Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Definition of Retail Order, and Codify Interpretations and Policies Regarding Permissible Uses of Algorithms by RMOs, 10138-10145 [2024-02860]
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10138
Federal Register / Vol. 89, No. 30 / Tuesday, February 13, 2024 / Notices
SECURITIES AND EXCHANGE
COMMISSION
and at the Commission’s Public
Reference Room.
[Release No. 34–99489; File No. SR–
CboeBYX–2024–004]
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.
Self-Regulatory Organizations; Cboe
BYX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Amend
the Definition of Retail Order, and
Codify Interpretations and Policies
Regarding Permissible Uses of
Algorithms by RMOs
February 7, 2024.
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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 January
25, 2024, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BYX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) is filing with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposal to (i)
amend the definition of ‘‘Retail Order’’
as defined by Exchange Rule 11.24(a)(2);
(ii) codify proposed Interpretation and
Policy. 01, which describes the meaning
of the term, ‘‘retail investor,’’ as
referenced in proposed Rule 11.24(a)(2);
(iii) codify proposed Interpretation and
Policy .02, which describes the meaning
of the term, ‘‘natural person,’’ as
referenced in proposed Rule 11.24(a)(2);
(iv) codify proposed Interpretation and
Policy .03, which describes acceptable
uses of algorithms or other
computerized methodology by Retail
Member Organizations; and (v) codify
proposed Interpretation and Policy .04
which explains that Rule 11.24(a)(2)’s
provision preventing the terms of an
order with respect to price is not
intended to prevent a Retail Member
Organization from changing the terms of
the order to ensure a better execution
experience for a retail investor. The text
of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/byx/), at
the Exchange’s Office of the Secretary,
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this rule filing is to (i)
amend the definition of ‘‘Retail Order’’
as defined by Exchange Rule 11.24(a)(2);
(ii) codify proposed Interpretation and
Policy. 01, which describes the meaning
of the term, ‘‘retail investor,’’ as
referenced in proposed Rule 11.24(a)(2);
(iii) codify proposed Interpretation and
Policy .02, which describes the meaning
of the term, ‘‘natural person,’’ as
referenced in proposed Rule 11.24(a)(2);
(iv) codify proposed Interpretation and
Policy .03, which describes acceptable
uses of algorithms or other
computerized methodology by Retail
Member Organizations; and (v) codify
proposed Interpretation and Policy .04
which explains that Rule 11.24(a)(2)’s
provision preventing the terms of an
order with respect to price is not
intended to prevent a Retail Member
Organization from changing the terms of
the order to ensure a better execution
experience for a retail investor.
The Exchange, along with its affiliate
exchanges Cboe BZX Exchange, Inc.
(‘‘BZX’’), Cboe EDGX Exchange, Inc.
(‘‘EDGX’’), and Cboe EDGA Exchange,
Inc. (‘‘EDGA’’), believes that retail
investors are a key part of the trading
ecosystem, and as such, has designed
products and programs to execute retail
orders quickly, with high execution
quality and at a low-cost, with added
pricing incentives. For instance,
targeted retail order types on EDGX 3
3 EDGX’s Retail Priority program seeks to
enhanced execution quality for individual investors
who trade U.S. equities on EDGX. Retail Priority
offers a distinct allocation model, which differs
from the traditional time-based allocation model
used by most U.S. equities market centers that
allocate trades to orders that arrive first in time at
each price point. Retail Priority focuses on
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and BYX,4 execute both marketable and
non-marketable retail orders with price
improvement, and enhanced speed and
fill rates. Additionally, both EDGX and
BYX offer retail-only pricing incentives
for low cost remove and premium
rebates. EDGX also offers Retail Member
Organizations (‘‘RMO’’) 5 discounts on
port fees and market data, and retail
tiers give growing retail firms additional
rebates.
Retail Order Definition
As currently defined in Rule
11.24(a)(2), a ‘‘Retail Order’’ is an
agency or riskless principal order that
meets the criteria of FINRA Rule
5320.03 6 that originates from a natural
person and is submitted to the Exchange
by a RMO, provided that no change is
made to the terms of the order with
respect to price or side of the order and
the order does not originate from a
trading algorithm or any other
computerized methodology.
The Exchange has received Member
feedback,7 however, that it is unclear
whether Rule 11.24 permits the use of
algorithms or other computerized
methodologies (hereinafter, collectively
referred to as ‘‘algorithms’’) when
submitting individual retail investors’
orders to the Exchange.8 The impact of
improving execution quality and trading outcomes
for individual investors, and the firms facilitating
their orders, by reducing their time to execution.
Under Retail Priority, individual investors’
displayed limit orders will post at the front of the
order queue for same-priced orders submitted on
EDGX.
4 Orders designated by a Retail Member
Organization as ‘‘Retail Orders’’ (defined infra) are
eligible for participation in BYX’s Retail Price
Improvement Program. Through the Retail Price
Improvement Program, any BYX Member may input
Retail Price Improving (RPI) orders on the BYX
order book that will offer price improvement on
$.001 increments to RMOs that enter a Retail Order.
In addition to the price improvement opportunities,
Retail Orders that interact with price improving
orders receive an enhanced rebate on BYX. See
generally ‘‘Cboe Retail Price Improvement’’
available at: https://www.cboe.com/us/equities/
trading/offerings/retail_price_improvement/See
generally, ‘‘BYX Retail Price Improvement (RPI)
Program’’ available at: https://cdn.cboe.com/
resources/release_notes/2012/BATS-IntroducesRetail-Price-Improvement-Program.pdf.
5 The term, Retail Member Organization or RMO,
means ‘‘a Member (or a division thereof) that has
been approved by the Exchange under this Rule to
submit Retail Orders.’’ See Rule 11.24(a)(1),
definition of, ‘‘Retail Member Organization’’.’’
6 FINRA Rule 5320.03 provides for a Riskless
Principal Exception. See FINRA Rule 5320,
Prohibition Against Trading Ahead of Customer
Orders, available at: https://www.finra.org/rulesguidance/rulebooks/finra-rules/5320.
7 The Exchange has spoken with various current
and prospective Members, ranging from smaller,
regional broker-dealers to larger, bulge bracket
broker-dealers, that are responsible for handling
and routing retail orders for execution.
8 The Exchange notes that this is not a novel
question and that this issue was initially raised by
SIFMA in its comment letter to the New York Stock
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the rule’s ambiguity is twofold: first,
while Members may route orders
entered by retail investors to the
Exchange for execution, they are doing
so as non-RMOs and without
designating such orders as Retail
Orders; second, potential new Members
considering registering as RMOs may be
discouraged doing from so. In both
cases, the ambiguity of the Exchange’s
current definition is discouraging the
routing of retail order flow to the
Exchange and preventing individual
investors from receiving the benefits
provided to Retail Orders executed on
the Exchange.
The Exchange now seeks to amend
the definition of Retail Order to clarify
for Members, including potential new
Members, that the use of an algorithm
to submit orders to the Exchange on
behalf of a retail investor, does not
automatically preclude an RMO from
designating such orders as, ‘‘Retail
Orders.’’ Specifically, use of an
algorithm to submit a Retail Order to the
Exchange is permissible provided that
the order, or investment criteria for the
order (discussed infra) originates from a
natural person, such as the investor
him/herself, or a natural person on
behalf of a retail investor (e.g., a
Financial Advisor (‘‘FA’’), or trader),
and such order is submitted to the
Exchange by an RMO. Additionally,
except as described in proposed
Interpretation and Policy .03 (discussed
infra), no change to the terms of the
order with respect to price or side, may
be made.
The Exchange believes that the
proposed definition could encourage
additional Members to become RMOs
and route their Retail Orders to the
Exchange. If more Members choose to
become RMOs, the Exchange believes
there will be additional opportunities to
interact with retail order flow, which is
likely to incentivize more retail
liquidity provision, as it is generally
considered preferable to trade with
retail orders than with orders of
professional investors that are typically
more informed regarding short-term
price movements.9 By amending the
Exchange’s Retail Liquidity Program rule filing, in
which SIFMA noted that a broad prohibition on
algorithmic and computerized methodologies could
be read to mean only orders submitted via phone
may be considered Retail Orders, or that even
orders entered through an online broker by an
actual retail customer would not qualify. See
SIFMA Comment Letter (March 23, 2012), to
Securities Exchange Act Release No. 34–66346 (File
No. SR–NYSE–2011–55 and File No. SR–
NYSEAmex-2011–84) (‘‘Retail Liquidity Program’’).
9 Indeed, even the Commission noted ‘‘the
markets generally distinguish between individual
retail investors, whose orders are considered
desirable by liquidity providers because such retail
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Retail Order definition, RMOs and their
retail customers will have the potential
to receive price improved on BYX—a
transparent, well-regulated, public
exchange—receive low cost remove fees
and enhanced rebates, as well as be
eligible to participate in the Exchange’s
RPI Program 10 offering.
The Exchange believes that the
proposed amendments are merely a
codification of how retail trading occurs
in today’s markets and helps to ensure
that retail customers are not
inadvertently excluded from enhanced
execution quality simply because they
utilize automated trading solutions
widely utilized by other market
participants that have been developed
since the current definition was added
to the BYX rulebook. As noted in the
Staff Report on Algorithmic Trading in
U.S. Capital Markets, the current
markets for secondary trading in NMS
stocks is predominantly electronic, with
most of the trading lifecycle, including
order generation, routing, and
execution, being fully automated.11
Indeed, both retail and institutional
investors utilize algorithms to actively
make investment and trading
decisions.12 Additionally, some
specialized brokers provide individual
retail investors with sophisticated
broker algorithms, or allow them to
create their own algorithms,13 as well as
utilize auto-investing technology that
trades for retail customers based on how
much money a retail customer wishes to
invest, and their preferred investment
horizon.14 Given the prevalent use of
trading algorithms in the securities
investors are presumed on average to be less
informed about short-term price movements, and
professional traders, whose orders are presumed on
average to be more informed.’’ See Securities
Exchange Act Release No. 34–68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (SR–BYX–
2012–019) (‘‘Order Granting Approval to Proposed
Rule Change, as Modified by Amendment No. 2, to
Adopt a Retail Price Improvement Program’’).
10 Supra note 4.
11 See ‘‘Staff Report on Algorithmic Trading in
U.S. Capital Markets’’ (August 5, 2020), available at
https://www.sec.gov/tm/reports-and-publications/
special-studies/algo_trading_report_2020.
12 Id.
13 Id.
14 See generally Betterment©, Automated
Investing, available at: https://
www.betterment.com/investing (Betterment©
provides retail customers access to technology that
automatically invests in the market based on the
retail customer’s available funds and stated
investment period) (‘‘Automated Technology is how
we make investing easier, better, and more
accessible’’); see also (DriveWealth,© LLC, Robo,
available at: https://www.drivewealth.com/
solutions/robo (‘‘DriveWealth’s© technology
enables our partners to design cutting-edge roboinvesting experiences for your customers . . . or
you can empower people to make their own
investment decisions with robo-advisory
capability.’’)
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markets, the Exchange believes it
necessary to modify the definition of
Retail Order to align Exchange rules
with current market practice, and to
provide clarity to Members and
potential new Members regarding the
definition of Retail Order.
Proposed Interpretation and Policy .01
The Exchange also seeks to adopt
proposed Interpretation and Policy .01,
which seeks to describe the meaning of
the term, ‘‘retail investor,’’ which is
referenced in proposed Rule 11.24(a)(2).
To ensure that orders from only bona
fide retail investors may qualify as
Retail Orders, the Exchange believes it
important to first specify what type of
investor is considered a retail investor
for the purposes of Rule 11.24.
