Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule Applicable to Its Equities Trading Platform To Introduce a Flat Charge for the Execution of MDOs That Are Entered With the QDP Instruction

CourtSecurities And Exchange Commission
Citation85 FR 43269
Record Number2020-15304
SectionNotices
Published date16 July 2020
Federal Register, Volume 85 Issue 137 (Thursday, July 16, 2020)
[Federal Register Volume 85, Number 137 (Thursday, July 16, 2020)]
                [Notices]
                [Pages 43269-43272]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-15304]
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                SECURITIES AND EXCHANGE COMMISSION
                [Release No. 34-89291; File No. SR-CboeEDGA-2020-019]
                Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice
                of Filing and Immediate Effectiveness of a Proposed Rule Change To
                Amend the Fee Schedule Applicable to Its Equities Trading Platform To
                Introduce a Flat Charge for the Execution of MDOs That Are Entered With
                the QDP Instruction
                July 10, 2020.
                 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 July 1, 2020, Cboe EDGA Exchange, Inc. (the ``Exchange'' or
                ``EDGA'') 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.
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                 \1\ 15 U.S.C. 78s(b)(1).
                 \2\ 17 CFR 240.19b-4.
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                I. Self-Regulatory Organization's Statement of the Terms of Substance
                of the Proposed Rule Change
                 Cboe EDGA Exchange, Inc. (``EDGA'' or the ``Exchange'') is filing
                with the Securities and Exchange Commission (the ``Commission'') a
                proposed rule change to amend the fee schedule applicable to its
                equities trading platform to introduce a flat charge for the execution
                of MDOs that are entered with the QDP instruction. 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 (http://markets.cboe.com/us/equities/regulation/rule_filings/edga/), 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
                 On June 4, 2020, the Commission approved the Exchange's proposed
                introduction of a new order instruction, Quote Depletion Protection
                (``QDP''), that is available for Midpoint Discretionary Orders
                (``MDOs'').\3\ QDP, which was launched by the Exchange on June 10,
                2020, is designed to provide enhanced protections to MDOs by tracking
                significant executions on the EDGA Book, and facilitating the ability
                of Users to avoid potentially unfavorable executions by preventing MDOs
                entered with the optional QDP instruction from exercising discretion to
                trade at more aggressive prices when QDP has been triggered. The
                Exchange now proposes to introduce a flat charge for the execution of
                MDOs that are entered with the QDP instruction.
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                 \3\ See Securities Exchange Act Release No. 89016 (June 4,
                2020), 85 FR 35488 (June 10, 2020) (SR-CboeEDGA-2020-005).
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                 EDGA operates pursuant to an inverted pricing model where orders
                that add liquidity are generally charged a fee, and orders that remove
                liquidity are generally provided a rebate. Unlike MDOs entered on the
                Exchange's affiliate, Cboe EDGX, Exchange, Inc. (``EDGX''), MDOs
                entered on the Exchange pursuant to EDGA Rule 11.8(e) are allowed to
                execute both on entry and also after resting on the EDGA Book. MDOs
                that are executed on the Exchange may therefore be subject to a fee,
                rebate, or in some instances free executions, depending on whether the
                order is executed as the adder or remover of liquidity, and whether or
                not the order is executed within its discretionary range. Specifically,
                an MDO that adds liquidity is currently charged a fee of $0.00300 per
                share for securities priced at or above $1.00.\4\ This fee applies to
                MDOs that are executed either within the order's discretionary range or
                at its displayed or non-displayed ranked price.\5\ Conversely, for MDOs
                that remove liquidity in securities priced at or above $1.00, the
                Exchange's pricing depends on whether the order is executed within its
                discretionary range or at its displayed or non-displayed ranked price.
