘‘professional’’ customer for general
trading purposes. IEX is not creating a
new class of ‘‘professional’’ customer for
the equities market. Rather, the 390Order Limit will only be used to classify
certain orders seeking to take liquidity
in the exclusive context of IEX’s
Program. IEX’s proposal provides a
bright-line test that broker-dealers can
use to ascertain whether orders they
route to IEX under IEX’s Program are
individual retail investor orders or are
orders from market participants that IEX
believes trade with a frequency that is
uncharacteristic of a typical individual
retail investor trading for her personal
investment account. Moreover, whether
a retail investor exceeds the 390-Order
Limit or not, IEX’s proposal will not
change the priority status or fees of any
customer order outside of the Program.
Instead, the new threshold only further
restricts what types of incoming take
orders can interact with a resting RLP
order.40
While the commenter acknowledges
the potential for price improvement for
retail investors under IEX’s proposal,
the commenter believes that any such
benefits will be ‘‘short lived,’’ and that
this proposal opens up the possibilities
for similar rules by other equity
exchanges that could have negative
consequences to liquidity in the equity
market over the longer term, such as
higher fees for ‘‘professional’’
customers.41 The Commission does not
believe that the proposal’s benefits of
providing midpoint prices (or better) to
retail investors under the Program will
be short-lived because midpoint prices
can provide meaningful price
improvement under different market
40 While
RLP orders will only execute with
incoming Retail orders, an incoming Retail order
can interact with any order (i.e., not just RLP
orders) priced to execute at the Midpoint Price or
better.
41 See Ianni Letter 1, supra note 27, at 3–4.
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conditions.42 Further, because IEX’s
proposal is limited to classifying
incoming retail orders that remove
liquidity for the narrow purpose of its
Program, it is not comparable to a
broader ‘‘professional’’ customer rule as
currently exists in the options market.
The commenter also points to what
the commenter believes to be
competitive harm that the options
market versions of a 390-order threshold
have caused. The commenter believes
that some retail traders in the options
market may stop trading as they
approach the 390-order threshold, often
after being warned by their retail broker
that they are approaching the threshold,
so as to avoid losing ‘‘regular’’ customer
status should they exceed that limit.43
The commenter also cautions that a
desire to limit trading to stay under the
390-order threshold in the options
market can limit the ability of traders to
use small orders to seek out the best
hidden prices 44 and can potentially
result in wider options spreads if
secondary liquidity providers do not
compete to provide liquidity in order to
limit their trading to stay under the
threshold.45 The Commission agrees
with the Exchange that it is difficult to
definitely ascribe, without more
evidence, a causal link between the
adoption of professional customer status
in the options markets with wider
spreads.46 Nevertheless, the proposal’s
390-Order Limit should not constrain
the ability or willingness of liquidity
42 With respect to the commenter’s statement that
the quality of a fill should be based on all liquidity
available in the market (including hidden liquidity)
(see Ianni Letter 1, supra note 27, at 3), the
Commission recently adopted rules to require that
certain displayable odd-lot orders be included in
core consolidated market data and thus reflected in
the best bid and ask prices. See Securities Exchange
Act Release No. 90610 (December 9, 2020), 86 FR
18596 (April 9, 2021) (S7–03–20) at 18611–14.
43 See Ianni Letter 2, supra note 27, at 4. In both
letters, the commenter also provides analysis of
problems within the options market structure as it
applies to giving retail customers priority. See, e.g.,
Ianni Letter 1, supra note 27, at 1 (stating that
‘‘there is NO real customer ‘priority’ advantage
gained by retail options customers because of the
following: (1) More strikes and volatile markets (2)
Payment for order flow accounting for a majority of
customer orders (3) Market fragmentation (4) Price
Improvement rules’’). The Commission appreciates
the commenter taking time to provide such an
analysis. However, any such issues related to the
options market structure are outside the scope of
this approval order, and thus, cannot be addressed
by the Commission herein.
44 See Ianni Letter 1, supra note 27, at 4 (‘‘I will
knowingly pay a ‘likely’ higher price for an option
just to save on the number of orders I send. I would
argue that there is no such thing as ‘best execution’
for retail customers in the equity options market
today because of the 390-order rule. You are asking
all investors to sacrifice ‘best execution’ over
customer status.’’)
45 See Ianni Letter 2, supra note 27, at 7.
46 See IEX Response, supra note 28, at 3–4.
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38169
providers to provide liquidity. First, any
liquidity-providing market participant
can submit RLP orders and exceeding
390 orders per day would have no effect
on the participant’s ability to do so.
Second, RLP orders are non-displayed
orders that yield priority to displayed
orders, including displayable odd lot
orders at executable prices, and thus
should not directly impact IEX’s bid/ask
spreads.47 While a program that
segments retail order flow away from
displayed exchange quotes could
theoretically impact spreads if it
impacts the willingness of liquidity
providers to display tighter quotes, IEX
correctly notes that much of the retail
volume today executes away from
exchanges, and thus, IEX’s proposal is
appropriately regarded as a way to
compete to bring that flow back onto an
exchange. Third, while the proposed
threshold could impact liquidity takers
(i.e., retail traders that exceed the 390Order Limit) because they would lose
the ability to interact with resting RLP
orders on IEX, liquidity takers’ orders
could still be submitted to IEX or other
exchanges for potential midpoint
executions (e.g., against midpoint peg
orders).