Specifically, a retail investor is intended
to refer to a non-professional, individual
investor that invests money in their own
account, held at a brokerage firm. A
retail investor may also refer to an
account held in corporate form (e.g.,
corporation, or limited liability
company) that has been established for
the benefit of an individual or group of
related family members (e.g., the legal
representative for a family office).15
Furthermore, the investment goals of a
retail investor are mainly saving for
retirement and/or education, generating
income, or growing wealth over the
long-term. A retail investor may trade
directly on his or her own behalf (e.g.,
self-directed online brokerage account),
utilize online investing platforms that
employ software algorithms to create
and enters orders, and manage
investment portfolios based on an
investor’s investment criteria (e.g.,
‘‘robo-advisors’’), or utilize a FA who
makes investment decisions and enters
orders on the retail investor’s behalf.
The Exchange believes that this
description will help to make clear to
investors whether their trading practices
and investment goals are consistent
with the Exchange’s view of what
constitutes retail trading activity.
Additionally, this description should
help to make clear that Retail Orders
can also include orders entered on
behalf of entities organized for the
benefit of retail investors, and are not
strictly limited to humans—e.g., orders
entered by a legal representative for a
family office may be considered Retail
Orders as they ultimately benefit a retail
investor.
15 Family offices are ‘‘entities established by
wealthy families to manage their wealth and
provide other services to family members, such as
tax and estate planning services. See generally
Small Entity Compliance Guide, ‘‘Family Office’’,
available at: https://www.sec.gov/rules/final/2011/
ia-3220-secg.htm.
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Conversely, the term retail investor is
not intended to include individual
investors that engage in more
professional trading strategies designed
to profit from bid-ask spreads, shortterm price movements, and arbitrage, or
in trading behavior where multiple buy
and sell orders are entered over a short
period of time based on market
conditions.16 While the Exchange
acknowledges that certain industry
offerings may provide individual
investors the tools to trade in such a
manner, such trading strategies are not
considered those of a retail investor for
the purposes of Rule 11.24.
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Proposed Interpretation and Policy .02
The Exchange also seeks to adopt
proposed Interpretation and Policy .02,
which seeks to describe the meaning of
the term, ‘‘natural person,’’ which is
referenced in proposed Rule 11.24(a)(2).
Specifically, for the purposes of Rule
11.24, the Exchange intends for the term
‘‘natural person’’ to refer to a human
who enters an order or investment
criteria for an order (discussed infra).
This individual may be the retail
investor him/herself, or a natural person
entering the order on behalf of a retail
investor (e.g., an FA or trader).
The Exchange believes that this
clarification will help to ensure that
only bona fide retail orders are
submitted to the Exchange as Retail
Orders by making clear that orders
generated automatically by an
algorithm, without human intervention,
shall not be considered Retail Orders.
For the sake of clarity, while the
proposed definition of Retail Order
requires an order to be entered by a
human, a retail investor may utilize an
online brokerage platform that employs
algorithms to create and manage orders
based on investment criteria (discussed
infra) entered by a natural person. The
Exchange believes that such orders still
require human intervention, and the
initial impetus to trade was not
generated by an algorithm. In other
words, the use of an algorithm comes
only after investment criteria is entered
by a human.
Additionally, the Exchange believes
that proposed Interpretation and Policy
.02 will place professional investors and
trading firms on notice that orders
generated from algorithms, without
16 The Exchange notes that the items noted herein
are not intended to be an exhaustive list of
restricted trading strategies. Indeed, what is
noteworthy is that such trading activity is not
representative of the type of activity an ‘‘ordinary’’
investor would engage in. Accordingly, while
certain trading strategies may not be explicitly
noted, trading representative of more sophisticated
investors would similarly be prohibited for the
purposes of Rule 11.21[sic].
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human intervention, that are entered
and routed to the Exchange for
professional trading purposes such as
market making, high-frequency trading,
and proprietary trading, etc., shall not
satisfy the definition of Retail Order.17
While certain industry offerings may
provide individual investors
sophisticated tools enabling them to
trade in a more automated fashion, the
Exchange does not believe that such
trading strategies and corresponding
orders should be considered Retail
Orders for the purposes of Rule 11.24.
Proposed Interpretation and Policy .03
Importantly, the Exchange seeks to
ensure that only bona fide retail flow is
designated as a Retail Order and does
not intend for professional investors and
professional trading firms to avail
themselves of the benefits provided to
RMOs by the Exchange. Therefore, the
Exchange also seeks adopt
Interpretation and Policy .03 to describe
how an RMO can permissibly utilize an
algorithm when entering Retail Orders
onto the Exchange.
The Exchange believes that an RMO
can utilize an algorithm to enter
individual investors’ orders onto the
Exchange, and permissibly designate
such orders as Retail Orders, provided
the order or investment criteria used to
generate an order, originates from a
natural person, such as the retail
investor him/herself, or a natural person
on behalf of a retail investor (e.g., an FA
or trader), and is submitted to the
Exchange for execution by an RMO.
Examples of acceptable uses of
algorithms by an RMO include, but are
not limited to: a smart order router to
route the Retail Order to the Exchange
for execution; a smart order router to
assess trading venues for the best priced
quotation and liquidity prior to routing
the Retail Order to the Exchange; an
order management system, smart order
router, or other functionality to change
the terms an order to seek a better
execution price; use of an order
management system to assist with
portfolio rebalancing and asset
reallocation for the accounts of retail
investors; and a retail investor’s use of
automated investment management
tools offered by RMOs to manage their
assets based on their goals and risk
tolerance (i.e. robo-advisory solutions).
One example of an acceptable use of
an algorithm by an RMO includes the
use of a smart order router to route a
Retail Order to the Exchange for
execution. Here, an RMO may
permissibly use a smart order router to
send an order to the Exchange that: (i)
17 Id.
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an employee of the RMO (e.g., an FA or
trader) entered into their trading system
on behalf of a retail investor, (ii) was
entered by the retail investor him/
herself and is being managed by the
RMO algorithmically (e.g., an order
entered by an individual investor via a
self-directed brokerage account), (iii)
was created by the RMO’s automated
investment algorithm that creates orders
based on investment criteria entered
into a brokerage platform by a retail
investor (i.e., robo-advisory solutions),
or (iv) the RMO is managing on behalf
of their broker-dealer customer that
manages retail flow through the same
channels described in (i)–(iii). In each
use case, such algorithmic usage is
permissible because the orders or
investment criteria were not generated
without intervention by a natural person
and the algorithms are only used after
the orders or investment criteria have
been entered.
Another permissible use of an
algorithm by an RMO includes the use
of a smart order router to assess trading
venues for the best priced quotation and
liquidity prior to routing the Retail
Order entered through the channels
described in (i)–(iv) above. Here, there
is no automated generation of an order
by an algorithm without intervention by
a natural person—whether by order
entry or entry of investment criteria (i.e.,
the robo-advisory scenario noted above,
and discussed further infra). Rather, the
RMO is using algorithmic technology
post-order entry to assess the best
market for the retail investor’s orders,
which is consistent with an RMO’s duty
to provide best execution 18 and integral
to providing optimal execution quality.
An RMO’s use of an order
management system, smart order router,
or other functionality to change the
terms an order to seek a better execution
price, may also be a permissible use of
an algorithm. As discussed further
below, an RMO may utilize such
technology to monitor and manage
orders previously routed to the
Exchange on behalf of a retail investor
to help work the order towards
execution, by amending an order’s limit
price, or changing the size of an order.
Here, an order is not being
18 See. FINRA Rule 5310, Best Execution and
Interpositioning, available at: https://www.finra.org/
rules-guidance/guidance/reports/2021-finrasexamination-and-risk-monitoring-program/bestexecution. FINRA Rule 5310 requires, amongst
other things, that in any transaction for or with a
customer or a customer of another broker-dealer, a
FINRA member and persons associated with a
FINRA member shall use reasonable diligence to
ascertain the best market for the subject security
and buy or sell in such market so that the resultant
price to the customer is favorable as possible under
prevailing market conditions.
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automatically generated by an algorithm
without intervention by a natural
person. Rather, the RMO is utilizing
trading technology post-order entry by a
natural person to help achieve best
execution for the retail investors’ orders,
and to help achieve optimal execution
quality.
Moreover, use of an order
management system to assist with
portfolio rebalancing and asset
reallocation for the accounts of retail
investors may be a permissible use of an
algorithm by an RMO. Here, a natural
person employed by an RMO, such as
an FA, often manages the accounts of
multiple retail investors. In managing
the assets of these accounts, FAs may
often utilize order management systems,
or other software that automatically
rebalances their customers’ equity
security allocations, and simultaneously
generates a pro-rata buy or sell order to
execute the change in position for these
accounts in order to eliminate the need
to manually enter multiple buy and/or
sell orders across multiple accounts.
Here, an FA is utilizing an order
management system to help manage
orders they are entering on behalf of
retail investors. While the generation of
the order may be based on automated
actions from the order management
system, the creation of the order is
originating from the intervention of a
natural person, the FA, in a manner
consistent with the FA’s understanding
of her/his clients’ investment criteria.
Finally, the use of robo-advisory
solutions offered by RMOs to retail
investors to help them manage their
personal assets based on their
investment criteria (discussed infra)
may also be an acceptable use of
algorithms. As discussed below, roboadvisory solutions involve the
algorithmic creation and management of
orders based on investment criteria
entered into the trading tool by a natural
person. Despite the automated creation
of an order by the RMO’s algorithm, the
Exchange believes that the algorithms
offered by robo-advisory solutions are
only utilized after a natural person
enters his/her investment criteria and
provides certain guidelines for his/her
account. While robo-advisory solutions
represent a relatively new type of
trading platform available to retail
investors, these platforms are investing
solutions widely used by retail investors
and offered by numerous brokerage
firms. Given the popularity of roboadvisory solutions, to exclude such
automated trading technology would be
ignore the reality of how many retail
investors participate in today’s markets.
Conversely, orders automatically
generated and submitted to the
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Exchange by an algorithm based on
factors such as market conditions and
price movements, which do not
originate from a manual entry of order
terms or investment criteria by a natural
person, shall not be considered Retail
Orders. Examples of such algorithms
include, but are not limited to,
algorithms developed for marketmaking, high-frequency trading,
liquidity provision, arbitrage, hedging,
or proprietary trading. In addition to the
fact that such orders do not typically
originate from a natural person, entities
engaging in such trading strategies are
not typically doing so for the account of
a retail investor. While retail investors
may be offered certain technologies that
would permit them to engage in the
trading strategies mentioned above, this
activity is generally outside the scope of
the investment goals of a traditional
retail investor (discussed supra) and
should be excluded from the type of
permissible algorithm usage for Retail
Orders.
Proposed Interpretation and Policy .04
The Exchange believes that proposed
Rule 11.21(a)(2)’s [sic] provisions
prohibiting the changing of a Retail
Order’s price or side may discourage the
submission of Retail Orders to the
Exchange, as it may be unclear how an
RMO may handle a Retail Order it
submitted to the Exchange
algorithmically. As such, the Exchange
seeks to codify Interpretation and Policy
.04 to mitigate any confusion that RMOs
may have in this regard. Specifically,
despite proposed Rule 11.21(a)(2)’s [sic]
provision preventing the changing of the
price or side of a Retail Order,
Interpretation and Policy .04 would
provide that post-order entry an RMO
may algorithmically amend the Retail
Order’s price and/or size provided such
amendments are made for the purposes
of seeking better execution, enhance
execution quality, or minimize market
impact.
Accordingly, an RMO may utilize an
algorithm to add a limit price to an
unpriced order, amend an order’s price
and/or size to manage an order’s
marketability and/or mitigate the risk of
receiving executions at aberrant prices,
or adjust the price and/or size of an
order as market conditions or trading
objectives may dictate. For example, an
RMO that receives unpriced orders from
its retail clients may choose to assign
limit prices to such orders to prevent
unintended market impact and to
prevent such orders from executing at
undesirable price levels, or to ensure an
order’s limit price falls within the Limit
PO 00000
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10141
Up/Limit Down (‘‘LULD’’) 19 bands. In
this regard, Interpretation and Policy .04
will help to ensure that an order
submitted by a retail investor does not
lose its standing as a Retail Order
simply because the RMO that submitted
the order assigned limit prices to the
orders to help ensure better priced
executions.
