[Federal Register Volume 78, Number 115 (Friday, June 14, 2013)]
[Notices]
[Pages 35996-36002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-14114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69725; File No. SR-EDGX-2013-19]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Amendments to the EDGX Exchange, Inc. Fee Schedule
June 10, 2013.
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 June 3, 2013, 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.
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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
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.
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\3\ As defined in Exchange Rule 1.5(n).
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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
1. Purpose
The Exchange proposes to amend its fees and rebates applicable to
Members of the Exchange pursuant to EDGX Rule 15.1(a) and (c) to: (1)
Lower the default \4\ rebate at the top of its fee schedule for adding
liquidity in securities at or above $1.00 on EDGX from a rebate of
$0.0021 per share to a rebate of $0.0020 per share and make conforming
changes to add flags B, V, Y, 3, and 4; (2) make conforming changes to
the internalization flags 5, EA, and ER; (3) increase the fee charged
from $0.0018 per share to $0.0020 per share for orders that yield Flag
RB, which routes to NASDAQ OMX BX (``BX'') and adds liquidity; (4)
decrease the rebate from $0.0026 per share to $0.0020 per share for
orders that yield Flag RS, which routes to NASDAQ OMX PSX (``PSX'') and
adds liquidity; (5) add the Midpoint Match Volume Tier (``MPM Volume
Tier'') to Footnote 3 of the Exchange's fee schedule; \5\ and (6) amend
the criteria to meet the $0.0035 per share Mega Tier in Footnote 1 as
well as lower the associated removal and routing rate from $0.0020 per
share to $0.0015 per share on the Exchange's fee schedule.
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\4\ ``Default'' refers to the standard rebate provided to
Members for orders that add liquidity to the Exchange absent Members
qualifying for additional volume tiered pricing.
\5\ References herein to ``Footnotes'' refer only to footnotes
on the Exchange's fee schedule and not to footnotes within the
current filing.
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Lower Default Rebate
The Exchange proposes to lower the default rebate at the top of its
fee schedule for adding liquidity in securities at or above $1.00 on
EDGX from a rebate of $0.0021 per share to a rebate of $0.0020 per
share. This change will also be reflected in the following added
liquidity flags: B, V, Y, 3, and 4. The Exchange notes that Members
will still qualify for all tiered rebates on the Exchange's fee
schedule.
Amendments to Customer Internalization Fees
For customer internalization, which occurs when two orders
presented to the Exchange from the same Member (i.e., MPID) are
presented separately and not
[[Page 35997]]
in a paired manner, but nonetheless inadvertently match with one
another,\6\ the Exchange currently charges $0.00045 per share per side
of an execution (for adding liquidity and for removing liquidity) for
Flags EA, ER, and 5. This charge occurs in lieu of the standard or
tiered rebate/removal rates. Therefore, Members currently incur a total
transaction cost of $0.0009 per share for both sides of an execution
for customer internalization.
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\6\ Members are advised to consult Rule 12.2 respecting
fictitious trading.
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In SR-EDGX-2011-13,\7\ the Exchange represented that it ``will work
promptly to ensure that the internalization fee is no more favorable
than each prevailing maker/taker spread.'' In order to ensure that the
internalization fee is no more favorable than the proposed maker/taker
spread of $0.0010 for the standard add rate (proposed rebate of
$0.0020) and standard removal rate ($0.0030 charge per share), the
Exchange is proposing to charge $0.0005 per side for customer
internalization (flags EA, ER and 5). However, if a Member posts
10,000,000 shares or more of average daily volume (``ADV'') to EDGX,
then the Member would get the current rate of $0.0001 per share per
side for customer internalization.\8\ If this occurs, then the Member's
rate for inadvertently matching with itself decreases to $0.0001 per
share per side, as reflected in Footnote 11. In each case (both tiered
and standard rates), the charge for Members inadvertently matching with
themselves is no more favorable than each maker/taker spread. The
applicable rate for customer internalization thus allows the Exchange
to discourage potential wash sales.
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\7\ See Securities Exchange Release No. 64452 (May 10, 2011), 76
FR 28110, 28111 (May 13, 2011) (SR-EDGX-2011-13).
\8\ EDGX has a variety of tiered rebates ranging from $0.0025-
$0.0035 per share, which makes its maker/taker spreads range from
$0.0005 (standard removal rate--Growth Tier), $0.0002 (standard
removal rate--Super Tier or 0.65% total consolidated volume
(``TCV'') step-up tier rebate), (standard removal rate--Step-Up Take
tier or Investor Tier), -$0.0001 (standard removal rate--Ultra Tier
rebate), -$0.0002 (standard removal rate--Mega Tier rebate of
$0.0032), -$0.0003 (standard removal rate--Market Depth Tier rebate
of $0.0033 per share), and -$0.0005 (standard removal rate--Mega
Tier rebate of $0.0035 per share). As a result of the customer
internalization charge, Members who internalized would be charged
$0.0001 per share per side of an execution (total of $0.0002 per
share) instead of capturing the maker/taker spreads resulting from
achieving the tiered rebates.