Finally, citing to his experience in the
options market, the commenter believes
that interpretation and enforcement of
the 390-Order Limit could be difficult
because, for example, he has observed
ambiguity and inconsistency among
broker-dealers in the options market
with respect to how orders should be
counted towards the 390 threshold.48
IEX has represented that its regulatory
program will be enhanced for this
proposal.49 The Commission believes
that the proposed threshold is clear and
applies to an investor that places ‘‘more
than 390 equity orders per day on
average during a calendar month for its
own beneficial account(s)’’.50 To the
extent that market participants have
interpretive questions, the Exchange
should address them and, if necessary,
amend its rule to provide additional
clarity.
Accordingly, and based on the
foregoing, the Commission finds that the
proposed changes to the Exchange’s
definition of Retail order, including the
proposed new 390-Order Limit, are
consistent with the Act.
47 Retail orders cannot affect the IEX bid-ask
spread because those orders neither display nor rest
on the Order Book.
48 See Ianni Letter 2, supra note 27, at 5.
49 See Notice, supra note 3, at 19916.
50 See proposed IEX Rule 11.190(b)(15) and
Supplementary Material .01 thereto.
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Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
Retail Liquidity Identifier and Revisions
to RLP Orders
Next, the Exchange proposes to
disseminate a Retail Liquidity Identifier
when RLP orders resting on the Order
Book aggregate to form at least one
round lot, provided that the RLP order
interest is resting at the Midpoint Price
and is priced at least $0.001 better than
the national best bid or national best
offer. According to the Exchange, the
purpose of the Retail Liquidity Identifier
is to provide relevant market
information to RMOs that there is some
RLP trading interest at the Midpoint
Price on the Exchange, thereby
incentivizing RMOs to send Retail
orders to IEX.51 In conjunction with its
proposal to disseminate the Retail
Liquidity Identifier, the Exchange
proposes to amend the definition of RLP
orders so such orders can only be
midpoint peg orders without a
minimum quantity restriction. The
Exchange believes that disseminating a
Retail Liquidity Identifier to indicate
RLP orders resting at the Midpoint Price
would be unnecessarily complicated if
RLP orders were to continue to be
discretionary peg orders, because
discretionary peg orders do not
explicitly post to the Order Book at the
Midpoint Price.52 Likewise, the
Exchange believes that attaching a
minimum quantity to an RLP order
would hinder a market participant’s
ability to determine the availability of
trading interest at the Midpoint Price,
given that the interest would only be
available to counterparties able to meet
the minimum quantities.53
As noted by the Exchange, similar
retail liquidity identifiers are currently
disseminated by other exchanges that
offer retail programs, though other
exchange programs typically allow the
equivalent to RLP orders to rest
undisplayed at prices that improve the
displayed quote by subpenny
increments.54 The Commission believes
that IEX’s Retail Liquidity Identifier will
serve a similar purpose as the identifiers
currently disseminated by other
exchanges, as it will inform market
participants that have or control retail
order flow about the availability of price
improvement opportunities for Retail
orders. In turn, market participants that
have or control retail order flow would
normally be expected to use that
information as they assess the best
prices available for the customer. Given
the potential benefits to individual
investors and any increased likelihood
51 See
Notice, supra note 3, at 19914.
id. at 19915.
53 See id.
54 See id.
52 See
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that they may be able to obtain midpoint
executions, the Commission believes
that the Retail Liquidity Identifier is
appropriately designed to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system.55
Furthermore, the Commission finds
that limiting RLP orders to be midpoint
peg orders without a minimum quantity
option is an appropriate compliment to
the proposed Retail Liquidity Identifier.
As explained above, the Retail Liquidity
Identifier is meant to notify RMOs that
there is Midpoint-Priced liquidity
available on the Exchange. As such, the
Commission believes that requiring RLP
orders to be midpoint peg orders
without the option to designate a
minimum quantity condition provides
an increased chance of execution to
incoming Retail orders and makes the
Retail Liquidity Identifier a more
reliable indicator of available midpoint
liquidity.
Finally, as originally proposed, the
revised RLP orders would have been
given Order Book priority over nondisplayed orders priced to execute at the
Midpoint Price.56 However, in
Amendment No. 1, the Exchange
revised its proposal so that the
Exchange’s regular priority rules (i.e.,
price/time) would apply equally to RLP
orders and such non-displayed orders,
thus eliminating the originally proposed
Order Book priority for RLP orders. IEX
cites to precedent from at least one other
exchange’s retail program providing that
when a retail liquidity providing order
is at the same price as a non-displayed
order, the orders will be ranked together
with time priority.57 The Commission
finds that IEX’s revised proposal to not
provide a priority advantage to RLP
orders over other non-displayed orders
priced to execute at the Midpoint Price
is not unfairly discriminatory as it does
not provide an advantage to an order
that will only interact with incoming
Retail orders (i.e., RLP orders) over
orders that are not so restricted (e.g.,
midpoint peg orders). Treating both in
time priority and allowing incoming
Retail orders to interact with either is
55 In connection with this proposal, the Exchange
states that it plans to submit a letter requesting that
the staff of the Division of Trading and Markets not
recommend any enforcement action under Rule 602
of Regulation NMS (‘‘Quote Rule’’) based on the
Exchange’s and its members’ participation in the
Program. See id. at 19914 n.39. In its filing, the
Exchange asserts that the information proposed to
be contained in the Retail Liquidity Identifier does
not constitute a ‘‘quote’’ within the meaning of
Regulation NMS because it would not include a
specific price or size of the interest. See id. at
19914.