                Specifically, the Exchange currently provides a rebate of $0.00240 per
                share for MDOs that remove liquidity at the order's displayed or non-
                displayed ranked price,\6\ but instead offers free executions for MDOs
                that remove liquidity within the order's discretionary range, in each
                case for securities priced at or above $1.00.\7\ For all MDOs executed
                in securities priced below $1.00, the Exchange provides free
                executions, regardless of whether the order is executed as the adder or
                remover of liquidity, or whether or not
                [[Page 43270]]
                the order is executed within its discretionary range.\8\
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                 \4\ See EDGA Fee Schedule, Fee Codes DA and DM.
                 \5\ Id.
                 \6\ See EDGA Fee Schedule, Fee Code DR.
                 \7\ See EDGA Fee Schedule, Fee Code DT.
                 \8\ See EDGA Fee Schedule, Fee Codes DA, DM, DR, and DT.
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                 The Exchange now proposes to instead introduce a small flat fee for
                the execution of an MDO that is entered with a QDP instruction. As
                proposed, MDOs entered with a QDP instruction would be subject to a fee
                of $0.00040 per share for securities priced at or above $1.00, or 0.30%
                of the dollar value of the trade for securities priced below $1.00.\9\
                This charge would apply to the execution of MDOs that are entered with
                a QDP instruction, regardless of whether a QDP Active Period has been
                enabled in the security. MDOs entered without the optional QDP
                instruction would continue to be subject to current pricing. The
                Exchange's affiliate, Cboe EDGX Exchange, Inc. (``EDGX'') is
                simultaneously proposing a similar flat fee pricing model for MDOs
                entered with a QDP instruction that are executed on that exchange.\10\
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                 \9\ To effect this change, the Exchange would introduce a new
                fee code ``DQ'' to its fee schedule that applies to MDOs entered
                with a QDP instruction.
                 \10\ See SR-CboeEDGX-2020-032 (pending publication).
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                2. Statutory Basis
                 The Exchange believes that the proposed rule change is consistent
                with the objectives of Section 6 of the Act,\11\ in general, and
                furthers the objectives of Section 6(b)(4),\12\ in particular, as it is
                designed to provide for the equitable allocation of reasonable dues,
                fees and other charges among its members and other persons using its
                facilities. Specifically, the Exchange believes that the proposed rule
                change is consistent with the requirements of the Act as it is designed
                to compensate the Exchange for the development of new and innovative
                market features, i.e., QDP, while continuing to provide a pricing model
                that the Exchange believes is competitive with pricing models offered
                by other national securities exchanges and off-exchange venues that
                offer similar protective features to their customers. The Exchange
                operates in a highly-competitive market in which market participants
                can readily direct order flow to competing venues if they deem fee
                levels at a particular venue to be excessive. The proposed rule change
                reflects a competitive pricing structure designed both to compensate
                the Exchange for the introduction of innovative features and allow it
                to continue to compete aggressively with other market centers.
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                 \11\ 15 U.S.C. 78f.
                 \12\ 15 U.S.C. 78f(b)(4).
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                 As discussed, the proposed rule change would introduce pricing that
                is specific to MDOs entered with the recently-introduced QDP
                instruction. Although such MDOs would be subject to a small flat fee
                instead of a fee, rebate, or free execution under the current pricing
                model, the Exchange believes that the proposed pricing is reasonable
                given the enhanced benefits provided to Users that choose to utilize
                the protective features provided by the QDP instruction. QDP, which was
                introduced on the Exchange in June, is designed to facilitate the
                ability for market participants, including buy-side and other
                investors, to avoid potentially unfavorable executions in an MDO's
                discretionary range by preventing the exercise of discretion for two
                milliseconds following the execution of the EDGA best bid or offer on
                the same side of the market as the MDO below one round lot. While
                market participants that use this instruction would be subject to a
                small flat charge, including when the order adds or removes liquidity,
                the Exchange believes that the value of the protection provided by this
                feature outweighs the small fee that would be charged by the Exchange.
