[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47899-47902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-19611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67598; File No. SR-EDGX-2012-33]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing of Proposed Rule Change to Amend EDGX Rule 11.5(c) to add the
Edge Market Close \SM\ Order
August 6, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\
[[Page 47900]]
notice is hereby given that, on July 27, 2012, the EDGX Exchange, Inc.
(the ``Exchange'' or ``EDGX'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II 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 Rule 11.5(c) to add a new order
type, the Edge Market CloseSM (``EMC'') Order, to the rule.
The text of the proposed rule changes is available on the Exchange's
Web site at www.directedge.com, at the Exchange's principal office and
at the Public Reference Room of the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule changes and
discussed any comments it received on the proposed rule changes. 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to amend Rule 11.5(c) to add new
subparagraph (15), which would describe a new order type, the EMC
Order. An EMC Order would be defined as an order to buy or sell on the
Exchange a security that is listed on the New York Stock Exchange LLC
(the ``NYSE'') or The NASDAQ Stock Market LLC (``NASDAQ'') (each, a
``Listing Market'') at the official closing price of such security
published by the corresponding Listing Market.\3\ Users \4\ would be
able to enter, cancel and cancel/replace EMC Orders from prior to the
Pre-Opening Session \5\ on trade date until five (5) minutes prior to
the ``cut-off time'' for the entry of Market At-the-Close Orders on the
NYSE and Market-on-Close Orders on NASDAQ (in each case, the ``EMC Cut-
Off Time'').\6\ All EMC Orders on the EDGX Book \7\ at the EMC Cut-Off
Time would be locked-in either for execution on the Exchange or for
routing to the applicable Listing Market (to the extent not otherwise
matched with a contra-side EMC Order), as described below. Users would
not be able to cancel or cancel/replace any EMC Order after the EMC
Cut-Off Time, and the Exchange would reject back to the User any EMC
Order received after the EMC Cut-Off Time. During the time between the
EMC Cut-Off Time and the NYSE Cut-Off Time or the NASDAQ Cut-Off time,
as the case may be, the Exchange would calculate, for each security for
which EMC Orders were entered, the maximum number of shares underlying
such EMC Orders that can be matched, or paired off. Priority on the
EDGX Book for EMC Orders would be based strictly on time of entry. EMC
Orders would be eligible for partial execution on the Exchange. The
unmatched portion of any EMC Orders that could not be paired off on the
Exchange pursuant to this process would then be routed as Market At-
the-Close Orders to the closing process of the NYSE for NYSE-listed
stocks, or as Market-on-Close Orders to the closing process of NASDAQ
for NASDAQ-listed stocks. If there was no contra-side EMC Order on the
Exchange to match against a particular EMC Order, then such EMC Order
would be routed to the closing process of the applicable Listing Market
as described above. The execution price of an EMC Order executed on the
Exchange would be the official closing price \8\ published by the NYSE
for EMC Orders in NYSE-listed stocks, or by NASDAQ for EMC Orders in
NASDAQ-listed stocks, and Users would be charged fees, if any, for such
executions according to the Exchange's published fee schedule. The
execution prices of the unmatched portion of any EMC Orders that were
routed to the applicable Listing Market for execution in such Listing
Market's closing auction would also be the official closing price
published by such Listing Market, and the Exchange would pass through
to the Member any fees charged by the Listing Market for the execution
of orders in its respective closing process.
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\3\ In the event that a particular security were listed on both
the NYSE and NASDAQ, the Exchange would select one of such exchanges
for purposes of ascertaining the official closing price for the
execution of EMC Orders in such security, based on the exchange with
the greater market share in the security measured over the previous
three (3) calendar months. The Exchange would disclose on its Web
site such selection prospectively in advance of offering the EMC
Order in such security.
\4\ As defined in EDGX Rule 1.5(ee).
\5\ As defined in EDGX Rule 1.5(s).
\6\ Currently, the NYSE designates the cut-off time for the
entry of Market At-the-Close Orders as 3:45 p.m. Eastern Time (the
``NYSE Cut-off Time''). See NYSE Rule 123C. NASDAQ in turn,
designates the ``end of the order entry period'' as 3:50 p.m. (the
``NASDAQ Cut-Off Time''). See NASDAQ Rule 4754. Thus, the EMC Cut-
Off Times would be 3:40 p.m. for EMC Orders in NYSE-listed stocks,
and 3:45 p.m. for EMC Orders in NASDAQ-listed stocks.
