Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Modify Rule 11.24 To Introduce an Enhanced RPI Order and Expand Its Retail Price Improvement Program To Include Securities Priced Below $1.00, 2993-3003 [2024-00712]
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Federal Register / Vol. 89, No. 11 / Wednesday, January 17, 2024 / Notices
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
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)
of the Act 29 and paragraph (f) of Rule
19b–4 30 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. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
lotter on DSK11XQN23PROD with NOTICES1
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CboeBZX–2024–003 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CboeBZX–2024–003. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2024–003 and should be
submitted on or before February 7, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–00710 Filed 1–16–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99311; File No. SR–
CboeBYX–2023–020]
Self-Regulatory Organizations; Cboe
BYX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Modify
Rule 11.24 To Introduce an Enhanced
RPI Order and Expand Its Retail Price
Improvement Program To Include
Securities Priced Below $1.00
January 10, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
27, 2023, Cboe BYX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
31 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
29 15
U.S.C. 78s(b)(3)(A).
30 17 CFR 240.19b–4(f).
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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 modify
Rule 11.24 to introduce an Enhanced
RPI Order and expand its Retail Price
Improvement program to include
securities priced below $1.00. The text
of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change
is available on the Exchange’s website
(https://markets.cboe.com/us/equities/
regulation/rule_filings/byx/), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 11.24 to enhance the Exchange’s
Retail Price Improvement Program (the
‘‘Program’’) for the benefit of retail
investors. Specifically, the Exchange
proposes to introduce a new Retail Price
Improvement Order type (‘‘RPI Order’’) 3
to be known as an ‘‘Enhanced RPI
Order.’’ The proposed Enhanced RPI
Order will allow retail liquidity
providers to post orders at their limit
price but have the opportunity to
provide a greater amount of price
improvement as compared to other
resting orders on the same side of the
BYX Book with higher priority in order
to execute with an incoming Retail
Order 4 by exercising at a price within
their established step-up range. The
proposed change is designed to provide
retail investors with additional
opportunities for meaningful price
3 See Rule 11.24(a)(3) (‘‘Retail Price Improvement
Order’’).
4 See Rule 11.24(a)(2) (‘‘Retail Order’’).
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Federal Register / Vol. 89, No. 11 / Wednesday, January 17, 2024 / Notices
improvement by introducing a new
order type that will ‘‘step-up’’ its price
against orders with a higher priority
resting on the BYX Book.5 Additionally,
the Exchange proposes to expand the
Program to securities priced below
$1.00.6
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Background
In November 2012, the Exchange
received approval to operate its Program
on a pilot basis.7 The Program operated
under a pilot basis until September 30,
2019, when the Program was approved
on a permanent basis.8 In addition, the
Exchange was granted a limited
exemption from the Sub-Penny Rule, as
well as Regulation NMS Rule 602
(Quote Rule) No Action relief 9 to
operate the Program.10 The Program is
currently designed to attract Retail
Orders to the Exchange and allow such
order flow to receive potential price
improvement. The Program is currently
limited to trades occurring at prices
equal to or greater than $1.00 per
share.11 Under the Program, a class of
market participant called a Retail
Member Organization (‘‘RMO’’) 12 is
eligible to submit certain retail order
flow (‘‘Retail Orders’’) to the Exchange.
Users 13 are permitted to provide
potential price improvement for Retail
Orders 14 in the form of non-displayed
5 See Rule 1.5(e) (‘‘BYX Book’’). The ‘‘BYX Book’’
is the System’s electronic file of orders. The
‘‘System’’ shall mean the electronic
communications and trading facility designated by
the Board through which securities orders of Users
are consolidated for ranking, execution, and when
applicable, routing away. See Rule 1.5(aa)
(‘‘System’’).
6 See Rule 11.24(h). The Program is currently
limited to trades occurring at prices equal to or
greater than $1.00 per share.
7 See Securities Exchange Act Release No. 68303
(November 27, 2012), 77 FR 71652 (December 3,
2012), SR–BYX–2012–019 (‘‘Pilot Approval
Order’’).
8 See Securities Exchange Act Release No. 87154
(September 30, 2019), 84 FR 53183 (October 4,
2019), SR–CboeBYX–2019–014 (‘‘RPI Approval
Order’’).
9 See Letter from David Shillman to Eric Swanson
(November 27, 2012) (‘‘No Action Letter’’), available
at https://www.sec.gov/divisions/marketreg/mrnoaction/byx-112712-602.pdf.
10 Supra note 8 at 53185.
11 Supra note 6. The Exchange will periodically
notify the membership regarding the securities
included in the Program through an information
circular. The Exchange is proposing to make the
Program available to all securities (discussed infra).
12 See Rule 11.24(a)(1). A ‘‘Retail Member
Organization’’ or ‘‘RMO’’ is a Member (or a division
thereof) that has been approved by the Exchange
under Rule 11.24 to submit Retail Orders.
13 See Rule 1.5(cc). A ‘‘User’’ is defined as any
member or sponsored participant of the Exchange
who is authorized to obtain access to the System.
14 Supra note 4. A ‘‘Retail Order’’ is defined as
an agency or riskless principal order that originates
from a natural person and is submitted to the
Exchange by an RMO, provided that no change is
made to the terms of the order with respect to price
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interest that is better than the national
best bid that is a Protected Quotation
(‘‘Protected NBB’’) or the national best
offer that is a Protected Quotation
(‘‘Protected NBO’’, and together with the
Protected NBB, the ‘‘Protected
NBBO’’).15
The Exchange developed this Program
with the goal of incentivizing RMOs to
execute their Retail Orders on the
Exchange, rather than off-exchange
venues, by providing Retail Orders with
greater access to potential opportunities
for price improvement on the Exchange.
However, as noted by the Commission,
even with the presence of retail
liquidity programs (‘‘RLPs’’) offered by
Cboe and other national securities
exchanges,16 the great majority of
marketable orders of retail investors
continue to be sent to wholesalers.17
Indeed, as noted in the Commission’s
recent rule proposal related to minimum
pricing increments, RLPs have not yet
attracted a significant volume of retail
order flow.18 In fact, since RLPs have
been adopted, the percentage of onexchange share volume has continued to
decrease from approximately 71% to
approximately 56% as of November
2023.19
or side of market and the order does not originate
from a trading algorithm or any computerized
methodology.
15 See Rule 1.5(t). The term ‘‘Protected
Quotation’’ has the same meaning as is set forth in
Regulation NMS Rule 600(b)(71). The terms
Protected NBB and Protected NBO are defined in
BYX Rule 1.5(s). The Protected NBB is the bestpriced protected bid and the Protected NBO is the
best-priced protected offer. Generally, the Protected
NBB and Protected NBO and the national best bid
(‘‘NBB’’) and national best offer (‘‘NBO’’, together
with the NBB, the ‘‘NBBO’’) will be the same.
However, a market center is not required to route
to the NBB or NBO if that market center is subject
to an exception under Regulation NMS Rule
611(b)(1) or if such NBB or NBO is otherwise not
available for an automatic execution. In such case,
the Protected NBB or Protected NBO would be the
best-priced protected bid or offer to which a market
center must route interest pursuant to Regulation
NMS Rule 611.
16 See, e.g., NYSE and NYSE Arca Retail Liquidity
programs, which promote cost savings through
price improvement for individual investors
provided by retail liquidity providers that submit
non-displayed interest priced better than the best
protected best bid or protected best offer. Available
at https://www.nyse.com/markets/liquidityprograms. See also IEX Retail Program, which
incentivizes midpoint liquidity for retail orders
through the use of retail liquidity provider orders.
Available at https://www.iexexchange.io/products/
retail-program. See also Nasdaq BX Retail Price
Improvement, which allows retail orders to interact
with price-improving liquidity. Available at https://
www.nasdaqtrader.com/content/BXRPIfs.pdf.
17 See Securities Exchange Act Release No. 96495
(December 14, 2022), 88 FR 128 (January 3, 2023)
(‘‘Order Competition Rule’’) at 144.
18 See Securities Exchange Act Release No. 96494
(December 14, 2022), 87 FR 80266 (December 29,
2022) (‘‘Tick Size Proposal’’) at 80273.
19 Source: Cboe internal data.
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Accordingly, the Exchange now seeks
to enhance its current Program by
offering retail liquidity providers an
optional Enhanced RPI Order type. The
Exchange believes the Enhanced Order
type will incentivize additional retail
liquidity provision by enabling RPI
liquidity providers to submit an order
that is ranked at a less aggressive price
than the step-up range at which the
provider is willing to execute, but have
the opportunity to ‘‘step up’’ to provide
a greater amount of price improvement
as compared to other higher priority
resting orders on the same side of the
BYX Book in order to execute with an
incoming contra-side Retail Order. As
discussed in more detail, below, the
Enhanced RPI Order type will have
price priority over resting orders when
its step-up range allows for additional
price improvement when a contra-side
Retail Order is submitted to the
Exchange. With the deeper pool of retail
liquidity-providing orders, the Exchange
believes that RMOs will see increased
opportunities for on-exchange price
improvement and seek to execute more
of their Retail Orders on the Exchange.
Proposal
The Exchange proposes to amend
Rule 11.24(a) to include the proposed
Enhanced RPI Order, which allows a
retail liquidity provider to post a limit
order to the Exchange, but also the
opportunity to ‘‘step-up’’ its price
within their defined step-up range by
providing a greater amount of price
improvement as compared to orders
with higher priority that are resting on
the same side of the BYX Book in order
to execute against an incoming Retail
Order seeking to remove liquidity. An
Enhanced RPI Order is designed to be
entered with a limit price, but must also
include a step-up range, which is the
most aggressive price it is willing to
execute against a contra-side Retail
Order. If the Enhanced RPI Order
includes a step-up range that improves
against the price of the highest-ranked
resting order on the same side of the
BYX Book, the Enhanced RPI Order will
be given price priority over the highestranked resting order. In order for an
Enhanced RPI Order to receive price
priority, the Enhanced RPI Order must
be able to provide a greater amount of
price improvement to an incoming
contra-side Retail Order than would
otherwise be available by stepping up to
the next valid tick increment.20
20 The Exchange notes that the minimum amount
of required price improvement will vary between
$0.001 and $0.01, based on the order types resting
on the BYX Book (discussed infra).
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The Exchange believes this proposed
change would further the purpose of the
Program to attract retail marketable
order flow to the Exchange, while also
increasing opportunities for price
improvement. By offering the Enhanced
RPI Order, the Exchange has created an
enhancement to its current Program that
offers a greater incentive for liquidity
providers to provide liquidity eligible to
execute against marketable retail order
flow on the Exchange. The Enhanced
RPI Order would allow Users to post
orders at their limit price but step-up to
a more aggressive price in order to
execute against marketable retail order
flow that is less prone to adverse
selection. Marketable retail order flow,
in turn, would receive price
improvement greater than what is
currently available under the Program.
The Exchange believes that the
proposed change will lead to increased
participation in the Program by Users
seeking to provide liquidity for
marketable retail order flow, which in
turn will attract additional marketable
retail order flow to the Exchange in
search of price improvement
opportunities.
The Exchange also proposes to
introduce Rule 11.24(a)(5) in order to
define the term RPI Interest as either RPI
Orders or Enhanced RPI Orders.
Additionally, the Exchange proposes to
amend Rule 11.24(g) in order to describe
order priority for Enhanced RPI Orders.
The Exchange also proposes to make
corresponding changes within Rule
11.24 to replace certain references to
RPI Order with the term RPI Interest in
order to have language inclusive of both
RPI Orders and Enhanced RPI Orders.
Further, the Exchange proposes to
delete Rule 11.24(h), as the Exchange
proposes to expand the Program to subdollar securities. The Exchange will
announce that the RPI Program has
expanded to all securities in a Trade
Desk notice, and periodic updates will
no longer be required. The Exchange
also proposes to renumber Rule 11.24(i)
in conjunction with the deletion of Rule
11.24(h).
Additionally, with the introduction of
the Enhanced RPI Order, the Exchange
proposes to amend Rule 11.24(a)(2) to
permit a Retail Order to be entered as
a Mid-Point Peg Order.21 The Exchange
also proposes to amend Rule 11.24(a)(2)
21 See Rule 11.9(c)(9). A Mid-Point Peg Order is
a limit order that, after entry into the System, the
price of the order is automatically adjusted by the
System in response to changes in the NBBO to be
pegged to the mid-point of the NBBO, or,
alternatively, pegged to the less aggressive of the
midpoint of the NBBO or one minimum price
variation inside the same side of the NBBO as the
order.
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to better describe that the time-in-force
requirement for all Retail Orders,
including those entered as a Mid-Point
Peg Order, is required to be Immediate
or Cancel (‘‘IOC’’). The Exchange
believes that allowing the Mid-Point Peg
Order instruction on a Retail Order will
benefit Users who choose to submit
Retail Orders because it will permit a
Retail Order to guarantee price
improvement at the midpoint or better.
The Mid-Point Peg Order instruction
will be optional, and not required for
Users of Retail Orders.
Current RPI Orders
Rule 11.24(a)(3) currently defines an
RPI Order as ‘‘non-displayed interest on
the Exchange that is priced better than
the Protected NBB or Protected NBO by
at least $0.001 and that is identified as
such.’’ 22 The Exchange now proposes to
amend the definition of RPI Order to
more accurately reflect how an RPI
Order may be entered by defining an
RPI Order as ‘‘non-displayed interest on
the Exchange that is eligible to execute
at prices better than the Protected NBB
or Protected NBO by at least $0.001 in
securities priced at or above $1.00 and
by at least $0.0001 in securities priced
below $1.00 and that is identified as
such.’’ As the Exchange is also
proposing to expand the Program to
prices below $1.00, more specificity is
required regarding the minimum pricing
increment. Further, the Exchange is
clarifying that an RPI Order may be
entered at any price but may execute
only at prices better than the Protected
NBB or Protected NBO.
As stated in Rule 11.24(a)(3), RPI
Orders are non-displayed and are
ranked in accordance with Rule
11.12(a). Furthermore, under Rule
11.24(g), competing RPI Orders in the
same security are ranked and allocated
according to price then time of entry
into the System. Executions occur in
price/time priority in accordance with
Rule 11.12. Any remaining unexecuted
RPI interest remains available to interact
with other incoming Retail Orders if
such interest is at an eligible price. Any
remaining unexecuted portion of the
Retail Order will cancel or execute in
accordance with Rule 11.24(f). The
following example illustrates this
method:
• Protected NBBO for security ABC is
$10.00–$10.05
• User 1 enters an RPI Order to buy
ABC at $10.015 for 500 shares
• User 2 then enters an RPI Order to
buy ABC at $10.02 for 500 shares
• User 3 then enters an RPI Order to
buy ABC at $10.035 for 500 shares
22 Supra
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An incoming Retail Order to sell ABC
for 1,000 shares executes first against
User 3’s bid for 500 shares at $10.035,
because it is the best priced bid, then
against User 2’s bid for 500 shares at
$10.02, because it is the next best priced
bid. User 1 is not filled because the
entire size of the Retail Order to sell
1,000 shares is depleted. The Retail
Order executes against RPI Orders in
price/time priority.23
Enhanced RPI Order
The Exchange now proposes to
introduce a new type of RPI Order that
Users seeking to provide RPI liquidity
may utilize on an optional basis. The
proposed Enhanced RPI Order will be
eligible to obtain price priority over
resting orders in the same security on
the same side of the BYX Book in order
to execute against a Retail Order by
including a step-up range when entered.