Importantly, such order amendments
may be made manually by a natural
person who entered the order on behalf
of the retail investor (e.g., an RMO’s
trader, an FA, or a retail investor via
their online brokerage account), by the
smart order router used by the RMO to
route the order to the Exchange, and/or
by the algorithm utilized by the RMO to
manage the order’s execution. While the
changing of an order’s price or size by
an algorithm or smart order router may
be automated, the Exchange believes
such behavior is permissible provided
the RMO is making such amendments
are made to satisfy their best execution
obligations, prevent outsized market
impact due to an order’s supermarketable limit price, or to ensure an
order’s marketable limit price falls
within the Limit Up/Limit Down bands.
Retail Segments That Will Benefit From
the Proposed Amendments
The Exchange believes that the
proposed definition may encourage
financial advisors from wealth
management firms that are RMOs to
send their Retail Orders to the
Exchange, as these RMOs will have
additional certainty as to how
algorithms may be used in the
submission of Retail Orders. When
managing their retail customers’
portfolios, even financial advisors rely
on automated technologies such as
trading algorithms and automated smart
order routing solutions to assist them
with efficiently managing and entering
orders for their various customer
accounts.20 Yet, in speaking with some
19 The Limit Up/Limit Down Plan is designed to
prevent trades in NMS Stocks from occurring
outside specified price bands, which are set at a
percentage level above and below the average
reference price of a security over the preceding fiveminute period. The percentage level is determined
by a security’s designation as a Tier 1 or Tier 2
security. Tier 1 comprises all securities in the S&P
500, the Russell 1000 and select Exchange Traded
Products (ETPs). Tier 2 comprises all other NMS
securities, except for rights and warrants, which are
specifically excluded from coverage. The Plan
applies during regular trading hours of 9:30 a.m.
ET–4:00 p.m. ET.
20 For instance, many brokerage firms offer
investment advisory programs where FAs manage
their clients’ portfolios based on their clients’
investment criteria and risk profiles. In managing
these accounts, FAs may determine that a certain
equity security has reached a price point triggering
the buying (selling) of such security across multiple
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of the Exchange’s Members, they are
hesitant to allow send their FAs retail
order flow to the Exchange given the
ambiguity of the current definition of
Retail Order. In this regard, the
Exchange believes that the proposed
rule change will provide further
guidance to these Members and
encourage them to route their Retail
Orders to the Exchange where they will
have the opportunity to receive price
improvement through BYX’s RPI
Program as well as benefit from retailonly pricing incentives. Certainly,
orders originating from FAs who are
responsible for managing individuals’
securities accounts are quintessentially
retail, and the qualification of such
orders as Retail Orders should not be in
doubt simply because FAs may elect to
utilize automated trading technologies
currently utilized by a broad array of
other market participants.
Additionally, the proposed rule may
also make clear to specialized brokers
and traditional brokerage firms 21 that
provide retail investors with automated
trading solutions, that orders from retail
investors may qualify as Retail Orders.
By way of background, automated
trading solutions generally begin by
providing retail investors with a
questionnaire that asks them for
investment criteria, such as personal
information regarding their age,
investing time horizon, investing goals,
and a target dollar amount to guide asset
allocation. From there, a retail investor’s
investments are initially allocated and
subsequently re-allocated according to
pre-determined models developed by
the brokerage firm. Typically,
automated rebalancing may also occur
when a retail investor adds or
withdraws money from the account, or
an allocation percentage drifts from the
retail investor’s desired range. Retail
client accounts. Rather than individually buying
(selling) the security multiple times for each client
account, an FA may instead choose to manage the
accounts through automated technology, such as an
order management system, trading algorithm, and
smart order router. The Exchange believes that the
Retail Order definition should include such
activity, as the order activity is being entered by a
natural person (i.e., the FA), on behalf of natural
persons (i.e., retail investors).
21 For example, Merrill Guided Investing offers
retail investors an automated investing tool. See
Merrill Guided Investing, available at: https://
merrilledge.com/investing/merrill-guided-investing;
see also Fidelity Go®, which provides retail
investors with technology to help automate
investing based on information retail investors
provide about themselves and their financial
institution, available at: https://www.fidelity.com/
managed-accounts/fidelity-go/overview; see also
Schwab Intelligent Portfolios®, which offers retail
investors automated investing through a roboadvisor that helps build and manage retail
investors’ portfolios, available at: https://intelligent.
schwab.com/.
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investors utilizing such services
typically complete a periodic review to
confirm that their portfolio is still
aligned with their investment goals, and
when their portfolios are reallocated,
they must accept the changes before an
allocation is executed. In this use case,
natural persons (i.e., retail customers)
are directly entering their investment
criteria into a brokerage firm’s platform,
and algorithms and trading models
automatically generate orders based on
such data after the retail customer
provides the criteria from which an
order can be generated. If such orders do
not qualify as Retail Orders, it would be
hard to contemplate what types of
orders do satisfy such a definition.
Existing Framework Ensuring Only
Bona Fide Retail Orders Satisfy Rule
11.24
The Exchange notes that it already has
in place robust protections designed to
ensure only bona fide retail orders are
designated as Retail Orders. The
proposed amendments will not
eliminate or diminish the strength of the
existing protections. Rather, the
proposed amendments will augment the
Exchange’s existing RMO framework.
Currently, Rule 11.24(b)(1)–(6) sets
forth an objective process by which a
Member organization applies to become
a RMO. First, to qualify as a Retail
Member Organization, a Member must
conduct a retail routing business or
route retail orders on behalf of another
broker-dealer.22 To become an RMO, a
Member is required to submit an
application form,23 supporting
documentation (e.g., marketing
literature, website screenshots, and
other publicly disclosed materials)
confirming that the applicant’s order
flow would meet the requirements of
the Retail Order definition,24 and an
attestation 25 in a form prescribed by the
Exchange, that substantially all orders
submitted as Retail Orders will qualify
as such under the Rule.26 After
submission of these materials, various
Exchange functions, including legal and
operations, review the application to
assess whether the applicant’s order
flow complies with Exchange rules.27
22 See
Rule 11.24(b)(1).
Rule 11.24(b)(2)(A).
24 See Rule 11.24(b)(2)(B).
25 See section, ‘‘Retail Member Organization—
Broker-Dealer Customer Agreement’’, and ‘‘BrokerDealer Customer Annual Attestation’’ of ‘‘Cboe BYX
Exchange, Inc., Retail Member Organization
Application’’, available at: https://cdn.cboe.com/
resources/membership/BYX_Retail_Member_
Organization_Application.pdf.
26 See Rule 11.24(b)(2)(C).
27 See Rule 11.24(b)(3).
23 See
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Applicants are then notified, in writing,
of the Exchange’s decision.28
Furthermore, all RMOs must have in
place policies and procedures
reasonably designed to ensure that it
will only designate orders as Retail
Orders if all requirements of a Retail
Order are met.29 These policies and
procedures must require the Member to
(i) exercise due diligence before entering
a Retail Order to assure that entry as a
Retail Order is in compliance with the
requirements of the Rule, and (ii)
monitor whether orders entered as
Retail Orders meet the applicable
requirements.30 If a RMO does not itself
conduct a retail business but routes
Retail Orders on behalf of another
broker-dealer, the RMO’s supervisory
procedures must be reasonably designed
to assure that the orders it receives from
the other broker-dealer that are
designated as Retail Orders meets the
definition of a Retail Order.31 In these
cases, the RMO must (i) obtain an
annual written representation, in a form
acceptable to the Exchange, from each
other broker-dealer that sends the RMO
orders to be designated as Retail Orders
that the entry of such orders as Retail
Orders will be in compliance with the
requirements of this Rule; and (ii)
monitor whether Retail Order flow
routed on behalf of other such brokerdealers meets the applicable
requirements.32 Importantly, the
Exchange’s regulatory and surveillance
functions provide appropriate oversight
by the Exchange by monitoring for
continued compliance with the terms of
these provisions. If a RMO fails to abide
by the Retail Order requirements, the
Exchange in its sole discretion may
disqualify a Member from its status as
a RMO.33
Overall, the Exchange believes it has
in place an effective framework for
ensuring that only bona fide retail
orders are designated as Retail Orders
by RMOs, and notes that the proposed
amendments will only seek to enhance
Members’ understanding of Exchange
rules regarding Retail Orders, as well as
augment the Exchange’s ability to
enforce its rules related to Retail Orders.
Therefore, while the proposed
amendments may broaden the spectrum
of retail investors whose orders are
eligible to be routed to the Exchange by
RMOs, the enhanced clarity of these
rules will help to enable Members to
make routing decisions in compliance
28 Id.
29 See
Rule 11.24(b)(6).
30 Id.
31 Id.
32 Id.
33 See
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with applicable Exchange rules. In this
regard, the Exchange believes it
important to note that as Members of the
Exchange, RMOs must be registered
brokers or dealers. As registered brokers
or dealers, RMOs are subject to a
panoply of rules, such as FINRA Rule
2010 (Standards of Commercial Honor
and Principles of Trade), BYX Rule 2.2.
(Obligation of Members and the
Exchange), and BYX Rule 3.1 (Business
Conduct of Members). These rules
require, amongst other things, that as
brokers or dealers, Members are
required to conduct business with the
highest standards of commercial honor,
and obligate Members to comply with
all Exchange rules, by-laws, and
regulations.34 While the Exchange has
an obligation to maintain fair and
orderly markets and carry out it its
duties as a self-regulatory organization,
RMOs are also obligated to ensure that
only orders that comply with Exchange
rules are routed to the Exchange and
designated as Retail Orders.
The Exchange also believes that the
proposed amendments will provide the
Exchange’s regulatory and surveillance
functions with a rule set that is more
aligned with today’s retail order routing
practices. With the prevalent use of
algorithms in today’s equity markets,
more descriptive rule text will aid the
Exchange’s business associates in
properly guiding its Members through
the RMO process, as well as further
strengthen the regulatory and
surveillance function’s ability to enforce
Exchange rules.
2. Statutory Basis
The Exchange believes the proposed
rule changes are 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.35 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 36 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
and coordination with persons engaged
in regulating, clearing, settling,
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34 While
the RMO application process discussed
above does rely on information provided by the
applicant, the Exchange believes that ultimately it
must be allowed to rely on representations made by
registered brokers or dealers that are obligated to
conduct their securities business consistent with
the highest standards of commercial honor, and in
submitting their application, have attested to the
accuracy of the information provided to the
Exchange.
35 15 U.S.C. 78f(b).
36 15 U.S.C. 78f(b)(5).
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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) 37 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
Retail Order Definition
The Exchange believes that the
proposed rule change is consistent with
these principles because it would
increase competition among execution
venues, encourage additional onexchange retail liquidity, and offer retail
investors the opportunity to receive
orderbook priority ahead of all other
interest on the BYX Book. The Exchange
notes that a significant percentage of the
orders of individual investors are
executed over the counter,38 and that by
amending the definition of Retail Order
more retail flow may be directed to the
Exchange and have the opportunity to
execute on a regulated, transparent
market. Indeed, even the Commission
has noted that ‘‘a very large percentage
of marketable (immediately executable)
order flow of individual investors is
‘executed’ or ‘internalized’ by brokerdealers in the [over-the-countermarkets].’’ 39 The Commission has also
noted that a review of the order flow of
eight retail brokers revealed that nearly
100% of their customer market orders
were routed to over-the-counter market
makers, often pursuant to payment for
order flow arrangements.40 By helping
to incentivize RMOs to send Retail
Orders to the Exchange, RMOs will have
another alternative to over-the-counter
market makers. In turn, an increase in
the number of Retail Orders submitted
onto the Exchange will encourage more
retail liquidity provision, thereby
deepening BYX’s retail liquidity pool,
fostering enhanced price discovery, and
offering Retail Orders more price
improvement opportunities as liquidity
37 Id.
38 Ninety-plus percent (90%) of retail marketable
orders are routed to wholesalers and executed offexchange. See Chair Gensler’s remarks, ‘‘Market
Structure and the Retail Investors: Remarks Before
the Piper Sandler Global Exchange Conference’’,
(June 2, 2022), available at: https://www.sec.gov/
news/speech/gensler-remarks-piper-sandler-globalexchange-conference-060822).