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Fee Change for Flag RB
In securities priced at or above $1.00, the Exchange currently
assesses a fee of $0.0018 per share for Members' orders that yield Flag
RB, which routes to BX and adds liquidity. The Exchange proposes to
amend its fee schedule to increase this fee to $0.0020 per share for
Members' orders that yield Flag RB. The proposed change represents a
pass through of the rate that Direct Edge ECN LLC (d/b/a DE Route)
(``DE Route''), the Exchange's affiliated routing broker-dealer, is
charged for routing orders to BX that add liquidity and do not qualify
for a volume tiered discount. When DE Route routes to BX and adds
liquidity, it is charged a default fee of $0.0020 per share.\9\ DE
Route will pass through this rate on BX to the Exchange and the
Exchange, in turn, will pass through this rate to its Members. The
Exchange notes that the proposed change is in response to BX's May 2013
fee filing with the Securities and Exchange Commission (the
``Commission''), wherein BX increased the rate it charges its
customers, such as DE Route, from a charge of $0.0018 per share to a
charge of $0.0020 per share for orders that are routed to BX and add
liquidity.\10\
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\9\ The Exchange notes that to the extent DE Route does or does
not achieve any volume tiered rebate on BX, its rate for Flag RB
will not change. See BX Fee Schedule, http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing (charging a default fee of $0.0020 per
share for adding displayed liquidity to BX).
\10\ See Securities Exchange Act Release No. 69522 (May 6,
2013), 78 FR 27464 (May 10, 2013) (SR-BX-2013-034) (amending the
default fee BX charges for adding liquidity to the BX order book
from $0.0018 per share to $0.0020 per share).
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Rebate Change for Flag RS
In securities priced at $1.00 or above, the Exchange currently
provides a rebate of $0.0026 per share for Members' orders that yield
Flag RS, which routes to PSX and adds liquidity. The Exchange proposes
to amend its fee schedule to decrease the rebate it provides Members
from $0.0026 per share to $0.0020 per share for Flag RS. The proposed
change represents a pass through of the rate that DE Route is rebated
for routing orders to PSX that add liquidity and do not qualify for a
volume tiered discount.\11\ When DE Route routes to PSX and adds
liquidity, it is provided a default rebate of $0.0020 per share. DE
Route will pass through this rate on PSX to the Exchange and the
Exchange, in turn, will pass through this rate to its Members. The
Exchange notes that the proposed change is in response to PSX's May
2013 fee filing with the Commission, wherein PSX decreased the rebate
it provides its customers, such as DE Route, from a rebate of $0.0026
per share to a rebate of $0.0020 per share for orders that are routed
to PSX and add liquidity.\12\
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\11\ The Exchange notes that to the extent DE Route does or does
not achieve any volume tiered rebate on PSX, its rate for Flag RS
will not change. See PSX Fee Schedule, http://www.nasdaqtrader.com/Trader.aspx?id=PSX_pricing (providing a default rebate of $0.0020
per share for adding displayed liquidity to PSX).
\12\ See Securities Exchange Act Release No. 69588 (May 15,
2013), 78 FR 29801 (May 21, 2013) (SR-Phlx-2013-51) (amending the
default rebate PSX provides for adding displayed liquidity to the
PSX order book from $0.0026 per share to $0.0020 per share).
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Addition of MPM Volume Tier
The Exchange proposes to add the MPM Volume Tier to Footnote 3 of
the Exchange's fee schedule. A Member could qualify for the MPM Volume
Tier by adding and/or removing an ADV of at least 3,000,000 shares on a
daily basis, measured monthly, on EDGX, yielding flags MM (adds
liquidity to MPM using the Midpoint Match order type \13\) and/or MT
(removes liquidity from MPM using MPM order type). Members qualifying
for the MPM Volume Tier would not pay a fee for orders yielding Flag
MM.
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\13\ As defined in Exchange Rule 11.5(c)(7), the Midpoint Match
(``MPM'') order type is an order with an instruction to execute it
at the midpoint of the NBBO.
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The Exchange notes that the proposed tier is subject to competitive
forces because it is comparable to The NASDAQ Stock Market LLC's
(``NASDAQ'') similar pricing tier that is dependent on achieving
stipulated volume requirements in midpoint liquidity, as discussed in
further detail below.