56 See Notice, supra note 3, at 19914.
57 See Amendment No. 1, supra note 7, at 8
(citing NYSE Arca Rule 7.44–E(l)).
PO 00000
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designed to promote just and equitable
principles of trade and not impose an
inappropriate burden on competition.
For the foregoing reasons, the
Commission believes that IEX’s
proposed changes to its Program are
consistent with the Act in that they are
reasonably 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 are not designed to
permit unfair discrimination between
customers, issuers, brokers or dealers.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 1 to
the proposed rule change is consistent
with the Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
IEX–2021–06 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–IEX–2021–06. 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 this
filing will also be available for
inspection and copying at the principal
E:\FR\FM\19JYN1.SGM
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Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
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–IEX–2021–06 and should
be submitted on or before August 9,
2021.
lotter on DSK11XQN23PROD with NOTICES1
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 30th day after the date of
publication of notice of Amendment No.
1 in the Federal Register. Amendment
No. 1 revises the original proposal by
amending IEX Rule 11.232(e)(3)(A) to
provide that RLP orders now will be
ranked in time priority with nondisplayed orders priced to execute at the
Midpoint Price, rather than ahead of
such orders as was originally proposed.
Thus, at the priority level specified in
IEX Rule 11.232(e)(3)(A)(iii), incoming
Retail orders will execute against RLP
orders and non-displayed orders priced
to trade at the Midpoint Price in price/
time priority.
In Amendment No. 1, the Exchange
states that based on additional analysis
of the potential benefits and burdens of
RLP orders and non-displayed orders
priced to trade at the Midpoint Price, it
determined that RLP orders should be
ranked in time priority with such other
orders, consistent with the Exchange’s
regular price/time priority. The
Exchange states that the proposed
priority change does not raise any new
or novel issues as it is consistent with
the rules of other exchanges’ retail
liquidity programs, including NYSE
Arca, as noted above.58
The changes to the proposal do not
raise any novel regulatory issues, as
they are consistent with the rules of
other exchange retail programs
previously approved by the
Commission. Further, the changes assist
the Commission in evaluating the
Exchange’s proposal and in determining
that it is consistent with the Act as
discussed above. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,59 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 Exchange Act,60
that the proposed rule change (SR–IEX–
2021–06), 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.61
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–15199 Filed 7–16–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92384; File No. SR–GEMX–
2021–06]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Options 2,
Section 5, Market Maker Quotations
July 13, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 30,
2021, Nasdaq GEMX, LLC (‘‘GEMX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Options 2, Section 5, Market Maker
Quotations.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/gemx/rules, at the principal
office of the Exchange, 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
60 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
61 17
58 See
59 15
supra note 57 and accompanying text.
U.S.C. 78s(b)(2).
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38171
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
GEMX Rules at Options 2, Section 5,
Market Maker Quotations. Currently, the
Exchange requires Competitive Market
Makers 3 and Primary Market Makers 4
to enter bids and offers for the options
to which they are registered, except in
an assigned options series listed intraday on the Exchange.5 Quotations must
meet the legal quote width requirements
specified in Options 2, Section 4(b)(4).6
On any given day, a Competitive Market
Maker is not required to enter
quotations in the options classes to
which it is appointed. A Competitive
Market Maker may initiate quoting in
options classes to which it is appointed
intra-day. If a Competitive Market
Maker initiates quoting in an options
class, the Competitive Market Maker,
associated with the same Member,7 is
collectively required to provide twosided quotations in 60% of the
cumulative number of seconds, or such
higher percentage as the Exchange may
announce in advance, for which that
Member’s assigned options class is open
for trading.8 Notwithstanding the
foregoing, a Competitive Market Maker
shall not be required to make two-sided
markets pursuant to Options 2, Section
5(e)(1) in any Quarterly Options Series,
any adjusted options series, and any
option series with an expiration of nine
months or greater for options on equities
and exchange-traded funds (‘‘ETFs’’) or
with an expiration of twelve months or
greater for index options. Competitive
Market Makers may choose to quote
such series in addition to regular series
3 The term ‘‘Competitive Market Maker’’ means a
Member that is approved to exercise trading
privileges associated with CMM Rights. See Options
1, Section 1(a)(12).
4 The term ‘‘Primary Market Maker’’ means a
Member that is approved to exercise trading
privileges associated with PMM Rights. See Options
1, Section 1(a)(35).
5 Options 2, Section 5(e).
6 Options 2, Section 4(b)(4) describes bid/ask
differentials.
7 The term ‘‘Member’’ means an organization that
has been approved to exercise trading rights
associated with Exchange Rights. See General 1,
Section 1(a)(13)[sic].
8 Options 2, Section 5(e)(1).
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]]>Agencies
[Federal Register Volume 86, Number 135 (Monday, July 19, 2021)]
[Notices]
[Pages 38166-38171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15199]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92398; File No. SR-IEX-2021-06]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Revise the
Definitions of Retail Orders and Retail Liquidity Provider Orders and
Disseminate a Retail Liquidity Identifier Under the IEX Retail Price
Improvement Program
July 13, 2021.