Enhanced RPI Orders will be ranked in
accordance with proposed Rule
11.24(g)(2) (discussed infra). In order to
effect the proposed change, the
Exchange proposes to introduce Rule
11.24(a)(4), which would define an
Enhanced RPI Order as:
• An ‘‘Enhanced Retail Price
Improvement Order’’ or ‘‘Enhanced RPI
Order’’ consists of non-displayed
interest on the Exchange that is eligible
to execute against contra-side Retail
Orders. An Enhanced RPI Order will be
ranked at its limit price and must also
include a step-up range, which is the
maximum price (for buy orders) or
minimum price (for sell orders) at
which the Enhanced RPI Order is
willing to execute. An Enhanced RPI
Order may execute at: (i) its limit price;
(ii) for securities priced at or above
$1.00, at a price within the step-up
range that is able to improve upon the
price of a same-side resting order on the
BYX Book by stepping up to the next
half cent or full cent, and for securities
priced below $1.00 by stepping up to
the next valid tick increment; or (iii) at
a price within the step-up range when
the limit price of a contra-side Retail
Order is within the step-up range. An
Enhanced RPI Order may be a primary
pegged order or a limit order. The
System will monitor whether Enhanced
RPI interest, including the step-up
range, and adjusted by any offset and
subject to the ceiling or floor price, is
eligible to interact with incoming Retail
Orders. An Enhanced RPI Order (the
buy or sell interest, the step-up range,
the offset, and the ceiling or floor)
remains non-displayed in its entirety.
Any User is permitted, but not required,
23 See Rule 11.24(f) for additional examples of
priority and order allocation in the current Program.
note 3.
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to submit Enhanced RPI Orders. An
Enhanced RPI Order may be an odd lot,
round lot or mixed lot. An Enhanced
RPI Order shall have priority as
described in Rule 11.24(g)(2).
The price of an Enhanced RPI Order
will be determined by a User’s entry of
the following into the Exchange: (1)
Enhanced RPI buy or sell interest; (2)
the step-up range; (3) an offset, if any;
and (4) a ceiling or floor price, if any.
The step-up range of an Enhanced RPI
Order is the maximum amount above
the order’s limit price at which a User
is willing to execute. If the Enhanced
RPI Order can improve upon resting
liquidity on the same side of the BYX
Book by stepping up to the nearest
whole cent tick or half cent midpoint
tick, it will receive price priority over
the resting liquidity on the BYX Book.
An Enhanced RPI Order, however, will
not improve upon the price of another
resting Enhanced RPI Order to receive
price priority.
Enhanced RPI Order Priority
As discussed above, the proposed
Enhanced RPI Order will be ranked at
its limit price, which is less aggressive
than its step-up range. With the
introduction of the proposed Enhanced
RPI Order, the Exchange proposes to
reorganize Rule 11.24(g) into Rule
11.24(g)(1) and (2). Proposed Rule
11.24(g)(1) would contain the existing
rule text that describes order priority
with respect to RPI Orders, which the
Exchange does not propose to amend.
Proposed Rule 11.24(g)(2) would
describe order priority with respect to
Enhanced RPI Orders.
An Enhanced RPI Order will be
ranked and allocated according to its
limit price then time of entry into the
System. The Exchange proposes,
however, that an Enhanced RPI Order
will be granted price priority over
orders resting on the BYX Book in the
event that the Enhanced RPI Order is
able to provide a greater amount of price
improvement to an incoming contraside Retail Order by stepping up to the
next half cent 24 or full cent (for
securities priced at or above $1.00) or
the next valid tick increment (for
securities priced below $1.00). The stepup range of an Enhanced RPI Order will
be utilized to determine price priority
when: (1) the range is needed to gain
priority over a resting order with higher
order book priority that is not an
Enhanced RPI Order; (2) in situations
where: (a) a contra-side Retail Order is
24 Discussed infra Examples 2 and 5. An
Enhanced RPI Order may only need to step-up one
half cent in order to provide meaningful price
improvement in situations where the best-priced
resting order is ranked at a full cent.
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Example 2 26
entered at a less aggressive price than
the ranked price of the Enhanced RPI
Order and all other resting liquidity and
(b) the Enhanced RPI Order’s step-up
range is equal to or more aggressively
priced than the Retail Order’s limit
price; and (3) to determine order book
priority when multiple Enhanced RPI
Orders are resting on the BYX Book and
are eligible to trade ahead of higher
priority orders resting on the BYX Book
that are not Enhanced RPI Orders. The
Exchange notes when multiple
Enhanced RPI Orders are resting on the
BYX Book. there are no other resting
orders on the same side of the BYX
Book with higher priority, and a contraside Retail Order is entered at a price
equal to or more aggressive than the
highest-priced Enhanced RPI Order
resting on the BYX Book, the Enhanced
RPI Orders will execute in standard
price/time priority according to their
limit price rather than utilize the stepup range to determine order book
priority.
The Exchange has included the
examples below to show how order
priority with an Enhanced RPI Order
will be determined. In the examples
below, the Retail Liquidity Identifier
(discussed infra) is presumed to be
displayed unless stated otherwise.
If the best-priced resting order on the
BYX Book is ranked at a whole cent, the
Enhanced RPI Order may only need to
step-up one-half cent in order to provide
meaningful price improvement.
Consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters a non-displayed order
to buy ABC at $10.02 for 100.
Æ User 2 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 2’s step-up range is $10.03. User
2’s order is ranked at $10.01.
Æ User 3 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 3’s Retail Order for 100
will execute against User 2’s Enhanced
RPI Order at $10.025. While User 1’s
order is ranked at a higher price ($10.02)
than User 2’s order ($10.01), User 2 has
included a step-up range of $10.03 on
its order and is willing to provide
additional price improvement as
compared to other orders resting on the
BYX Book. Even though User 2’s order
may execute up to a price of $10.03, it
only needs to provide one-half cent
price improvement over User 1’s ranked
price of $10.02 in order to provide
meaningful price improvement at the
midpoint.
Example 1 25
Example 3 27
In order to illustrate priority of an
Enhanced RPI Order over other nondisplayed orders resting on the BYX
Book, consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters a Mid-Point Peg order
to buy ABC at $10.03 for 100. User 1’s
order is ranked at $10.025 as the User
elected that the Mid-Point Peg order be
pegged to the mid-point of the NBBO.
Æ User 2 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 2’s step-up range is $10.03. User
2’s order is ranked at $10.01.
Æ User 3 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 3’s Retail Order for 100
will execute against User 2’s Enhanced
RPI Order at $10.03. While User 1’s
order is ranked at a higher price
($10.025) than User 2’s order ($10.01),
User 2’s order includes a step-up range
of $10.03, which provides additional
price improvement to User 3’s Retail
Order than User 1’s Mid-Point Peg
Order. As User 2’s order provides an
additional $0.005 of price improvement
over User 1’s midpoint price, the
Exchange gives priority to User 2’s
Enhanced RPI Order.
There are instances where an
Enhanced RPI Order may need to stepup a full penny in order to provide
meaningful price improvement.
Consider the following:
• The Protected NBBO for security
ABC is $10.00 × $10.10.
Æ User 1 enters a non-displayed order
to buy ABC at $10.03 for 100.
Æ User 2 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 2’s step-up range is $10.05. User
2’s order is ranked at $10.01.
Æ User 3 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 3’s Retail Order for 100
will execute against User 2’s Enhanced
RPI Order at $10.04. While User 1’s
order is ranked at a higher price ($10.03)
than User 2’s order ($10.01), User 2 has
included a step-up range of $10.05 on
its order and is willing to provide
additional price improvement as
compared to other orders resting on the
BYX Book. Even though User 2’s order
may execute up to a price of $10.05, it
only needs to provide one penny of
price improvement above User 1’s
ranked price of $10.03 in order to
provide meaningful price improvement.
26 See
25 See
PO 00000
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Example 4 28
There may be instances where there is
no other liquidity resting on the BYX
Book against which the Enhanced RPI
Order can step up against. In these
instances, the Enhanced RPI Order will
trade at its ranked price. Consider the
following example.
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 1’s step-up range is $10.025. User
1’s order is ranked at $10.01.
Æ User 2 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 2’s Retail Order for 100
will execute against User 1’s Enhanced
RPI Order at $10.01 as there are no
better-priced orders resting on the BYX
Book against which User 1 would need
to provide greater price improvement to
User 2.
Example 5 29
Enhanced RPI Orders will only have
priority against other better-priced
liquidity resting on the BYX Book in the
event that the Enhanced RPI Order can
step-up to the next half cent or full cent.
In the example below, the Enhanced RPI
Order is unable to step up against the
best priced order on the BYX Book but
is able to step up against an order
ranked at the next best price level.
Consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters a non-displayed order
to buy ABC at $10.04 for 100.
Æ User 2 enters a non-displayed order
to buy ABC at $10.02 for 100.
Æ User 3 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 3’s step-up range is $10.04. User
3’s order is ranked at $10.01.
Æ User 4 enters a Retail Order to sell
ABC at $10.00 for 150.
• Result: User 4’s Retail Order will
execute 100 shares first with User 1’s
non-displayed order as User 1’s nondisplayed order has price priority over
the orders submitted by Users 2 and 3.
While User 3’s Enhanced RPI Order has
a step-up range of $10.04, the step-up
range does not provide greater price
improvement for User 4’s Retail Order
as compared to User 1’s non-displayed
order and as such, User 3’s Enhanced
RPI Order does not have priority over
User 1’s non-displayed order. Once User
4’s Retail Order executes against User
1’s non-displayed order, 50 shares
remain on User 4’s Retail Order. User
4’s Retail Order will then execute its
remaining 50 shares with User 3’s
28 See
29 See
proposed Rule 11.24(a)(4).
proposed Rule 11.24(g)(2)(A).
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Enhanced RPI Order at a price of
$10.025. While User 2’s non-displayed
order is ranked at a higher price ($10.02)
than User 3’s Enhanced RPI Order
($10.01), User 3’s Enhanced RPI Order
has a step-up range of $10.04 and User
2’s non-displayed order does not
contain a step-up range. As User 3’s
Enhanced RPI Order is willing to
provide greater price improvement as
compared to a better-priced order
resting on the same side of the BYX
Book, it is given priority over User 2’s
non-displayed order. User 3’s Enhanced
RPI Order executes 50 shares against
User 4’s non-displayed order at a price
of $10.025 because it provides one-half
cent of price improvement over User 2’s
ranked price of $10.02.
Example 6 30
Enhanced RPI Orders will execute
within their step-up range when the
incoming Retail Order’s price is not
executable at the Enhanced RPI Order’s
ranked price. Consider the following
example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 1’s step-up range is $10.04. User
1’s order is ranked at $10.01.
Æ User 2 enters a Retail Order to sell
ABC at $10.03 for 100.
• Result: User 2’s Retail Order will
execute with User 1’s Enhanced RPI
Order at $10.03 as the limit price of
User 2’s Retail Order ($10.03) is within
User 1’s step-up range.
Example 7 31
When there are multiple Enhanced
RPI Orders resting on the BYX Book, no
other same side liquidity with higher
priority, and the contra-side Retail
Order is priced more aggressively than
the resting Enhanced RPI Orders,
execution priority will be determined by
the higher ranked price and not by the
step-up ranges of the Enhanced RPI
Orders. Consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 1’s step-up range is $10.05. User
1’s order is ranked at $10.01.
Æ User 2 enters an Enhanced RPI
Order to buy ABC at $10.02 for 100.
User 2’s step-up range is $10.04. User
2’s order is ranked at $10.02.
Æ User 3 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 3’s Retail Order will
execute with User 2’s Enhanced RPI
30 See
31 See
PO 00000
proposed Rule 11.24(a)(4).
proposed Rule 11.24(g)(2).
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Order at $10.02 because User 2’s
Enhanced RPI Order has price priority
over User 1’s Enhanced RPI Order due
to its higher ranked price of $10.02.
Given that User 3’s Retail Order was
priced more aggressively than the
resting Enhanced RPI Orders at its time
of entry, the Exchange believes that
priority should be determined by using
the ranked price of the Enhanced RPI
Orders resting on the BYX Book at the
time of User 3’s Retail Order entry.
Example 8 32
The step-up range will be used to
determine order book priority in
situations where: (i) a contra-side Retail
Order is entered at a less aggressive
price than the Enhanced RPI Order’s
limit price and all other resting liquidity
in the same security and (ii) the
Enhanced RPI Order’s step-up range is
equal to or more aggressively priced
than the Retail Order’s limit price.
Consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 1’s step-up range is $10.05. User
1’s order is ranked at $10.01.
Æ User 2 enters a non-displayed order
to buy ABC at $10.02 for 100. User 2’s
order is ranked at $10.02.
Æ User 3 enters a Retail Order to sell
ABC at $10.03 for 100.
• Result: User 3’s order will execute
with User 1’s Enhanced RPI Order at
$10.03 because (i) User 3’s Retail Order
was entered at a less aggressive price
than the ranked price of both User 1 and
User 2’s orders; and (ii) the step-up
range of User 1’s Enhanced RPI Order is
more aggressively priced ($10.05) than
the limit price of User 3’s Retail Order
($10.03). Even though User 2’s ranked
price is higher than User 1’s ranked
price, User 2’s order is not marketable
against User 3’s Retail Order. User 3’s
Retail Order would otherwise be unable
to execute if the Exchange did not look
to the price improvement provided by
User 1’s step-up range to permit an
execution between User 1 and User 3.
Example 9 33
The step-up range will be used to
determine order book priority in
situations where multiple Enhanced RPI
Orders are resting on the BYX Book and
are eligible to trade ahead of higher
priority orders resting on the BYX Book.
Consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
32 See
33 See
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Æ User 1 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 1’s step-up range is $10.05. User
1’s order is ranked at $10.01.
Æ User 2 enters an Enhanced RPI
Order to buy ABC at $10.02 for 100.
User 2’s step-up range is $10.04. User
2’s order is ranked at $10.02.
Æ User 3 enters a non-displayed order
to buy ABC at $10.03 for 100. User 3’s
order is ranked at $10.03.
Æ User 4 enters a Retail Order to sell
ABC at $10.03 for 100.
• Result: User 4’s Retail Order will
execute with User 1’s Enhanced RPI
Order at $10.04 because the Exchange
looks to the step-up range to determine
order book priority when there are
multiple Enhanced RPI Orders resting
on the BYX Book that are willing to
provide additional price improvement
as compared to other orders resting on
the BYX Book. While both User 1 and
User 2 can execute at a price of $10.04,
User 1’s Enhanced RPI Order has a
higher step-up range ($10.05) as
compared to the step-up range of User
2’s Enhanced RPI Order ($10.04). As
such, User 1’s Enhanced RPI Order is
given priority ahead of User 2’s
Enhanced RPI Order to execute against
User 4’s Retail Order. In this instance,
when there are multiple Enhanced RPI
Orders that can provide price
improvement to the contra-side Retail
Order, the Exchange believes it is
appropriate to use the highest step-up
range to determine order book priority
as it is encouraging Users to submit
aggressively priced orders by granting
order book priority to the User with the
highest step-up range. As such, the
Exchange believes it is appropriate to
give priority to User 1’s Enhanced RPI
Order in this instance because User 1’s
step-up range is more aggressive than
User 2’s step-up range and is therefore
willing to provide additional price
improvement to Retail Orders as
compared to User 2’s Enhanced RPI
Order.
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Example 10 34
Enhanced RPI Orders will have price
priority over resting RPI orders (that do
not contain a step-up range) on the BYX
Book so long as the step-up range of the
Enhanced RPI Order is greater than the
limit price of the resting RPI order.
Consider the following example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters an Enhanced RPI
Order to buy ABC at $10.01 for 100.
User 1’s step-up range is $10.05. User
1’s order is ranked at $10.01.
34 See
proposed Rule 11.24(g)(2)(A).
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Æ User 2 enters an RPI Order to buy
ABC at $10.02.
Æ User 3 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 3’s Retail Order will
execute with User 1’s Enhanced RPI
Order at a price of $10.025 because User
1’s Enhanced RPI Order containing a
step-up range allows User 3’s Retail
Order to receive an additional one-half
cent price improvement as compared to
the ranked price of User 2’s RPI Order.
While User 2’s RPI Order had a higher
ranked price ($10.02) than User 1’s
Enhanced RPI Order ($10.01), User 2’s
RPI Order did not contain a step-up
range. Given that Enhanced RPI Orders
are designed to provide meaningful
price improvement against all resting
orders on the BYX Book, the Exchange
believes this factor favors using the
price improvement provided by the
step-up range in order to determine
priority in situations where there are
both resting RPI and Enhanced RPI
Orders on the BYX Book. While RPI
Orders do provide at least $0.001 of
price improvement as compared to the
Protected NBBO, Enhanced RPI Orders
allow for price improvement to the next
valid half cent or full cent as the
transaction is priced above $1.00.35
Thus, using the step-up range to
determine priority when RPI Orders are
resting on the BYX Book results in an
increased amount of price improvement
for the contra-side Retail Order.