Amendment to $0.0035 Mega Tier
Lastly, Footnote 1 of the Exchange's fee schedule currently
provides that Members may qualify for a Mega Tier rebate of $0.0035 per
share (the ``$0.0035 Mega Tier'') for all liquidity posted on EDGX
where Members add or route at least 2,000,000 shares of ADV prior to
9:30 a.m. or after 4:00 p.m. (including all flags except 6) and add a
minimum of 35,000,000 shares of ADV on EDGX in total, including during
both market hours and pre- and post-trading hours. In addition, for
meeting the aforementioned criteria, Members will pay a reduced rate
for removing liquidity of $0.0020 per share for Flags N, W, 6, 7, BB,
PI, RT, and ZR. Where a Member does not meet the criteria for any Mega
Tier, then a removal rate of $0.0030 per share applies.
The Exchange proposes to amend Footnote 1 of its fee schedule to
increase the ADV requirement of the $0.0035 Mega Tier from 2,000,000
shares of ADV to 4,000,000 shares of ADV, add a requirement to have an
``added liquidity'' to ``added plus removed liquidity'' ratio of at
least 85% where added flags are defined as B, V, Y, 3, 4,
[[Page 35998]]
HA, MM, RP, and ZA, and removal flags are defined as N, W, 6, BB, MT,
PI, PR, and ZR and reduce the removal and/or routing rate associated
with achieving this tier from $0.0020 per share to $0.0015 per share.
The amended tier would read as follows:
Members can qualify for the Mega Tier and be provided a rebate
of $0.0035 per share for all liquidity posted on EDGX if they (i)
add or route at least 4,000,000 shares of ADV prior to 9:30 a.m. or
after 4:00 p.m. (includes all flags except 6), (ii) add a minimum of
35,000,000 shares of ADV on EDGX in total, including during both
market hours and pre and post-trading hours, and (iii) have an
``added liquidity'' to ``added plus removed liquidity'' ratio of at
least 85% where added flags are defined as B, V, Y, 3, 4, HA, MM,
RP, and ZA, and removal flags are defined as N, W, 6, BB, MT, PI,
PR, and ZR. In addition, for meeting the aforementioned criteria,
Members will pay a reduced rate for removing and/or routing
liquidity of $0.0015 per share for Flags N, W, 6, 7, BB, PI, RT, and
ZR.
The remainder of the footnote as it pertains to the $0.0035 per
share Mega Tier rebate would remain unchanged.
As described in SR-EDGX-2013-16 \14\ and discussed in further
detail below, the $0.0035 Mega Tier is subject to competitive forces
because it is comparable to NASDAQ's Routable Order Program
(``ROP''),\15\ a similar program with similar criteria focused on
recognizing the propensity of Members representing retail customers to
make use of exchange-provided routing strategies and pre- and post-
market trading sessions, as compared with proprietary traders.\16\
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\14\ See Securities Exchange Act Release No. 69539 (May 8,
2013), 78 FR 28269, 28270 (May 14, 2013) (SR-EDGX-2013-16).
\15\ See Nasdaq Equity Trader Alert 2013-8, http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2013-8. See also, NASDAQ,
Price List--Trading Connectivity, http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
\16\ See Securities Exchange Act Release No. 68905 (February 12,
2013), 78 FR 11716 (February 19, 2013) (SR-NASDAQ-2013-023).
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Implementation Date
The Exchange proposes to implement these amendments to its fee
schedule on June 3, 2013.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\17\ in general, and
furthers the objectives of Section 6(b)(4),\18\ 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.
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\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(4).
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Lower Default Rebate
The Exchange believes that its proposal to lower the rebate from
$0.0021 per share to $0.0020 per share is an equitable allocation of
reasonable dues, fees and other charges as it will enable the Exchange
to retain additional funds to offset increased administrative,
regulatory, and other infrastructure costs associated with operating an
exchange. The rate is reasonable in that it is comparable to rebates
for adding liquidity offered by NYSE Arca, Inc. (``NYSE Arca'')
(rebates of 0.0021 per share for Tapes A/C securities, $0.0022 per
share for Tape B securities) and on NASDAQ (rebate of $0.0020 per
share).\19\ The Exchange believes that the proposed rebate is non-
discriminatory in that it applies uniformly to all Members.
