[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Notices]
[Pages 36354-36357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14971]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72445; File No. SR-EDGX-2014-05]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Adopt a New Order Type Called the Mid-Point
Discretionary Order
June 20, 2014.
I. Introduction
On March 7, 2014, EDGX Exchange, Inc. (``Exchange'' or ``EDGX'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend its rules to add a new order type called the Mid-Point
Discretionary Order (``MDO'') and to reflect the priority of MDOs. The
proposed rule change was published for comment in the Federal Register
on March 25, 2014.\3\ On May 2, 2014, the Commission extended the time
period in which to either approve or disapprove the proposed rule
change to June 23, 2014.\4\ The Commission received no comment letters
on the proposed rule change. This order institutes proceedings under
Section 19(b)(2)(B) of the Act \5\ to determine whether to approve or
disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71747 (March 19,
2014), 79 FR 16401 (March 25, 2014) (``Notice'').
\4\ See Securities Exchange Act Release No. 72086 (May 2, 2014),
79 FR 26473 (May 8, 2014).
\5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal
A. Proposed Mid-Point Discretionary Order
The Exchange proposes to add a new order type--called the Mid-Point
Discretionary Order or MDO. An MDO would be a limit order to buy that
is displayed and pegged to the National Best Bid (``NBB''), with
discretion to execute at prices up to and including
[[Page 36355]]
the mid-point of the NBBO,\6\ and a limit order to sell that is
displayed and pegged to the National Best Offer (``NBO''), with
discretion to execute at prices down to and including the mid-point of
the NBBO.\7\ The displayed price of an MDO would be re-priced to track
changes in the NBBO.\8\ An MDO's sole time stamp would be the one
assigned to the order at its displayed price, and it would only change
when the displayed price is adjusted to track changes in the NBB or NBO
to which it is pegged. Therefore, if the discretionary range of an MDO
changes due to a change in the mid-point of the NBBO (i.e., if the NBO
changes for an MDO to buy or if the NBB changes for an MDO to sell), an
MDO's time stamp would not change.
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\6\ EDGX Rule 1.5(o) defines ``NBBO'' as ``the national best bid
or offer.'' See also Rule 600(b)(42) of Regulation NMS under the
Act.
\7\ See proposed EDGX Rule 11.5(c)(14). The Exchange represents
that the proposed MDO is based on and would operate similarly to the
Mid-Point Discretionary Order on EDGA Exchange, Inc. (``EDGA''). See
Notice, supra note 3, at 16402. However, the Exchange identifies and
explains four differences, which it attributes to the different fee
structures used by EDGA and EDGX. Id. at 16403-05. The differences
are that an MDO on EDGX, unlike an MDO on EDGA: (1) Would not be
eligible to execute immediately upon entry at its displayed price;
(2) would not be eligible to execute against resting Discretionary
Orders, including contra-side MDOs; (3) would only be eligible to
execute at the mid-point of the NBBO against Mid-Point Match Orders
and incoming liquidity-removing orders when their limit prices are
equal to the mid-point of the NBBO; and (4) would be immediately
canceled in the event a trading halt is declared by the listing
market. Id.; see also infra notes 9, 13-18 and accompanying text.
\8\ See proposed EDGX Rule 11.5(c)(14).
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An MDO would not independently establish or maintain the NBB or
NBO; rather, the displayed price of the MDO would be derived from the
NBB or NBO. Accordingly, an MDO would be cancelled if no NBBO exists.
An MDO would also be cancelled if a trading halt is declared by the
listing market.\9\ An MDO would be able to join the Exchange BBO when
the Exchange BBO equals the NBBO and the EDGX Book is locked or crossed
by another market.\10\ However, if an MDO displayed on the Exchange
would create a locked or crossed market, the System would automatically
adjust the price of the order \11\ to one minimum price variation below
the current NBO (for an MDO to buy) or to one minimum price variation
above the current NBB (for an MDO to sell) with no discretion to
execute to the mid-point of the NBBO.\12\
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\9\ Id. In the Notice, the Exchange explains rationale for this
behavior. See supra, note 3, at 16404-05; note 7.
\10\ See proposed EDGX Rule 11.5(c)(14). EDGX Rule 1.5(d)
defines ``EDGX Book'' as the ``System's electronic file of orders.''
\11\ EDGX Rule 1.5(cc) defines ``System'' as ``the electronic
communications and trading facility designated by the Board through
which securities orders of Users are consolidated for ranking,
execution and, when applicable, routing away.''
\12\ See proposed EDGX Rule 11.5(c)(14).
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Upon entry into the System, an MDO would not be eligible to execute
immediately at its displayed price; however, it would be eligible to
execute at the mid-point of the NBBO.\13\ An MDO would be eligible to
execute at its displayed price only after it has been posted to the
EDGX Book.\14\
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\13\ Id.