Example 11 36
Enhanced RPI Orders may also
improve against displayed orders resting
on the BYX Book in order to provide
price improvement to a contra-side
Retail Order. Consider the following
example:
• The Protected NBBO for security
ABC is $10.00 × $10.05.
Æ User 1 enters an Enhanced RPI
Order to buy ABC at $9.99 for 100. User
1’s step-up range is $10.05. User 1’s
order is ranked at $9.99. The Retail
35 The Exchange notes that there may be
situations in which an Enhanced RPI Order that is
granted order book priority over an RPI Order will
provide only $0.001 of price improvement over the
RPI Order when stepping up to the next half cent
or full cent. For example, the Protected NBBO is
$10.00 × $10.05. Assume that a buy-side Enhanced
RPI Order for 100 shares has a step-up range to
$10.04 and is granted order book priority over a
buy-side RPI Order for 100 shares with a limit price
of $10.024. A sell-side Retail Order for 100 shares
is entered at $10.00. In this instance, the buy-side
Enhanced RPI Order steps-up to a price of $10.025
to execute against the sell-side Retail Order. While
the Enhanced RPI Order is only providing $0.001
of price improvement as compared to the RPI Order
with a limit price of $10.024, the Enhanced RPI
Order provides a total of $0.025 of price
improvement to the Retail Order as compared to the
Retail Order’s limit price of $10.00.
36 See proposed Rule 11.24(g)(2)(A).
PO 00000
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Liquidity Identifier is not displayed as
the limit price of $9.99 is below the
NBB and the Retail Liquidity Identifier
will only display when there is RPI
interest priced at least $0.001 better
than the Protected NBB or Protected
NBO.
Æ User 2 enters a displayed order to
buy ABC at $10.00 for 100.
Æ User 3 enters a Retail Order to sell
ABC at $10.00 for 100.
• Result: User 3’s Retail Order will
execute with User 1’s Enhanced RPI
Order at a price of $10.01. While User
2’s displayed order is displayed and
ranked at a higher price ($10.00) than
User 1’s Enhanced RPI Order ($9.99),
User 1’s Enhanced RPI Order includes a
step-up range on its order, which
permits the order to execute up to a
price of $10.05. In this instance,
executing User 2’s displayed order at
$10.00 does not provide any price
improvement to the Retail Order when
User 1’s Enhanced RPI Order is resting
on the BYX Book and is willing to
provide additional price improvement
to Order 3 than Order 2 is willing to
provide. User 1’s Enhanced RPI Order is
willing to step up to the next full cent
above $10.00 (in this case, $10.01),
which provides a full penny of price
improvement to User 3’s Retail Order.,
As such, this is the price at which User
3’s Retail Order executes with User 1’s
Enhanced RPI Order.
As demonstrated in the examples
above, the Exchange is proposing to
grant an Enhanced RPI Order price
priority over equal-priced or betterpriced resting orders on the BYX Book
so long as the Enhanced RPI Order can
provide meaningful price improvement
over such resting orders. The Exchange
believes that allowing liquidity
providers to post orders outside of the
range at which they are willing to
execute yet maintain the opportunity to
step-up against resting orders on the
same side of the BYX Book in exchange
for price priority will incentivize these
liquidity providers to provide additional
liquidity on the Exchange. As a result of
additional, aggressively priced liquidity
submitted to the Exchange designed
specifically to interact with Retail
Orders, RMOs will therefore be
incentivized to submit additional retail
order flow to the Exchange which has
the potential to interact with an
Enhanced RPI Order and receive
meaningful price improvement.
Retail Liquidity Identifier
The Exchange currently disseminates
an identifier pursuant to Rule 11.24(e)
when RPI interest priced at least $0.001
better than the Protected NBB or
Protected NBO for a particular security
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is available in the System (‘‘Retail
Liquidity Identifier’’ or ‘‘Identifier’’).
The Identifier is disseminated through
consolidated data streams (i.e., pursuant
to the Consolidated Tape Association
Plan/Consolidated Quotation Plan, or
CTA/CQ, for Tape A and Tape B
securities, and the Nasdaq UTP Plan for
Tape C securities) as well as through
proprietary Exchange data feeds.37 The
Identifier reflects the symbol and the
side (buy or sell) of the RPI interest, but
does not include the price or size of the
RPI interest. In particular, CQ and UTP
quoting outputs include a field for codes
related to the Retail Liquidity Identifier.
The codes indicate RPI interest that is
priced better than the Protected NBB or
Protected NBO by at least the minimum
level of price improvement as required
by the Program.
The Exchange proposes to continue to
disseminate the Retail Liquidity
Identifier in its current form should the
Enhanced RPI Order be approved. For
Enhanced RPI orders, the indicator will
be based off of the ranked price only
and the step-up range will not be used.
The purpose of the Identifier is to
provide relevant market information to
RMOs that there is available RPI interest
available on the Exchange, thereby
incentivizing RMOs to send Retail
Orders to the Exchange. The Exchange
proposes to make clear in Rule 11.24(e)
that both RPI Orders and Enhanced RPI
Orders constitute RPI interest and that
the Retail Liquidity Identifier shall be
disseminated when RPI Interest (as
defined in proposed Rule 11.24(e))
priced at least $0.001 better than the
Protected NBB or Protected NBO for a
particular security is available in the
System. A separate liquidity identifier
that identifies Enhanced RPI Order
interest will not be disseminated.
Because the proposed Enhanced RPI
Order is an extension of the existing RPI
Order, it will automatically offer at least
$0.001 of price improvement over the
Protected NBB or Protected NBO. As
such, displaying the Retail Liquidity
Identifier will provide an indication to
RMOs that at least $0.001 of price
improvement is available in the System,
with the opportunity of potentially
receiving additional price improvement
should the RPI interest be in the form
of an Enhanced RPI Order.
37 The Exchange notes that the Retail Liquidity
Identifier for Tape A and Tape B securities are
disseminated pursuant to the CTA/CQ Plan. The
identifier is also available through the consolidated
public market data stream for Tape C securities. The
processor for the Nasdaq UTP disseminates the
Retail Liquidity Identifier and analogous identifiers
from other market centers that operate programs
similar to the RPI Program.
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As discussed below, the Exchange
proposes to expand the Program to
include securities priced below $1.00.
Given that the minimum price variation
(‘‘MPV’’) of a sub-dollar security is
$0.0001,38 the Identifier for sub-dollar
securities will be displayed when there
is at least $0.0001 of price improvement
over the Protected NBB or Protected
NBO. The Exchange will not make any
other changes to the Identifier for subdollar securities other than the
minimum amount of price improvement
required to display the Identifier.
Securities Priced Below $1.00
Rule 11.24(h) currently limits the
Program to trades occurring at prices
equal to or greater than $1.00 per share
and the Exchange periodically notifies
Members 39 regarding securities
included in the Program through an
information circular.40 Now, the
Exchange proposes to expand the
Program to all securities, including
those priced below $1.00. The rationale
behind expanding the Program to all
securities regardless of execution price
stems from the growth of sub-dollar
trading (i.e., trading at prices below
$1.00), both on- and off-exchange. As of
March 2023, an analysis of SIP 41 data
by the Exchange found that sub-dollar
average daily volume has increased
313% as compared to first quarter
2019.42 In this period, sub-dollar onexchange average daily volume grew
from 442 million shares per day to 1.8
billion shares per day.43 An analysis of
SIP and FINRA Trade Reporting Facility
(‘‘TRF’’),44 data indicates that exchanges
represented approximately 39.8%
market share in sub-dollar securities,
with a total of 1,638 securities trading
below $1.00.45 As an exchange group,
38 See 17 CFR 242.612 (‘‘Minimum pricing
increment’’).
39 See Rule 1.5(n). The term ‘‘Member’’ shall
mean ay registered broker or dealer that has been
admitted to membership in the Exchange. A
Member will have the status of a ‘‘member’’ of the
Exchange as that term is defined in Section 3(a)(3)
of the Act. Membership may be granted to a sole
proprietor, partnership, corporation, limited
liability company or other organization which is a
registered broker or dealer pursuant to Section 15
of the Act, and which has been approved by the
Exchange.
40 Supra note 6.
41 The ‘‘SIP’’ refers to the centralized securities
information processors.
42 See ‘‘How Subdollar Securities are Trading
Now’’ (March 16, 2023). Available at https://
www.cboe.com/insights/posts/how-subdollarsecurities-are-trading-now/.
43 Id.
44 Trade Reporting Facilities are facilities through
which FINRA members report off-exchange
transactions in NMS stocks, as defined in SEC Rule
600(b)(47) of Regulation NMS. See Tick Size
Proposal at 80315.
45 Supra note 42.
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Cboe had approximately 13.3% of
market share of sub-dollar securities in
the first quarter of 2023.46
As trading in sub-dollar securities has
grown steadily since 2020, the Exchange
believes it is appropriate to expand the
Program to include securities priced
below $1.00. The Exchange notes,
however, that the MPV for sub-dollar
securities differs from the MPV for
securities priced at or above $1.00. As
provided for by Regulation NMS Rule
612, for securities priced below $1.00,
the MPV is $0.0001, whereas for
securities priced at or above $1.00 the
MPV is $0.01.47 The Exchange proposes
that in order for an Enhanced RPI Order
to gain queue priority ahead of resting
orders on the same side of the BYX
Book, the Enhanced RPI Order will be
stepped-up to the nearest MPV
($0.0001). This differs from the
treatment of Enhanced RPI Orders for
securities priced at or above $1.00,
which are proposed to be stepped-up to
the nearest half-cent midpoint or whole
cent tick ahead of resting orders on the
same side of the BYX Book. The
Exchange believes that the different
treatment of Enhanced RPI Orders for
securities priced below $1.00 is
appropriate given that the MPV for
securities priced below $1.00 is
significantly less than the MPV for
securities priced at or above $1.00. The
Exchange notes that it will announce to
its Members via a Trade Desk Notice
that the Program is expanding to all
securities priced below $1.00 and will
no longer provide periodic updates of
securities included in the Program.
Implementation
The Exchange plans to implement the
proposed rule change during the second
half of 2024 and will announce the
implementation date via Trade Desk
Notice.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.48 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 49 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
46 Id.
47 Supra
note 38.
U.S.C. 78f(b).
49 15 U.S.C. 78f(b)(5).
48 15
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and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, 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.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 50 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Commission has repeatedly
emphasized that the U.S. capital
markets should be structured with the
interests of retail investors in mind 51
and has recently proposed a series of
rules designed, in part, to attempt to
bring order flow back to the exchanges
from off-exchange trading venues.52 The
Exchange believes its proposed
enhancements to the Program are
consistent with the Commission’s goal
of ensuring that the equities markets
continue to serve the needs of the
investing public. Specifically,
introducing the Enhanced RPI Order
type would protect investors and the
public interest by providing retail
investors the ability to obtain
meaningful price improvement on BYX,
a national securities exchange. The
Exchange is committed to innovation
that improves the quality of the equities
markets and believes that the proposed
Enhanced RPI Order may increase the
attractiveness of the Exchange for the
execution of Retail Orders submitted on
behalf of the millions of ordinary
investors that rely on these markets for
their investment needs.
The Exchange believes the proposed
Enhanced RPI Order promotes just and
equitable principles of trade and is not
unfairly discriminatory because the
order type will be available for all Users,
and is not limited to a certain subset of
market participants. Even though
Enhanced RPI Orders may be entered by
any market participant, the Exchange
believes that the majority of Enhanced
RPI Orders will be entered by or on
behalf of institutional investors that are
willing to provide additional price
improvement as a way to minimize their
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50 Id.
51 See U.S. Securities and Exchange Commission,
Strategic Plan, Fiscal Years 2018–2022, available at
https://www.sec.gov/files/SEC_Strategic_Plan_
FY18-FY22_FINAL_0.pdf.
52 Supra notes 17–18. See also, Securities
Exchange Act Release No. 96496 (December 14,
2022), 88 FR 5440 (January 27, 2023) (‘‘Regulation
Best Execution’’); Securities Exchange Act Release
No. 96493 (December 14, 2022), 88 FR 3786
(January 20, 2023) (‘‘Disclosure of Order Execution
Information’’).
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adverse selection costs.53 The Exchange
does not believe that such segmentation
is inconsistent with section 6(b)(5) of
the Act, as it does not permit unfair
discrimination. The Commission has
previously stated that the markets
generally distinguish between retail
investors, whose orders are considered
desirable by liquidity providers because
such retail investors are presumed to be
less informed about short-term price
movements, and professional traders,
whose orders are presumed to be more
informed.54 The Commission has
further stated that without opportunities
for price improvement, retail investors
may encounter wider spreads that are a
consequence of liquidity providers
interacting with more informed order
flow.55 The Exchange believes that its
proposed Enhanced RPI Order is
reasonably designed to attract
marketable retail order flow to the
exchange as it will help to ensure that
retail investors benefit from the better
price that liquidity providers are willing
to provide to retail orders in exchange
for minimizing their adverse selection
costs.
Additionally, the Exchange believes
that the proposed Enhanced RPI Order
type is not unfairly discriminatory to
institutional investors as it rewards the
User that enters the most aggressively
priced Enhanced RPI Order with order
book priority. Ultimately, execution
priority amongst orders resting on the
BYX Book will be determined by the
step-up range entered on each Enhanced
RPI Order. If the step-up range for an
Enhanced RPI Order provides a
marketable, contra-side Retail Order
with greater price improvement than
would otherwise be available from other
resting orders by stepping up to the next
half cent or full cent (for securities
priced at or above $1.00) or the valid
tick increment (for securities priced
below $1.00), then the Enhanced RPI
Order will be granted order book
priority. In the event that multiple
Enhanced RPI Orders are resting on the
BYX Book, the Enhanced RPI Order
with the highest step-up range will be
given order book priority. The Exchange
believes rewarding the most
53 Adverse selection is the phenomenon where
the price of a stock drops right after a liquidity
provider purchases the stock. Marketable retail
order flow is generally seen as more desirable by
institutional liquidity providers as executions
against retail orders are less prone to adverse
selection. The Commission has previously opined
that retail liquidity programs may be beneficial to
institutional investors as they may be able to reduce
their possible adverse selection costs by interacting
with retail order flow. See Pilot Approval Order at
71656.
54 Id.
55 Id.
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aggressively priced step-up range will
encourage Users to submit Enhanced
RPI Orders with step-up ranges that are
likely to provide meaningful price
improvement to Retail Orders, which
ultimately benefits both retail investors,
who will receive price improvement
over the NBBO, and the User entering
the Enhanced RPI Order, who is able to
execute against a marketable Retail
Order to minimize its adverse selection
costs and interact with retail order flow
that they are currently unable to access
on the Exchange given that such order
flow is largely executed off-exchange.
As noted in the Exchange’s initial RPI
filings,56 most equities exchanges,
including BYX, determine priority
based on a price/time/display allocation
model.57 This has contributed to deep
and liquid markets for equity securities
as liquidity providers compete to be the
first to establish a particular price.
While the price/time/display allocation
model generally works well for
institutional investors, retail investors
are traditionally not able to compete
with market makers and other
automated liquidity providers to set an
aggressive price on orders submitted to
the Exchange. Importantly, retail
investors, in contrast to institutional
investors, tend to have longer
investment time horizons, which means
they are not in the business of
optimizing queue placement under a
time-based allocation model. Therefore,
in order to facilitate the needs of retail
investors, the Exchange believes an
alternative approach—such as this
Enhanced RPI Order proposal—would
benefit the retail investor community.
As discussed earlier, the proposed
introduction of the Enhanced RPI Order
is designed to provide retail investors
with enhanced opportunities to obtain
meaningful price improvement by
providing them with potential
opportunities to execute versus nondisplayed Enhanced RPI Orders that
offer price improvement beyond that
offered by resting orders on the
Exchange. Marketable retail order flow
is routinely executed in full on entry at
the national best bid or offer or better,58
but many retail liquidity programs,
56 Supra
notes 7–8.