I. Introduction
On April 1, 2021, the Investors Exchange LLC (``IEX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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 enhance its Retail Price
Improvement Program for the benefit of retail investors. The proposed
rule change was published for comment in the Federal Register on April
15, 2021.\3\ On May 26, 2021, pursuant to Section 19(b)(2) of the
Act,\4\
[[Page 38167]]
the Commission designated a longer period within which to either
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 91523 (April 9,
2021), 86 FR 19912 (April 15, 2021) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 92029 (May 26,
2021), 86 FR 29608 (June 2, 2021).
---------------------------------------------------------------------------
The Commission received two comment letters regarding the proposed
rule change, and one response to comments from the Exchange.\6\ On July
2, 2021, the Exchange filed Amendment No. 1 to the proposed rule
change.\7\ The Commission is publishing this notice to solicit comments
on Amendment No. 1 from interested persons, and issuing this order
approving the proposed rule change, as modified by Amendment No. 1, on
an accelerated basis.
---------------------------------------------------------------------------
\6\ Comments received on the proposal are available on the
Commission's website at: https://www.sec.gov/comments/sr-iex-2021-06/sriex202106.htm.
\7\ In Amendment No. 1, the Exchange proposes to modify the
proposal to rank RLP orders (as defined below) in time priority with
non-displayed orders priced to execute at the Midpoint Price (as
defined below), rather than ahead of such orders as originally
proposed. The full text of Amendment No. 1 is available on the
Commission's website at: https://www.sec.gov/comments/sr-iex-2021-06/sriex202106-9041946-246227.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The Exchange proposes several changes to its Retail Price
Improvement Program (the ``Program'').\8\ Under the Program, IEX
members that qualify as Retail Member Organizations (``RMOs'') are
eligible to submit certain agency or riskless principal orders that
reflect the trading interest of a natural person with a ``Retail
order'' modifier. Retail orders are only eligible to execute at the
midpoint price of the national best bid and national best offer
(``Midpoint Price'') or better. Any IEX member is able to provide price
improvement to Retail orders by submitting contra-side orders priced to
execute at the Midpoint Price or better, including Retail Liquidity
Provider (``RLP'') orders that are only eligible to execute against a
Retail order at the Midpoint Price.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 86619 (August 9,
2019), 84 FR 41769 (August 15, 2019) (SR-IEX-2019-05) (order
approving the IEX Retail Price Improvement Program).
---------------------------------------------------------------------------
Retail Order Definition
First, the Exchange proposes to revise the definition of ``Retail
order'' in IEX Rule 11.190(b)(15) such that Retail orders may only be
submitted on behalf of a retail customer that does not place more than
390 equity orders per day on average during a calendar month for its
own beneficial account(s) (the ``390-Order Limit'').\9\ Currently,
``Retail orders'' under the Exchange's Program must reflect the trading
interest of a natural person and meet other requirements, but they are
not classified based on a per-day order threshold. The Exchange's
proposal also specifies the counting methodology \10\ and supervisory
requirements \11\ to determine whether a retail customer has reached
the 390-Order Limit.
---------------------------------------------------------------------------
\9\ See also proposed IEX Rule 11.190(b)(15), Supplementary
Material .01 (further defining ``Retail order'').
\10\ Under the proposal, certain ``parent'' orders that are
broken into multiple ``child'' orders will count as one order even
if the ``child'' orders are routed across multiple exchanges; with
certain exceptions, any order that cancels and replaces an existing
order will count as a separate order. See proposed IEX Rule
11.190(b)(15), Supplementary Material .01.
\11\ Under the proposal, RMOs (as defined in IEX Rule 11.232)
would be required to have reasonable policies and procedures in
place to ensure that Retail orders are appropriately represented on
the Exchange. Such policies and procedures would need to provide for
a review of retail customers' activity on at least a quarterly
basis. Orders from any retail customer that exceeded an average of
390 equity orders per day during any month of a calendar quarter may
not be entered as ``Retail 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
orders but that has averaged more than 390 equity orders per day
during a month, the Exchange will notify the RMO, and the RMO will
be required to change the manner in which it is representing the
retail customer's orders within five business days. See proposed IEX
Rule 11.190(b)(15), Supplementary Material .02.
---------------------------------------------------------------------------
Retail Liquidity Identifier
Next, the Exchange proposes to disseminate a ``Retail Liquidity
Identifier'' to inform RMOs of the presence of RLP trading interest on
the Exchange in order to incentivize RMOs to send Retail orders to the
Exchange.\12\ Specifically, the Exchange proposes new IEX Rule
11.232(f) to disseminate a Retail Liquidity Identifier through the
Exchange's proprietary market data feeds and the appropriate securities
information processor (``SIP'') when resting available RLP order
interest aggregates to form at least one round lot for a particular
security,\13\ provided that the RLP order interest is resting at the
Midpoint Price \14\ and is priced at least $0.001 better \15\ than the
national best bid or national best offer. The Retail Liquidity
Identifier will reflect the symbol and the side (buy or sell) of the
RLP order interest, but will not include the price or size.\16\
---------------------------------------------------------------------------
\12\ See Notice, supra note 3, at 19914.
\13\ The Exchange believes the one round lot requirement is
appropriate in order to limit dissemination to when there is a
material amount of RLP order interest available. See id. at 19915.
\14\ The Exchange notes that an RLP order could have a limit
price less aggressive than the Midpoint Price, in which case it
would not be eligible to trade with an incoming Retail order. Such
RLP orders would not be included in the Retail Liquidity Identifier
dissemination. See id.