\14\ In the Notice, the Exchange explains the rationale for this
behavior and it identifies order types on other exchanges that it
believes operate in the same manner. See supra note 3, at 16403-04;
note 7.
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An MDO would not be eligible to execute against resting
Discretionary Orders,\15\ including contra-side MDOs.\16\ An MDO would
only be eligible to execute at the mid-point of the NBBO against Mid-
Point Match Orders \17\ and incoming liquidity-removing orders when
their limit price is equal to the mid-point of the NBBO.\18\ An MDO in
a stock priced at $1.00 or more would only be executed in sub-penny
increments when executed at the mid-point of the NBBO against contra-
side Mid-Point Match Orders.\19\ In addition, an MDO would not be
eligible for routing pursuant to EDGX Rule 11.9(b)(2).\20\
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\15\ See EDGX Rule 11.5(c)(13).
\16\ See proposed EDGX Rule 11.5(c)(14). In the Notice, the
Exchange explains the rationale for this behavior. See supra, note
3, at 16404; note 7.
\17\ See EDGX Rule 11.5(c)(7).
\18\ See proposed EDGX Rule 11.5(c)(14). In the Notice, the
Exchange explains the rationale for this behavior. See supra, note
3, at 16404; note 7.
\19\ See proposed EDGX Rule 11.5(c)(14). An MDO would execute
against all other order types solely in whole penny increments,
would not be eligible to execute against a contra-side MDO at the
mid-point of the NBBO, and would not be displayed or ranked in sub-
penny increments.
\20\ Id.
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An MDO could include a limit price, by which its displayed price
and discretion to the mid-point of the NBBO would be bound.\21\
Specifically, an MDO to buy or sell with a limit price that is less
than the prevailing NBB or greater than the prevailing NBO,
respectively, is posted to the EDGX Book at its limit price.\22\
Further, for example, if an MDO to buy is entered with a limit price
that is less than the prevailing mid-point of the NBBO, it would have
discretion to buy only up to its limit price, not the mid-point of the
NBBO. Conversely, if an MDO to buy is entered with a limit price that
is greater than the prevailing NBO, it would have discretion to buy up
to the mid-point of the NBBO and not to its limit price.\23\
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\21\ Id.
\22\ Id.
\23\ The Exchange notes that an MDO's discretion to trade to and
including the mid-point of the NBBO may be limited where the only
available contra-side liquidity at the mid-point is represented by
MDOs or Non-Displayed Orders resting on the EDGX Book. See Notice,
supra note 3, at 16402.
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The Exchange also proposes to address how an MDO would comply with
the National Market System Plan, also known as Limit Up/Limit Down
(``LULD''), established pursuant to Rule 608 of the Act, to address
extraordinary market volatility (``LULD Plan'').\24\ Specifically, an
MDO to buy would be re-priced to the Upper Price Band and not the
Protected Bid where the price of the Upper Price Band moves below an
existing Protected Bid, and an MDO to sell would be re-priced to the
Lower Price Band and not the Protected Offer where the price of the
Lower Price Band moves above an existing Protected Offer.\25\ An MDO
would only execute at its displayed price and not within its
discretionary ranges when: (i) The price of the Upper Price Band equals
or moves below an existing Protected Bid; or (ii) the price of the
Lower Price Band equals or moves above an existing Protected Offer.\26\
When those conditions no longer exist, an MDO would resume trading
against other orders in its discretionary range and being displayed at
and pegged to the NBBO.\27\
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\24\ See Appendix A to Securities Exchange Act Release No. 67091
(May 31, 2012), 77 FR 33498 (June 6, 2012).
\25\ See proposed EDGX Rule 11.5(c)(14); EDGX Rule 11.9(a)(3).
EDGX Rule 1.5(gg) states that ``[t]he terms . . . Upper Price Band
and Lower Price Band . . . shall have the definitions and meanings
ascribed to them under the [LULD] Plan.'' EDGX Rule 1.5(v) defines
``Protected Bid'' and ``Protected Offer'' as ``a bid or offer in a
stock that is (i) displayed by an automated trading center; (ii)
disseminated pursuant to an effective national market system plan;
and (iii) an automated quotation that is the best bid or best offer
of a national securities exchange or association.''
\26\ See proposed EDGX Rule 11.5(c)(14).
\27\ Id.