                Further, the proposed pricing may actually be beneficial to market
                participants that primarily add liquidity with MDOs as the proposed
                flat fee would be lower than the fee charged under the current MDO
                pricing model. In this respect, the Exchange notes that although MDOs
                entered on the EDGA Book may remove liquidity, both MDOs and the
                associated QDP instruction are designed primarily to facilitate
                liquidity provision by buy-side and other investors that are seeking
                protection from potential adverse selection risks. As a result, the
                Exchange believes that the benefits of more attractive pricing for
                adding liquidity may outweigh, in many respects, the costs of paying a
                fee when removing liquidity.
                 The Nasdaq Stock Market LLC (``Nasdaq'') similarly charges special
                fees for the use of orders that are designed to offer certain
                protections to market participants. Specifically, Nasdaq charges a fee
                of $0.0004 per share to members that trade using its Midpoint Extended
                Life Order (``M-ELO'') in securities priced at or above $1.\13\ The
                Exchange believes that the proposed fees would be competitive with the
                fees that Nasdaq charges for M-ELO executions, as well as the fees
                charged by other national securities exchanges and off-exchange venues
                that provide various protective features.\14\ QDP is offered on a
                voluntary basis, and therefore market participants that would prefer to
                operate under the current pricing structure can continue to enter MDOs
                without the QDP instruction. The Exchange believes, however, that
                market participants may find value in the use of the QDP instruction,
                and--similar to firms that trade using Nasdaq M-ELO, IEX Discretionary
                Peg, or other similar trading mechanisms--would be willing to pay a
                small flat fee to benefit from the protections that this instruction is
                designed to provide to investors.
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                 \13\ See Nasdaq Rules, Equity 7, Pricing Schedule, Section
                118(a)(1),(2),(3). Nasdaq does not charge a fee for M-ELO executions
                in securities priced below $1. See Nasdaq Rules, Equity 7, Pricing
                Schedule, Section 118(b).
                 \14\ For example, Investors Exchange LLC (``IEX''), charges a
                fee of $0.0009 or $0.0003 per share for adding or removing non-
                displayed or displayed liquidity, respectively. See IEX Fee
                Schedule, Fee Codes I and L. Although IEX does not have special
                pricing for its Discretionary Peg Orders, which are similar in
                certain respects to an MDO entered with a QDP instruction, firms
                that trade such orders on IEX would be subject to the general
                transaction fees described above.
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                 The Exchange also believes that the proposed fee change is
                equitable and not unfairly discriminatory because it would apply
                equally to all MDOs entered with a QDP instruction. As discussed, QDP
                is an optional order instruction that a market participant can choose
                to include on an MDO entered on the Exchange in order to benefit from
                enhanced protections at times when recent executions on the EDGA Book
                suggest that the market may be about to move against the resting MDO.
                Both the MDO order type and the associated QDP instruction are
                available to all Users on an equal and non-discriminatory basis, and
                any User that chooses to use the QDP instruction would be subject to
                the same fee. As proposed, any MDO entered with a QDP instruction would
                be charged a small flat fee, regardless of how the order is ultimately
                executed. That is, an MDO entered with a QDP instruction would always
                be subject to a small transaction fee, whether or not the order acts as
                the adder or remover of liquidity, whether or not the MDO is executed
                within its discretionary range or at its displayed or non-displayed
                ranked price, and irrespective of whether or not the MDO is executed
                during a QDP Active Period where executions within the order's
                discretionary range are prevented.
                 Although MDOs that include the new QDP instruction would be subject
                to a simplified pricing model compared to MDOs that do not include this
                instruction, the Exchange does not believe that this is inequitable or
                unfairly discriminatory within the meaning of the Act. All similarly
                [[Page 43271]]
                situated market participants would be subject to consistent and non-
                discriminatory pricing based on the instructions that they include on
                their MDOs, with Users that include the optional QDP instruction paying
                a small fee that the Exchange believes is modest in relation to the
                value provided by the QDP instruction in avoiding potentially
                unfavorable executions. The proposed pricing is designed to be
                attractive to Users that enter MDOs with a QDP instruction,
                notwithstanding the fact that market participants would be subject to a
                fee in all circumstances. Further, the Exchange believes that the
                ability to charge a flat fee for the execution of such orders would
                appropriately compensate the Exchange for the development of this
                feature, while allowing the Exchange to offer pricing that is
                competitive with other national securities exchanges and off-exchange
                venues that may offer competing features. To the extent that any
                particular User believes that the benefits of the QDP instruction are
                outweighed by the proposed pricing, such Users would be free to enter
                MDOs without the QDP instruction, in which case their orders would be
                subject to the same pricing offered today.