\15\ The Exchange notes that, because the RLP orders will be
resting at the Midpoint Price, IEX's Retail Liquidity Identifier
will reflect at least $0.005 of price improvement for any orders
priced at or above $1.00 per share, unless the national best bid or
offer is locked or crossed. See id.
\16\ The Exchange notes that, while an explicit price will not
be disseminated, because RLP orders are only eligible to trade at
the Midpoint Price, dissemination will thus reflect the availability
of price improvement at the Midpoint Price. See id. at 19914-15.
---------------------------------------------------------------------------
RLP Order Definition
In conjunction with the proposed Retail Liquidity Identifier, the
Exchange proposes to revise the definition of ``RLP order'' in IEX Rule
11.190(b)(14) so that such orders can only be midpoint peg orders (as
defined in IEX Rule 11.190(b)(9)) and cannot include a minimum quantity
restriction. Currently, an RLP order is a discretionary peg order (as
defined in IEX Rule 11.190(b)(10)). The Exchange believes that
continuing to have RLP orders be discretionary peg orders would
unnecessarily complicate the Retail Liquidity Identifier because, under
the Exchange's rules, discretionary peg orders do not explicitly post
to the Exchange's order book (``Order Book'') at the Midpoint
Price.\17\ The Exchange further notes that permitting an RLP order to
include a minimum quantity restriction would reduce the determinism of
the order's availability to trade at the Midpoint Price; the Exchange
believes that prohibiting quantity restrictions will increase execution
rates for Retail orders.\18\
---------------------------------------------------------------------------
\17\ See id. at 19915.
\18\ See id.
---------------------------------------------------------------------------
RLP Order Priority
As originally proposed, the revised RLP orders would have been
given Order Book priority over non-displayed orders priced to execute
at the Midpoint Price.\19\ However, in Amendment No. 1, the Exchange
revised its proposal so that the Exchange's regular priority rules
(i.e., price/time) would apply equally to RLP orders and non-RLP orders
at the midpoint, thus eliminating the originally proposed Order Book
priority for RLP orders. Accordingly, under the revised proposal set
forth in Amendment No. 1, RLP orders resting at the Midpoint Price will
be ranked against resting non-displayed orders priced to execute at the
Midpoint Price
[[Page 38168]]
based on time priority since all such prices will be at the Midpoint
Price.\20\
---------------------------------------------------------------------------
\19\ See id. at 19914.
\20\ See supra note 7.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\21\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\22\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, 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; and with Section
6(b)(8) of the Act,\23\ which requires that the rules of a national
securities exchange not impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\21\ 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).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
Retail Order Definition
First, the Exchange proposes to amend the definition of Retail
order by adopting the 390-Order Limit and setting forth criteria to
determine when this limit is reached and how it is enforced. The
Exchange notes that one other equities exchange, Cboe EDGX Exchange,
Inc. (``EDGX''), uses the same 390 orders-per-day average in its retail
liquidity program to delineate EDGX Retail Priority Orders, and applies
a counting methodology and supervisory requirements that are
substantially similar to those being proposed by IEX.\24\ The Exchange
believes that the 390-Order Limit is reasonable and not overly
restrictive because it contemplates active trading, while not reaching
a level to indicate one is a professional trader.\25\ The Exchange
further believes that limiting the types of investors on whose behalf
Retail orders can be submitted to those who are less likely to be
professional market participants, will expand the pool of market
participants willing to provide contra-side liquidity because of the
Retail orders' non-professional characteristics, thereby increasing
price improvement opportunities for Retail orders at midpoint
prices.\26\
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\24\ See Notice, supra note 3, at 19914.
\25\ See id.
\26\ See id.
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The Commission received two letters from one commenter, both of
which focus on the 390-Order Limit,\27\ and the Exchange submitted a
single response to both letters.\28\ The commenter expresses concern
with the 390-Order Limit based on his experience with the use of
``professional'' customer rules in the options market. Specifically,
the commenter states that, in the present-day options market, there is
low likelihood that customer origin code orders enjoy a meaningful
priority advantage over market makers, and the 390-order threshold
effectively limits competition between non-professional liquidity
providers and market makers.\29\ The commenter suggests that the
``professional'' customer designation in the options market has over
time created a ``two-tiered'' market that benefits market makers and
limits how many orders a ``secondary'' liquidity provider will be
willing to display (before they trip the ``professional'' customer
threshold), and thus detracts from the incentive for market makers to
display their best price, which leads to wider bid/ask spreads for
options.\30\ In addition, the commenter believes that the
``professional'' customer designation in options limits the probability
of customer-to-customer trades, especially when accounting for the
likelihood of make vs. take orders posting on different exchanges
because of differing fee and rebate incentives.\31\ The commenter
further states that applying a 390-order threshold to equities, as IEX
proposes to do for its Program, would cater to preferred members by
giving them a more attractive pool of order flow to trade against, and
will provide a ``short lived'' benefit of better prices to retail
customers.\32\ The commenter is critical of payment for order flow and
the small amount of price improvement it often provides to customers,
and recommends that the quality of an execution should be based on all
liquidity in the market (including hidden liquidity) and not just
displayed liquidity that can be negatively impacted by competitive
dynamics.\33\ Further, the commenter is critical of the ambiguity
inherent in the application of the 390-order threshold across broker-
dealers in the options market, and believes similar interpretive
questions could be present in the equities context.\34\
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\27\ See letters to Vanessa Countryman, Secretary, Commission,
from Mike Ianni, dated May 5, 2021 (``Ianni Letter 1'') and May 30,
2021 (``Ianni Letter 2'').