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\19\ NYSE Arca, NYSE Arca Equities Trading Fees, http://usequities.nyx.com/markets/nyse-arca-equities/trading-fees; NASDAQ,
Price List--Trading & Connectivity, http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
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Amendments to Customer Internalization Fees
The Exchange believes that the increased fee for customer
internalization from $0.00045 to $0.0005 per share per side of an
execution for Flags EA, ER (regular trading session) and 5 (pre and
post market) represents an equitable allocation of reasonable dues,
fees, and other charges as it is designed to discourage Members from
inadvertently matching with one another, thereby discouraging potential
wash sales. The increased fee also allows the Exchange to offset its
administrative, clearing, and other operating costs incurred in
executing such trades. Finally, the fee is equitable in that it is
consistent \20\ with the EDGX fee structure that has a proposed maker/
taker spread of $0.0010 per share (where the standard rebate to add
liquidity on EDGX is proposed to be $0.0020 per share and the standard
fee to remove liquidity is $0.0030 per share).
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\20\ In each case, the internalization fee is no more favorable
to the Member than each prevailing maker/taker spread.
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This increased fee per side of an execution on Flags EA, ER, and 5
($0.0005 per side instead of $0.00045 per side per share), yields a
total cost of $0.0010, thus making the internalization fee consistent
with the current maker/taker spreads.\21\ The Exchange believes that
the proposed rate is non-discriminatory in that it applies uniformly to
all Members.
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\21\ The Exchange will continue to ensure that the
internalization fee is no more favorable than each prevailing maker/
taker spread.
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Fee Change for Flag RB
The Exchange believes that its proposal to increase the pass
through a charge for Members' orders that yield Flag RB from $0.0018 to
$0.0020 per share represents an equitable allocation of reasonable
dues, fees, and other charges among Members and other persons using its
facilities because the Exchange does not levy additional fees or offer
additional rebates for orders that it routes to BX through DE Route.
Prior to BX's May 2013 fee filing, BX charged DE Route a fee of $0.0018
per share for orders yielding Flag RB, which DE Route passed through to
the Exchange and the Exchange passed through to its Members. In BX's
May 2013 fee filing, BX increased the rate it charges its customers,
such as DE Route, from a charge of $0.0018 per share to a charge of
$0.0020 per share for orders that are routed to BX and add
liquidity.\22\ Therefore, the Exchange believes that the proposed
change in Flag RB from a fee of $0.0018 per share to a fee of $0.0020
per share is equitable and reasonable because it accounts for the
pricing changes on BX. In addition, the proposal allows the Exchange to
continue to charge its Members a pass-through rate for orders that are
routed to BX and add liquidity using DE Route. The Exchange notes that
routing through DE Route is voluntary. Lastly, the Exchange also
believes that the proposed amendment is non-discriminatory because it
applies uniformly to all Members.
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\22\ See Securities Exchange Act Release No. 69522 (May 6,
2013), 78 FR 27464 (May 10, 2013) (SR-BX-2013-034) (amending the
default fee BX charges for adding liquidity to the BX order book
from $0.0018 per share to $0.0020 per share).
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Rebate Change for Flag RS
The Exchange believes that its proposal to decrease the pass
through rebate for Members' orders that yield Flag RS from $0.0026 to
$0.0020 per share represents an equitable allocation of reasonable
dues, fees, and other charges among Members and other persons using its
facilities because the Exchange does not levy additional fees or offer
additional rebates for orders that it routes to PSX through DE Route.
Prior to PSX's May 2013 fee filing, PSX provided DE Route a rebate of
$0.0026 per share for orders yielding Flag RS, which DE Route passed
through to the Exchange and the Exchange passed through to its Members.
In PSX's May 2013 fee filing, PSX decreased the rebate it provides its
customers, such as DE Route, from a rebate of $0.0026 per
[[Page 35999]]
share to a rebate of $0.0020 per share for orders that are routed to
PSX and add liquidity.\23\ Therefore, the Exchange believes that the
proposed decrease in rebate from $0.0026 per share to a rebate of
$0.0020 per share for orders that yield Flag RS is equitable and
reasonable because it accounts for the pricing changes on PSX. In
addition, the proposal allows the Exchange to continue to charge its
Members a pass-through rate for orders that are routed to PSX and add
liquidity using DE Route. The Exchange notes that routing through DE
Route is voluntary. Lastly, the Exchange also believes that the
proposed amendment is non-discriminatory because it applies uniformly
to all Members.
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\23\ See Securities Exchange Act Release No. 69588 (May 15,
2013) (SR-Phlx-2013-51) (amending the default rebate PSX provides
for adding displayed liquidity to the PSX order book from $0.0026
per share to $0.0020 per share).