                B. Self-Regulatory Organization's Statement on Burden on Competition
                 The Exchange does not believe that the proposed rule change would
                impose any burden on competition that is not necessary or appropriate
                in furtherance of the purposes of the Act. Rather, the Exchange
                believes that the proposed changes to its fees would promote continued
                competition between the Exchange, other national securities exchanges,
                and off-exchange venues that must continuously compete to offer both
                competitive pricing and services to members and investors. As proposed,
                the Exchange would charge a small flat fee for the use of its recently-
                introduced QDP instruction. Charging fees for the use of this
                instruction would both compensate for the development and introduction
                of new and innovative features, and provide continued incentives for
                the Exchange to compete on both cost and the quality of its products
                and services.
                Intramarket Competition
                 The Exchange believes the proposed rule change would not impose any
                burden on intramarket competition that is not necessary or appropriate
                in furtherance of the purposes of the Act. The proposed fees would
                apply to all members equally in that all members would be subject to
                the same flat fee for the execution of orders that include a QDP
                instruction. The Exchange and other national securities exchanges
                (e.g., Nasdaq) offer pricing that is based on the characteristics of
                the order that is executed on the Exchange. Although MDOs entered with
                the QDP instruction would be subject to the pricing described in this
                proposed rule change, the Exchange does not believe that pricing would
                impose any significant burden on intramarket competition as this fee
                would be applied in the same manner to the execution of any MDO entered
                with this instruction. Both MDO and the associated QDP instruction
                discussed in this filing are available to all Users on an equal and
                non-discriminatory basis. As a result, any User can decide to use (or
                not use) the QDP instruction based on the benefits provided by that
                instruction in potentially avoiding unfavorable executions, and the
                associated charge that the Exchange proposes to introduce for its use.
                As discussed, any firm that chooses to use the QDP instruction would be
                charged the same flat fee for the execution of orders that are entered
                with this instruction.
                Intermarket Competition
                 The Exchange also believes the proposed fees would not impose any
                burden on intermarket competition that is not necessary or appropriate
                in furtherance of the purposes of the Act. As discussed, the Exchange
                operates in a highly competitive market where members can direct their
                orders to a number of different market centers. These include 12 live
                U.S. equities exchanges, as well as a large number of off-exchange
                venues that trade NMS stocks. In addition, the Exchange represents a
                small percentage of the overall market. Based on publicly available
                information, no single equities exchange has more than 20% of U.S.
                equities market share.\15\ Therefore, no exchange possesses significant
                pricing power in the execution of order flow. Indeed, market
                participants can readily choose to send their orders to other exchange
                and off-exchange venues if they deem fee levels at those other venues
                to be more favorable, or if they believe that the products and services
                that they offer are better serve their trading needs. Since competitors
                are free to modify their own pricing in response, and as market
                participants may readily adjust their order routing practices, the
                Exchange believes that the degree to which pricing changes in this
                market may impose any burden on competition is extremely limited.
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                 \15\ See Cboe Global Markets U.S. Equities Market Volume Summary
                (May 28, 2020), available at http://markets.cboe.com/us/equities/market_share/.