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C. Proposed Amendments to EDGX Rule 11.8(a)--Priority
The Exchange proposes to amend EDGX Rule 11.8(a) to reflect the
priority an MDO would have when it is executed within its discretionary
range. Specifically, current EDGX Rule 11.8(a)(2) states that the EDGX
System shall execute equally priced trading interest in time priority
in the following order: (i) Displayed size of limit orders; (ii) Mid-
Point Match Orders; (iii) non-displayed limit orders and the reserve
quantity of Reserve Orders; \28\ (iv) discretionary range of
Discretionary Orders as set forth in current Rule
[[Page 36356]]
11.5(c)(13); and (v) Route Peg Orders as set forth in current Rule
11.5(c)(17). The Exchange proposes that, when an MDO executes at its
displayed price, the MDO would have the same priority as that of the
displayed size of a limit order, in accordance with EDGX Rule
11.8(a)(2)(A). The Exchange also proposes that, when an MDO executes
within its discretionary range, the MDO would have the same priority as
the discretionary range of a Discretionary Order, as set forth in Rule
11.8(a)(2)(D).\29\
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\28\ See EDGX Rule 11.5(c)(1).
\29\ The Exchange provides an example to illustrate the
application of the priority rules to an MDO. See Notice, supra note
3, at 16407.
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In addition, the Exchange proposes to address the priority of
orders when an MDO is posted to the EDGX Book. Where orders to buy (or
sell) are made at the same price, EDGX Rule 11.8(a)(2) requires that
the order clearly established as the first entered into the System at
that price shall have precedence up to the number of shares of stock
specified in the order.\30\ As described above, an MDO would not be
eligible to execute immediately upon entry into the System at its
displayed price.\31\ Instead, an MDO would be eligible to execute at
its displayed price only after it has been posted to the EDGX Book
(i.e., at the displayed price, it functions as a ``post-only'' order
type). Therefore, the Exchange proposes to add subparagraph (9) to EDGX
Rule 11.8(a) to provide that, in accordance with proposed Rule
11.5(c)(14), where an MDO does not execute against certain marketable
contra-side interest resting on the EDGX Book, it would,
notwithstanding EDGX Rule 11.8(a)(2) described above, be posted
directly to the EDGX Book and would be eligible to execute against
later-arriving marketable contra-side orders.
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\30\ The Commission notes that the EDGX System executes equally-
priced trading interest within the System in time priority within
order type categories in the following order: (1) Displayed size of
limit orders; (2) Mid-Point Match Orders; (3) Non-displayed limit
orders and the reserve quantity of Reserve Orders; (4) Discretionary
range of Discretionary Orders as set forth in Rule 11.5(c)(13); and
(5) Route Peg Orders as set forth in Rule 11.5(c)(17).
\31\ See supra notes 13 thru 14and accompanying text. An MDO
also would not be eligible to execute against resting Discretionary
Orders, including contra-side MDOs. See supra notes 15 and 16 and
accompanying text.
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For example, assume that the NBBO is $10.00 x $10.01, and that User
A \32\ has submitted a Discretionary Order (a non-``post-only'' order
type) to buy at $10.00 with discretion to $10.01 that rests on the EDGX
Book. If User B submits an MDO to sell with a limit price of $10.01,
User B's MDO would not be able to execute against User A's resting
Discretionary Order to buy, despite otherwise being marketable against
User A. User B's MDO to sell instead would be posted to the EDGX Book
and displayed at $10.01 with discretion to execute down to the mid-
point of the NBBO, $10.005. If User C submits an order identical to
User A's Discretionary Order, User C's Discretionary Order to buy would
execute against User B's MDO Order to sell at $10.01, and User A's
Discretionary Order to buy would remain on the EDGX Book, despite User
A being first in time priority. The Exchange believes that precluding
MDOs from executing against resting Discretionary Orders would promote
just and equitable principles of trade by permitting the Exchange to
offer a low-cost pricing structure while also offering an order type
that provides Users the opportunity to achieve price improvement to and
including the mid-point of the NBBO.\33\ The Exchange also argues that,
once a User's order is posted to the book (User A in the example
above), such User expects to receive a rebate, and, thus, would be
willing to forgo an execution against a later-arriving MDO at the
displayed price.\34\ The Exchange further argues that, if a User is
willing to pay a fee for broader execution opportunities at the mid-
point of the NBBO, that User could utilize a Mid-Point Match Order,
rather than an MDO.\35\ The Exchange further states that amending its
general priority structure to accommodate scenarios similar to the one
noted above is appropriate because the Exchange believes that Users
could then post aggressively-priced liquidity (by submitting an MDO)
because they will have certainty as to the fee or rebate they would pay
or receive from the Exchange if their orders are executed.\36\
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\32\ EDGX Rule 1.5(ee) defines ``User'' as ``any Member or
Sponsored Participant who is authorized to obtain access to the
System pursuant to Rule 11.3.''
\33\ See Notice, supra note 3, at 16408. Specifically, the
Exchange stated that, if the Exchange were to allow MDOs on EDGX to
execute against each other, the provider of liquidity would receive
a rebate while the taker of liquidity would be charged no fee. Id.