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Addition of MPM Volume Tier
The Exchange believes that the addition of the MPM Volume Tier
represents an equitable allocation of reasonable dues, fees, and other
charges because it incentivizes Members to add midpoint liquidity to
the EDGX Book.\24\ In particular, the MPM Volume Tier is designed to
incent Members to achieve preferred pricing by adding midpoint
liquidity utilizing the MPM order type, yielding Flag MM by assessing
no charge for all orders yielding Flag MM when a Member meets the
criteria for the tier. The Exchange believes that Members utilizing
orders that add liquidity to MPM may receive the benefit of price
improvement, and the addition of the MPM Volume Tier and its associated
lower rate would be a reasonable means by which to encourage the use of
such orders. In addition, the Exchange believes that by encouraging the
use of MPM orders, Members seeking price improvement would be more
motivated to direct their orders to EDGX because they would have a
heightened expectation of the availability of liquidity at the midpoint
of the NBBO. Furthermore, the Exchange believes that adding the MPM
Volume Tier would recognize the contribution that non-displayed
liquidity provides to the marketplace, including price improvement
opportunities and increased the diversity of liquidity to EDGX.
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\24\ As defined in Exchange Rule 1.5(d).
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The Exchange also believes that the MPM Volume Tier is reasonable
and equitably allocated because such increased liquidity benefits all
investors by deepening EDGX's liquidity pool, offering additional
flexibility for all investors to enjoy cost savings and improving
investor protection. Furthermore, such increased volume would increase
potential revenue to the Exchange and would allow the Exchange to
spread its administrative and infrastructure costs over a greater
number of shares, leading to lower per share costs. These lower per
share costs in turn would allow the Exchange to pass on the savings to
Members in the form of higher rebates and lower fees. Volume-based
discounts such as the one proposed herein are widely utilized in the
cash equities markets, and are equitable because they are open to all
Members on an equal basis and provide discounts that are reasonably
related to the value to an exchange's market quality associated with
higher levels of market activity, such as higher levels of liquidity
provision and opportunities for price improvement.
The Exchange believes that the proposed rate of no fee (free) for
the MPM Volume Tier provided that Members add an ADV of 3,000,000
shares or more represents an equitable allocation of reasonable dues,
fees, and other charges because lower charges are directly correlated
with more stringent criteria. While similar to other tiers in the
Exchange's fee schedule in this respect, the MPM Volume Tier cannot be
directly compared to other tiers in the Exchange's fee schedule with
regard to proportionality or consistency because of the nature of the
tier, as a tier that specifically rewards adding non-displayed
liquidity at the midpoint, sets it apart from all other tiers in the
Exchange's fee schedule.
In addition, the proposed rate (free) offered by the MPM Volume
Tier is reasonable because it is within industry norms. The Exchange
notes that, based on the spread between rates for adding and removing
liquidity, the proposed tier is comparable to NASDAQ's similar pricing
tier that is dependent on achieving stipulated volume requirements in
midpoint liquidity. In particular, NASDAQ currently provides a rebate
of $0.0017 per share to its members that add greater than 3 million
shares of midpoint liquidity on a monthly basis and a fee of $0.0030
per share to remove liquidity at the midpoint.\25\ Accordingly, such
members that add and remove liquidity at the midpoint and meet the
criteria of the tier are subject to a spread of $0.0013 per share. The
Exchange currently charges Members a fee of $0.0012 per share to remove
liquidity at the midpoint and a fee of $0.0012 per share to add
liquidity at the midpoint and offers no tiered pricing for midpoint
orders. Accordingly, Members that add and remove liquidity at the
midpoint are subject to a spread of $0.0024 per share. Under the
proposed MPM Volume Tier (offering no fee for orders that add liquidity
at the midpoint and meet the criteria for the tier), Members that add
and remove liquidity at the midpoint and meet the requirements of the
MPM Volume Tier would be subject to a spread of $0.0012 per share,
bringing the spread provided by the Exchange to Members that meet its
MPM Volume Tier in line with that provided by NASDAQ to its members
that meet its similar midpoint tier ($0.0013 per share).
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\25\ See NASDAQ, Price List--Trading Connectivity, http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 (providing for
rebates to add non-displayed midpoint liquidity).
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Lastly, the Exchange also believes that the proposed amendment is
non-discriminatory because it applies uniformly to all Members.
Amendment to $0.0035 Mega Tier
The Exchange believes that the amendments to the $0.0035 Mega Tier
to increase the volume requirement from 2,000,000 shares of ADV to
4,000,000 shares of ADV during pre- and post-trading hours, add a
condition that requires Members to have an ``added liquidity'' to
``added plus removed liquidity'' ratio of at least 85%, and lower the
associated reduced removal and/or routing rates for achieving this tier
from $0.0020 per share to $0.0015 per share on Flags N, W, 6, 7, BB,
PI, RT, and ZR represents an equitable allocation of reasonable dues,
fees, and other charges. The $0.0035 Mega Tier was intended to
encourage greater participation on EDGX by Members that represent
retail customers.\26\ In particular, the Exchange
[[Page 36000]]
notes that an ``added liquidity'' to ``added plus removed liquidity''
ratio of at least 85% is a characteristic of retail order flow, where
retail members add substantially more liquidity than they remove.