PSX, however, offers a price setter pro
rata model that rewards liquidity providers that set
the best price and then rewards other market
participants that enter larger sized orders. See
Securities Exchange Act Release No. 72250 (May
23, 2014), 79 FR 31147 (May 30, 2014) (SR–Phlx–
2014–24).
58 A review of internal Exchange data found that
60% of retail orders across the Exchange and its
affiliates executed at the NBBO year-to-date in
2023. Similarly, 59% of retail orders across the
Exchange and its affiliates executed at the NBBO in
calendar year 2022.
57 Nasdaq
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including the Exchange’s current
Program, are designed to offer at least
$0.001 of price improvement over the
Protected NBB or Protected NBO to
Retail Orders.59 By introducing
Enhanced RPI Orders, the Exchange is
proposing to prioritize Enhanced RPI
Orders ahead of other resting orders on
the same side of the BYX Book in
exchange for the Enhanced RPI Order
offering meaningful price improvement
to Retail Orders by stepping up to the
next half cent or whole cent (for
securities priced at or above $1.00) or
the next valid tick increment (for
securities priced below $1.00). The
Exchange believes the ability to post an
order at a price outside of the range at
which it is willing to execute with the
ability to gain priority in exchange for
executing at a more aggressive price will
(1) encourage Users to submit
aggressively priced Enhanced RPI
Orders, and (2) attract Retail Order flow
to the Exchange, both of which will
benefit all investors. Increased order
flow will create a deeper pool of
liquidity on the Exchange, which
provides for greater execution
opportunities for all Users and provides
for overall enhanced price discovery
and price improvement opportunities
on the Exchange. If successful, the
proposed rule change would benefit
market participants by increasing the
diversity of order flow with which they
can interact on a national securities
exchange, thereby increasing order
interaction and contributing to price
formation.
Giving queue priority to certain order
types is not a novel concept in the
securities markets. In fact, on the
Exchange’s affiliate, Cboe EDGX
Exchange, Inc. (‘‘EDGX’’), the displayed
portion of Retail Orders are given
allocation priority ahead of all other
available interest on the EDGX Book
(‘‘EDGX Retail Priority’’).60 The
Commission found that EDGX Retail
Priority represented a reasonable effort
to enhance the ability of bona fide retail
trading interest to compete for
executions with orders entered by other
market participants that may be better
equipped to optimize their place in the
intermarket queue.61 The Exchange
believes that grating queue priority to an
Enhanced RPI Order as discussed in the
Purpose section similarly reflects a
reasonable effort by the Exchange to
create additional price improvement
59 See, e.g., IEX Rule 11.232; Nasdaq BX Rule
4780; NYSE Arca Rule 7.44–E; NYSE Rule 7.44.
60 See EDGX Rule 11.9(a)(2)(A).
61 See Securities Exchange Act Release No. 87200
(October 2, 2019), 84 FR 53788 (October 8, 2019),
SR–CboeEDGX–2019–012 (‘‘EDGX Retail Priority
Approval Order’’).
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opportunities for retail investors, as has
been the standard identified by the
Commission in several approval orders
written in regards to RLPs.62 While the
Exchange is not proposing to prioritize
Retail Orders as EDGX has done, it is
proposing to prioritize Enhanced RPI
Orders that provide price improvement
and may only interact with contra-side
Retail Orders.
The Exchange believes that the
prioritization of Enhanced RPI Orders
that offer meaningful price
improvement over other resting orders
on the same side of the BYX Book
promotes just and equitable principles
of trade and is consistent with Section
6(b)(5) of the Act as it encourages Users
to submit aggressively priced Enhanced
RPI Orders in exchange for queue
priority ahead of all resting orders on
the same side of the BYX Book so long
as meaningful price improvement is
provided to a contra-side Retail Order.
The Exchange proposes to provide
queue priority for Enhanced RPI Orders
over all other types of orders and is not
limiting queue priority to a certain
subset of order types. As previously
stated, all Users are eligible to submit
Enhanced RPI Orders. And while the
Exchange believes that most Enhanced
RPI Orders will be submitted by or on
behalf of professional traders, retail
investors will have the opportunity to
receive better-priced executions should
they choose to submit a marketable
Retail Order to the Exchange. The
Exchange believes the introduction of
Enhanced RPI Orders will deepen the
Exchange’s pool of available liquidity,
increase marketable retail order flow to
the Exchange and provide additional
competition for marketable retail order
flow, most of which is currently
executed off-exchange in the OTC
markets. Promoting competition for
retail order flow among execution
venues stands to benefit retail investors,
who may be eligible to receive greater
price improvement on the Exchange by
interacting with an Enhanced RPI Order
than they would if their order was
internalized by a broker-dealer on the
OTC market.
Furthermore, the Exchange believes
that its proposal to limit the use of the
step-up range to determine order book
priority is consistent with Section
6(b)(5) of the Act because the use of the
step-up range rather than limit price to
determine order priority is limited to
the following: (1) the range is needed to
gain priority over a resting order with
62 Supra note 8. See also Securities Exchange Act
Release No. 67347 (July 3, 2012), 77 FR 40673 (July
10, 2012) (SR–NYSE–2011–55; SR–NYSEAmex–
2011–84) (‘‘RLP Approval Order’’) at 40679.
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3001
higher order book priority; (2) in
situations where (i) a contra-side Retail
Order is entered at a less aggressive
price than the Enhanced RPI Order’s
limit price and all other resting liquidity
in the same security and (ii) the
Enhanced RPI Order’s step-up range is
equal to or more aggressively priced
than the Retail Order’s limit price; and
(3) to determine order book priority
when multiple Enhanced RPI Orders are
resting on the BYX Book and are eligible
to trade ahead of higher priority orders.
The primary use case of the Enhanced
RPI Order identified in the first scenario
listed above is to provide price
improvement to marketable retail order
flow. As previously discussed in the
Statutory Basis section, the Exchange
believes allowing the use of a step-up
range in order to provide an additional,
more aggressive price at which an
Enhanced RPI Order may execute is
essential in order to deepen the pool of
liquidity available to retail investors. In
exchange for providing aggressively
priced orders, these liquidity providers
will be rewarded with executions
against marketable retail order flow,
which is generally preferred over more
informed order flow. Retail investors, on
the other hand, will receive meaningful
price improvement should their order
execute against an Enhanced RPI Order.
In the situation where (i) a contra-side
Retail Order is entered at a less
aggressive price than the Enhanced RPI
Order’s limit price and all other resting
liquidity in the same security and (ii)
the Enhanced RPI Order’s step-up range
is equal to or more aggressively priced
than the limit price of the Retail Order,
the Exchange believes using the step-up
range to determine order priority
promotes just and equitable principles
of trade because it rewards the
Enhanced RPI Order with the most
aggressive step-up range rather than
forego an execution due to the limit
price of all orders resting on the BYX
Book being ineligible to trade with the
contra-side Retail Order. The intent of
the Enhanced RPI Order is to reward
aggressively priced liquidity with queue
priority while simultaneously providing
price improvement to Retail Orders. The
Exchange believes that determining
order priority using the step-up range in
this limited situation is aligned with the
intent of liquidity providers that choose
to submit Enhanced RPI Orders and
emphasizes a benefit of using the
Enhanced RPI Order—the ability to
enter an order at a less aggressive price
yet also provide a step-up range that the
liquidity provider is willing to execute
in order to execute against marketable
retail order flow rather than forego an
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execution and remain on the BYX Book.
The Exchange seeks to encourage
liquidity providers to submit order flow
designed to interact with marketable
retail order flow in an effort to increase
the amount of Retail Order executions
occurring on-exchange. By rewarding
aggressively priced Enhanced RPI
Orders in situations where the order
would otherwise not execute, the
Exchange believes its pool of liquidity
available to marketable retail order flow
will deepen, thus incentivizing RMOs to
submit additional marketable retail
order flow to the Exchange.
Likewise, using the step-up range
rather than the limit price of an
Enhanced RPI Order in situations where
multiple Enhanced RPI Orders are
resting on the BYX Book and are eligible
to trade ahead of higher priority orders
promotes the use of the Enhanced RPI
Order type as the Exchange seeks to
encourage RMOs to submit marketable
Retail Orders to the Exchange.
Determining order priority of Enhanced
Orders based on their step-up range over
the limit price of all other higher
priority orders rewards the Enhanced
RPI Order that provides the most
aggressive execution price. The
Exchange believes that using the step-up
range rather than the limit price in
situations where there are multiple
Enhanced RPI Orders will encourage
Users to submit aggressively priced
Enhanced RPI Orders to the Exchange,
as they will be given priority to interact
with more desirable marketable retail
order flow based on their step-up range.
Additionally, the Exchange believes that
RMOs will be encouraged to direct
marketable retail order flow to the
Exchange knowing that the worst price
they will receive is $0.001 better than
the Protected NBB or Protected NBO for
securities priced at or above $1.00 63 and
there is potential to receive more
meaningful price improvement should
an Enhanced RPI Order be present on
the opposite side of the BYX Book.64
An analysis of internal Exchange data
found that the current Program provided
approximately $33 million in price
improvement to retail investors during
63 For securities priced below $1.00, the
minimum amount of price improvement as
compared to the Protected NBB or Protected NBO
is $0.0001.
64 Retail Orders may only receive $0.001 price
improvement in certain situations, including where
an Enhanced RPI Order steps up against the limit
price of an RPI Order priced in sub-pennies. An
Enhanced RPI Order would be given order book
priority over RPI Orders in the event that the
Enhanced RPI Order was priced equal to or less
aggressive than the limit price of a resting RPI Order
but had a step-up range that was priced more
aggressive than the limit price of the resting RPI
Order (supra note 20).
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calendar year 2022, which is a
substantial increase from the 4.5 million
provided to retail investors between
January 2016 and June 2018.65 It is
reasonable to believe that the proposed
Enhanced RPI Order, by virtue of
providing at least $0.005 of price
improvement in exchange for execution
priority, would only add to the
Exchange’s ability to provide price
improvement to retail investors. The
Exchange does not believe that offering
additional price improvement to retail
investors through Enhanced RPI Orders
would cause harm to the broader
market. On the contrary, the Exchange
believes that rewarding Enhanced RPI
Orders with order book priority in
exchange for price improvement would
further the Commission’s goal of
providing additional opportunities for
retail investors to interact directly with
a large volume of individual investor
orders. The Exchange created the
Enhanced RPI Order with the goal of
encouraging liquidity providers to
submit orders eligible to interact with
marketable retail order flow with the
competition from these liquidity
providers resulting in a reasonable
alternative for marketable retail order
flow to receive executions at a price
better than the Protected NBBO. As the
Commission noted in its Order
Competition Rule proposal, over 90% of
marketable NMS retail stock orders are
routed to wholesalers where the orders
are not exposed to order-by-order
competition.66 While wholesalers
generally achieve price improvement
relative to the NBBO, the Commission
has indicated that exchanges often have
liquidity available at the NBBO
midpoint, which would be a more
favorable price than a retail order
receives when executed by a
wholesaler.67 Here, the Exchange is
proposing price improvement of at least
$0.005, and in some cases $0.01, which
the Exchange believes would further the
Commission’s goal of ‘‘increasing
competition and enhancing the direct
exposure of individual investor orders
to a broader spectrum of market
participants’’ as set forth in section 11A
of the Exchange Act.68
In addition to the proposed
introduction of the Enhanced RPI Order,
the Exchange also believes that
expanding the Program to include
securities priced below $1.00 is
consistent with Section 6(b)(5) of the
Act because it promotes just and
equitable principles of trade by allowing
65 See
RPI Approval Order at 53184.
note 17 at 178.
liquidity providers to submit orders
designed to interact with retail order
flow in all securities, rather than only in
securities priced at or above $1.00. As
stated above, a significant majority of
the increased volume in sub-dollar
securities comes from executions
occurring off-exchange.69 By permitting
the Exchange to expand its Program to
include securities priced below $1.00,
the Exchange would be a more attractive
venue for liquidity providers seeking to
interact with retail order flow, which
furthers the Commission’s goal of
bringing retail order executions back onexchange. Further, the proposal to
expand the Program to include
securities priced below $1.00 is not
unfairly discriminatory because all
Users will be able to submit RPI Orders
or Enhanced RPI Orders at prices below
$1.00. As noted above, the Exchange,
along with its affiliates, maintained a
market share of 13.3% in sub-dollar
securities during the first quarter of
2023.70 The Exchange believes that its
expansion of the Program to include
sub-dollar securities would lead to more
liquidity providers submitting order
flow to the Exchange in an attempt to
execute against Retail Orders. In turn,
RMOs would submit additional Retail
Order flow to the Exchange to interact
with RPI Orders and Enhanced RPI
Orders as there would be additional
opportunities for price improvement in
sub-dollar securities. The proposal
removes impediments to and perfect the
mechanism of a free and open market
and a national market system and
protects investors and the public
interest by allowing executions in Retail
Orders priced below $1.00 to receive
price improvement by executing against
RPI Orders or Enhanced RPI Orders,
which are currently only available at
prices at or above $1.00. In addition to
the changes described above, the
Exchange believes that the changes to
certain existing rule text within Rule
11.24 is consistent with Section 6(b)(5)
of the Act because it provides additional
certainty as to how Rule 11.24 is to be
applied. The proposed revised
definition of RPI Interest in Rule
11.24(a)(5) is necessary in order to
capture the proposed Enhanced RPI
Order type, in addition to the existing
RPI Order. Additionally, amending Rule
11.24(e) and Rule 11.24(f)(1)–(2) to
reflect the changes made in Rule
11.24(a)(5) is necessary in order to
ensure that RPI Interest is properly
defined throughout Rule 11.24. The
deletion of Rule 11.24(h) and
renumbering of Rule 11.24(i) are
66 Supra
67 Id.
69 Supra
68 Id.
70 Id.
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consistent with the Exchange’s proposal
to expand the Program to securities
priced below $1.00. The proposed
changes to Rule 11.24(a)(2) are intended
to: (i) clarify that a Retail Order must be
submitted with a time-in-force of IOC;
and (ii) introduce the ability for Users
to submit Retail Orders as Mid-Point
Peg Orders, both of which changes serve
to provide additional guidance to Users
of Retail Orders about the order
modifiers permitted by the Exchange.
The Exchange believes these changes
are ministerial in nature and serve to
ensure that Rule 11.24 is properly
describing order behavior after the
proposed introduction of the Enhanced
RPI Order and proposed expansion of
the Program to securities priced below
$1.00.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposal
does not impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Rather, the
proposed rule change is designed to
increase intramarket competition for
retail order flow by introducing a new
order type that is designed to provide
price improvement to Retail Orders in
exchange for price priority over resting
orders on the same side of the BYX
Book. The proposal, which seeks to
provide an innovative form of price
improvement to Retail Orders through
the creation of the Enhanced RPI Order,
represents an effort by the Exchange to
encourage on-exchange liquidity an
incentivize the trading of Retail Orders
on a national securities exchange.
The Exchange also believes the
proposed rule change does not impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the Act. As discussed
above, IEX, NYSE, NYSE Arca, and
Nasdaq BX each operate RLPs and the
Exchange believes that its proposed rule
change will allow it to compete for
additional retail order flow with the
aforementioned exchanges.71
Furthermore, the Exchange’s proposal
will promote competition between the
Exchange and off-exchange trading
venues where the majority of retail
order flow trades today. The proposed
Enhanced RPI Order is designed to
foster innovation within the market and
increase the quality of the national
71 Supra
note 59.
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market system by allowing national
securities exchanges to compete both
with each other and with off-exchange
venues for order flow. Expanding the
program to include securities priced
below $1.00 similarly would not impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the Act. The Exchange’s
proposal is designed to increase
competition for trading in all securities,
including but not limited to securities
priced below $1.00. Given the growth of
trading in sub-dollar securities since
2020, the Exchange believes that
expanding the Program to include subdollar securities will make the Program
an attractive option for retail investors
seeking to trade in lower-priced
securities, and as such is a competitive
measure designed to compete directly
with other exchanges for order flow.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
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–
CboeBYX–2023–020 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Frm 00086
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Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CboeBYX–2023–020. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection.