\28\ See letter to Vanessa Countryman, Secretary, Commission,
from Claudia Crowley, Chief Regulatory Officer, IEX, dated June 29,
2021 (``IEX Response'').
\29\ See Ianni Letter 1, supra note 27, at 2-3; and Ianni Letter
2, supra note 27, at 2.
\30\ See Ianni Letter 1, supra note 27, at 4; and Ianni Letter
2, supra note 27, at 4 and 7-8.
\31\ See Ianni Letter 2, supra note 27, at 2.
\32\ See Ianni Letter 1, supra note 27, at 3.
\33\ See id.
\34\ See Ianni Letter 2, supra note 27, at 6.
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In its response letter, IEX states its belief that the commenter's
concerns about options market practices ``cannot be reasonably
extrapolated to the use of retail liquidity provider programs for
equity exchanges, or to IEX's Retail Program in particular.'' \35\ IEX
points out that the commenter focuses on the impact of the 390-order
threshold on options orders seeking to provide liquidity, but IEX
explains that the 390-Order Limit only applies to Retail orders under
the Program, which are never displayed and can only take resting
liquidity.\36\ Accordingly, Retail orders will never post to the Order
Book, will never be flagged as Retail orders in any market data, and do
not directly contribute to or impact IEX's bid/ask spread.\37\ Thus,
IEX argues that the commenter's concerns with the 390-Order Limit ``are
not at issue in our proposal.'' \38\
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\35\ See IEX Response, supra note 28, at 3.
\36\ See id. at 4.
\37\ See id. at 4-5.
\38\ See id. at 4.
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Further in response to the commenter's concerns about how the 390-
order threshold in options can harm non-professionals who limit their
trading to avoid crossing the threshold, the Exchange argues that the
market for retail order flow is already ``two-tiered'' in that the
preponderance of retail orders are executed on non-exchange venues, and
that this proposal seeks to enhance IEX's ability to compete for retail
order flow while providing meaningful price improvement to retail
customers.\39\
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\39\ See id. at 5-6. The Exchange also points to existing
precedent for applying the 390-Order Limit to an equity exchange.
See id. at 5 (citing Securities Exchange Act Release No. 87200
(October 2, 2019), 84 FR 53788 (October 8, 2019) (SR-CboeEDGX-2019-
012)).
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The Commission believes that the commenter raises concerns that
merit further consideration about the application of a 390-order
threshold for ``professional'' customer status in the options market,
particularly as that market has continued to evolve since those
designations were first introduced. In the options market,
[[Page 38169]]
particularly those that offer to the ``customer'' origin code the
highest priority (including over market makers) and often low or no
fees, there can potentially be a meaningful difference between being
classified as a ``customer'' or a ``professional'' customer, as the
latter is typically subject to the same priority and fee levels as
other broker-dealers, including those with the most sophisticated and
costly trading resources. Thus, in the options market, crossing the
390-order threshold and being labeled as a ``professional'' customer
can potentially matter to some frequent traders.
However, IEX is not proposing to use the 390-Order Limit to
classify order origin codes into ``customer'' and ``professional''
customer for general trading purposes. IEX is not creating a new class
of ``professional'' customer for the equities market. Rather, the 390-
Order Limit will only be used to classify certain orders seeking to
take liquidity in the exclusive context of IEX's Program. IEX's
proposal provides a bright-line test that broker-dealers can use to
ascertain whether orders they route to IEX under IEX's Program are
individual retail investor orders or are orders from market
participants that IEX believes trade with a frequency that is
uncharacteristic of a typical individual retail investor trading for
her personal investment account. Moreover, whether a retail investor
exceeds the 390-Order Limit or not, IEX's proposal will not change the
priority status or fees of any customer order outside of the Program.
Instead, the new threshold only further restricts what types of
incoming take orders can interact with a resting RLP order.\40\
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\40\ While RLP orders will only execute with incoming Retail
orders, an incoming Retail order can interact with any order (i.e.,
not just RLP orders) priced to execute at the Midpoint Price or
better.
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While the commenter acknowledges the potential for price
improvement for retail investors under IEX's proposal, the commenter
believes that any such benefits will be ``short lived,'' and that this
proposal opens up the possibilities for similar rules by other equity
exchanges that could have negative consequences to liquidity in the
equity market over the longer term, such as higher fees for
``professional'' customers.\41\ The Commission does not believe that
the proposal's benefits of providing midpoint prices (or better) to
retail investors under the Program will be short-lived because midpoint
prices can provide meaningful price improvement under different market
conditions.\42\ Further, because IEX's proposal is limited to
classifying incoming retail orders that remove liquidity for the narrow
purpose of its Program, it is not comparable to a broader
``professional'' customer rule as currently exists in the options
market.
---------------------------------------------------------------------------
\41\ See Ianni Letter 1, supra note 27, at 3-4.
\42\ With respect to the commenter's statement that the quality
of a fill should be based on all liquidity available in the market
(including hidden liquidity) (see Ianni Letter 1, supra note 27, at
3), the Commission recently adopted rules to require that certain
displayable odd-lot orders be included in core consolidated market
data and thus reflected in the best bid and ask prices. See
Securities Exchange Act Release No. 90610 (December 9, 2020), 86 FR
18596 (April 9, 2021) (S7-03-20) at 18611-14.