39 See Securities Exchange Act Release No. 61358
(January 14, 2010), 75 FR 3594, 3600 (January 21,
2010) (‘‘Concept Release on Equity Market
Structure’’).
40 Id.
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10143
providers compete to trade with Retail
Orders increases.
The Exchange also believes that the
proposed amendment to the definition
of ‘‘Retail Order’’ promotes just and
equitable principles of trade and is not
unfairly discriminatory. While the
proposed amendment treats Retail
Orders differently than non-retail
orders, the Exchange believes that such
a distinction does not constitute unfair
discrimination, and in fact benefits both
liquidity providers and retail investors
alike. As noted by the Commission in its
order approving the BYX RPI program,41
the markets already distinguish between
retail investors, whose orders are
considered desirable by liquidity
providers because retail investors are
presumed to be, on average, less
informed about short-term price
movements, and professional traders,
whose orders are presumed, on average,
to be more informed about short-term
price movements.42 Because of this
distinction, the Commission noted that
liquidity providers prefer to provide
price improvement opportunities to less
informed retail orders than to informed
professional orders, and that absent
price improvement opportunities, retail
investors are likely to encounter wider
spreads which are a consequence of
their interaction with more informed
order flow.43 The Exchange believes
that in clarifying the definition of Retail
Order, RMOs will be more encouraged
to enter orders onto the Exchange,
which in turn may attract retail
liquidity, benefitting both the retail
investing community and professional
traders.
The proposed amendment to the
definition of Retail Order is also
designed to protect investors and the
public interest. In conjunction with
proposed Interpretations and Policies
.01–.04, the Exchange seeks to clarify
precisely how Retail Orders may be
entered onto the Exchange by RMOs
through the use of algorithms. This
clarity is designed to not only encourage
Members to submit Retail Orders onto
the Exchange, but to ensure that only
bona fide retail orders are able to take
advantage of the benefits provided to
Retail Orders by the Exchange.
Proposed Interpretation and Policy .01
Proposed Interpretation and Policy
.01 is designed 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. By
41 Supra
note 9.
42 Id.
43 Id.
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providing additional guidance to market
participants about what is meant by the
term ‘‘retail investor’’, the Exchange is
helping to ensure that only bona fide
retail activity is entered onto the
Exchange, and that professional
investors cannot somehow avail
themselves of the benefits offered to
Retail Orders by the Exchange.
The proposed clarification may also
provide Members, and potential new
Members, with the necessary assurances
that they are in fact managing retail
order flow, encouraging them to enter
their Retail Orders onto the Exchange as
RMOs. Increased RMO participation
may in turn foster more retail liquidity
provision as more sophisticated order
flow seeks to trade with retail flow. The
increase in liquidity provision and RMO
provision will likely lead to deeper
liquidity on the Exchange that will help
to enhance price discovery and
increased price improvement
opportunities for not only retail
investors, but all investors submitting
order flow to the Exchange.
Additionally, by routing Retail Orders to
the Exchange, RMOs and their retail
investors will benefit from the
Exchange’s retail-only pricing
incentives, as well as increased price
improvement opportunities and
enhanced order priority offered by
BYX’s RPI Program.
Proposed Interpretation and Policy .02
Proposed Interpretation and Policy
.02 is designed 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. By
providing additional guidance around
the term ‘‘natural person’’, it will be
clearer to Members that an order, or
investment criteria for an order, must be
entered by a human and cannot
originate from an algorithm without
human intervention. This will help to
ensure that only bona fide retail orders
are designated as ‘‘Retail Orders’’ and
mitigate the likelihood that professional
investors that utilize fully automated
trading technology designed to
participate in certain trading strategies
inappropriately seek to designate their
orders as Retail Orders.
Furthermore, by clarifying that orders
created through broker-dealers’ roboadvisory programs can qualify as Retail
Orders if the investment criteria are
entered by a natural person, additional
order flow from robo-advisory program
may be directed to the Exchange for
execution. Similarly, by making clear
that a ‘‘natural person’’ may also be an
account held in corporate form, such as
an individual retirement account or
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limited liability corporation (e.g., family
office), more retail flow may be directed
to the Exchange. By executing on the
Exchange RMOs will be able to avail
themselves of retail-specific pricing,
which they can pass onto their retail
clients in the form of reduced
commissions and transaction costs.
Finally, as noted throughout,
increased retail flow will augment the
Exchange’s liquidity pools, thereby
fostering price discovery, and creating
more opportunities for price
improvement. With improved onexecution experiences more investors
may be incentivized to route their retails
orders on-exchange (i.e., BYX) exposing
retail flow to on-exchange price
competition.
Proposed Interpretation and Policy. 03
Proposed Interpretation and Policy
.03 is designed to protect investors and
the markets by making clear to RMOs
using algorithms to enter Retail Orders
onto the Exchange that orders must be
entered by a retail investor or a natural
person on behalf of a retail investor, and
that in the case of robo-advisory
solutions, the retail investor must enter
the investment criteria that the
brokerage firm’s algorithm uses to
generate orders. By providing examples
of both acceptable and unacceptable
uses of algorithms, market participants
will be clearer as to whether the orders
they route to the Exchange for execution
are indeed ‘‘Retail Orders’’. In doing so,
the Exchange is helping to ensure that
only bona fide retail orders qualify as
Retail Orders, and that professional
investors are not inappropriately
receiving benefits specifically reserved
for retail investors.
Proposed Interpretation and Policy
.03 will also help to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system. By
providing additional guidance on how
RMOs may use algorithms when
submitting Retail Orders to the
Exchange, Members will be more certain
as to whether their orders in fact qualify
as Retail Orders. In doing so, RMOs may
route more Retail Orders to the
Exchange and in turn, may encourage
more market participants to provide
additional retail liquidity thereby
deepening the liquidity pool, and
enhancing price discovery and
transparency. As more investors are
incentivized to execute their retail flow
on the Exchange an increasing number
of individual investors’ orders will be
exposed to on-exchange price
competition, increasing their
opportunity to receive price
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improvement and improved execution
quality.
Interpretation and Policy .04
Interpretation and Policy .04 helps to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system. The
provision preventing the changing of the
price or side of an order in both the
current and proposed definition of
Retail Order was designed to ensure that
orders entered onto the Exchange by
RMOs were submitted on behalf of retail
investors, and not institutional orders
which typically have the terms of price
and size amended, canceled, or replaced
frequently throughout the day.
However, the Exchange recognizes that
RMOs may sometimes receive unpriced
orders from their retail customers or
may deem a certain limit price to be
appropriate for the purposes of seeking
a better execution and/or preventing an
order from executing at undesirable
price levels. As such, by clarifying that
Retail Orders may in fact be amended
provided it is to affect a better execution
experience for the retail investor, or to
manage market impact, RMOs may be
more encouraged to send more Retail
Orders to the Exchange. As noted
throughout, increased RMO activity and
retail liquidity provision will only serve
to deepen liquidity for Retail Orders,
which in turn will lead to price
competition and increased price
improvement opportunities for
individual investors’ orders.
The Exchange also believes that
proposed Interpretations and Policies
.01–.04 promote just and equitable
principles of trade and are not unfairly
discriminatory because they are
intended to provide guidance to all
Members, in particular RMOs, as to
what constitutes a Retail Order.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes its proposed
amendment to the definition of Retail
Order and codification of Interpretation
and Policies .01–.04 will benefit
intramarket competition rather than
burden competition. The proposed
changes serve to provide additional
clarity to Members and RMOs as to the
types of persons or accounts eligible to
submit Retail Orders and describe the
permissible and impermissible uses of
algorithms available to Members and
RMOs when submitting Retail Orders.
The Exchange believes this additional
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information will lead to additional retail
order flow being submitted to the
Exchange by RMOs, which all contraside orders are eligible to interact with.
Greater overall order flow and trading
opportunities benefits all market
participants on the Exchange. An
increase in RMO activity and liquidity
providing orders will serve to enhance
the Exchange’s available liquidity.
Deeper liquidity pools will, in turn,
enhance price discovery, as well as
price improvement opportunities for
retail investors as liquidity providers
compete for retail executions. Liquidity
providers also benefit by being able to
interact with retail order flow that is
often executed off-exchange, and
therefore generally inaccessible to those
trading in the lit markets.
While the proposed definition will
help to ensure that only bona fide retail
investors receive the benefits of afforded
to Retail Orders, prioritization of retail
investors is not a novel concept in the
securities market. In this regard, the
proposed amendments should not result
in any new or novel issues to be
considered by the Commission, or that
have not already been contemplated by
today’s market participants. Indeed, as
noted in the Amendment 1 of EDGX’s
Retail Priority filing,44 customer priority
has a long tradition in the options
market where orders entered on behalf
of non-broker dealer public customers
have historically been afforded priority
over orders submitted by registered
broker dealers. In fact, most options
exchanges, including the Exchange’s
equity options platform,45 employ a
customer priority execution algorithm
where orders submitted by a subset of
public customer with more limited
trading activity are provided order book
priority ahead of orders submitted by
broker-dealers or other market
professionals at the same price.
The Exchange further believes that the
proposed rule change will increase
intermarket competition by enabling the
Exchange to better compete with other
exchanges and off-exchange trading
venues for retail order flow. The
Commission has spoken about
‘‘increasing competition and enhancing
the direct exposure of individual
investor orders to a broader spectrum of
market participants’’ 46 and the
Exchange believes its proposed
amendments to the definition of Retail
Order and introduction of
44 See Securities Exchange Act Release No. 86280
(July 2, 2019), 84 FR 32808 (July 9, 2019) (‘‘Notice
of Amendment No. 1’’).
45 See BYX Rule 21.8(d)(1).
46 See Securities Exchange Act Release No. 96495
(December 14, 2022), 88 FR 128 (January 3, 2023)
(‘‘Order Competition Rule’’) at 178.
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Interpretations and Policies .01–.04
provide sufficient guidance to RMOs to
encourage additional retail order flow
be sent to the Exchange. In turn, retail
investors will have additional
opportunities to receive executions on a
transparent, regulated, national
securities exchange in addition to the
currently available off-exchange trading
venues. Additionally, a revised
definition of Retail Order may
encourage additional competition for
retail order flow on-exchange that
would be eligible to participate in the
various retail liquidity programs offered
by exchanges,47 including the
Exchange’s RPI program. This, in turn,
could create additional incentives for
regulated exchanges to develop
additional liquidity programs designed
at providing additional benefits to retail
investors, thus promoting additional
intermarket competition.
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:
47 See e.g., Cboe BYX Exchange Retail Price
Improvement (https://www.cboe.com/us/equities/
trading/offerings/retail_price_improvement/);
Nasdaq retail services (https://www.nasdaqtrader.
com/content/productsservices/Trading/Equities
RetailOfferingOverview.pdf); NYSE and NYSE
National Retail Liquidity (https://www.nyse.com/
markets/liquidity-programs); IEX Retail Program
(https://www.iexexchange.io/products/retailprogram).
