Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend EDGX Rule 15.1(a) and (c)
Dec 04, 2012 (FIND, Inc. via COMTEX) --
November 28, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the
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"Act"), *1 and Rule 19b-4 thereunder, *2 notice is hereby given that on November 26, 2012 the EDGX Exchange, Inc. (the "Exchange" or "EDGX") filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I, II and III below, which items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
*1 15 U.S.C. 78s(b)(1).
*2 17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend its fees and rebates applicable to Members *3 of the Exchange pursuant to EDGX Rule 15.1(a) and (c). All of the changes described herein are applicable to EDGX Members. The text of the proposed rule change is available on the Exchange's Internet Web site at www.directedge.com, at the Exchange's principal office, and at the Public Reference Room of the Commission.
*3 As defined in Exchange Rule 1.5(n).
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 self-regulatory organization 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 self-regulatory organization 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 the Statutory Basis for, the Proposed Rule Change
The Exchange proposes to introduce new flags ZA and ZR for Members that utilize Retail Orders. Flag ZA is proposed to be yielded for those Members that use Retail Orders that add liquidity to EDGX and is proposed to be assigned a rebate of $0.0032 per share. Flag ZR is proposed to be yielded for those Members that use Retail Orders that remove liquidity from EDGX and is proposed to be assigned a charge of $0.0030 per share. Footnote 4, in turn, is proposed to be amended to define a "Retail Order" as an agency order that originates from a natural person and is submitted to the Exchange by a Member, provided that no change is made to the terms of the order (e.g., price or side of market), and the order does not originate from a trading algorithm or any other computerized methodology. The Exchange proposes to append Footnote 4 to its default, non-tiered rebate of $0.0023 per share at the top of its fee schedule to signify a rate change if the conditions in Footnote 4 are met. *4 For additional transparency, the Exchange also proposes to append Footnote 4 to the default, non-tiered removal rate of $0.0030 per share, even though a rate change is not signified.
*4 Currently, the Exchange offers Members a default rate rebate of $0.0023 per share for
orders in securities at or above $1.00 that add liquidity to the Exchange, where "default"
refers to the standard rebate offered by the Exchange to Members absent Members
qualifying for additional volume tiered pricing.
The Exchange notes that Members will only be able to designate their orders as "Retail Orders" that add/remove liquidity using the FIX order entry protocol (FIX) but not the HP-API order entry protocol (HP-API). The Exchange also notes that Members using HP-API only who would like to take advantage of the new "Retail Order" flags can subscribe to FIX logical ports with the first five logical ports being provided free of charge while $500.00/month is charged for each additional logical port.
The Exchange also proposes to specify in Footnote 4 that to the extent Members qualify for a rebate higher than $0.0032 per share through other volume tiers, such as the Mega Tier ( $0.0035 per share) or Market Depth Tier ( $0.0033 per share), Members will earn the higher rebate on Flag ZA instead of its assigned rate. In addition, to the extent Members qualify for a removal rate lower than $0.0030 per share through any other tier, such as the Mega Tier ( $0.0029 per share) or Step-up Take Tier ( $0.0028 per share), then Members will earn [sic] the lower removal rate on Flag ZR instead of its assigned rate.
A Member would be required to attest, in a form and/or manner prescribed by the Exchange, that they have implemented policies and procedures that are reasonably designed to ensure that every order designated by the Member as a "Retail Order" complies with the Exchange's definition of a Retail Order, as described above. The proposed use of Flags ZA and ZR to identify Retail Orders would be optional for Members. Accordingly, a Member that does not opt to identify qualified orders as Retail Orders would choose not to make an attestation to the Exchange and thereby, not receive the rates associated with Flags ZA or ZR.
Additionally, a Member would be required to have written policies and procedures reasonably designed to assure that it will only designate orders as Retail Orders if all requirements of a Retail Order are met. Such written 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 specified by the Exchange, and (ii) monitor whether orders entered as Retail Orders meet the applicable requirements. If the Member represents Retail Orders from another broker-dealer customer, the Member's supervisory procedures must be reasonably designed to assure that the orders it receives from such broker-dealer customer that it designates as Retail Orders meet the definition of a Retail Order. The Member must (i) obtain an annual written representation, in a form acceptable to the Exchange, from each broker-dealer customer that sends it orders to be designated as Retail Orders that entry of such orders as Retail Orders will be in compliance with the requirements specified by the Exchange, and (ii) monitor whether its broker-dealer customer's Retail Order flow continues to meet the applicable requirements. *5
*5 The Financial Industry Regulatory Authority, Inc., on behalf of the Exchange, will review a Member's compliance with these requirements through an exam-based review of the Member's internal controls.