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The commenter also points to what the commenter believes to be
competitive harm that the options market versions of a 390-order
threshold have caused. The commenter believes that some retail traders
in the options market may stop trading as they approach the 390-order
threshold, often after being warned by their retail broker that they
are approaching the threshold, so as to avoid losing ``regular''
customer status should they exceed that limit.\43\ The commenter also
cautions that a desire to limit trading to stay under the 390-order
threshold in the options market can limit the ability of traders to use
small orders to seek out the best hidden prices \44\ and can
potentially result in wider options spreads if secondary liquidity
providers do not compete to provide liquidity in order to limit their
trading to stay under the threshold.\45\ The Commission agrees with the
Exchange that it is difficult to definitely ascribe, without more
evidence, a causal link between the adoption of professional customer
status in the options markets with wider spreads.\46\ Nevertheless, the
proposal's 390-Order Limit should not constrain the ability or
willingness of liquidity providers to provide liquidity. First, any
liquidity-providing market participant can submit RLP orders and
exceeding 390 orders per day would have no effect on the participant's
ability to do so. Second, RLP orders are non-displayed orders that
yield priority to displayed orders, including displayable odd lot
orders at executable prices, and thus should not directly impact IEX's
bid/ask spreads.\47\ While a program that segments retail order flow
away from displayed exchange quotes could theoretically impact spreads
if it impacts the willingness of liquidity providers to display tighter
quotes, IEX correctly notes that much of the retail volume today
executes away from exchanges, and thus, IEX's proposal is appropriately
regarded as a way to compete to bring that flow back onto an exchange.
Third, while the proposed threshold could impact liquidity takers
(i.e., retail traders that exceed the 390-Order Limit) because they
would lose the ability to interact with resting RLP orders on IEX,
liquidity takers' orders could still be submitted to IEX or other
exchanges for potential midpoint executions (e.g., against midpoint peg
orders).
---------------------------------------------------------------------------
\43\ See Ianni Letter 2, supra note 27, at 4. In both letters,
the commenter also provides analysis of problems within the options
market structure as it applies to giving retail customers priority.
See, e.g., Ianni Letter 1, supra note 27, at 1 (stating that ``there
is NO real customer `priority' advantage gained by retail options
customers because of the following: (1) More strikes and volatile
markets (2) Payment for order flow accounting for a majority of
customer orders (3) Market fragmentation (4) Price Improvement
rules''). The Commission appreciates the commenter taking time to
provide such an analysis. However, any such issues related to the
options market structure are outside the scope of this approval
order, and thus, cannot be addressed by the Commission herein.
\44\ See Ianni Letter 1, supra note 27, at 4 (``I will knowingly
pay a `likely' higher price for an option just to save on the number
of orders I send. I would argue that there is no such thing as `best
execution' for retail customers in the equity options market today
because of the 390-order rule. You are asking all investors to
sacrifice `best execution' over customer status.'')
\45\ See Ianni Letter 2, supra note 27, at 7.
\46\ See IEX Response, supra note 28, at 3-4.
\47\ Retail orders cannot affect the IEX bid-ask spread because
those orders neither display nor rest on the Order Book.
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Finally, citing to his experience in the options market, the
commenter believes that interpretation and enforcement of the 390-Order
Limit could be difficult because, for example, he has observed
ambiguity and inconsistency among broker-dealers in the options market
with respect to how orders should be counted towards the 390
threshold.\48\ IEX has represented that its regulatory program will be
enhanced for this proposal.\49\ The Commission believes that the
proposed threshold is clear and applies to an investor that places
``more than 390 equity orders per day on average during a calendar
month for its own beneficial account(s)''.\50\ To the extent that
market participants have interpretive questions, the Exchange should
address them and, if necessary, amend its rule to provide additional
clarity.
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\48\ See Ianni Letter 2, supra note 27, at 5.
\49\ See Notice, supra note 3, at 19916.
\50\ See proposed IEX Rule 11.190(b)(15) and Supplementary
Material .01 thereto.
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Accordingly, and based on the foregoing, the Commission finds that
the proposed changes to the Exchange's definition of Retail order,
including the proposed new 390-Order Limit, are consistent with the
Act.
[[Page 38170]]
Retail Liquidity Identifier and Revisions to RLP Orders
Next, the Exchange proposes to disseminate a Retail Liquidity
Identifier when RLP orders resting on the Order Book aggregate to form
at least one round lot, provided that the RLP order interest is resting
at the Midpoint Price and is priced at least $0.001 better than the
national best bid or national best offer. According to the Exchange,
the purpose of the Retail Liquidity Identifier is to provide relevant
market information to RMOs that there is some RLP trading interest at
the Midpoint Price on the Exchange, thereby incentivizing RMOs to send
Retail orders to IEX.\51\ In conjunction with its proposal to
disseminate the Retail Liquidity Identifier, the Exchange proposes to
amend the definition of RLP orders so such orders can only be midpoint
peg orders without a minimum quantity restriction. The Exchange
believes that disseminating a Retail Liquidity Identifier to indicate
RLP orders resting at the Midpoint Price would be unnecessarily
complicated if RLP orders were to continue to be discretionary peg
orders, because discretionary peg orders do not explicitly post to the
Order Book at the Midpoint Price.\52\ Likewise, the Exchange believes
that attaching a minimum quantity to an RLP order would hinder a market
participant's ability to determine the availability of trading interest
at the Midpoint Price, given that the interest would only be available
to counterparties able to meet the minimum quantities.\53\
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\51\ See Notice, supra note 3, at 19914.