PO 00000
Frm 00125
Fmt 4703
Sfmt 9990
10145
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–2024–004 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–2024–004. 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–2024–004 and should be
submitted on or before March 5, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–02860 Filed 2–12–24; 8:45 am]
BILLING CODE 8011–01–P
48 17
E:\FR\FM\13FEN1.SGM
CFR 200.30–3(a)(12).
13FEN1
]]>Agencies
[Federal Register Volume 89, Number 30 (Tuesday, February 13, 2024)]
[Notices]
[Pages 10138-10145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02860]
[[Page 10138]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99489; File No. SR-CboeBYX-2024-004]
Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend the Definition of Retail
Order, and Codify Interpretations and Policies Regarding Permissible
Uses of Algorithms by RMOs
February 7, 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 January 25, 2024, 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
Cboe BYX Exchange, Inc. (the ``Exchange'' or ``BYX'') is filing
with the Securities and Exchange Commission (the ``Commission'') a
proposal to (i) amend the definition of ``Retail Order'' as defined by
Exchange Rule 11.24(a)(2); (ii) codify proposed Interpretation and
Policy. 01, which describes the meaning of the term, ``retail
investor,'' as referenced in proposed Rule 11.24(a)(2); (iii) codify
proposed Interpretation and Policy .02, which describes the meaning of
the term, ``natural person,'' as referenced in proposed Rule
11.24(a)(2); (iv) codify proposed Interpretation and Policy .03, which
describes acceptable uses of algorithms or other computerized
methodology by Retail Member Organizations; and (v) codify proposed
Interpretation and Policy .04 which explains that Rule 11.24(a)(2)'s
provision preventing the terms of an order with respect to price is not
intended to prevent a Retail Member Organization from changing the
terms of the order to ensure a better execution experience for a retail
investor. The text of the proposed rule change is provided in Exhibit
5.
The text of the proposed rule change is also 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 purpose of this rule filing is to (i) amend the definition of
``Retail Order'' as defined by Exchange Rule 11.24(a)(2); (ii) codify
proposed Interpretation and Policy. 01, which describes the meaning of
the term, ``retail investor,'' as referenced in proposed Rule
11.24(a)(2); (iii) codify proposed Interpretation and Policy .02, which
describes the meaning of the term, ``natural person,'' as referenced in
proposed Rule 11.24(a)(2); (iv) codify proposed Interpretation and
Policy .03, which describes acceptable uses of algorithms or other
computerized methodology by Retail Member Organizations; and (v) codify
proposed Interpretation and Policy .04 which explains that Rule
11.24(a)(2)'s provision preventing the terms of an order with respect
to price is not intended to prevent a Retail Member Organization from
changing the terms of the order to ensure a better execution experience
for a retail investor.
The Exchange, along with its affiliate exchanges Cboe BZX Exchange,
Inc. (``BZX''), Cboe EDGX Exchange, Inc. (``EDGX''), and Cboe EDGA
Exchange, Inc. (``EDGA''), believes that retail investors are a key
part of the trading ecosystem, and as such, has designed products and
programs to execute retail orders quickly, with high execution quality
and at a low-cost, with added pricing incentives. For instance,
targeted retail order types on EDGX \3\ and BYX,\4\ execute both
marketable and non-marketable retail orders with price improvement, and
enhanced speed and fill rates. Additionally, both EDGX and BYX offer
retail-only pricing incentives for low cost remove and premium rebates.
EDGX also offers Retail Member Organizations (``RMO'') \5\ discounts on
port fees and market data, and retail tiers give growing retail firms
additional rebates.
---------------------------------------------------------------------------
\3\ EDGX's Retail Priority program seeks to enhanced execution
quality for individual investors who trade U.S. equities on EDGX.
Retail Priority offers a distinct allocation model, which differs
from the traditional time-based allocation model used by most U.S.
equities market centers that allocate trades to orders that arrive
first in time at each price point. Retail Priority focuses on
improving execution quality and trading outcomes for individual
investors, and the firms facilitating their orders, by reducing
their time to execution. Under Retail Priority, individual
investors' displayed limit orders will post at the front of the
order queue for same-priced orders submitted on EDGX.
\4\ Orders designated by a Retail Member Organization as
``Retail Orders'' (defined infra) are eligible for participation in
BYX's Retail Price Improvement Program. Through the Retail Price
Improvement Program, any BYX Member may input Retail Price Improving
(RPI) orders on the BYX order book that will offer price improvement
on $.001 increments to RMOs that enter a Retail Order. In addition
to the price improvement opportunities, Retail Orders that interact
with price improving orders receive an enhanced rebate on BYX. See
generally ``Cboe Retail Price Improvement'' available at: https://www.cboe.com/us/equities/trading/offerings/retail_price_improvement/See generally, ``BYX Retail Price Improvement (RPI) Program''
available at: https://cdn.cboe.com/resources/release_notes/2012/BATS-Introduces-Retail-Price-Improvement-Program.pdf.
\5\ The term, Retail Member Organization or RMO, means ``a
Member (or a division thereof) that has been approved by the
Exchange under this Rule to submit Retail Orders.'' See Rule
11.24(a)(1), definition of, ``Retail Member Organization''.''
---------------------------------------------------------------------------
Retail Order Definition
As currently defined in Rule 11.24(a)(2), a ``Retail Order'' is an
agency or riskless principal order that meets the criteria of FINRA
Rule 5320.03 \6\ that originates from a natural person and is submitted
to the Exchange by a RMO, provided that no change is made to the terms
of the order with respect to price or side of the order and the order
does not originate from a trading algorithm or any other computerized
methodology.
---------------------------------------------------------------------------
\6\ FINRA Rule 5320.03 provides for a Riskless Principal
Exception. See FINRA Rule 5320, Prohibition Against Trading Ahead of
Customer Orders, available at: https://www.finra.org/rules-guidance/rulebooks/finra-rules/5320.
---------------------------------------------------------------------------
The Exchange has received Member feedback,\7\ however, that it is
unclear whether Rule 11.24 permits the use of algorithms or other
computerized methodologies (hereinafter, collectively referred to as
``algorithms'') when submitting individual retail investors' orders to
the Exchange.\8\ The impact of
[[Page 10139]]
the rule's ambiguity is twofold: first, while Members may route orders
entered by retail investors to the Exchange for execution, they are
doing so as non-RMOs and without designating such orders as Retail
Orders; second, potential new Members considering registering as RMOs
may be discouraged doing from so. In both cases, the ambiguity of the
Exchange's current definition is discouraging the routing of retail
order flow to the Exchange and preventing individual investors from
receiving the benefits provided to Retail Orders executed on the
Exchange.
---------------------------------------------------------------------------
\7\ The Exchange has spoken with various current and prospective
Members, ranging from smaller, regional broker-dealers to larger,
bulge bracket broker-dealers, that are responsible for handling and
routing retail orders for execution.
\8\ The Exchange notes that this is not a novel question and
that this issue was initially raised by SIFMA in its comment letter
to the New York Stock Exchange's Retail Liquidity Program rule
filing, in which SIFMA noted that a broad prohibition on algorithmic
and computerized methodologies could be read to mean only orders
submitted via phone may be considered Retail Orders, or that even
orders entered through an online broker by an actual retail customer
would not qualify. See SIFMA Comment Letter (March 23, 2012), to
Securities Exchange Act Release No. 34-66346 (File No. SR-NYSE-2011-
55 and File No. SR-NYSEAmex-2011-84) (``Retail Liquidity Program'').
---------------------------------------------------------------------------
The Exchange now seeks to amend the definition of Retail Order to
clarify for Members, including potential new Members, that the use of
an algorithm to submit orders to the Exchange on behalf of a retail
investor, does not automatically preclude an RMO from designating such
orders as, ``Retail Orders.'' Specifically, use of an algorithm to
submit a Retail Order to the Exchange is permissible provided that the
order, or investment criteria for the order (discussed infra)
originates from a natural person, such as the investor him/herself, or
a natural person on behalf of a retail investor (e.g., a Financial
Advisor (``FA''), or trader), and such order is submitted to the
Exchange by an RMO. Additionally, except as described in proposed
Interpretation and Policy .03 (discussed infra), no change to the terms
of the order with respect to price or side, may be made.
The Exchange believes that the proposed definition could encourage
additional Members to become RMOs and route their Retail Orders to the
Exchange. If more Members choose to become RMOs, the Exchange believes
there will be additional opportunities to interact with retail order
flow, which is likely to incentivize more retail liquidity provision,
as it is generally considered preferable to trade with retail orders
than with orders of professional investors that are typically more
informed regarding short-term price movements.\9\ By amending the
Retail Order definition, RMOs and their retail customers will have the
potential to receive price improved on BYX--a transparent, well-
regulated, public exchange--receive low cost remove fees and enhanced
rebates, as well as be eligible to participate in the Exchange's RPI
Program \10\ offering.
---------------------------------------------------------------------------
\9\ Indeed, even the Commission noted ``the markets generally
distinguish between individual retail investors, whose orders are
considered desirable by liquidity providers because such retail
investors are presumed on average to be less informed about short-
term price movements, and professional traders, whose orders are
presumed on average to be more informed.'' See Securities Exchange
Act Release No. 34-68303 (November 27, 2012), 77 FR 71652 (December
3, 2012) (SR-BYX-2012-019) (``Order Granting Approval to Proposed
Rule Change, as Modified by Amendment No. 2, to Adopt a Retail Price
Improvement Program'').
\10\ Supra note 4.
---------------------------------------------------------------------------
The Exchange believes that the proposed amendments are merely a
codification of how retail trading occurs in today's markets and helps
to ensure that retail customers are not inadvertently excluded from
enhanced execution quality simply because they utilize automated
trading solutions widely utilized by other market participants that
have been developed since the current definition was added to the BYX
rulebook. As noted in the Staff Report on Algorithmic Trading in U.S.
Capital Markets, the current markets for secondary trading in NMS
stocks is predominantly electronic, with most of the trading lifecycle,
including order generation, routing, and execution, being fully
automated.\11\ Indeed, both retail and institutional investors utilize
algorithms to actively make investment and trading decisions.\12\
Additionally, some specialized brokers provide individual retail
investors with sophisticated broker algorithms, or allow them to create
their own algorithms,\13\ as well as utilize auto-investing technology
that trades for retail customers based on how much money a retail
customer wishes to invest, and their preferred investment horizon.\14\
Given the prevalent use of trading algorithms in the securities
markets, the Exchange believes it necessary to modify the definition of
Retail Order to align Exchange rules with current market practice, and
to provide clarity to Members and potential new Members regarding the
definition of Retail Order.
---------------------------------------------------------------------------
\11\ See ``Staff Report on Algorithmic Trading in U.S. Capital
Markets'' (August 5, 2020), available at https://www.sec.gov/tm/reports-and-publications/special-studies/algo_trading_report_2020.
\12\ Id.
\13\ Id.
\14\ See generally Betterment(copyright), Automated Investing,
available at: https://www.betterment.com/investing
(Betterment(copyright) provides retail customers access to
technology that automatically invests in the market based on the
retail customer's available funds and stated investment period)
(``Automated Technology is how we make investing easier, better, and
more accessible''); see also (DriveWealth,(copyright) LLC, Robo,
available at: https://www.drivewealth.com/solutions/robo
(``DriveWealth's(copyright) technology enables our partners to
design cutting-edge robo-investing experiences for your customers .
. . or you can empower people to make their own investment decisions
with robo-advisory capability.'')