The Exchange further proposes that it may disqualify a Member from qualifying for Flags ZA and ZR if the Exchange determines, in its sole discretion, that a Member has failed to abide by the requirements proposed herein, including, for example, if a Member designates orders submitted to the Exchange as Retail Orders but those orders fail to meet any of the requirements of Retail Orders. Tiered or non-tiered default rates would apply based on the Member's qualifying levels for a Member that is disqualified from qualifying for Flags ZA and ZR.
The Exchange also proposes to amend the text of the first paragraph of Footnote 1 to include Flag ZR as part of the list of "removal flags," where Flag ZR removes liquidity from the EDGX Book *6 and qualifies for the removal rate of $0.0029 per share in connection with satisfying the criteria for the Mega Tier rebate.
*6 As defined in Exchange Rule 1.5(d).
The Exchange also proposes to amend the text of Footnote 2 to include Flag ZR as part of the "remove liquidity" flags
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listed therein that qualify for the Step-Up Take Tier reduced charge of $0.0028 per share for the removal flags. *7
*7 The Exchange notes that where Members that have Retail Orders that add liquidity to EDGX and also qualify for the Step-Up Take Tier, the Exchange would provide such Members the more favorable rebate of $0.0032 per share. This is made clear in the
language in the second paragraph of proposed Footnote 4, as described above.
The Exchange proposes to amend the text of Footnote 13, sections (i) and (ii), to include Flags ZA and ZR as qualifying "added flags" and "removal flags," respectively, for the Investor Tier.
The Exchange proposes to implement these amendments to its fee schedule on December 1, 2012.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act, *8 in general, and furthers the objectives of Section 6(b)(4) of the Act, *9 in particular, because it provides for the equitable allocation of reasonable dues, fees, and other charges among its Members, issuers and other persons using its facilities and does not unfairly discriminate between customers, issuers, brokers or dealers.
*8 15 U.S.C. 78f.
*9 15 U.S.C. 78f(b)(4).
The Exchange believes that the proposed rule change is reasonable, equitable and not unfairly discriminatory because it would encourage Members to send additional Retail Orders that add liquidity to the Exchange for execution in order to qualify for an incrementally higher credit for such executions that add liquidity on the Exchange. *10 In this regard, the Exchange believes that maintaining or increasing the proportion of Retail Orders in exchange-listed securities that are executed on a registered national securities exchange (rather than relying on certain available off- exchange execution methods) would contribute to investors' confidence in the fairness of their transactions and would benefit all investors by deepening the Exchange's liquidity pool, supporting the quality of price discovery, promoting market transparency and improving investor protection.
*10 The Exchanges notes that the removal fee through Flag ZR is the same as the default, non-tiered removal rate. Thus, the Exchange believes that there would be a neutral effect on removers of liquidity as the Exchange is neither incenting nor disincentivizing the use of Flag ZR.
The Exchange notes that a significant percentage of the orders of individual investors are executed over-the-counter. *11 The Exchange believes that it is thus appropriate to create a financial incentive to bring more retail order flow to a public market, such as the Exchange over off-exchange venues. The Exchange believes that investor protection and transparency is promoted by rewarding displayed liquidity on exchanges over off-exchange executions. By offering a proposed rebate of $0.0032 per share for Flag ZA, the Exchange believes it will encourage use of Retail Orders, while maintaining consistency with the Exchange's overall pricing philosophy of encouraging displayed liquidity. The Exchange places a higher value on displayed liquidity because the Exchange believes that displayed liquidity is a public good that benefits investors and traders generally by providing greater price transparency and enhancing public price discovery, which ultimately lead to substantial reductions in transaction costs.