All submissions should refer to file
number SR–CboeBYX–2023–020 and
should be submitted on or before
February 7, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.72
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–00712 Filed 1–16–24; 8:45 am]
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:
PO 00000
3003
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–667, OMB Control No.
3235–0745]
Proposed Collection; Comment
Request; Extension: Rule 18a–5
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
72 17
E:\FR\FM\17JAN1.SGM
CFR 200.30–3(a)(12).
17JAN1
]]>Agencies
[Federal Register Volume 89, Number 11 (Wednesday, January 17, 2024)]
[Notices]
[Pages 2993-3003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00712]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99311; File No. SR-CboeBYX-2023-020]
Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Modify Rule 11.24 To Introduce an
Enhanced RPI Order and Expand Its Retail Price Improvement Program To
Include Securities Priced Below $1.00
January 10, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 27, 2023, Cboe BYX Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to modify Rule 11.24 to introduce an Enhanced
RPI Order and expand its Retail Price Improvement program to include
securities priced below $1.00. The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change is available on the Exchange's
website (https://markets.cboe.com/us/equities/regulation/rule_filings/byx/), at the Exchange's Office of the Secretary, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 11.24 to enhance the Exchange's
Retail Price Improvement Program (the ``Program'') for the benefit of
retail investors. Specifically, the Exchange proposes to introduce a
new Retail Price Improvement Order type (``RPI Order'') \3\ to be known
as an ``Enhanced RPI Order.'' The proposed Enhanced RPI Order will
allow retail liquidity providers to post orders at their limit price
but have the opportunity to provide a greater amount of price
improvement as compared to other resting orders on the same side of the
BYX Book with higher priority in order to execute with an incoming
Retail Order \4\ by exercising at a price within their established
step-up range. The proposed change is designed to provide retail
investors with additional opportunities for meaningful price
[[Page 2994]]
improvement by introducing a new order type that will ``step-up'' its
price against orders with a higher priority resting on the BYX Book.\5\
Additionally, the Exchange proposes to expand the Program to securities
priced below $1.00.\6\
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\3\ See Rule 11.24(a)(3) (``Retail Price Improvement Order'').
\4\ See Rule 11.24(a)(2) (``Retail Order'').
\5\ See Rule 1.5(e) (``BYX Book''). The ``BYX Book'' is the
System's electronic file of orders. The ``System'' shall mean the
electronic communications and trading facility designated by the
Board through which securities orders of Users are consolidated for
ranking, execution, and when applicable, routing away. See Rule
1.5(aa) (``System'').
\6\ See Rule 11.24(h). The Program is currently limited to
trades occurring at prices equal to or greater than $1.00 per share.
---------------------------------------------------------------------------
Background
In November 2012, the Exchange received approval to operate its
Program on a pilot basis.\7\ The Program operated under a pilot basis
until September 30, 2019, when the Program was approved on a permanent
basis.\8\ In addition, the Exchange was granted a limited exemption
from the Sub-Penny Rule, as well as Regulation NMS Rule 602 (Quote
Rule) No Action relief \9\ to operate the Program.\10\ The Program is
currently designed to attract Retail Orders to the Exchange and allow
such order flow to receive potential price improvement. The Program is
currently limited to trades occurring at prices equal to or greater
than $1.00 per share.\11\ Under the Program, a class of market
participant called a Retail Member Organization (``RMO'') \12\ is
eligible to submit certain retail order flow (``Retail Orders'') to the
Exchange. Users \13\ are permitted to provide potential price
improvement for Retail Orders \14\ in the form of non-displayed
interest that is better than the national best bid that is a Protected
Quotation (``Protected NBB'') or the national best offer that is a
Protected Quotation (``Protected NBO'', and together with the Protected
NBB, the ``Protected NBBO'').\15\
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\7\ See Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012), SR-BYX-2012-019 (``Pilot
Approval Order'').
\8\ See Securities Exchange Act Release No. 87154 (September 30,
2019), 84 FR 53183 (October 4, 2019), SR-CboeBYX-2019-014 (``RPI
Approval Order'').
\9\ See Letter from David Shillman to Eric Swanson (November 27,
2012) (``No Action Letter''), available at https://www.sec.gov/divisions/marketreg/mr-noaction/byx-112712-602.pdf.
\10\ Supra note 8 at 53185.
\11\ Supra note 6. The Exchange will periodically notify the
membership regarding the securities included in the Program through
an information circular. The Exchange is proposing to make the
Program available to all securities (discussed infra).
\12\ See Rule 11.24(a)(1). A ``Retail Member Organization'' or
``RMO'' is a Member (or a division thereof) that has been approved
by the Exchange under Rule 11.24 to submit Retail Orders.
\13\ See Rule 1.5(cc). A ``User'' is defined as any member or
sponsored participant of the Exchange who is authorized to obtain
access to the System.
\14\ Supra note 4. A ``Retail Order'' is defined as an agency or
riskless principal order that originates from a natural person and
is submitted to the Exchange by an RMO, provided that no change is
made to the terms of the order with respect to price or side of
market and the order does not originate from a trading algorithm or
any computerized methodology.
\15\ See Rule 1.5(t). The term ``Protected Quotation'' has the
same meaning as is set forth in Regulation NMS Rule 600(b)(71). The
terms Protected NBB and Protected NBO are defined in BYX Rule
1.5(s). The Protected NBB is the best-priced protected bid and the
Protected NBO is the best-priced protected offer. Generally, the
Protected NBB and Protected NBO and the national best bid (``NBB'')
and national best offer (``NBO'', together with the NBB, the
``NBBO'') will be the same. However, a market center is not required
to route to the NBB or NBO if that market center is subject to an
exception under Regulation NMS Rule 611(b)(1) or if such NBB or NBO
is otherwise not available for an automatic execution. In such case,
the Protected NBB or Protected NBO would be the best-priced
protected bid or offer to which a market center must route interest
pursuant to Regulation NMS Rule 611.
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The Exchange developed this Program with the goal of incentivizing
RMOs to execute their Retail Orders on the Exchange, rather than off-
exchange venues, by providing Retail Orders with greater access to
potential opportunities for price improvement on the Exchange. However,
as noted by the Commission, even with the presence of retail liquidity
programs (``RLPs'') offered by Cboe and other national securities
exchanges,\16\ the great majority of marketable orders of retail
investors continue to be sent to wholesalers.\17\ Indeed, as noted in
the Commission's recent rule proposal related to minimum pricing
increments, RLPs have not yet attracted a significant volume of retail
order flow.\18\ In fact, since RLPs have been adopted, the percentage
of on-exchange share volume has continued to decrease from
approximately 71% to approximately 56% as of November 2023.\19\
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\16\ See, e.g., NYSE and NYSE Arca Retail Liquidity programs,
which promote cost savings through price improvement for individual
investors provided by retail liquidity providers that submit non-
displayed interest priced better than the best protected best bid or
protected best offer. Available at https://www.nyse.com/markets/liquidity-programs. See also IEX Retail Program, which incentivizes
midpoint liquidity for retail orders through the use of retail
liquidity provider orders. Available at https://www.iexexchange.io/products/retail-program. See also Nasdaq BX Retail Price
Improvement, which allows retail orders to interact with price-
improving liquidity. Available at https://www.nasdaqtrader.com/content/BXRPIfs.pdf.
\17\ See Securities Exchange Act Release No. 96495 (December 14,
2022), 88 FR 128 (January 3, 2023) (``Order Competition Rule'') at
144.
\18\ See Securities Exchange Act Release No. 96494 (December 14,
2022), 87 FR 80266 (December 29, 2022) (``Tick Size Proposal'') at
80273.
\19\ Source: Cboe internal data.
---------------------------------------------------------------------------
Accordingly, the Exchange now seeks to enhance its current Program
by offering retail liquidity providers an optional Enhanced RPI Order
type. The Exchange believes the Enhanced Order type will incentivize
additional retail liquidity provision by enabling RPI liquidity
providers to submit an order that is ranked at a less aggressive price
than the step-up range at which the provider is willing to execute, but
have the opportunity to ``step up'' to provide a greater amount of
price improvement as compared to other higher priority resting orders
on the same side of the BYX Book in order to execute with an incoming
contra-side Retail Order. As discussed in more detail, below, the
Enhanced RPI Order type will have price priority over resting orders
when its step-up range allows for additional price improvement when a
contra-side Retail Order is submitted to the Exchange. With the deeper
pool of retail liquidity-providing orders, the Exchange believes that
RMOs will see increased opportunities for on-exchange price improvement
and seek to execute more of their Retail Orders on the Exchange.
Proposal
The Exchange proposes to amend Rule 11.24(a) to include the
proposed Enhanced RPI Order, which allows a retail liquidity provider
to post a limit order to the Exchange, but also the opportunity to
``step-up'' its price within their defined step-up range by providing a
greater amount of price improvement as compared to orders with higher
priority that are resting on the same side of the BYX Book in order to
execute against an incoming Retail Order seeking to remove liquidity.
An Enhanced RPI Order is designed to be entered with a limit price, but
must also include a step-up range, which is the most aggressive price
it is willing to execute against a contra-side Retail Order. If the
Enhanced RPI Order includes a step-up range that improves against the
price of the highest-ranked resting order on the same side of the BYX
Book, the Enhanced RPI Order will be given price priority over the
highest-ranked resting order. In order for an Enhanced RPI Order to
receive price priority, the Enhanced RPI Order must be able to provide
a greater amount of price improvement to an incoming contra-side Retail
Order than would otherwise be available by stepping up to the next
valid tick increment.\20\
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\20\ The Exchange notes that the minimum amount of required
price improvement will vary between $0.001 and $0.01, based on the
order types resting on the BYX Book (discussed infra).
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[[Page 2995]]
The Exchange believes this proposed change would further the
purpose of the Program to attract retail marketable order flow to the
Exchange, while also increasing opportunities for price improvement. By
offering the Enhanced RPI Order, the Exchange has created an
enhancement to its current Program that offers a greater incentive for
liquidity providers to provide liquidity eligible to execute against
marketable retail order flow on the Exchange. The Enhanced RPI Order
would allow Users to post orders at their limit price but step-up to a
more aggressive price in order to execute against marketable retail
order flow that is less prone to adverse selection. Marketable retail
order flow, in turn, would receive price improvement greater than what
is currently available under the Program. The Exchange believes that
the proposed change will lead to increased participation in the Program
by Users seeking to provide liquidity for marketable retail order flow,
which in turn will attract additional marketable retail order flow to
the Exchange in search of price improvement opportunities.
The Exchange also proposes to introduce Rule 11.24(a)(5) in order
to define the term RPI Interest as either RPI Orders or Enhanced RPI
Orders. Additionally, the Exchange proposes to amend Rule 11.24(g) in
order to describe order priority for Enhanced RPI Orders. The Exchange
also proposes to make corresponding changes within Rule 11.24 to
replace certain references to RPI Order with the term RPI Interest in
order to have language inclusive of both RPI Orders and Enhanced RPI
Orders. Further, the Exchange proposes to delete Rule 11.24(h), as the
Exchange proposes to expand the Program to sub-dollar securities. The
Exchange will announce that the RPI Program has expanded to all
securities in a Trade Desk notice, and periodic updates will no longer
be required. The Exchange also proposes to renumber Rule 11.24(i) in
conjunction with the deletion of Rule 11.24(h).
Additionally, with the introduction of the Enhanced RPI Order, the
Exchange proposes to amend Rule 11.24(a)(2) to permit a Retail Order to
be entered as a Mid-Point Peg Order.\21\ The Exchange also proposes to
amend Rule 11.24(a)(2) to better describe that the time-in-force
requirement for all Retail Orders, including those entered as a Mid-
Point Peg Order, is required to be Immediate or Cancel (``IOC''). The
Exchange believes that allowing the Mid-Point Peg Order instruction on
a Retail Order will benefit Users who choose to submit Retail Orders
because it will permit a Retail Order to guarantee price improvement at
the midpoint or better. The Mid-Point Peg Order instruction will be
optional, and not required for Users of Retail Orders.
---------------------------------------------------------------------------
\21\ See Rule 11.9(c)(9). A Mid-Point Peg Order is a limit order
that, after entry into the System, the price of the order is
automatically adjusted by the System in response to changes in the
NBBO to be pegged to the mid-point of the NBBO, or, alternatively,
pegged to the less aggressive of the midpoint of the NBBO or one
minimum price variation inside the same side of the NBBO as the
order.
---------------------------------------------------------------------------
Current RPI Orders
Rule 11.24(a)(3) currently defines an RPI Order as ``non-displayed
interest on the Exchange that is priced better than the Protected NBB
or Protected NBO by at least $0.001 and that is identified as such.''
\22\ The Exchange now proposes to amend the definition of RPI Order to
more accurately reflect how an RPI Order may be entered by defining an
RPI Order as ``non-displayed interest on the Exchange that is eligible
to execute at prices better than the Protected NBB or Protected NBO by
at least $0.001 in securities priced at or above $1.00 and by at least
$0.0001 in securities priced below $1.00 and that is identified as
such.'' As the Exchange is also proposing to expand the Program to
prices below $1.00, more specificity is required regarding the minimum
pricing increment. Further, the Exchange is clarifying that an RPI
Order may be entered at any price but may execute only at prices better
than the Protected NBB or Protected NBO.
---------------------------------------------------------------------------
\22\ Supra note 3.
---------------------------------------------------------------------------
As stated in Rule 11.24(a)(3), RPI Orders are non-displayed and are
ranked in accordance with Rule 11.12(a). Furthermore, under Rule
11.24(g), competing RPI Orders in the same security are ranked and
allocated according to price then time of entry into the System.
Executions occur in price/time priority in accordance with Rule 11.12.
Any remaining unexecuted RPI interest remains available to interact
with other incoming Retail Orders if such interest is at an eligible
price. Any remaining unexecuted portion of the Retail Order will cancel
or execute in accordance with Rule 11.24(f). The following example
illustrates this method:
Protected NBBO for security ABC is $10.00-$10.05
User 1 enters an RPI Order to buy ABC at $10.015 for 500
shares
User 2 then enters an RPI Order to buy ABC at $10.02 for 500
shares
User 3 then enters an RPI Order to buy ABC at $10.035 for 500
shares
An incoming Retail Order to sell ABC for 1,000 shares executes
first against User 3's bid for 500 shares at $10.035, because it is the
best priced bid, then against User 2's bid for 500 shares at $10.02,
because it is the next best priced bid. User 1 is not filled because
the entire size of the Retail Order to sell 1,000 shares is depleted.
The Retail Order executes against RPI Orders in price/time
priority.\23\
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\23\ See Rule 11.24(f) for additional examples of priority and
order allocation in the current Program.
---------------------------------------------------------------------------
Enhanced RPI Order
The Exchange now proposes to introduce a new type of RPI Order that
Users seeking to provide RPI liquidity may utilize on an optional
basis. The proposed Enhanced RPI Order will be eligible to obtain price
priority over resting orders in the same security on the same side of
the BYX Book in order to execute against a Retail Order by including a
step-up range when entered. Enhanced RPI Orders will be ranked in
accordance with proposed Rule 11.24(g)(2) (discussed infra). In order
to effect the proposed change, the Exchange proposes to introduce Rule
11.24(a)(4), which would define an Enhanced RPI Order as:
An ``Enhanced Retail Price Improvement Order'' or
``Enhanced RPI Order'' consists of non-displayed interest on the
Exchange that is eligible to execute against contra-side Retail Orders.