---------------------------------------------------------------------------
Proposed Interpretation and Policy .01
The Exchange also seeks to adopt proposed Interpretation and Policy
.01, which seeks to describe the meaning of the term, ``retail
investor,'' which is referenced in proposed Rule 11.24(a)(2). To ensure
that orders from only bona fide retail investors may qualify as Retail
Orders, the Exchange believes it important to first specify what type
of investor is considered a retail investor for the purposes of Rule
11.24. Specifically, a retail investor is intended to refer to a non-
professional, individual investor that invests money in their own
account, held at a brokerage firm. A retail investor may also refer to
an account held in corporate form (e.g., corporation, or limited
liability company) that has been established for the benefit of an
individual or group of related family members (e.g., the legal
representative for a family office).\15\ Furthermore, the investment
goals of a retail investor are mainly saving for retirement and/or
education, generating income, or growing wealth over the long-term. A
retail investor may trade directly on his or her own behalf (e.g.,
self-directed online brokerage account), utilize online investing
platforms that employ software algorithms to create and enters orders,
and manage investment portfolios based on an investor's investment
criteria (e.g., ``robo-advisors''), or utilize a FA who makes
investment decisions and enters orders on the retail investor's behalf.
---------------------------------------------------------------------------
\15\ Family offices are ``entities established by wealthy
families to manage their wealth and provide other services to family
members, such as tax and estate planning services. See generally
Small Entity Compliance Guide, ``Family Office'', available at:
https://www.sec.gov/rules/final/2011/ia-3220-secg.htm.
---------------------------------------------------------------------------
The Exchange believes that this description will help to make clear
to investors whether their trading practices and investment goals are
consistent with the Exchange's view of what constitutes retail trading
activity. Additionally, this description should help to make clear that
Retail Orders can also include orders entered on behalf of entities
organized for the benefit of retail investors, and are not strictly
limited to humans--e.g., orders entered by a legal representative for a
family office may be considered Retail Orders as they ultimately
benefit a retail investor.
[[Page 10140]]
Conversely, the term retail investor is not intended to include
individual investors that engage in more professional trading
strategies designed to profit from bid-ask spreads, short-term price
movements, and arbitrage, or in trading behavior where multiple buy and
sell orders are entered over a short period of time based on market
conditions.\16\ While the Exchange acknowledges that certain industry
offerings may provide individual investors the tools to trade in such a
manner, such trading strategies are not considered those of a retail
investor for the purposes of Rule 11.24.
---------------------------------------------------------------------------
\16\ The Exchange notes that the items noted herein are not
intended to be an exhaustive list of restricted trading strategies.
Indeed, what is noteworthy is that such trading activity is not
representative of the type of activity an ``ordinary'' investor
would engage in. Accordingly, while certain trading strategies may
not be explicitly noted, trading representative of more
sophisticated investors would similarly be prohibited for the
purposes of Rule 11.21[sic].
---------------------------------------------------------------------------
Proposed Interpretation and Policy .02
The Exchange also seeks to adopt proposed Interpretation and Policy
.02, which seeks to describe the meaning of the term, ``natural
person,'' which is referenced in proposed Rule 11.24(a)(2).
Specifically, for the purposes of Rule 11.24, the Exchange intends for
the term ``natural person'' to refer to a human who enters an order or
investment criteria for an order (discussed infra). This individual may
be the retail investor him/herself, or a natural person entering the
order on behalf of a retail investor (e.g., an FA or trader).
The Exchange believes that this clarification will help to ensure
that only bona fide retail orders are submitted to the Exchange as
Retail Orders by making clear that orders generated automatically by an
algorithm, without human intervention, shall not be considered Retail
Orders. For the sake of clarity, while the proposed definition of
Retail Order requires an order to be entered by a human, a retail
investor may utilize an online brokerage platform that employs
algorithms to create and manage orders based on investment criteria
(discussed infra) entered by a natural person. The Exchange believes
that such orders still require human intervention, and the initial
impetus to trade was not generated by an algorithm. In other words, the
use of an algorithm comes only after investment criteria is entered by
a human.
Additionally, the Exchange believes that proposed Interpretation
and Policy .02 will place professional investors and trading firms on
notice that orders generated from algorithms, without human
intervention, that are entered and routed to the Exchange for
professional trading purposes such as market making, high-frequency
trading, and proprietary trading, etc., shall not satisfy the
definition of Retail Order.\17\ While certain industry offerings may
provide individual investors sophisticated tools enabling them to trade
in a more automated fashion, the Exchange does not believe that such
trading strategies and corresponding orders should be considered Retail
Orders for the purposes of Rule 11.24.
---------------------------------------------------------------------------
\17\ Id.
---------------------------------------------------------------------------
Proposed Interpretation and Policy .03
Importantly, the Exchange seeks to ensure that only bona fide
retail flow is designated as a Retail Order and does not intend for
professional investors and professional trading firms to avail
themselves of the benefits provided to RMOs by the Exchange. Therefore,
the Exchange also seeks adopt Interpretation and Policy .03 to describe
how an RMO can permissibly utilize an algorithm when entering Retail
Orders onto the Exchange.
The Exchange believes that an RMO can utilize an algorithm to enter
individual investors' orders onto the Exchange, and permissibly
designate such orders as Retail Orders, provided the order or
investment criteria used to generate an order, originates from a
natural person, such as the retail investor him/herself, or a natural
person on behalf of a retail investor (e.g., an FA or trader), and is
submitted to the Exchange for execution by an RMO. Examples of
acceptable uses of algorithms by an RMO include, but are not limited
to: a smart order router to route the Retail Order to the Exchange for
execution; a smart order router to assess trading venues for the best
priced quotation and liquidity prior to routing the Retail Order to the
Exchange; an order management system, smart order router, or other
functionality to change the terms an order to seek a better execution
price; use of an order management system to assist with portfolio
rebalancing and asset reallocation for the accounts of retail
investors; and a retail investor's use of automated investment
management tools offered by RMOs to manage their assets based on their
goals and risk tolerance (i.e. robo-advisory solutions).
One example of an acceptable use of an algorithm by an RMO includes
the use of a smart order router to route a Retail Order to the Exchange
for execution. Here, an RMO may permissibly use a smart order router to
send an order to the Exchange that: (i) an employee of the RMO (e.g.,
an FA or trader) entered into their trading system on behalf of a
retail investor, (ii) was entered by the retail investor him/herself
and is being managed by the RMO algorithmically (e.g., an order entered
by an individual investor via a self-directed brokerage account), (iii)
was created by the RMO's automated investment algorithm that creates
orders based on investment criteria entered into a brokerage platform
by a retail investor (i.e., robo-advisory solutions), or (iv) the RMO
is managing on behalf of their broker-dealer customer that manages
retail flow through the same channels described in (i)-(iii). In each
use case, such algorithmic usage is permissible because the orders or
investment criteria were not generated without intervention by a
natural person and the algorithms are only used after the orders or
investment criteria have been entered.
Another permissible use of an algorithm by an RMO includes the use
of a smart order router to assess trading venues for the best priced
quotation and liquidity prior to routing the Retail Order entered
through the channels described in (i)-(iv) above. Here, there is no
automated generation of an order by an algorithm without intervention
by a natural person--whether by order entry or entry of investment
criteria (i.e., the robo-advisory scenario noted above, and discussed
further infra). Rather, the RMO is using algorithmic technology post-
order entry to assess the best market for the retail investor's orders,
which is consistent with an RMO's duty to provide best execution \18\
and integral to providing optimal execution quality.
---------------------------------------------------------------------------
\18\ See. FINRA Rule 5310, Best Execution and Interpositioning,
available at: https://www.finra.org/rules-guidance/guidance/reports/2021-finras-examination-and-risk-monitoring-program/best-execution.
FINRA Rule 5310 requires, amongst other things, that in any
transaction for or with a customer or a customer of another broker-
dealer, a FINRA member and persons associated with a FINRA member
shall use reasonable diligence to ascertain the best market for the
subject security and buy or sell in such market so that the
resultant price to the customer is favorable as possible under
prevailing market conditions.
---------------------------------------------------------------------------
An RMO's use of an order management system, smart order router, or
other functionality to change the terms an order to seek a better
execution price, may also be a permissible use of an algorithm. As
discussed further below, an RMO may utilize such technology to monitor
and manage orders previously routed to the Exchange on behalf of a
retail investor to help work the order towards execution, by amending
an order's limit price, or changing the size of an order. Here, an
order is not being
[[Page 10141]]
automatically generated by an algorithm without intervention by a
natural person. Rather, the RMO is utilizing trading technology post-
order entry by a natural person to help achieve best execution for the
retail investors' orders, and to help achieve optimal execution
quality.
Moreover, use of an order management system to assist with
portfolio rebalancing and asset reallocation for the accounts of retail
investors may be a permissible use of an algorithm by an RMO. Here, a
natural person employed by an RMO, such as an FA, often manages the
accounts of multiple retail investors. In managing the assets of these
accounts, FAs may often utilize order management systems, or other
software that automatically rebalances their customers' equity security
allocations, and simultaneously generates a pro-rata buy or sell order
to execute the change in position for these accounts in order to
eliminate the need to manually enter multiple buy and/or sell orders
across multiple accounts. Here, an FA is utilizing an order management
system to help manage orders they are entering on behalf of retail
investors. While the generation of the order may be based on automated
actions from the order management system, the creation of the order is
originating from the intervention of a natural person, the FA, in a
manner consistent with the FA's understanding of her/his clients'
investment criteria.
Finally, the use of robo-advisory solutions offered by RMOs to
retail investors to help them manage their personal assets based on
their investment criteria (discussed infra) may also be an acceptable
use of algorithms. As discussed below, robo-advisory solutions involve
the algorithmic creation and management of orders based on investment
criteria entered into the trading tool by a natural person. Despite the
automated creation of an order by the RMO's algorithm, the Exchange
believes that the algorithms offered by robo-advisory solutions are
only utilized after a natural person enters his/her investment criteria
and provides certain guidelines for his/her account. While robo-
advisory solutions represent a relatively new type of trading platform
available to retail investors, these platforms are investing solutions
widely used by retail investors and offered by numerous brokerage
firms. Given the popularity of robo-advisory solutions, to exclude such
automated trading technology would be ignore the reality of how many
retail investors participate in today's markets.
Conversely, orders automatically generated and submitted to the
Exchange by an algorithm based on factors such as market conditions and
price movements, which do not originate from a manual entry of order
terms or investment criteria by a natural person, shall not be
considered Retail Orders. Examples of such algorithms include, but are
not limited to, algorithms developed for market-making, high-frequency
trading, liquidity provision, arbitrage, hedging, or proprietary
trading. In addition to the fact that such orders do not typically
originate from a natural person, entities engaging in such trading
strategies are not typically doing so for the account of a retail
investor. While retail investors may be offered certain technologies
that would permit them to engage in the trading strategies mentioned
above, this activity is generally outside the scope of the investment
goals of a traditional retail investor (discussed supra) and should be
excluded from the type of permissible algorithm usage for Retail
Orders.
Proposed Interpretation and Policy .04
The Exchange believes that proposed Rule 11.21(a)(2)'s [sic]
provisions prohibiting the changing of a Retail Order's price or side
may discourage the submission of Retail Orders to the Exchange, as it
may be unclear how an RMO may handle a Retail Order it submitted to the
Exchange algorithmically. As such, the Exchange seeks to codify
Interpretation and Policy .04 to mitigate any confusion that RMOs may
have in this regard. Specifically, despite proposed Rule 11.21(a)(2)'s
[sic] provision preventing the changing of the price or side of a
Retail Order, Interpretation and Policy .04 would provide that post-
order entry an RMO may algorithmically amend the Retail Order's price
and/or size provided such amendments are made for the purposes of
seeking better execution, enhance execution quality, or minimize market
impact.
Accordingly, an RMO may utilize an algorithm to add a limit price
to an unpriced order, amend an order's price and/or size to manage an
order's marketability and/or mitigate the risk of receiving executions
at aberrant prices, or adjust the price and/or size of an order as
market conditions or trading objectives may dictate. For example, an
RMO that receives unpriced orders from its retail clients may choose to
assign limit prices to such orders to prevent unintended market impact
and to prevent such orders from executing at undesirable price levels,
or to ensure an order's limit price falls within the Limit Up/Limit
Down (``LULD'') \19\ bands. In this regard, Interpretation and Policy
.04 will help to ensure that an order submitted by a retail investor
does not lose its standing as a Retail Order simply because the RMO
that submitted the order assigned limit prices to the orders to help
ensure better priced executions.