Members that primarily post liquidity are more valuable Members to the
Exchange and the marketplace in terms of liquidity provision. Because
retail orders are more likely to reflect long-term investment
intentions than the orders of proprietary traders, they promote price
discovery and dampen volatility. Accordingly, their presence on the
EDGX Book has the potential to benefit all market participants. For
this reason, EDGX believes that it is equitable to provide significant
financial incentives to encourage greater retail participation in the
market in general and on EDGX in particular. The Exchange believes that
increasing the volume requirement and requiring the addition of an
``added liquidity'' to ``added plus removed liquidity'' ratio of at
least 85% may result in increased volume in retail orders by firms
aspiring to meet the criteria of the tier and, accordingly, would lead
to benefits for all market participants.
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\26\ See Securities Exchange Act Release No. 69539 (May 8,
2013), 78 FR 28269, 28270 (May 14, 2013) (SR-EDGX-2013-16) (adding
flags RT and 7, yielded from routing strategies ROUT and pre- and
post-routing, respectively, and utilized by retail investors, to the
$0.0035 Mega Tier). The Exchange notes that the Commission has
expressed concern that a significant percentage of the orders of
individual investors are executed in over-the-counter markets, that
is, at off exchange markets. Securities Exchange Act Release No.
61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (Concept
Release on Equity Market Structure, ``Concept Release''). In the
Concept Release, the Commission recognized the strong policy
preference under the Act in favor of price transparency and
displayed markets. 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 Web site) (comments of
Commission Chairman on what she viewed as a troubling trend of
reduced participation in the equity markets by individual investors,
and that nearly 30 percent of volume in U.S.-listed equities is
executed in venues that do not display their liquidity or make it
generally available to the public).
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The Exchange believes that the amendment is reasonable because
higher rebates and proposed reduced fees for removal of liquidity and/
or routing are directly correlated with more stringent criteria. The
criteria for the $0.0035 Mega Tier is the most stringent of all other
tiers on the Exchange's fee schedule. In order to qualify for the next
best tier after the Mega Tier, the Market Depth Tier, a Member would
receive a rebate of $0.0033 per share for displayed liquidity added on
EDGX if they post greater than or equal to 0.50% of the Total
Consolidated Volume (``TCV'') in ADV on EDGX in total, where at least 2
million shares of which are non-displayed orders that yield Flag HA.
Assuming a TCV of 6 billion shares for April 2013, this would amount to
30 million shares, at least 2 million shares of which are non-displayed
orders. In order for Members to qualify for the next best tier after
the Market Depth Tier and be provided a rebate of $0.0032 per share for
all liquidity posted on EDGX, Members must add or route at least
4,000,000 shares of ADV prior to 9:30 a.m. or after 4:00 p.m. (includes
all flags except 6) and add a minimum of .20% of the TCV on a daily
basis measured monthly, including during both market hours and pre and
post-trading hours (``$0.0032 Mega Tier''). Based on a TCV of 6 billion
shares for April 2013, this would be 12 million shares. The criteria
for the Market Depth Tier and $0.0032 Mega Tier are less stringent then
the volume thresholds for the $0.0035 Mega Tier Rebate because Members
must add a minimum of 35 million shares of ADV, have an ``added
liquidity'' to ``added plus removed liquidity'' ratio of at least
85%,\27\ and add or route at least 4 million shares of ADV during pre-
and post-trading hours to earn a rebate of $0.0035 per share and be
eligible for the proposed lower removal and/or routing fees ($0.0015
per share).
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\27\ Assuming 35 million shares added volume, Members can remove
no more than 6.2 million shares to achieve this 85% ratio.
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As discussed, the criteria for the $0.0035 Mega Tier is the most
stringent as fewer Members generally trade during pre- and post-trading
hours because of the limited time parameters associated with these
trading sessions, which generally results in less liquidity. The
Exchange incentivizes adding resting liquidity by assigning a higher
value to this liquidity because liquidity received prior to the regular
trading session typically remains resident on the EDGX Book throughout
the remainder of the entire trading day. Such liquidity received during
pre- and post-trading hours is an important contributor to price
discovery and acts as an important indication of price for the market
as a whole considering the relative illiquidity of the pre- and post-
trading hour sessions. The Exchange believes that increasing the volume
requirement of the tier, requiring the addition of an ``added
liquidity'' to ``added plus removed liquidity'' ratio of at least 85%,
and reducing the favorable removal and/or routing rates for achieving
this tier is reasonable because it may result in increased liquidity
during these trading sessions submitted by Members aspiring to meet the
criteria of the tier. Such increased liquidity benefits all investors
by deepening EDGX's liquidity pool, supporting the quality of price
discovery, promoting market transparency and improving investor
protection.