\52\ See id. at 19915.
\53\ See id.
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As noted by the Exchange, similar retail liquidity identifiers are
currently disseminated by other exchanges that offer retail programs,
though other exchange programs typically allow the equivalent to RLP
orders to rest undisplayed at prices that improve the displayed quote
by subpenny increments.\54\ The Commission believes that IEX's Retail
Liquidity Identifier will serve a similar purpose as the identifiers
currently disseminated by other exchanges, as it will inform market
participants that have or control retail order flow about the
availability of price improvement opportunities for Retail orders. In
turn, market participants that have or control retail order flow would
normally be expected to use that information as they assess the best
prices available for the customer. Given the potential benefits to
individual investors and any increased likelihood that they may be able
to obtain midpoint executions, the Commission believes that the Retail
Liquidity Identifier is appropriately designed to remove impediments to
and perfect the mechanism of a free and open market and a national
market system.\55\
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\54\ See id.
\55\ In connection with this proposal, the Exchange states that
it plans to submit a letter requesting that the staff of the
Division of Trading and Markets not recommend any enforcement action
under Rule 602 of Regulation NMS (``Quote Rule'') based on the
Exchange's and its members' participation in the Program. See id. at
19914 n.39. In its filing, the Exchange asserts that the information
proposed to be contained in the Retail Liquidity Identifier does not
constitute a ``quote'' within the meaning of Regulation NMS because
it would not include a specific price or size of the interest. See
id. at 19914.
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Furthermore, the Commission finds that limiting RLP orders to be
midpoint peg orders without a minimum quantity option is an appropriate
compliment to the proposed Retail Liquidity Identifier. As explained
above, the Retail Liquidity Identifier is meant to notify RMOs that
there is Midpoint-Priced liquidity available on the Exchange. As such,
the Commission believes that requiring RLP orders to be midpoint peg
orders without the option to designate a minimum quantity condition
provides an increased chance of execution to incoming Retail orders and
makes the Retail Liquidity Identifier a more reliable indicator of
available midpoint liquidity.
Finally, as originally proposed, the revised RLP orders would have
been given Order Book priority over non-displayed orders priced to
execute at the Midpoint Price.\56\ However, in Amendment No. 1, the
Exchange revised its proposal so that the Exchange's regular priority
rules (i.e., price/time) would apply equally to RLP orders and such
non-displayed orders, thus eliminating the originally proposed Order
Book priority for RLP orders. IEX cites to precedent from at least one
other exchange's retail program providing that when a retail liquidity
providing order is at the same price as a non-displayed order, the
orders will be ranked together with time priority.\57\ The Commission
finds that IEX's revised proposal to not provide a priority advantage
to RLP orders over other non-displayed orders priced to execute at the
Midpoint Price is not unfairly discriminatory as it does not provide an
advantage to an order that will only interact with incoming Retail
orders (i.e., RLP orders) over orders that are not so restricted (e.g.,
midpoint peg orders). Treating both in time priority and allowing
incoming Retail orders to interact with either is designed to promote
just and equitable principles of trade and not impose an inappropriate
burden on competition.
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\56\ See Notice, supra note 3, at 19914.
\57\ See Amendment No. 1, supra note 7, at 8 (citing NYSE Arca
Rule 7.44-E(l)).
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For the foregoing reasons, the Commission believes that IEX's
proposed changes to its Program are consistent with the Act in that
they are reasonably 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 are not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-IEX-2021-06 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-IEX-2021-06. 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 this filing will also be available for inspection
and copying at the principal
[[Page 38171]]
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-IEX-2021-06
and should be submitted on or before August 9, 2021.
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 30th day after the
date of publication of notice of Amendment No. 1 in the Federal
Register. Amendment No. 1 revises the original proposal by amending IEX
Rule 11.232(e)(3)(A) to provide that RLP orders now will be ranked in
time priority with non-displayed orders priced to execute at the
Midpoint Price, rather than ahead of such orders as was originally
proposed. Thus, at the priority level specified in IEX Rule
11.232(e)(3)(A)(iii), incoming Retail orders will execute against RLP
orders and non-displayed orders priced to trade at the Midpoint Price
in price/time priority.
In Amendment No. 1, the Exchange states that based on additional
analysis of the potential benefits and burdens of RLP orders and non-
displayed orders priced to trade at the Midpoint Price, it determined
that RLP orders should be ranked in time priority with such other
orders, consistent with the Exchange's regular price/time priority. The
Exchange states that the proposed priority change does not raise any
new or novel issues as it is consistent with the rules of other
exchanges' retail liquidity programs, including NYSE Arca, as noted
above.\58\
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\58\ See supra note 57 and accompanying text.
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The changes to the proposal do not raise any novel regulatory
issues, as they are consistent with the rules of other exchange retail
programs previously approved by the Commission. Further, the changes
assist the Commission in evaluating the Exchange's proposal and in
determining that it is consistent with the Act as discussed above.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\59\ to approve the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\59\ 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
Exchange Act,\60\ that the proposed rule change (SR-IEX-2021-06), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\60\ 15 U.S.C. 78s(b)(2).
\61\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15199 Filed 7-16-21; 8:45 am]
BILLING CODE 8011-01-P