*11 See Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (noting that dark pools and internalizing broker-dealers executed approximately 25.4% of share volume in September 2009). See also Mary L. Schapiro, Strengthening Our Equity Market Structure (Speech at the Economic Club of New York, Sept. 7, 2010) (available on the Commission's Web site). In her speech, Chairman Schapiro noted that nearly 30 percent of volume in U.S.-listed equities was executed in venues that do not display their liquidity or make it generally available to the public and the percentage was increasing nearly every month.
The Exchange also notes that the Commission recently approved a similar proposal by the New York Stock Exchange, Inc. ("NYSE") and NYSE MKT LLC ("NYSE MKT"). *12 Accordingly, the proposal generally encourages competition between exchange venues for retail order flow and encourages additional retail order flow.
*12 See Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR 40673 (July 10,
2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84) (the "RLP Approval
The Exchange believes that a differential pricing structure for Retail Orders is not unfairly discriminatory. As stated in the NYSE RLP Approval Order, the "Commission has previously recognized that 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." *13 The Exchange's proposed differential pricing structure for Retail Orders raises similar policy considerations as the rules approved by the Commission in the NYSE RLP Approval Order, which account for the difference of assumed information and sophistication level between different trading participants by providing Retail Orders access to better rebates.
*13 See Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR 40673 (July 10,
2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84) (the "NYSE RLP Approval Order"). In conjunction with the approval of the NYSE Retail Liquidity Program, a nearly identical program was proposed and approved to operate on NYSE MKT (formerly, the American Stock Exchange), at 40679-40680 (citing Concept Release on Equity Market Structure and approval of an options exchange program related to price improvement for retail orders). Certain options exchanges deploy this same rationale today through pricing structures that vary for a trading participant based on the capacity of the contra-side trading participant. See, e.g., Securities Exchange Act Release No. 63632 (January 3, 2011), 76 FR 1205 (January 7, 2011) (SR-BATS-2010-038) (notice of filing and immediate effectiveness of proposal to modify fees for BATS Exchange Inc. ("BATS") Options, including liquidity rebates that are variable depending on the capacity of the contra-party to the transaction; see also Securities Exchange Act Release No. 67171 (June 8, 2012), 77 FR 35732 (June 14, 2012) (SR-NASDAQ-2012-068) (notice of filing and immediate effectiveness of proposal to modify fees for the NASDAQ Options Market, including certain fees and rebates that are variable depending on the capacity of the contra- party to the transaction).
The Exchange understands that Section 6(b)(5) of the Act *14 prohibits an exchange from establishing rules that are designed to permit unfair discrimination between market participants. However, Section 6(b)(5) of the Act does not prohibit exchange members or other broker-dealers from discriminating, so long as their activities are otherwise consistent with the federal securities laws. While the Exchange believes that markets and price discovery optimally function through the interactions of diverse flow types, it also believes that growth in internalization has required differentiation of retail order flow from other order flow types. The differentiation proposed herein by the Exchange is not designed to permit unfair discrimination, but instead to promote a competitive process around retail executions such that retail investors would receive better rebates than they currently do through bilateral internalization arrangements. Additionally, the Exchange believes that the proposed Retail Order rate for Flag ZA (rebate of $0.0032 per share) will incentivize Members to submit Retail Orders that add liquidity to the Exchange. As a result of the additional liquidity, the Exchange believes that this would result in improved market quality.
*14 15 U.S.C. 78f(b)(5).
The Exchange also believes that the proposed rates for Retail Orders (Flags
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ZA and ZR, respectively) are equitable and not unfairly discriminatory because Members could qualify for the same rates (rebate of $0.0032 per share and charge of $0.0030 per share, respectively) through other volume discounts or through the default, non-tiered removal rate. For example, Members could achieve the rebate of $0.0032 per share if they satisfy the conditions for the Mega Tier rebate of $0.0032 per share. Members could also achieve the removal fee of $0.0030 per share without satisfying an additional tier as $0.0030 per share is the default rate for removing liquidity on the Exchange's fee schedule. Thus, the Exchange believes that there would be a neutral effect on removers of liquidity as the Exchange is neither incenting nor disincentivizing the use of Flag ZR.