---------------------------------------------------------------------------
\19\ The Limit Up/Limit Down Plan is designed to prevent trades
in NMS Stocks from occurring outside specified price bands, which
are set at a percentage level above and below the average reference
price of a security over the preceding five-minute period. The
percentage level is determined by a security's designation as a Tier
1 or Tier 2 security. Tier 1 comprises all securities in the S&P
500, the Russell 1000 and select Exchange Traded Products (ETPs).
Tier 2 comprises all other NMS securities, except for rights and
warrants, which are specifically excluded from coverage. The Plan
applies during regular trading hours of 9:30 a.m. ET-4:00 p.m. ET.
---------------------------------------------------------------------------
Importantly, such order amendments may be made manually by a
natural person who entered the order on behalf of the retail investor
(e.g., an RMO's trader, an FA, or a retail investor via their online
brokerage account), by the smart order router used by the RMO to route
the order to the Exchange, and/or by the algorithm utilized by the RMO
to manage the order's execution. While the changing of an order's price
or size by an algorithm or smart order router may be automated, the
Exchange believes such behavior is permissible provided the RMO is
making such amendments are made to satisfy their best execution
obligations, prevent outsized market impact due to an order's super-
marketable limit price, or to ensure an order's marketable limit price
falls within the Limit Up/Limit Down bands.
Retail Segments That Will Benefit From the Proposed Amendments
The Exchange believes that the proposed definition may encourage
financial advisors from wealth management firms that are RMOs to send
their Retail Orders to the Exchange, as these RMOs will have additional
certainty as to how algorithms may be used in the submission of Retail
Orders. When managing their retail customers' portfolios, even
financial advisors rely on automated technologies such as trading
algorithms and automated smart order routing solutions to assist them
with efficiently managing and entering orders for their various
customer accounts.\20\ Yet, in speaking with some
[[Page 10142]]
of the Exchange's Members, they are hesitant to allow send their FAs
retail order flow to the Exchange given the ambiguity of the current
definition of Retail Order. In this regard, the Exchange believes that
the proposed rule change will provide further guidance to these Members
and encourage them to route their Retail Orders to the Exchange where
they will have the opportunity to receive price improvement through
BYX's RPI Program as well as benefit from retail-only pricing
incentives. Certainly, orders originating from FAs who are responsible
for managing individuals' securities accounts are quintessentially
retail, and the qualification of such orders as Retail Orders should
not be in doubt simply because FAs may elect to utilize automated
trading technologies currently utilized by a broad array of other
market participants.
---------------------------------------------------------------------------
\20\ For instance, many brokerage firms offer investment
advisory programs where FAs manage their clients' portfolios based
on their clients' investment criteria and risk profiles. In managing
these accounts, FAs may determine that a certain equity security has
reached a price point triggering the buying (selling) of such
security across multiple client accounts. Rather than individually
buying (selling) the security multiple times for each client
account, an FA may instead choose to manage the accounts through
automated technology, such as an order management system, trading
algorithm, and smart order router. The Exchange believes that the
Retail Order definition should include such activity, as the order
activity is being entered by a natural person (i.e., the FA), on
behalf of natural persons (i.e., retail investors).
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Additionally, the proposed rule may also make clear to specialized
brokers and traditional brokerage firms \21\ that provide retail
investors with automated trading solutions, that orders from retail
investors may qualify as Retail Orders. By way of background, automated
trading solutions generally begin by providing retail investors with a
questionnaire that asks them for investment criteria, such as personal
information regarding their age, investing time horizon, investing
goals, and a target dollar amount to guide asset allocation. From
there, a retail investor's investments are initially allocated and
subsequently re-allocated according to pre-determined models developed
by the brokerage firm. Typically, automated rebalancing may also occur
when a retail investor adds or withdraws money from the account, or an
allocation percentage drifts from the retail investor's desired range.
Retail investors utilizing such services typically complete a periodic
review to confirm that their portfolio is still aligned with their
investment goals, and when their portfolios are reallocated, they must
accept the changes before an allocation is executed. In this use case,
natural persons (i.e., retail customers) are directly entering their
investment criteria into a brokerage firm's platform, and algorithms
and trading models automatically generate orders based on such data
after the retail customer provides the criteria from which an order can
be generated. If such orders do not qualify as Retail Orders, it would
be hard to contemplate what types of orders do satisfy such a
definition.
---------------------------------------------------------------------------
\21\ For example, Merrill Guided Investing offers retail
investors an automated investing tool. See Merrill Guided Investing,
available at: https://merrilledge.com/investing/merrill-guided-investing; see also Fidelity Go[supreg], which provides retail
investors with technology to help automate investing based on
information retail investors provide about themselves and their
financial institution, available at: https://www.fidelity.com/managed-accounts/fidelity-go/overview; see also Schwab Intelligent
Portfolios[supreg], which offers retail investors automated
investing through a robo-advisor that helps build and manage retail
investors' portfolios, available at: https://intelligent.schwab.com/.
---------------------------------------------------------------------------
Existing Framework Ensuring Only Bona Fide Retail Orders Satisfy Rule
11.24
The Exchange notes that it already has in place robust protections
designed to ensure only bona fide retail orders are designated as
Retail Orders. The proposed amendments will not eliminate or diminish
the strength of the existing protections. Rather, the proposed
amendments will augment the Exchange's existing RMO framework.
Currently, Rule 11.24(b)(1)-(6) sets forth an objective process by
which a Member organization applies to become a RMO. First, to qualify
as a Retail Member Organization, a Member must conduct a retail routing
business or route retail orders on behalf of another broker-dealer.\22\
To become an RMO, a Member is required to submit an application
form,\23\ supporting documentation (e.g., marketing literature, website
screenshots, and other publicly disclosed materials) confirming that
the applicant's order flow would meet the requirements of the Retail
Order definition,\24\ and an attestation \25\ in a form prescribed by
the Exchange, that substantially all orders submitted as Retail Orders
will qualify as such under the Rule.\26\ After submission of these
materials, various Exchange functions, including legal and operations,
review the application to assess whether the applicant's order flow
complies with Exchange rules.\27\ Applicants are then notified, in
writing, of the Exchange's decision.\28\
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\22\ See Rule 11.24(b)(1).
\23\ See Rule 11.24(b)(2)(A).
\24\ See Rule 11.24(b)(2)(B).
\25\ See section, ``Retail Member Organization--Broker-Dealer
Customer Agreement'', and ``Broker-Dealer Customer Annual
Attestation'' of ``Cboe BYX Exchange, Inc., Retail Member
Organization Application'', available at: https://cdn.cboe.com/resources/membership/BYX_Retail_Member_Organization_Application.pdf.
\26\ See Rule 11.24(b)(2)(C).
\27\ See Rule 11.24(b)(3).
\28\ Id.
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Furthermore, all RMOs must have in place policies and procedures
reasonably designed to ensure that it will only designate orders as
Retail Orders if all requirements of a Retail Order are met.\29\ These
policies and procedures must require the Member to (i) exercise due
diligence before entering a Retail Order to assure that entry as a
Retail Order is in compliance with the requirements of the Rule, and
(ii) monitor whether orders entered as Retail Orders meet the
applicable requirements.\30\ If a RMO does not itself conduct a retail
business but routes Retail Orders on behalf of another broker-dealer,
the RMO's supervisory procedures must be reasonably designed to assure
that the orders it receives from the other broker-dealer that are
designated as Retail Orders meets the definition of a Retail Order.\31\
In these cases, the RMO must (i) obtain an annual written
representation, in a form acceptable to the Exchange, from each other
broker-dealer that sends the RMO orders to be designated as Retail
Orders that the entry of such orders as Retail Orders will be in
compliance with the requirements of this Rule; and (ii) monitor whether
Retail Order flow routed on behalf of other such broker-dealers meets
the applicable requirements.\32\ Importantly, the Exchange's regulatory
and surveillance functions provide appropriate oversight by the
Exchange by monitoring for continued compliance with the terms of these
provisions. If a RMO fails to abide by the Retail Order requirements,
the Exchange in its sole discretion may disqualify a Member from its
status as a RMO.\33\
---------------------------------------------------------------------------
\29\ See Rule 11.24(b)(6).
\30\ Id.
\31\ Id.
\32\ Id.
\33\ See Rule 1121(b)(d)(1). [sic]
---------------------------------------------------------------------------
Overall, the Exchange believes it has in place an effective
framework for ensuring that only bona fide retail orders are designated
as Retail Orders by RMOs, and notes that the proposed amendments will
only seek to enhance Members' understanding of Exchange rules regarding
Retail Orders, as well as augment the Exchange's ability to enforce its
rules related to Retail Orders. Therefore, while the proposed
amendments may broaden the spectrum of retail investors whose orders
are eligible to be routed to the Exchange by RMOs, the enhanced clarity
of these rules will help to enable Members to make routing decisions in
compliance
[[Page 10143]]
with applicable Exchange rules. In this regard, the Exchange believes
it important to note that as Members of the Exchange, RMOs must be
registered brokers or dealers. As registered brokers or dealers, RMOs
are subject to a panoply of rules, such as FINRA Rule 2010 (Standards
of Commercial Honor and Principles of Trade), BYX Rule 2.2. (Obligation
of Members and the Exchange), and BYX Rule 3.1 (Business Conduct of
Members). These rules require, amongst other things, that as brokers or
dealers, Members are required to conduct business with the highest
standards of commercial honor, and obligate Members to comply with all
Exchange rules, by-laws, and regulations.\34\ While the Exchange has an
obligation to maintain fair and orderly markets and carry out it its
duties as a self-regulatory organization, RMOs are also obligated to
ensure that only orders that comply with Exchange rules are routed to
the Exchange and designated as Retail Orders.
---------------------------------------------------------------------------
\34\ While the RMO application process discussed above does rely
on information provided by the applicant, the Exchange believes that
ultimately it must be allowed to rely on representations made by
registered brokers or dealers that are obligated to conduct their
securities business consistent with the highest standards of
commercial honor, and in submitting their application, have attested
to the accuracy of the information provided to the Exchange.
---------------------------------------------------------------------------
The Exchange also believes that the proposed amendments will
provide the Exchange's regulatory and surveillance functions with a
rule set that is more aligned with today's retail order routing
practices. With the prevalent use of algorithms in today's equity
markets, more descriptive rule text will aid the Exchange's business
associates in properly guiding its Members through the RMO process, as
well as further strengthen the regulatory and surveillance function's
ability to enforce Exchange rules.
2. Statutory Basis
The Exchange believes the proposed rule changes are 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.\35\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \36\ 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
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) \37\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78f(b).
\36\ 15 U.S.C. 78f(b)(5).
\37\ Id.
---------------------------------------------------------------------------
Retail Order Definition
The Exchange believes that the proposed rule change is consistent
with these principles because it would increase competition among
execution venues, encourage additional on-exchange retail liquidity,
and offer retail investors the opportunity to receive orderbook
priority ahead of all other interest on the BYX Book. The Exchange
notes that a significant percentage of the orders of individual
investors are executed over the counter,\38\ and that by amending the
definition of Retail Order more retail flow may be directed to the
Exchange and have the opportunity to execute on a regulated,
transparent market. Indeed, even the Commission has noted that ``a very
large percentage of marketable (immediately executable) order flow of
individual investors is `executed' or `internalized' by broker-dealers
in the [over-the-counter-markets].'' \39\ The Commission has also noted
that a review of the order flow of eight retail brokers revealed that
nearly 100% of their customer market orders were routed to over-the-
counter market makers, often pursuant to payment for order flow
arrangements.\40\ By helping to incentivize RMOs to send Retail Orders
to the Exchange, RMOs will have another alternative to over-the-counter
market makers. In turn, an increase in the number of Retail Orders
submitted onto the Exchange will encourage more retail liquidity
provision, thereby deepening BYX's retail liquidity pool, fostering
enhanced price discovery, and offering Retail Orders more price
improvement opportunities as liquidity providers compete to trade with
Retail Orders increases.