An Enhanced RPI Order will be ranked at its limit price and must also
include a step-up range, which is the maximum price (for buy orders) or
minimum price (for sell orders) at which the Enhanced RPI Order is
willing to execute. An Enhanced RPI Order may execute at: (i) its limit
price; (ii) for securities priced at or above $1.00, at a price within
the step-up range that is able to improve upon the price of a same-side
resting order on the BYX Book by stepping up to the next half cent or
full cent, and for securities priced below $1.00 by stepping up to the
next valid tick increment; or (iii) at a price within the step-up range
when the limit price of a contra-side Retail Order is within the step-
up range. An Enhanced RPI Order may be a primary pegged order or a
limit order. The System will monitor whether Enhanced RPI interest,
including the step-up range, and adjusted by any offset and subject to
the ceiling or floor price, is eligible to interact with incoming
Retail Orders. An Enhanced RPI Order (the buy or sell interest, the
step-up range, the offset, and the ceiling or floor) remains non-
displayed in its entirety. Any User is permitted, but not required,
[[Page 2996]]
to submit Enhanced RPI Orders. An Enhanced RPI Order may be an odd lot,
round lot or mixed lot. An Enhanced RPI Order shall have priority as
described in Rule 11.24(g)(2).
The price of an Enhanced RPI Order will be determined by a User's
entry of the following into the Exchange: (1) Enhanced RPI buy or sell
interest; (2) the step-up range; (3) an offset, if any; and (4) a
ceiling or floor price, if any. The step-up range of an Enhanced RPI
Order is the maximum amount above the order's limit price at which a
User is willing to execute. If the Enhanced RPI Order can improve upon
resting liquidity on the same side of the BYX Book by stepping up to
the nearest whole cent tick or half cent midpoint tick, it will receive
price priority over the resting liquidity on the BYX Book. An Enhanced
RPI Order, however, will not improve upon the price of another resting
Enhanced RPI Order to receive price priority.
Enhanced RPI Order Priority
As discussed above, the proposed Enhanced RPI Order will be ranked
at its limit price, which is less aggressive than its step-up range.
With the introduction of the proposed Enhanced RPI Order, the Exchange
proposes to reorganize Rule 11.24(g) into Rule 11.24(g)(1) and (2).
Proposed Rule 11.24(g)(1) would contain the existing rule text that
describes order priority with respect to RPI Orders, which the Exchange
does not propose to amend. Proposed Rule 11.24(g)(2) would describe
order priority with respect to Enhanced RPI Orders.
An Enhanced RPI Order will be ranked and allocated according to its
limit price then time of entry into the System. The Exchange proposes,
however, that an Enhanced RPI Order will be granted price priority over
orders resting on the BYX Book in the event that the Enhanced RPI Order
is able to provide a greater amount of price improvement to an incoming
contra-side Retail Order by stepping up to the next half cent \24\ or
full cent (for securities priced at or above $1.00) or the next valid
tick increment (for securities priced below $1.00). The step-up range
of an Enhanced RPI Order will be utilized to determine price priority
when: (1) the range is needed to gain priority over a resting order
with higher order book priority that is not an Enhanced RPI Order; (2)
in situations where: (a) a contra-side Retail Order is entered at a
less aggressive price than the ranked price of the Enhanced RPI Order
and all other resting liquidity and (b) the Enhanced RPI Order's step-
up range is equal to or more aggressively priced than the Retail
Order's limit price; and (3) to determine order book priority when
multiple Enhanced RPI Orders are resting on the BYX Book and are
eligible to trade ahead of higher priority orders resting on the BYX
Book that are not Enhanced RPI Orders. The Exchange notes when multiple
Enhanced RPI Orders are resting on the BYX Book. there are no other
resting orders on the same side of the BYX Book with higher priority,
and a contra-side Retail Order is entered at a price equal to or more
aggressive than the highest-priced Enhanced RPI Order resting on the
BYX Book, the Enhanced RPI Orders will execute in standard price/time
priority according to their limit price rather than utilize the step-up
range to determine order book priority.
---------------------------------------------------------------------------
\24\ Discussed infra Examples 2 and 5. An Enhanced RPI Order may
only need to step-up one half cent in order to provide meaningful
price improvement in situations where the best-priced resting order
is ranked at a full cent.
---------------------------------------------------------------------------
The Exchange has included the examples below to show how order
priority with an Enhanced RPI Order will be determined. In the examples
below, the Retail Liquidity Identifier (discussed infra) is presumed to
be displayed unless stated otherwise.
Example 1 \25\
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\25\ See proposed Rule 11.24(g)(2)(A).
---------------------------------------------------------------------------
In order to illustrate priority of an Enhanced RPI Order over other
non-displayed orders resting on the BYX Book, consider the following
example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters a Mid-Point Peg order to buy ABC at $10.03 for
100. User 1's order is ranked at $10.025 as the User elected that the
Mid-Point Peg order be pegged to the mid-point of the NBBO.
[cir] User 2 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 2's step-up range is $10.03. User 2's order is ranked at
$10.01.
[cir] User 3 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 3's Retail Order for 100 will execute against
User 2's Enhanced RPI Order at $10.03. While User 1's order is ranked
at a higher price ($10.025) than User 2's order ($10.01), User 2's
order includes a step-up range of $10.03, which provides additional
price improvement to User 3's Retail Order than User 1's Mid-Point Peg
Order. As User 2's order provides an additional $0.005 of price
improvement over User 1's midpoint price, the Exchange gives priority
to User 2's Enhanced RPI Order.
Example 2 \26\
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\26\ See proposed Rule 11.24(g)(2)(A).
---------------------------------------------------------------------------
If the best-priced resting order on the BYX Book is ranked at a
whole cent, the Enhanced RPI Order may only need to step-up one-half
cent in order to provide meaningful price improvement. Consider the
following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters a non-displayed order to buy ABC at $10.02 for
100.
[cir] User 2 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 2's step-up range is $10.03. User 2's order is ranked at
$10.01.
[cir] User 3 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 3's Retail Order for 100 will execute against
User 2's Enhanced RPI Order at $10.025. While User 1's order is ranked
at a higher price ($10.02) than User 2's order ($10.01), User 2 has
included a step-up range of $10.03 on its order and is willing to
provide additional price improvement as compared to other orders
resting on the BYX Book. Even though User 2's order may execute up to a
price of $10.03, it only needs to provide one-half cent price
improvement over User 1's ranked price of $10.02 in order to provide
meaningful price improvement at the midpoint.
Example 3 \27\
---------------------------------------------------------------------------
\27\ See proposed Rule 11.24(g)(2)(A).
---------------------------------------------------------------------------
There are instances where an Enhanced RPI Order may need to step-up
a full penny in order to provide meaningful price improvement. Consider
the following:
The Protected NBBO for security ABC is $10.00 x $10.10.
[cir] User 1 enters a non-displayed order to buy ABC at $10.03 for
100.
[cir] User 2 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 2's step-up range is $10.05. User 2's order is ranked at
$10.01.
[cir] User 3 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 3's Retail Order for 100 will execute against
User 2's Enhanced RPI Order at $10.04. While User 1's order is ranked
at a higher price ($10.03) than User 2's order ($10.01), User 2 has
included a step-up range of $10.05 on its order and is willing to
provide additional price improvement as compared to other orders
resting on the BYX Book. Even though User 2's order may execute up to a
price of $10.05, it only needs to provide one penny of price
improvement above User 1's ranked price of $10.03 in order to provide
meaningful price improvement.
[[Page 2997]]
Example 4 \28\
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\28\ See proposed Rule 11.24(a)(4).
---------------------------------------------------------------------------
There may be instances where there is no other liquidity resting on
the BYX Book against which the Enhanced RPI Order can step up against.
In these instances, the Enhanced RPI Order will trade at its ranked
price. Consider the following example.
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 1's step-up range is $10.025. User 1's order is ranked at
$10.01.
[cir] User 2 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 2's Retail Order for 100 will execute against
User 1's Enhanced RPI Order at $10.01 as there are no better-priced
orders resting on the BYX Book against which User 1 would need to
provide greater price improvement to User 2.
Example 5 \29\
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\29\ See proposed Rule 11.24(g)(2)(A).
---------------------------------------------------------------------------
Enhanced RPI Orders will only have priority against other better-
priced liquidity resting on the BYX Book in the event that the Enhanced
RPI Order can step-up to the next half cent or full cent. In the
example below, the Enhanced RPI Order is unable to step up against the
best priced order on the BYX Book but is able to step up against an
order ranked at the next best price level. Consider the following
example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters a non-displayed order to buy ABC at $10.04 for
100.
[cir] User 2 enters a non-displayed order to buy ABC at $10.02 for
100.
[cir] User 3 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 3's step-up range is $10.04. User 3's order is ranked at
$10.01.
[cir] User 4 enters a Retail Order to sell ABC at $10.00 for 150.
Result: User 4's Retail Order will execute 100 shares
first with User 1's non-displayed order as User 1's non-displayed order
has price priority over the orders submitted by Users 2 and 3. While
User 3's Enhanced RPI Order has a step-up range of $10.04, the step-up
range does not provide greater price improvement for User 4's Retail
Order as compared to User 1's non-displayed order and as such, User 3's
Enhanced RPI Order does not have priority over User 1's non-displayed
order. Once User 4's Retail Order executes against User 1's non-
displayed order, 50 shares remain on User 4's Retail Order. User 4's
Retail Order will then execute its remaining 50 shares with User 3's
Enhanced RPI Order at a price of $10.025. While User 2's non-displayed
order is ranked at a higher price ($10.02) than User 3's Enhanced RPI
Order ($10.01), User 3's Enhanced RPI Order has a step-up range of
$10.04 and User 2's non-displayed order does not contain a step-up
range. As User 3's Enhanced RPI Order is willing to provide greater
price improvement as compared to a better-priced order resting on the
same side of the BYX Book, it is given priority over User 2's non-
displayed order. User 3's Enhanced RPI Order executes 50 shares against
User 4's non-displayed order at a price of $10.025 because it provides
one-half cent of price improvement over User 2's ranked price of
$10.02.
Example 6 \30\
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\30\ See proposed Rule 11.24(a)(4).
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Enhanced RPI Orders will execute within their step-up range when
the incoming Retail Order's price is not executable at the Enhanced RPI
Order's ranked price. Consider the following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 1's step-up range is $10.04. User 1's order is ranked at
$10.01.
[cir] User 2 enters a Retail Order to sell ABC at $10.03 for 100.
Result: User 2's Retail Order will execute with User 1's
Enhanced RPI Order at $10.03 as the limit price of User 2's Retail
Order ($10.03) is within User 1's step-up range.
Example 7 \31\
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\31\ See proposed Rule 11.24(g)(2).
---------------------------------------------------------------------------
When there are multiple Enhanced RPI Orders resting on the BYX
Book, no other same side liquidity with higher priority, and the
contra-side Retail Order is priced more aggressively than the resting
Enhanced RPI Orders, execution priority will be determined by the
higher ranked price and not by the step-up ranges of the Enhanced RPI
Orders. Consider the following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 1's step-up range is $10.05. User 1's order is ranked at
$10.01.
[cir] User 2 enters an Enhanced RPI Order to buy ABC at $10.02 for
100. User 2's step-up range is $10.04. User 2's order is ranked at
$10.02.
[cir] User 3 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 3's Retail Order will execute with User 2's
Enhanced RPI Order at $10.02 because User 2's Enhanced RPI Order has
price priority over User 1's Enhanced RPI Order due to its higher
ranked price of $10.02. Given that User 3's Retail Order was priced
more aggressively than the resting Enhanced RPI Orders at its time of
entry, the Exchange believes that priority should be determined by
using the ranked price of the Enhanced RPI Orders resting on the BYX
Book at the time of User 3's Retail Order entry.
Example 8 \32\
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\32\ See proposed Rule 11.24(g)(2)(B).
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The step-up range will be used to determine order book priority in
situations where: (i) a contra-side Retail Order is entered at a less
aggressive price than the Enhanced RPI Order's limit price and all
other resting liquidity in the same security and (ii) the Enhanced RPI
Order's step-up range is equal to or more aggressively priced than the
Retail Order's limit price. Consider the following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 1's step-up range is $10.05. User 1's order is ranked at
$10.01.
[cir] User 2 enters a non-displayed order to buy ABC at $10.02 for
100. User 2's order is ranked at $10.02.
[cir] User 3 enters a Retail Order to sell ABC at $10.03 for 100.
Result: User 3's order will execute with User 1's Enhanced
RPI Order at $10.03 because (i) User 3's Retail Order was entered at a
less aggressive price than the ranked price of both User 1 and User 2's
orders; and (ii) the step-up range of User 1's Enhanced RPI Order is
more aggressively priced ($10.05) than the limit price of User 3's
Retail Order ($10.03). Even though User 2's ranked price is higher than
User 1's ranked price, User 2's order is not marketable against User
3's Retail Order. User 3's Retail Order would otherwise be unable to
execute if the Exchange did not look to the price improvement provided
by User 1's step-up range to permit an execution between User 1 and
User 3.
Example 9 \33\
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\33\ See proposed Rule 11.24(g)(2)(C).
---------------------------------------------------------------------------
The step-up range will be used to determine order book priority in
situations where multiple Enhanced RPI Orders are resting on the BYX
Book and are eligible to trade ahead of higher priority orders resting
on the BYX Book. Consider the following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[[Page 2998]]
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 1's step-up range is $10.05. User 1's order is ranked at
$10.01.
[cir] User 2 enters an Enhanced RPI Order to buy ABC at $10.02 for
100. User 2's step-up range is $10.04. User 2's order is ranked at
$10.02.
[cir] User 3 enters a non-displayed order to buy ABC at $10.03 for
100. User 3's order is ranked at $10.03.
[cir] User 4 enters a Retail Order to sell ABC at $10.03 for 100.
Result: User 4's Retail Order will execute with User 1's
Enhanced RPI Order at $10.04 because the Exchange looks to the step-up
range to determine order book priority when there are multiple Enhanced
RPI Orders resting on the BYX Book that are willing to provide
additional price improvement as compared to other orders resting on the
BYX Book. While both User 1 and User 2 can execute at a price of
$10.04, User 1's Enhanced RPI Order has a higher step-up range ($10.05)
as compared to the step-up range of User 2's Enhanced RPI Order
($10.04). As such, User 1's Enhanced RPI Order is given priority ahead
of User 2's Enhanced RPI Order to execute against User 4's Retail
Order. In this instance, when there are multiple Enhanced RPI Orders
that can provide price improvement to the contra-side Retail Order, the
Exchange believes it is appropriate to use the highest step-up range to
determine order book priority as it is encouraging Users to submit
aggressively priced orders by granting order book priority to the User
with the highest step-up range. As such, the Exchange believes it is
appropriate to give priority to User 1's Enhanced RPI Order in this
instance because User 1's step-up range is more aggressive than User
2's step-up range and is therefore willing to provide additional price
improvement to Retail Orders as compared to User 2's Enhanced RPI
Order.
Example 10 \34\
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\34\ See proposed Rule 11.24(g)(2)(A).
---------------------------------------------------------------------------
Enhanced RPI Orders will have price priority over resting RPI
orders (that do not contain a step-up range) on the BYX Book so long as
the step-up range of the Enhanced RPI Order is greater than the limit
price of the resting RPI order. Consider the following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $10.01 for
100. User 1's step-up range is $10.05. User 1's order is ranked at
$10.01.
[cir] User 2 enters an RPI Order to buy ABC at $10.02.
[cir] User 3 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 3's Retail Order will execute with User 1's
Enhanced RPI Order at a price of $10.025 because User 1's Enhanced RPI
Order containing a step-up range allows User 3's Retail Order to
receive an additional one-half cent price improvement as compared to
the ranked price of User 2's RPI Order. While User 2's RPI Order had a
higher ranked price ($10.02) than User 1's Enhanced RPI Order ($10.01),
User 2's RPI Order did not contain a step-up range. Given that Enhanced
RPI Orders are designed to provide meaningful price improvement against
all resting orders on the BYX Book, the Exchange believes this factor
favors using the price improvement provided by the step-up range in
order to determine priority in situations where there are both resting
RPI and Enhanced RPI Orders on the BYX Book. While RPI Orders do
provide at least $0.001 of price improvement as compared to the
Protected NBBO, Enhanced RPI Orders allow for price improvement to the
next valid half cent or full cent as the transaction is priced above
$1.00.\35\ Thus, using the step-up range to determine priority when RPI
Orders are resting on the BYX Book results in an increased amount of
price improvement for the contra-side Retail Order.