On the other hand, the Exchange states that an MDO on EDGA may
execute against resting Discretionary Orders, including contra-side
MDOs, because both orders would pay a fee. Id.; see also EDGA Fee
Schedule available at http://www.directedge.com/Trading/EDGAFeeSchedule.aspx.
\34\ See Notice, supra note 3, at 16408. The Exchange
acknowledges that a later-arriving, identical Discretionary Order
would act as a liquidity remover and pay a fee to execute against
the MDO. Id. at 16403.
\35\ Id.
\36\ Id. at 16408.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-EDGX-
2014-05 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \37\ to determine whether the proposed rule
change should be approved or disapproved.\38\ Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues that are raised by the proposal and are discussed below.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described in greater detail below, the Commission seeks and
encourages interested persons to comment on the proposal and provide
the Commission with additional comment to inform the Commission's
analysis whether to approve or disapprove the proposed rule change.
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\37\ 15 U.S.C. 78s(b)(2)(B).
\38\ Section 19(b)(2)(B) of the Act provides that proceedings to
determine whether to disapprove a proposed rule change must be
concluded within 180 days of the date of publication of notice of
the filing of the proposed rule change. The time for conclusion of
the proceedings may be extended for up to an additional 60 days if
the Commission finds good cause for such extension and publishes its
reasons for so finding or if the self-regulatory organization
consents to the extension.
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Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The sections of the Act applicable to the proposed rule change that
provide the grounds for approval or disapproval under consideration are
Section 6(b)(5).\39\ Section 6(b)(5) of the Act \40\ requires that the
rules of an exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest; and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\39\ 15 U.S.C. 78f(b)(5).
\40\ 15 U.S.C. 78f(b)(5).
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The interaction (or non-interaction) of the MDO with other orders
on the EDGX Book raises important issues that warrant further public
comment and Commission consideration. Specifically, in certain
circumstances, as described above, an incoming MDO, which functions as
a post-only order type, would not interact with a resting non-post-only
order, but would interact with
[[Page 36357]]
an identical later-arriving non-post-only order. The Commission
believes the proposed rule change raises questions regarding: (1)
Whether it is unfairly discriminatory, or inconsistent with the
protection of investors and the public interest, for the later-arriving
order to have execution priority in these circumstances; and (2)
whether it is inconsistent with a free and open market and the national
market system, or the protection of investors and the public interest,
for an exchange to create complex order interaction scenarios in order
to maintain a simplified fee schedule.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data and arguments with respect to the
concerns identified above, as well as any others they may have with the
proposal. In particular, the Commission invites the written views of
interested persons concerning whether the proposed rule change is
inconsistent with Section6(b)(5), or any other provision, of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\41\
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\41\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views and
arguments regarding whether the proposed rule change should be approved
or disapproved by July 17, 2014. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
July 31, 2014.
The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal, in
addition to any other comments they may wish to submit about the
proposed rule change. In particular, the Commission seeks comment on
the following:
1. As proposed, an incoming MDO would not execute against certain
resting orders willing to pay a take fee, but could instead execute
against later-arriving orders identical to the resting orders.\42\
Would this result add unnecessary complexity to the Exchange's priority
rules and the equity markets generally? Would it create opportunities
for Users to effect ``queue-jumping'' or other strategies that might be
unfair or detrimental to the markets? Please explain.
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\42\ See supra notes 15-16, 32-36 and accompanying text.
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2. The Exchange asserts that, once a User's order is posted to the
EDGX Book, the User expects to receive a rebate, even if it was willing
to pay a take fee when the order was initially submitted.\43\ Does this
accurately represent User expectations? Please explain. Would such a
User be willing to pay a fee to execute against an incoming MDO if the
net execution price, taking into account the rebate forgone and the fee
paid, is within the range of prices the User would have been willing to
accept upon order entry?
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\43\ See supra note 34 and accompanying text.
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3. The Exchange indicates that one reason an incoming MDO would not
execute against a resting, contra-side Discretionary Order or MDO is
because, in this circumstance, the provider of liquidity would receive
a rebate while the taker of liquidity would be charged no fee.\44\ Is
it appropriate for an Exchange to address scenarios such as this--in
which it would lose money--by adding complexity to the way orders
interact (including overriding time priority), rather than adjusting
its fee schedule?
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\44\ See supra notes 15-16 and accompanying text.
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4. What type of market participants would avail themselves of the
MDO, and how and why would the order type improve market quality or
otherwise promote fair and orderly markets, or the protection of
investors and the public interest?
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-2014-05 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-EDGX-2014-05. 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 such 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 publicly available. All
submissions should refer to File Number SR-EDGX-2014-05 and should be
submitted on or before July 17, 2014. If comments are received, any
rebuttal comments should be submitted by July 31, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14971 Filed 6-25-14; 8:45 am]
BILLING CODE 8011-01-P