---------------------------------------------------------------------------
\38\ Ninety-plus percent (90%) of retail marketable orders are
routed to wholesalers and executed off-exchange. See Chair Gensler's
remarks, ``Market Structure and the Retail Investors: Remarks Before
the Piper Sandler Global Exchange Conference'', (June 2, 2022),
available at: https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-global-exchange-conference-060822).
\39\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594, 3600 (January 21, 2010) (``Concept Release on
Equity Market Structure'').
\40\ Id.
---------------------------------------------------------------------------
The Exchange also believes that the proposed amendment to the
definition of ``Retail Order'' promotes just and equitable principles
of trade and is not unfairly discriminatory. While the proposed
amendment treats Retail Orders differently than non-retail orders, the
Exchange believes that such a distinction does not constitute unfair
discrimination, and in fact benefits both liquidity providers and
retail investors alike. As noted by the Commission in its order
approving the BYX RPI program,\41\ the markets already distinguish
between retail investors, whose orders are considered desirable by
liquidity providers because retail investors are presumed to be, on
average, less informed about short-term price movements, and
professional traders, whose orders are presumed, on average, to be more
informed about short-term price movements.\42\ Because of this
distinction, the Commission noted that liquidity providers prefer to
provide price improvement opportunities to less informed retail orders
than to informed professional orders, and that absent price improvement
opportunities, retail investors are likely to encounter wider spreads
which are a consequence of their interaction with more informed order
flow.\43\ The Exchange believes that in clarifying the definition of
Retail Order, RMOs will be more encouraged to enter orders onto the
Exchange, which in turn may attract retail liquidity, benefitting both
the retail investing community and professional traders.
---------------------------------------------------------------------------
\41\ Supra note 9.
\42\ Id.
\43\ Id.
---------------------------------------------------------------------------
The proposed amendment to the definition of Retail Order is also
designed to protect investors and the public interest. In conjunction
with proposed Interpretations and Policies .01-.04, the Exchange seeks
to clarify precisely how Retail Orders may be entered onto the Exchange
by RMOs through the use of algorithms. This clarity is designed to not
only encourage Members to submit Retail Orders onto the Exchange, but
to ensure that only bona fide retail orders are able to take advantage
of the benefits provided to Retail Orders by the Exchange.
Proposed Interpretation and Policy .01
Proposed Interpretation and Policy .01 is designed 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. By
[[Page 10144]]
providing additional guidance to market participants about what is
meant by the term ``retail investor'', the Exchange is helping to
ensure that only bona fide retail activity is entered onto the
Exchange, and that professional investors cannot somehow avail
themselves of the benefits offered to Retail Orders by the Exchange.
The proposed clarification may also provide Members, and potential
new Members, with the necessary assurances that they are in fact
managing retail order flow, encouraging them to enter their Retail
Orders onto the Exchange as RMOs. Increased RMO participation may in
turn foster more retail liquidity provision as more sophisticated order
flow seeks to trade with retail flow. The increase in liquidity
provision and RMO provision will likely lead to deeper liquidity on the
Exchange that will help to enhance price discovery and increased price
improvement opportunities for not only retail investors, but all
investors submitting order flow to the Exchange. Additionally, by
routing Retail Orders to the Exchange, RMOs and their retail investors
will benefit from the Exchange's retail-only pricing incentives, as
well as increased price improvement opportunities and enhanced order
priority offered by BYX's RPI Program.
Proposed Interpretation and Policy .02
Proposed Interpretation and Policy .02 is designed 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. By providing additional guidance around the term
``natural person'', it will be clearer to Members that an order, or
investment criteria for an order, must be entered by a human and cannot
originate from an algorithm without human intervention. This will help
to ensure that only bona fide retail orders are designated as ``Retail
Orders'' and mitigate the likelihood that professional investors that
utilize fully automated trading technology designed to participate in
certain trading strategies inappropriately seek to designate their
orders as Retail Orders.
Furthermore, by clarifying that orders created through broker-
dealers' robo-advisory programs can qualify as Retail Orders if the
investment criteria are entered by a natural person, additional order
flow from robo-advisory program may be directed to the Exchange for
execution. Similarly, by making clear that a ``natural person'' may
also be an account held in corporate form, such as an individual
retirement account or limited liability corporation (e.g., family
office), more retail flow may be directed to the Exchange. By executing
on the Exchange RMOs will be able to avail themselves of retail-
specific pricing, which they can pass onto their retail clients in the
form of reduced commissions and transaction costs.
Finally, as noted throughout, increased retail flow will augment
the Exchange's liquidity pools, thereby fostering price discovery, and
creating more opportunities for price improvement. With improved on-
execution experiences more investors may be incentivized to route their
retails orders on-exchange (i.e., BYX) exposing retail flow to on-
exchange price competition.
Proposed Interpretation and Policy. 03
Proposed Interpretation and Policy .03 is designed to protect
investors and the markets by making clear to RMOs using algorithms to
enter Retail Orders onto the Exchange that orders must be entered by a
retail investor or a natural person on behalf of a retail investor, and
that in the case of robo-advisory solutions, the retail investor must
enter the investment criteria that the brokerage firm's algorithm uses
to generate orders. By providing examples of both acceptable and
unacceptable uses of algorithms, market participants will be clearer as
to whether the orders they route to the Exchange for execution are
indeed ``Retail Orders''. In doing so, the Exchange is helping to
ensure that only bona fide retail orders qualify as Retail Orders, and
that professional investors are not inappropriately receiving benefits
specifically reserved for retail investors.
Proposed Interpretation and Policy .03 will also help to remove
impediments to and perfect the mechanism of a free and open market and
a national market system. By providing additional guidance on how RMOs
may use algorithms when submitting Retail Orders to the Exchange,
Members will be more certain as to whether their orders in fact qualify
as Retail Orders. In doing so, RMOs may route more Retail Orders to the
Exchange and in turn, may encourage more market participants to provide
additional retail liquidity thereby deepening the liquidity pool, and
enhancing price discovery and transparency. As more investors are
incentivized to execute their retail flow on the Exchange an increasing
number of individual investors' orders will be exposed to on-exchange
price competition, increasing their opportunity to receive price
improvement and improved execution quality.
Interpretation and Policy .04
Interpretation and Policy .04 helps to remove impediments to and
perfect the mechanism of a free and open market and a national market
system. The provision preventing the changing of the price or side of
an order in both the current and proposed definition of Retail Order
was designed to ensure that orders entered onto the Exchange by RMOs
were submitted on behalf of retail investors, and not institutional
orders which typically have the terms of price and size amended,
canceled, or replaced frequently throughout the day. However, the
Exchange recognizes that RMOs may sometimes receive unpriced orders
from their retail customers or may deem a certain limit price to be
appropriate for the purposes of seeking a better execution and/or
preventing an order from executing at undesirable price levels. As
such, by clarifying that Retail Orders may in fact be amended provided
it is to affect a better execution experience for the retail investor,
or to manage market impact, RMOs may be more encouraged to send more
Retail Orders to the Exchange. As noted throughout, increased RMO
activity and retail liquidity provision will only serve to deepen
liquidity for Retail Orders, which in turn will lead to price
competition and increased price improvement opportunities for
individual investors' orders.
The Exchange also believes that proposed Interpretations and
Policies .01-.04 promote just and equitable principles of trade and are
not unfairly discriminatory because they are intended to provide
guidance to all Members, in particular RMOs, as to what constitutes a
Retail Order.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes its
proposed amendment to the definition of Retail Order and codification
of Interpretation and Policies .01-.04 will benefit intramarket
competition rather than burden competition. The proposed changes serve
to provide additional clarity to Members and RMOs as to the types of
persons or accounts eligible to submit Retail Orders and describe the
permissible and impermissible uses of algorithms available to Members
and RMOs when submitting Retail Orders. The Exchange believes this
additional
[[Page 10145]]
information will lead to additional retail order flow being submitted
to the Exchange by RMOs, which all contra-side orders are eligible to
interact with. Greater overall order flow and trading opportunities
benefits all market participants on the Exchange. An increase in RMO
activity and liquidity providing orders will serve to enhance the
Exchange's available liquidity. Deeper liquidity pools will, in turn,
enhance price discovery, as well as price improvement opportunities for
retail investors as liquidity providers compete for retail executions.
Liquidity providers also benefit by being able to interact with retail
order flow that is often executed off-exchange, and therefore generally
inaccessible to those trading in the lit markets.
While the proposed definition will help to ensure that only bona
fide retail investors receive the benefits of afforded to Retail
Orders, prioritization of retail investors is not a novel concept in
the securities market. In this regard, the proposed amendments should
not result in any new or novel issues to be considered by the
Commission, or that have not already been contemplated by today's
market participants. Indeed, as noted in the Amendment 1 of EDGX's
Retail Priority filing,\44\ customer priority has a long tradition in
the options market where orders entered on behalf of non-broker dealer
public customers have historically been afforded priority over orders
submitted by registered broker dealers. In fact, most options
exchanges, including the Exchange's equity options platform,\45\ employ
a customer priority execution algorithm where orders submitted by a
subset of public customer with more limited trading activity are
provided order book priority ahead of orders submitted by broker-
dealers or other market professionals at the same price.
---------------------------------------------------------------------------
\44\ See Securities Exchange Act Release No. 86280 (July 2,
2019), 84 FR 32808 (July 9, 2019) (``Notice of Amendment No. 1'').
\45\ See BYX Rule 21.8(d)(1).
---------------------------------------------------------------------------
The Exchange further believes that the proposed rule change will
increase intermarket competition by enabling the Exchange to better
compete with other exchanges and off-exchange trading venues for retail
order flow. The Commission has spoken about ``increasing competition
and enhancing the direct exposure of individual investor orders to a
broader spectrum of market participants'' \46\ and the Exchange
believes its proposed amendments to the definition of Retail Order and
introduction of Interpretations and Policies .01-.04 provide sufficient
guidance to RMOs to encourage additional retail order flow be sent to
the Exchange. In turn, retail investors will have additional
opportunities to receive executions on a transparent, regulated,
national securities exchange in addition to the currently available
off-exchange trading venues. Additionally, a revised definition of
Retail Order may encourage additional competition for retail order flow
on-exchange that would be eligible to participate in the various retail
liquidity programs offered by exchanges,\47\ including the Exchange's
RPI program. This, in turn, could create additional incentives for
regulated exchanges to develop additional liquidity programs designed
at providing additional benefits to retail investors, thus promoting
additional intermarket competition.
---------------------------------------------------------------------------
\46\ See Securities Exchange Act Release No. 96495 (December 14,
2022), 88 FR 128 (January 3, 2023) (``Order Competition Rule'') at
178.
\47\ See e.g., Cboe BYX Exchange Retail Price Improvement
(https://www.cboe.com/us/equities/trading/offerings/retail_price_improvement/); Nasdaq retail services (https://www.nasdaqtrader.com/content/productsservices/Trading/EquitiesRetailOfferingOverview.pdf); NYSE and NYSE National Retail
Liquidity (https://www.nyse.com/markets/liquidity-programs); IEX
Retail Program (https://www.iexexchange.io/products/retail-program).
---------------------------------------------------------------------------
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-2024-004 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-2024-004. 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-2024-004 and should
be submitted on or before March 5, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
---------------------------------------------------------------------------
\48\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02860 Filed 2-12-24; 8:45 am]
BILLING CODE 8011-01-P