---------------------------------------------------------------------------
\35\ The Exchange notes that there may be situations in which an
Enhanced RPI Order that is granted order book priority over an RPI
Order will provide only $0.001 of price improvement over the RPI
Order when stepping up to the next half cent or full cent. For
example, the Protected NBBO is $10.00 x $10.05. Assume that a buy-
side Enhanced RPI Order for 100 shares has a step-up range to $10.04
and is granted order book priority over a buy-side RPI Order for 100
shares with a limit price of $10.024. A sell-side Retail Order for
100 shares is entered at $10.00. In this instance, the buy-side
Enhanced RPI Order steps-up to a price of $10.025 to execute against
the sell-side Retail Order. While the Enhanced RPI Order is only
providing $0.001 of price improvement as compared to the RPI Order
with a limit price of $10.024, the Enhanced RPI Order provides a
total of $0.025 of price improvement to the Retail Order as compared
to the Retail Order's limit price of $10.00.
---------------------------------------------------------------------------
Example 11 \36\
---------------------------------------------------------------------------
\36\ See proposed Rule 11.24(g)(2)(A).
---------------------------------------------------------------------------
Enhanced RPI Orders may also improve against displayed orders
resting on the BYX Book in order to provide price improvement to a
contra-side Retail Order. Consider the following example:
The Protected NBBO for security ABC is $10.00 x $10.05.
[cir] User 1 enters an Enhanced RPI Order to buy ABC at $9.99 for
100. User 1's step-up range is $10.05. User 1's order is ranked at
$9.99. The Retail Liquidity Identifier is not displayed as the limit
price of $9.99 is below the NBB and the Retail Liquidity Identifier
will only display when there is RPI interest priced at least $0.001
better than the Protected NBB or Protected NBO.
[cir] User 2 enters a displayed order to buy ABC at $10.00 for 100.
[cir] User 3 enters a Retail Order to sell ABC at $10.00 for 100.
Result: User 3's Retail Order will execute with User 1's
Enhanced RPI Order at a price of $10.01. While User 2's displayed order
is displayed and ranked at a higher price ($10.00) than User 1's
Enhanced RPI Order ($9.99), User 1's Enhanced RPI Order includes a
step-up range on its order, which permits the order to execute up to a
price of $10.05. In this instance, executing User 2's displayed order
at $10.00 does not provide any price improvement to the Retail Order
when User 1's Enhanced RPI Order is resting on the BYX Book and is
willing to provide additional price improvement to Order 3 than Order 2
is willing to provide. User 1's Enhanced RPI Order is willing to step
up to the next full cent above $10.00 (in this case, $10.01), which
provides a full penny of price improvement to User 3's Retail Order.,
As such, this is the price at which User 3's Retail Order executes with
User 1's Enhanced RPI Order.
As demonstrated in the examples above, the Exchange is proposing to
grant an Enhanced RPI Order price priority over equal-priced or better-
priced resting orders on the BYX Book so long as the Enhanced RPI Order
can provide meaningful price improvement over such resting orders. The
Exchange believes that allowing liquidity providers to post orders
outside of the range at which they are willing to execute yet maintain
the opportunity to step-up against resting orders on the same side of
the BYX Book in exchange for price priority will incentivize these
liquidity providers to provide additional liquidity on the Exchange. As
a result of additional, aggressively priced liquidity submitted to the
Exchange designed specifically to interact with Retail Orders, RMOs
will therefore be incentivized to submit additional retail order flow
to the Exchange which has the potential to interact with an Enhanced
RPI Order and receive meaningful price improvement.
Retail Liquidity Identifier
The Exchange currently disseminates an identifier pursuant to Rule
11.24(e) when RPI interest priced at least $0.001 better than the
Protected NBB or Protected NBO for a particular security
[[Page 2999]]
is available in the System (``Retail Liquidity Identifier'' or
``Identifier''). The Identifier is disseminated through consolidated
data streams (i.e., pursuant to the Consolidated Tape Association Plan/
Consolidated Quotation Plan, or CTA/CQ, for Tape A and Tape B
securities, and the Nasdaq UTP Plan for Tape C securities) as well as
through proprietary Exchange data feeds.\37\ The Identifier reflects
the symbol and the side (buy or sell) of the RPI interest, but does not
include the price or size of the RPI interest. In particular, CQ and
UTP quoting outputs include a field for codes related to the Retail
Liquidity Identifier. The codes indicate RPI interest that is priced
better than the Protected NBB or Protected NBO by at least the minimum
level of price improvement as required by the Program.
---------------------------------------------------------------------------
\37\ The Exchange notes that the Retail Liquidity Identifier for
Tape A and Tape B securities are disseminated pursuant to the CTA/CQ
Plan. The identifier is also available through the consolidated
public market data stream for Tape C securities. The processor for
the Nasdaq UTP disseminates the Retail Liquidity Identifier and
analogous identifiers from other market centers that operate
programs similar to the RPI Program.
---------------------------------------------------------------------------
The Exchange proposes to continue to disseminate the Retail
Liquidity Identifier in its current form should the Enhanced RPI Order
be approved. For Enhanced RPI orders, the indicator will be based off
of the ranked price only and the step-up range will not be used. The
purpose of the Identifier is to provide relevant market information to
RMOs that there is available RPI interest available on the Exchange,
thereby incentivizing RMOs to send Retail Orders to the Exchange. The
Exchange proposes to make clear in Rule 11.24(e) that both RPI Orders
and Enhanced RPI Orders constitute RPI interest and that the Retail
Liquidity Identifier shall be disseminated when RPI Interest (as
defined in proposed Rule 11.24(e)) priced at least $0.001 better than
the Protected NBB or Protected NBO for a particular security is
available in the System. A separate liquidity identifier that
identifies Enhanced RPI Order interest will not be disseminated.
Because the proposed Enhanced RPI Order is an extension of the existing
RPI Order, it will automatically offer at least $0.001 of price
improvement over the Protected NBB or Protected NBO. As such,
displaying the Retail Liquidity Identifier will provide an indication
to RMOs that at least $0.001 of price improvement is available in the
System, with the opportunity of potentially receiving additional price
improvement should the RPI interest be in the form of an Enhanced RPI
Order.
As discussed below, the Exchange proposes to expand the Program to
include securities priced below $1.00. Given that the minimum price
variation (``MPV'') of a sub-dollar security is $0.0001,\38\ the
Identifier for sub-dollar securities will be displayed when there is at
least $0.0001 of price improvement over the Protected NBB or Protected
NBO. The Exchange will not make any other changes to the Identifier for
sub-dollar securities other than the minimum amount of price
improvement required to display the Identifier.
---------------------------------------------------------------------------
\38\ See 17 CFR 242.612 (``Minimum pricing increment'').
---------------------------------------------------------------------------
Securities Priced Below $1.00
Rule 11.24(h) currently limits the Program to trades occurring at
prices equal to or greater than $1.00 per share and the Exchange
periodically notifies Members \39\ regarding securities included in the
Program through an information circular.\40\ Now, the Exchange proposes
to expand the Program to all securities, including those priced below
$1.00. The rationale behind expanding the Program to all securities
regardless of execution price stems from the growth of sub-dollar
trading (i.e., trading at prices below $1.00), both on- and off-
exchange. As of March 2023, an analysis of SIP \41\ data by the
Exchange found that sub-dollar average daily volume has increased 313%
as compared to first quarter 2019.\42\ In this period, sub-dollar on-
exchange average daily volume grew from 442 million shares per day to
1.8 billion shares per day.\43\ An analysis of SIP and FINRA Trade
Reporting Facility (``TRF''),\44\ data indicates that exchanges
represented approximately 39.8% market share in sub-dollar securities,
with a total of 1,638 securities trading below $1.00.\45\ As an
exchange group, Cboe had approximately 13.3% of market share of sub-
dollar securities in the first quarter of 2023.\46\
---------------------------------------------------------------------------
\39\ See Rule 1.5(n). The term ``Member'' shall mean ay
registered broker or dealer that has been admitted to membership in
the Exchange. A Member will have the status of a ``member'' of the
Exchange as that term is defined in Section 3(a)(3) of the Act.
Membership may be granted to a sole proprietor, partnership,
corporation, limited liability company or other organization which
is a registered broker or dealer pursuant to Section 15 of the Act,
and which has been approved by the Exchange.
\40\ Supra note 6.
\41\ The ``SIP'' refers to the centralized securities
information processors.
\42\ See ``How Subdollar Securities are Trading Now'' (March 16,
2023). Available at https://www.cboe.com/insights/posts/how-subdollar-securities-are-trading-now/.
\43\ Id.
\44\ Trade Reporting Facilities are facilities through which
FINRA members report off-exchange transactions in NMS stocks, as
defined in SEC Rule 600(b)(47) of Regulation NMS. See Tick Size
Proposal at 80315.
\45\ Supra note 42.
\46\ Id.
---------------------------------------------------------------------------
As trading in sub-dollar securities has grown steadily since 2020,
the Exchange believes it is appropriate to expand the Program to
include securities priced below $1.00. The Exchange notes, however,
that the MPV for sub-dollar securities differs from the MPV for
securities priced at or above $1.00. As provided for by Regulation NMS
Rule 612, for securities priced below $1.00, the MPV is $0.0001,
whereas for securities priced at or above $1.00 the MPV is $0.01.\47\
The Exchange proposes that in order for an Enhanced RPI Order to gain
queue priority ahead of resting orders on the same side of the BYX
Book, the Enhanced RPI Order will be stepped-up to the nearest MPV
($0.0001). This differs from the treatment of Enhanced RPI Orders for
securities priced at or above $1.00, which are proposed to be stepped-
up to the nearest half-cent midpoint or whole cent tick ahead of
resting orders on the same side of the BYX Book. The Exchange believes
that the different treatment of Enhanced RPI Orders for securities
priced below $1.00 is appropriate given that the MPV for securities
priced below $1.00 is significantly less than the MPV for securities
priced at or above $1.00. The Exchange notes that it will announce to
its Members via a Trade Desk Notice that the Program is expanding to
all securities priced below $1.00 and will no longer provide periodic
updates of securities included in the Program.
---------------------------------------------------------------------------
\47\ Supra note 38.
---------------------------------------------------------------------------
Implementation
The Exchange plans to implement the proposed rule change during the
second half of 2024 and will announce the implementation date via Trade
Desk Notice.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\48\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \49\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
[[Page 3000]]
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \50\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78f(b).
\49\ 15 U.S.C. 78f(b)(5).
\50\ Id.
---------------------------------------------------------------------------
The Commission has repeatedly emphasized that the U.S. capital
markets should be structured with the interests of retail investors in
mind \51\ and has recently proposed a series of rules designed, in
part, to attempt to bring order flow back to the exchanges from off-
exchange trading venues.\52\ The Exchange believes its proposed
enhancements to the Program are consistent with the Commission's goal
of ensuring that the equities markets continue to serve the needs of
the investing public. Specifically, introducing the Enhanced RPI Order
type would protect investors and the public interest by providing
retail investors the ability to obtain meaningful price improvement on
BYX, a national securities exchange. The Exchange is committed to
innovation that improves the quality of the equities markets and
believes that the proposed Enhanced RPI Order may increase the
attractiveness of the Exchange for the execution of Retail Orders
submitted on behalf of the millions of ordinary investors that rely on
these markets for their investment needs.
---------------------------------------------------------------------------
\51\ See U.S. Securities and Exchange Commission, Strategic
Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf.
\52\ Supra notes 17-18. See also, Securities Exchange Act
Release No. 96496 (December 14, 2022), 88 FR 5440 (January 27, 2023)
(``Regulation Best Execution''); Securities Exchange Act Release No.
96493 (December 14, 2022), 88 FR 3786 (January 20, 2023)
(``Disclosure of Order Execution Information'').
---------------------------------------------------------------------------
The Exchange believes the proposed Enhanced RPI Order promotes just
and equitable principles of trade and is not unfairly discriminatory
because the order type will be available for all Users, and is not
limited to a certain subset of market participants. Even though
Enhanced RPI Orders may be entered by any market participant, the
Exchange believes that the majority of Enhanced RPI Orders will be
entered by or on behalf of institutional investors that are willing to
provide additional price improvement as a way to minimize their adverse
selection costs.\53\ The Exchange does not believe that such
segmentation is inconsistent with section 6(b)(5) of the Act, as it
does not permit unfair discrimination. The Commission has previously
stated that the markets generally distinguish between retail investors,
whose orders are considered desirable by liquidity providers because
such retail investors are presumed to be less informed about short-term
price movements, and professional traders, whose orders are presumed to
be more informed.\54\ The Commission has further stated that without
opportunities for price improvement, retail investors may encounter
wider spreads that are a consequence of liquidity providers interacting
with more informed order flow.\55\ The Exchange believes that its
proposed Enhanced RPI Order is reasonably designed to attract
marketable retail order flow to the exchange as it will help to ensure
that retail investors benefit from the better price that liquidity
providers are willing to provide to retail orders in exchange for
minimizing their adverse selection costs.
---------------------------------------------------------------------------
\53\ Adverse selection is the phenomenon where the price of a
stock drops right after a liquidity provider purchases the stock.
Marketable retail order flow is generally seen as more desirable by
institutional liquidity providers as executions against retail
orders are less prone to adverse selection. The Commission has
previously opined that retail liquidity programs may be beneficial
to institutional investors as they may be able to reduce their
possible adverse selection costs by interacting with retail order
flow. See Pilot Approval Order at 71656.
\54\ Id.
\55\ Id.
---------------------------------------------------------------------------
Additionally, the Exchange believes that the proposed Enhanced RPI
Order type is not unfairly discriminatory to institutional investors as
it rewards the User that enters the most aggressively priced Enhanced
RPI Order with order book priority. Ultimately, execution priority
amongst orders resting on the BYX Book will be determined by the step-
up range entered on each Enhanced RPI Order. If the step-up range for
an Enhanced RPI Order provides a marketable, contra-side Retail Order
with greater price improvement than would otherwise be available from
other resting orders by stepping up to the next half cent or full cent
(for securities priced at or above $1.00) or the valid tick increment
(for securities priced below $1.00), then the Enhanced RPI Order will
be granted order book priority. In the event that multiple Enhanced RPI
Orders are resting on the BYX Book, the Enhanced RPI Order with the
highest step-up range will be given order book priority. The Exchange
believes rewarding the most aggressively priced step-up range will
encourage Users to submit Enhanced RPI Orders with step-up ranges that
are likely to provide meaningful price improvement to Retail Orders,
which ultimately benefits both retail investors, who will receive price
improvement over the NBBO, and the User entering the Enhanced RPI
Order, who is able to execute against a marketable Retail Order to
minimize its adverse selection costs and interact with retail order
flow that they are currently unable to access on the Exchange given
that such order flow is largely executed off-exchange.
As noted in the Exchange's initial RPI filings,\56\ most equities
exchanges, including BYX, determine priority based on a price/time/
display allocation model.\57\ This has contributed to deep and liquid
markets for equity securities as liquidity providers compete to be the
first to establish a particular price. While the price/time/display
allocation model generally works well for institutional investors,
retail investors are traditionally not able to compete with market
makers and other automated liquidity providers to set an aggressive
price on orders submitted to the Exchange. Importantly, retail
investors, in contrast to institutional investors, tend to have longer
investment time horizons, which means they are not in the business of
optimizing queue placement under a time-based allocation model.
Therefore, in order to facilitate the needs of retail investors, the
Exchange believes an alternative approach--such as this Enhanced RPI
Order proposal--would benefit the retail investor community.
---------------------------------------------------------------------------
\56\ Supra notes 7-8.
\57\ Nasdaq PSX, however, offers a price setter pro rata model
that rewards liquidity providers that set the best price and then
rewards other market participants that enter larger sized orders.
See Securities Exchange Act Release No. 72250 (May 23, 2014), 79 FR
31147 (May 30, 2014) (SR-Phlx-2014-24).