The Exchange believes that it is reasonable to lower removal and/or
routing fees using liquidity provision patterns. First, the lower
removal and/or routing rates are similar to the Exchange's Step-up Take
Tier in Footnote 2 of its fee schedule \28\ and other similar tiers on
NYSE Arca \29\ in that it offers a discounted removal rate that is
designed to incent fee sensitive liquidity takers to the Exchange
provided they are able to meet certain volume requirements. The
Exchange believes that the proposed reduction of certain of the
Exchange's routing fees (Flags RT and 7) provided the criteria for the
$0.0035 Mega Tier Rebate is met is equitably allocated, fair and
reasonable, and non-discriminatory in that the lower fees are equally
applicable to all Members that meet the applicable criteria and are
designed to encourage greater retail participation on EDGX.
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\28\ See Securities Exchange Act Release No. 68166 (November 6,
2012), 77 FR 67695 (November 13, 2012) (SR-EDGX-2012-46).
\29\ The Exchange's discounted removal rate from $0.0030 per
share to the proposed rate of $0.0015 per share for Members that
achieve the $0.0035 Mega Tier is also reasonable because it is
similar in concept to discounts offered by NYSE Arca, where the
default removal rate is $0.0030 per share and customers that qualify
for the Tape C Step Up Tier earn discounts of $0.0029 per share. See
NYSE Arca, Schedule of Fees and Charges for Exchange Services,
https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees_5_1_13.pdf.
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In addition, the proposed amendment to the volume requirement in
the $0.0035 Mega Tier is reasonable and within industry norms because
the strict requirements to meet the tier reflect the substantial
benefits offered by the tier. As described in SR-EDGX-2013-16,\30\ the
$0.0035 Mega Tier is comparable to NASDAQ's ROP,\31\ a similar program
with similar criteria focused on recognizing the propensity of Members
representing retail customers to make use of exchange-provided routing
strategies and pre- and post-market trading sessions, as compared with
proprietary traders.\32\ To qualify for the ROP and receive a rebate of
$0.0037 per share and a reduced removal fee of $0.0029 per share for
SCAN or LIST orders that access liquidity on NASDAQ, an MPID must: (i)
Add 35 million shares or more per day on average using the SCAN or LIST
routing strategies; and (ii) of the liquidity provided using SCAN or
LIST strategies, at least 2 million shares per day on average must be
provided before the NASDAQ opening cross and/or after the NASDAQ
closing cross. The proposed reduced removal/routing rate of $0.0015 per
share, when compared to the reduced charge offered by NASDAQ ($0.0029),
is substantially more favorable to market participants. As
[[Page 36001]]
such, the Exchange believes that the proposed reduced removal/routing
rate of $0.0015 per share offered by the $0.0035 Mega Tier justifies a
stricter volume requirement. Accordingly, the Exchange believes that it
is reasonable to increase the volume requirement to meet the tier from
2,000,000 shares of ADV to 4,000,000 shares of ADV during pre- and
post-trading hours. In addition, similar to NASDAQ's ROP's reduced
removal fees, the proposed reduction in removal fees and routing rates
for the Exchange's listed flags is reasonable because it reflects
significant fee reductions, thereby reducing the costs to Members that
represent retail customers and take advantage of the tier, and
potentially also reducing costs to the retail customers themselves. The
change is consistent with an equitable allocation of fees because EDGX
believes that it is reasonable to use fee reductions on removal and
routing fees as a means to encourage greater retail participation on
EDGX. In particular, Flags RT and 7 are proposed to be offered lower
routing rates because they are yielded from routing strategies ROUT
\33\ and pre and post-session routing, respectively, which are used by
retail investors and are similar to NASDAQ's SCAN routing strategy.\34\
The other removal flags selected (Flags N, W, 6, BB, PI, and ZR)
represent all possible removal flags that are yielded from removing
liquidity from EDGX.
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\30\ See Securities Exchange Act Release No. 69539 (May 8,
2013), 78 FR 28269, 28270 (May 14, 2013) (SR-EDGX-2013-16).
\31\ See Nasdaq Equity Trader Alert 2013-8, http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2013-8. See also, NASDAQ,
Price List--Trading Connectivity, http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
\32\ See Securities Exchange Act Release No. 68905 (February 12,
2013), 78 FR 11716 (February 19, 2013) (SR-NASDAQ-2013-023).
\33\ As defined in Exchange Rule 11.9(b)(2).