                ---------------------------------------------------------------------------
                Conclusion
                 In sum, if the changes proposed herein are unattractive to market
                participants, it is likely that the Exchange will lose market share to
                competing exchanges and off-exchange venues as a result. Accordingly,
                the Exchange does not believe that the proposed changes would impair
                the ability of members or competing order execution venues to maintain
                their competitive standing in the financial markets. Indeed, the
                Commission has repeatedly expressed its preference for competition over
                regulatory intervention in determining prices, products, and services
                in the securities markets. Specifically, in Regulation NMS, the
                Commission highlighted the importance of market forces in determining
                prices and SRO revenues and, also, recognized that current regulation
                of the market system ``has been remarkably successful in promoting
                market competition in its broader forms that are most important to
                investors and listed companies.'' \16\
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                 \16\ See Securities Exchange Act Release No. 51808 (June 9,
                2005), 70 FR 37496, 37499 (June 29, 2005).
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                 The fact that this market is competitive has also long been
                recognized by the courts. In NetCoalition v. Securities and Exchange
                Commission, the D.C. Circuit stated as follows: ``[n]o one disputes
                that competition for order flow is `fierce.' . . . As the SEC
                explained, `[i]n the U.S. national market system, buyers and sellers of
                securities, and the broker-dealers that act as their order-routing
                agents, have a wide range of choices of where to route orders for
                execution'; [and] `no exchange can afford to take its market share
                percentages for granted' because `no exchange possesses a monopoly,
                regulatory or otherwise, in the execution of order flow from broker
                dealers'. . . .''.\17\ Accordingly, the Exchange does not believe the
                proposed fees impose any burden on competition that is not necessary or
                appropriate in furtherance of the purposes of the Act.
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                 \17\ See NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
                (quoting Securities Exchange Act Release No. 59039 (December 2,
                2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
                21)).
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                C. Self-Regulatory Organization's Statement on Comments on the Proposed
                Rule Change Received From Members, Participants, or Others
                 No written comments were either solicited or received.
                [[Page 43272]]
                III. Date of Effectiveness of the Proposed Rule Change and Timing for
                Commission Action
                 The foregoing rule change has become effective pursuant to Section
                19(b)(3)(A) of the Act \18\ and paragraph (f) of Rule 19b-4 \19\
                thereunder. At any time within 60 days of the filing of the proposed
                rule change, the Commission summarily may temporarily suspend such rule
                change if it appears to the Commission that such action is necessary or
                appropriate in the public interest, for the protection of investors, or
                otherwise in furtherance of the purposes of the Act. If the Commission
                takes such action, the Commission will institute proceedings to
                determine whether the proposed rule change should be approved or
                disapproved.
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                 \18\ 15 U.S.C. 78s(b)(3)(A).
                 \19\ 17 CFR 240.19b-4(f).
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                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 (http://www.sec.gov/rules/sro.shtml); or
                 Send an email to [email protected]. Please include
                File Number SR-CboeEDGA-2020-019 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-CboeEDGA-2020-019. 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 (http://www.sec.gov/rules/sro.shtml).
                Copies of the submission, all subsequent amendments, all written
                statements with respect to the proposed rule change that are filed with
                the Commission, and all written communications relating to the proposed
                rule change between the Commission and any person, other than those
                that may be withheld from the public in accordance with the provisions
                of 5 U.S.C. 552, will be available for website viewing and printing in
                the Commission's Public Reference Room, 100 F Street NE, Washington, DC
                20549 on official business days between the hours of 10:00 a.m. and
                3:00 p.m. Copies of the filing also will be available for inspection
                and copying at the principal office of the Exchange. All comments
                received will be posted without change. Persons submitting comments are
                cautioned that we do not redact or edit personal identifying
                information from comment submissions. You should submit only
                information that you wish to make available publicly. All submissions
                should refer to File Number SR-CboeEDGA-2020-019, and should be
                submitted on or before August 6, 2020.
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                 \20\ 17 CFR 200.30-3(a)(12).
                 For the Commission, by the Division of Trading and Markets,
                pursuant to delegated authority.\20\
                J. Matthew DeLesDernier,
                Assistant Secretary.
                [FR Doc. 2020-15304 Filed 7-15-20; 8:45 am]
                BILLING CODE 8011-01-P
                

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