---------------------------------------------------------------------------
As discussed earlier, the proposed introduction of the Enhanced RPI
Order is designed to provide retail investors with enhanced
opportunities to obtain meaningful price improvement by providing them
with potential opportunities to execute versus non-displayed Enhanced
RPI Orders that offer price improvement beyond that offered by resting
orders on the Exchange. Marketable retail order flow is routinely
executed in full on entry at the national best bid or offer or
better,\58\ but many retail liquidity programs,
[[Page 3001]]
including the Exchange's current Program, are designed to offer at
least $0.001 of price improvement over the Protected NBB or Protected
NBO to Retail Orders.\59\ By introducing Enhanced RPI Orders, the
Exchange is proposing to prioritize Enhanced RPI Orders ahead of other
resting orders on the same side of the BYX Book in exchange for the
Enhanced RPI Order offering meaningful price improvement to Retail
Orders by stepping up to the next half cent or whole cent (for
securities priced at or above $1.00) or the next valid tick increment
(for securities priced below $1.00). The Exchange believes the ability
to post an order at a price outside of the range at which it is willing
to execute with the ability to gain priority in exchange for executing
at a more aggressive price will (1) encourage Users to submit
aggressively priced Enhanced RPI Orders, and (2) attract Retail Order
flow to the Exchange, both of which will benefit all investors.
Increased order flow will create a deeper pool of liquidity on the
Exchange, which provides for greater execution opportunities for all
Users and provides for overall enhanced price discovery and price
improvement opportunities on the Exchange. If successful, the proposed
rule change would benefit market participants by increasing the
diversity of order flow with which they can interact on a national
securities exchange, thereby increasing order interaction and
contributing to price formation.
---------------------------------------------------------------------------
\58\ A review of internal Exchange data found that 60% of retail
orders across the Exchange and its affiliates executed at the NBBO
year-to-date in 2023. Similarly, 59% of retail orders across the
Exchange and its affiliates executed at the NBBO in calendar year
2022.
\59\ See, e.g., IEX Rule 11.232; Nasdaq BX Rule 4780; NYSE Arca
Rule 7.44-E; NYSE Rule 7.44.
---------------------------------------------------------------------------
Giving queue priority to certain order types is not a novel concept
in the securities markets. In fact, on the Exchange's affiliate, Cboe
EDGX Exchange, Inc. (``EDGX''), the displayed portion of Retail Orders
are given allocation priority ahead of all other available interest on
the EDGX Book (``EDGX Retail Priority'').\60\ The Commission found that
EDGX Retail Priority represented a reasonable effort to enhance the
ability of bona fide retail trading interest to compete for executions
with orders entered by other market participants that may be better
equipped to optimize their place in the intermarket queue.\61\ The
Exchange believes that grating queue priority to an Enhanced RPI Order
as discussed in the Purpose section similarly reflects a reasonable
effort by the Exchange to create additional price improvement
opportunities for retail investors, as has been the standard identified
by the Commission in several approval orders written in regards to
RLPs.\62\ While the Exchange is not proposing to prioritize Retail
Orders as EDGX has done, it is proposing to prioritize Enhanced RPI
Orders that provide price improvement and may only interact with
contra-side Retail Orders.
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\60\ See EDGX Rule 11.9(a)(2)(A).
\61\ See Securities Exchange Act Release No. 87200 (October 2,
2019), 84 FR 53788 (October 8, 2019), SR-CboeEDGX-2019-012 (``EDGX
Retail Priority Approval Order'').
\62\ Supra note 8. See also Securities Exchange Act Release No.
67347 (July 3, 2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55;
SR-NYSEAmex-2011-84) (``RLP Approval Order'') at 40679.
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The Exchange believes that the prioritization of Enhanced RPI
Orders that offer meaningful price improvement over other resting
orders on the same side of the BYX Book promotes just and equitable
principles of trade and is consistent with Section 6(b)(5) of the Act
as it encourages Users to submit aggressively priced Enhanced RPI
Orders in exchange for queue priority ahead of all resting orders on
the same side of the BYX Book so long as meaningful price improvement
is provided to a contra-side Retail Order. The Exchange proposes to
provide queue priority for Enhanced RPI Orders over all other types of
orders and is not limiting queue priority to a certain subset of order
types. As previously stated, all Users are eligible to submit Enhanced
RPI Orders. And while the Exchange believes that most Enhanced RPI
Orders will be submitted by or on behalf of professional traders,
retail investors will have the opportunity to receive better-priced
executions should they choose to submit a marketable Retail Order to
the Exchange. The Exchange believes the introduction of Enhanced RPI
Orders will deepen the Exchange's pool of available liquidity, increase
marketable retail order flow to the Exchange and provide additional
competition for marketable retail order flow, most of which is
currently executed off-exchange in the OTC markets. Promoting
competition for retail order flow among execution venues stands to
benefit retail investors, who may be eligible to receive greater price
improvement on the Exchange by interacting with an Enhanced RPI Order
than they would if their order was internalized by a broker-dealer on
the OTC market.
Furthermore, the Exchange believes that its proposal to limit the
use of the step-up range to determine order book priority is consistent
with Section 6(b)(5) of the Act because the use of the step-up range
rather than limit price to determine order priority is limited to the
following: (1) the range is needed to gain priority over a resting
order with higher order book priority; (2) in situations where (i) a
contra-side Retail Order is entered at a less aggressive price than the
Enhanced RPI Order's limit price and all other resting liquidity in the
same security and (ii) the Enhanced RPI Order's step-up range is equal
to or more aggressively priced than the Retail Order's limit price; and
(3) to determine order book priority when multiple Enhanced RPI Orders
are resting on the BYX Book and are eligible to trade ahead of higher
priority orders. The primary use case of the Enhanced RPI Order
identified in the first scenario listed above is to provide price
improvement to marketable retail order flow. As previously discussed in
the Statutory Basis section, the Exchange believes allowing the use of
a step-up range in order to provide an additional, more aggressive
price at which an Enhanced RPI Order may execute is essential in order
to deepen the pool of liquidity available to retail investors. In
exchange for providing aggressively priced orders, these liquidity
providers will be rewarded with executions against marketable retail
order flow, which is generally preferred over more informed order flow.
Retail investors, on the other hand, will receive meaningful price
improvement should their order execute against an Enhanced RPI Order.
In the situation where (i) a contra-side Retail Order is entered at
a less aggressive price than the Enhanced RPI Order's limit price and
all other resting liquidity in the same security and (ii) the Enhanced
RPI Order's step-up range is equal to or more aggressively priced than
the limit price of the Retail Order, the Exchange believes using the
step-up range to determine order priority promotes just and equitable
principles of trade because it rewards the Enhanced RPI Order with the
most aggressive step-up range rather than forego an execution due to
the limit price of all orders resting on the BYX Book being ineligible
to trade with the contra-side Retail Order. The intent of the Enhanced
RPI Order is to reward aggressively priced liquidity with queue
priority while simultaneously providing price improvement to Retail
Orders. The Exchange believes that determining order priority using the
step-up range in this limited situation is aligned with the intent of
liquidity providers that choose to submit Enhanced RPI Orders and
emphasizes a benefit of using the Enhanced RPI Order--the ability to
enter an order at a less aggressive price yet also provide a step-up
range that the liquidity provider is willing to execute in order to
execute against marketable retail order flow rather than forego an
[[Page 3002]]
execution and remain on the BYX Book. The Exchange seeks to encourage
liquidity providers to submit order flow designed to interact with
marketable retail order flow in an effort to increase the amount of
Retail Order executions occurring on-exchange. By rewarding
aggressively priced Enhanced RPI Orders in situations where the order
would otherwise not execute, the Exchange believes its pool of
liquidity available to marketable retail order flow will deepen, thus
incentivizing RMOs to submit additional marketable retail order flow to
the Exchange.
Likewise, using the step-up range rather than the limit price of an
Enhanced RPI Order in situations where multiple Enhanced RPI Orders are
resting on the BYX Book and are eligible to trade ahead of higher
priority orders promotes the use of the Enhanced RPI Order type as the
Exchange seeks to encourage RMOs to submit marketable Retail Orders to
the Exchange. Determining order priority of Enhanced Orders based on
their step-up range over the limit price of all other higher priority
orders rewards the Enhanced RPI Order that provides the most aggressive
execution price. The Exchange believes that using the step-up range
rather than the limit price in situations where there are multiple
Enhanced RPI Orders will encourage Users to submit aggressively priced
Enhanced RPI Orders to the Exchange, as they will be given priority to
interact with more desirable marketable retail order flow based on
their step-up range. Additionally, the Exchange believes that RMOs will
be encouraged to direct marketable retail order flow to the Exchange
knowing that the worst price they will receive is $0.001 better than
the Protected NBB or Protected NBO for securities priced at or above
$1.00 \63\ and there is potential to receive more meaningful price
improvement should an Enhanced RPI Order be present on the opposite
side of the BYX Book.\64\
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\63\ For securities priced below $1.00, the minimum amount of
price improvement as compared to the Protected NBB or Protected NBO
is $0.0001.
\64\ Retail Orders may only receive $0.001 price improvement in
certain situations, including where an Enhanced RPI Order steps up
against the limit price of an RPI Order priced in sub-pennies. An
Enhanced RPI Order would be given order book priority over RPI
Orders in the event that the Enhanced RPI Order was priced equal to
or less aggressive than the limit price of a resting RPI Order but
had a step-up range that was priced more aggressive than the limit
price of the resting RPI Order (supra note 20).
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An analysis of internal Exchange data found that the current
Program provided approximately $33 million in price improvement to
retail investors during calendar year 2022, which is a substantial
increase from the 4.5 million provided to retail investors between
January 2016 and June 2018.\65\ It is reasonable to believe that the
proposed Enhanced RPI Order, by virtue of providing at least $0.005 of
price improvement in exchange for execution priority, would only add to
the Exchange's ability to provide price improvement to retail
investors. The Exchange does not believe that offering additional price
improvement to retail investors through Enhanced RPI Orders would cause
harm to the broader market. On the contrary, the Exchange believes that
rewarding Enhanced RPI Orders with order book priority in exchange for
price improvement would further the Commission's goal of providing
additional opportunities for retail investors to interact directly with
a large volume of individual investor orders. The Exchange created the
Enhanced RPI Order with the goal of encouraging liquidity providers to
submit orders eligible to interact with marketable retail order flow
with the competition from these liquidity providers resulting in a
reasonable alternative for marketable retail order flow to receive
executions at a price better than the Protected NBBO. As the Commission
noted in its Order Competition Rule proposal, over 90% of marketable
NMS retail stock orders are routed to wholesalers where the orders are
not exposed to order-by-order competition.\66\ While wholesalers
generally achieve price improvement relative to the NBBO, the
Commission has indicated that exchanges often have liquidity available
at the NBBO midpoint, which would be a more favorable price than a
retail order receives when executed by a wholesaler.\67\ Here, the
Exchange is proposing price improvement of at least $0.005, and in some
cases $0.01, which the Exchange believes would further the Commission's
goal of ``increasing competition and enhancing the direct exposure of
individual investor orders to a broader spectrum of market
participants'' as set forth in section 11A of the Exchange Act.\68\
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\65\ See RPI Approval Order at 53184.
\66\ Supra note 17 at 178.
\67\ Id.
\68\ Id.
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In addition to the proposed introduction of the Enhanced RPI Order,
the Exchange also believes that expanding the Program to include
securities priced below $1.00 is consistent with Section 6(b)(5) of the
Act because it promotes just and equitable principles of trade by
allowing liquidity providers to submit orders designed to interact with
retail order flow in all securities, rather than only in securities
priced at or above $1.00. As stated above, a significant majority of
the increased volume in sub-dollar securities comes from executions
occurring off-exchange.\69\ By permitting the Exchange to expand its
Program to include securities priced below $1.00, the Exchange would be
a more attractive venue for liquidity providers seeking to interact
with retail order flow, which furthers the Commission's goal of
bringing retail order executions back on-exchange. Further, the
proposal to expand the Program to include securities priced below $1.00
is not unfairly discriminatory because all Users will be able to submit
RPI Orders or Enhanced RPI Orders at prices below $1.00. As noted
above, the Exchange, along with its affiliates, maintained a market
share of 13.3% in sub-dollar securities during the first quarter of
2023.\70\ The Exchange believes that its expansion of the Program to
include sub-dollar securities would lead to more liquidity providers
submitting order flow to the Exchange in an attempt to execute against
Retail Orders. In turn, RMOs would submit additional Retail Order flow
to the Exchange to interact with RPI Orders and Enhanced RPI Orders as
there would be additional opportunities for price improvement in sub-
dollar securities. The proposal removes impediments to and perfect the
mechanism of a free and open market and a national market system and
protects investors and the public interest by allowing executions in
Retail Orders priced below $1.00 to receive price improvement by
executing against RPI Orders or Enhanced RPI Orders, which are
currently only available at prices at or above $1.00. In addition to
the changes described above, the Exchange believes that the changes to
certain existing rule text within Rule 11.24 is consistent with Section
6(b)(5) of the Act because it provides additional certainty as to how
Rule 11.24 is to be applied. The proposed revised definition of RPI
Interest in Rule 11.24(a)(5) is necessary in order to capture the
proposed Enhanced RPI Order type, in addition to the existing RPI
Order. Additionally, amending Rule 11.24(e) and Rule 11.24(f)(1)-(2) to
reflect the changes made in Rule 11.24(a)(5) is necessary in order to
ensure that RPI Interest is properly defined throughout Rule 11.24. The
deletion of Rule 11.24(h) and renumbering of Rule 11.24(i) are
[[Page 3003]]
consistent with the Exchange's proposal to expand the Program to
securities priced below $1.00. The proposed changes to Rule 11.24(a)(2)
are intended to: (i) clarify that a Retail Order must be submitted with
a time-in-force of IOC; and (ii) introduce the ability for Users to
submit Retail Orders as Mid-Point Peg Orders, both of which changes
serve to provide additional guidance to Users of Retail Orders about
the order modifiers permitted by the Exchange. The Exchange believes
these changes are ministerial in nature and serve to ensure that Rule
11.24 is properly describing order behavior after the proposed
introduction of the Enhanced RPI Order and proposed expansion of the
Program to securities priced below $1.00.
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\69\ Supra note 42.
\70\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposal does not impose any burden on intramarket competition that
is not necessary or appropriate in furtherance of the purposes of the
Act. Rather, the proposed rule change is designed to increase
intramarket competition for retail order flow by introducing a new
order type that is designed to provide price improvement to Retail
Orders in exchange for price priority over resting orders on the same
side of the BYX Book. The proposal, which seeks to provide an
innovative form of price improvement to Retail Orders through the
creation of the Enhanced RPI Order, represents an effort by the
Exchange to encourage on-exchange liquidity an incentivize the trading
of Retail Orders on a national securities exchange.
The Exchange also believes the proposed rule change does not impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the Act. As discussed above, IEX, NYSE,
NYSE Arca, and Nasdaq BX each operate RLPs and the Exchange believes
that its proposed rule change will allow it to compete for additional
retail order flow with the aforementioned exchanges.\71\ Furthermore,
the Exchange's proposal will promote competition between the Exchange
and off-exchange trading venues where the majority of retail order flow
trades today. The proposed Enhanced RPI Order is designed to foster
innovation within the market and increase the quality of the national
market system by allowing national securities exchanges to compete both
with each other and with off-exchange venues for order flow. Expanding
the program to include securities priced below $1.00 similarly would
not impose any burden on intermarket competition that is not necessary
or appropriate in furtherance of the Act. The Exchange's proposal is
designed to increase competition for trading in all securities,
including but not limited to securities priced below $1.00. Given the
growth of trading in sub-dollar securities since 2020, the Exchange
believes that expanding the Program to include sub-dollar securities
will make the Program an attractive option for retail investors seeking
to trade in lower-priced securities, and as such is a competitive
measure designed to compete directly with other exchanges for order
flow.
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\71\ Supra note 59.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBYX-2023-020 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-CboeBYX-2023-020. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-CboeBYX-2023-020 and
should be submitted on or before February 7, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\72\
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\72\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00712 Filed 1-16-24; 8:45 am]
BILLING CODE 8011-01-P