\7\ As defined in EDGX Rule 1.5(d).
\8\ For example, NYSE Rule 900(e) defines ``closing price'' as
``the price established by the last `regular way' sale in a security
prior to the official closing of the 9:30 a.m. to 4:00 p.m. trading
session, as determined by the Exchange.'' Further, while the term
``NASDAQ Official Closing Price'' is not specifically defined in
NASDAQ's rules, it is referenced in NASDAQ IM-5505(b) and NASDAQ
Rules 4753 (halt and imbalance crosses) and 4754 (closing cross).
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The following examples illustrate how the EMC Order would work. In
each case, assume that XYZ stock is listed on the NYSE; therefore, the
EMC Cut-Off Time would be 3:40 p.m.
Example 1: Member A enters an EMC Order to buy 500 shares of XYZ
at 2:00 p.m. Member B enters an EMC Order to sell 300 shares of XYZ
at 2:30 p.m. At or shortly after 3:40 p.m. but prior to the NYSE
Cut-Off Time of 3:45 p.m., the Exchange would pair off Member B's
EMC Order to sell 300 shares with 300 shares of Member A's EMC Order
to buy 500 shares, leaving a remainder of 200 shares to buy. Before
3:45 p.m., the remaining 200 shares of Member A's order would be
routed to the NYSE via EDGX's routing broker-dealer, Direct Edge ECN
LLC d/b/a DE Route, as a Market At-the-Close Order.
After 4:00 p.m., the Exchange would execute Member A's and
Member B's EMC Orders, for 300 shares each, at the official closing
price for XYZ published by the NYSE and report such execution to the
responsible Securities Information Processor. The Exchange would
also report back to Member A an execution at the official closing
price of the remaining 200 shares in the NYSE's closing auction, and
pass through to Member A the fees charged by the NYSE for executions
of Market At-the-Close Orders in its closing auction.
Example 2: Assume the same facts as above, except now Member C
enters an EMC Order to buy 1000 shares of XYZ at 3:40:02 p.m. The
Exchange would reject the order back to Member C because it would
have been submitted after the EMC Cut-Off Time of 3:40 p.m.
Example 3: Assume the same facts as above, except now Member D
enters an EMC Order to buy 300 shares of XYZ at 3:15 p.m., and at
3:20 p.m. Member A cancels its EMC Order to buy 500 shares and
replaces it with an EMC Order to buy 700 shares. Following the EMC
Cut-Off Time at 3:40 p.m., the Exchange would pair off Member D's
EMC Order to buy 300 shares with Member B's EMC Order to sell 300
shares, as Member A would have lost its time priority on the Book
when it cancelled and replaced its original order with greater size.
Member A's order would then be routed via DE Route to the NYSE as a
Market At-the-Close Order in accordance with NYSE rules.
The Exchange is proposing the EMC Order in order to increase the
level of
[[Page 47901]]
competition for orders seeking execution at the official closing
price.\9\ No other national securities exchange has offered its members
the ability to obtain a closing price execution away from the NYSE and
NASDAQ; as a result, the Exchange believes that the fees that the NYSE
and NASDAQ charge for executions of Market At-the-Close Orders and
Market-on-Close Orders, respectively, are not being sufficiently
challenged by competitive forces. While robust competition between and
among national securities exchanges and alternative market centers for
intraday equities order flow has resulted in a steady decrease in
trading fees over the previous decade, the fees charged by the NYSE and
NASDAQ for closing price executions have actually increased over the
past six years.
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\9\ If and to the extent that the Exchange charges any fees for
the execution of EMC Orders, it will file such fees with the
Commission and post them on its Web site prior to implementation of
the EMC Order.