Moreover, the proposed use of Retail Orders, which are available for all Members that utilize FIX, is equitable and not unfairly discriminatory because FIX is available for all Members on an equal and non-discriminatory basis, as all Members can sign up for new logical ports using FIX or HP-API at a cost of $500/month (the first five DIRECT logical ports being provided free). The Exchange also notes that all Members that it expects will send Retail Orders currently maintain logical ports that utilize FIX. The Exchange also notes that the Members that only utilize HP-API are generally those that are more concerned with latency as they trade for their own accounts where their order flow typically would not qualify as retail order flow. Finally, all order entry protocols on the Exchange do not necessarily support all Exchange functions and are designed differently in order to support the Member base most likely to utilize them.
The Exchange believes its amendments to footnotes 1, 2, and 13 support the Exchange's efforts to achieve consistent application and specificity among the flags on the fee schedule and provide transparency for its Members. First, in SR-EDGX-2012-39, the Exchange discounted certain "removal flags" if a Member satisfied the criteria for the Mega Tier rebate in Footnote 1. *15 Since Flag ZR is a removal flag with an assigned rate of $0.0030 per share, the Exchange believes it is appropriate to include Flag ZR in its list of removal flags that would qualify for a discounted removal rate of $0.0029 per share. The Exchange also believes that these proposed amendments are non-discriminatory because they apply to all Members.
*15 See Securities Exchange Act Release No. 67818 (September 10, 2012), 77 FR 56890 (September 14, 2012) (SR-EDGX-2012-39).
Secondly, in SR-EDGX-2012-46, *16 the Exchange listed in Footnote 2 of the fee schedule those removal flags that would qualify for the Step-up Take Tier if a Member satisfied the criteria. Since Flag ZR is a removal flag with an assigned rate of $0.0030 per share, the Exchange believes it is appropriate to include Flag ZR in its list of removal flags that would qualify for a discounted removal rate of $0.0028 per share. *17 The Exchange also believes that these proposed amendments are non-discriminatory because they apply to all Members.
*16 See Securities Exchange Act Release No. 68166 (November 6, 2012), 77 FR 67695 (November 13, 2012) (SR-EDGX-2012-46).
*17 The Exchange notes that Flag ZA is not yielded with the Step-Up Take Tier, like other listed add liquidity flags listed in Footnote 2, as the rate provided on the Step-Up Take Tier for adding liquidity (rebate of $0.0030 per share) is not as favorable to Members as the rate yielded on Flag ZA itself (rebate of $0.0032 per share). As a result, Members that have Retail Orders that add liquidity to EDGX would receive the rebate of $0.0032 per share in the situation where the Member also qualifies for the Step-Up Take Tier. This is made clear in the language in the second paragraph of proposed Footnote 4, as described above.
Finally, in SR-EDGX-2012-12, the Exchange included "added" and "removal flags" in its calculation of the "add liquidity" to "removed liquidity" ratio to qualify for the Investor Tier. *18 Since Flag ZR is a removal flag and Flag ZA is an add flag, the Exchange believes it is appropriate to include the volume from both of these flags in its calculation of the "add liquidity" to "removed liquidity" ratio. The Exchange also believes that these proposed amendments are non-discriminatory because they apply to all Members.
*18 See Securities Exchange Act Release No. 66762 (April 6, 2012), 77 FR 22053 (April 12, 2012) (SR-EDGX-2012-12).
The Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues. In such an environment, the Exchange must continually review, and consider adjusting, its fees and credits to remain competitive with other exchanges. For the reasons described above, the Exchange believes that the proposed rule change reflects this competitive environment.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from Members or other interested parties.
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 *19 and Rule 19b-4(f)(2) *20 thereunder. At any time within 60 days of the filing of such 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.
*19 15 U.S.C. 78s(b)(3)(A).
*20 17 CFR 19b-4(f)(2).
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:
. Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
. Send an email to firstname.lastname@example.org. Please include File Number SR- EDGX-2012-47 on the subject line.
. Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549- 1090.
All submissions should refer to File Number SR-EDGX-2012-47. 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 Web site (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
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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 Web site 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-EDGX-2012-47 and should be submitted on or before December 26, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. *21
*21 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
[FR Doc. 2012-29239 Filed 12-3-12; 8:45 am]
BILLING CODE 8011-01-P
Vol. 77, No. 233
[Release No. 34-68310; File No. SR-EDGX-2012-47]
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