\34\ See NASDAQ Rule 4758(a)(1)(A)(iv). See also Securities
Exchange Act Release No. 68905 (February 12, 2013), 78 FR 11716,
11717 (February 19, 2013) (SR-NASDAQ-2013-023) (describing SCAN as a
basic NASDAQ routing strategy that is widely used by firms that
represent retail customers. SCAN checks the NASDAQ Market Center
System for available shares, while remaining shares are
simultaneously routed to destinations on the applicable routing
table. If shares remain un-executed after routing, they are posted
on the NASDAQ book).
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Lastly, the Exchange also believes that the proposed amendment is
non-discriminatory because the amended tier applies uniformly to all
Members, whether or not they represent retail customers, that provide
significant levels of liquidity, and is therefore complementary to
existing incentives that already aim to encourage greater retail
participation, such as EDGX's Retail Order Tier \35\ and flags ZA/ZR in
Footnote 4 of its fee schedule.
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\35\ Footnote 4 of the Exchange's fee schedule provides that
Members will be provided a rebate of $0.0034 per share if they add
an average daily volume of Retail Orders (Flag ZA) that is 0.10% or
more of the TCV on a daily basis, measured monthly.
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B. Self-Regulatory Organization's Statement on Burden on Competition
These proposed rule changes do not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. The Exchange does not believe that any of these changes
represent a significant departure from previous pricing offered by the
Exchange or pricing offered by any of the Exchange's competitors.
Additionally, Members may opt to disfavor the Exchange's pricing if
they believe that alternatives offer them better value. Accordingly,
the Exchange believes that the proposed changes would not impair the
ability of Members or competing venues to maintain their competitive
standing in the financial markets.
The Exchange believes that its proposal to lower the rebate from
$0.0021 per share to $0.0020 per share will also assist in increasing
competition in that its proposed rebate is comparable to rebates for
adding liquidity offered by NYSE Arca (rebates of $0.0021 per share for
adding liquidity in Tapes A/C securities and $0.0022 per share for
adding liquidity in Tape B securities) and on NASDAQ (rebate of $0.0020
per share).\36\
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\36\ NYSE Arca, NYSE Arca Equities Trading Fees, http://usequities.nyx.com/markets/nyse-arca-equities/trading-fees; NASDAQ,
Price List--Trading & Connectivity, http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
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The Exchange believes that its internalization rates for securities
priced $1.00 and above will also not burden intermarket or intramarket
competition as the proposed rates are no more favorable than Members
achieving the maker/taker spreads between the default add and remove
rates on EDGX.
The Exchange believes that its proposal to pass through a charge of
$0.0020 per share for Members' orders that yield Flag RB would increase
intermarket competition because it offers customers an alternative
means to route to BX and add liquidity for the same price as entering
orders on BX directly. The Exchange believes that its proposal would
not burden intramarket competition because the proposed rate would
apply uniformly to all Members.
The Exchange believes that its proposal to pass through a rebate of
$0.0020 per share for Members' orders that yield Flag RS would increase
intermarket competition because it offers customers an alternative
means to route to PSX and add liquidity for the same price as entering
orders on PSX directly. The Exchange believes that its proposal would
not burden intramarket competition because the proposed rate would
apply uniformly to all Members.
The Exchange believes that its proposal would increase competition
for routing services because the market for order execution is
competitive and the Exchange's proposal provides customers with another
alternative to route their orders. The Exchange notes that routing
through DE Route is voluntary.
The Exchange believes that its proposal to add the MPM Volume Tier
would increase intermarket competition because it will lead to more
competition for orders that seek liquidity at the midpoint of the NBBO.
The Exchange believes that its proposal would neither increase nor
decrease intramarket competition because the MPM Volume Tier and its
associated rate is available to all Members on a uniform basis.
The Exchange believes that its proposal to increase the volume
requirement, add a requirement that ``added liquidity'' to ``added plus
removed liquidity'' ratio of at least 85%, and decrease the associated
reduced removal and/or routing rate for achieving the $0.0035 Mega Tier
would increase intermarket competition because Members that seek to
meet the tier would be required to send higher volume to the Exchange.
The Exchange believes that its proposal would neither increase nor
decrease intramarket competition because the rate for the $0.0035 Mega
Tier would continue to apply uniformly to all Members and the ability
of some Members to meet the tier would only benefit other Members by
contributing to increased price discovery and better market quality at
the Exchange, especially during pre- and post-market sessions.
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 \37\ and Rule 19b-4(f)(2) \38\ 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
[[Page 36002]]
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.
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\37\ 15 U.S.C. 78s(b)(3)(A).
\38\ 17 CFR 240.19b-4(f)(2).
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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-EDGX-2013-19 on the subject line.
Paper Comments
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-2013-19. 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 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-2013-19 and should be
submitted on or before July 5, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14114 Filed 6-13-13; 8:45 am]
BILLING CODE 8011-01-P