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For example, from August 2006 through July 2009, excluding any
tiered discounts offered by NASDAQ, NASDAQ charged $0.0005 per side for
closing price executions,\10\ which increased to $0.0007 per side in
2009 \11\ and to $0.0010 per side in 2010 \12\--approximately doubling
the rate in 3 years. Thus, currently the ``cost of match'' \13\ for
closing price executions on NASDAQ is approximately $0.0020, or ``20
mils''.\14\ Similarly, excluding any tiered discounts offered by the
NYSE, the NYSE increased its rate from $0.0005 per side to $0.0007 per
side in August 2009,\15\ then to $0.00085 per side from September 2010
\16\ to March 2012, when it was increased to $0.00095 per side,\17\
nearly doubling its rates in approximately three years. Thus, the cost
of match for closing price executions on the NYSE is approximately
$0.0019, or ``19 mils''.\18\
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\10\ See Securities Exchange Act Release No. 60323 (July 16,
2009), 74 FR 36543 (July 23, 2009) (SR-NASDAQ-2009-67) (citing to
the proposition that NASDAQ did not modify its fee for MOC orders
since it began to operate as a national securities exchange in
2006).
\11\ Id.
\12\ See Securities Exchange Act Release No. 62592 (July 29,
2010), 75 FR 47053 (August 4, 2010) (SR-NASDAQ-2010-95).
\13\ For purposes of this rule filing, the ``cost of match''
refers to the total or net cost of a single execution to both sides
of the transaction. For closing price executions on NASDAQ and the
NYSE, for example, it is currently measured by the explicit fee
charged to both sides of the cross (although under certain narrow
circumstances, on one or both sides, they are subject to reduction,
as described infra at footnotes 14 and 18). For most exchanges,
however, the ``cost of match'' for intraday matches or executions is
generally calculated by netting rebate credits against take or
removal fees.
\14\ The rate per share can be reduced to $0.0001 only in the
case of internalized shares (meaning, those shares executed in the
NASDAQ Closing Cross that execute against other ``on close'' orders
submitted by the same Market Participant Identifier (``MPID'')) of
MPIDs that execute more than 100 million Market-on-Close or Limit-
on-Close Orders in the NASDAQ Closing Cross per month, and that add
liquidity meeting the thresholds equivalent to NASDAQ's $0.00295
pricing tier.
\15\ See Securities Exchange Act Release No. 60436 (August 5,
2009), 74 FR 40252 (August 11, 2009) (SR-NYSE-2009-77).
\16\ See Securities Exchange Act Release No. 62826 (September 1,
2010), 75 FR 54928 (September 9, 2010) (SR-NYSE-2010-63).
\17\ See Securities Exchange Act Release No. 66600 (March 20,
2012) [sic], 77 FR 16298 (March 20, 2012) (SR-NYSE-2012-07).
\18\ The rate per share can be reduced to $0.00055 for market
participants whose average daily volume of ``on close'' orders is 14
million shares or more.
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Relative to intraday matches or executions the fees charged by the
NYSE and NASDAQ for closing price executions are significantly more
expensive. For example, large order flow providers that reach certain
of NASDAQ's top tiers have a typical cost of match that varies from
$0.00005 to $0.0005 (or ``1/2 a mil'' to ``5 mils'').\19\ Moreover, a
typical cost of match for market participants that are not Designated
Market Makers (``DMMs'') or Supplemental Liquidity Providers (``SLPs'')
on the NYSE is approximately $0.0008 (or ``8 mils'').\20\
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\19\ For example, NASDAQ's cost of match at two of its top tiers
can be approximated by subtracting the rebate credit (0.00295 or
0.0025) from the take or removal fee (0.0030) to equal 0.00005 or
0.0005/share, respectively. See http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
\20\ Non-DMM and non-SLP liquidity providers earn a rebate of
0.0015 per share. Non-floor based liquidity removers are charged
0.0023 per share. Thus, the approximate cost of match on the NYSE
(for non-DMM and non-SLPs) is 0.0008 per share. See http://usequities.nyx.com/markets/nyse-equities/trading-fees.
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The Exchange has designed the EMC Order to provide an alternative
means to obtain a closing price execution, without any impact on the
price discovery function of the NYSE's and NASDAQ's respective closing
processes. The existence of an alternative venue to obtain closing
price executions introduces competition, and, consequently, a potential
decrease in the fees charged to market participants for such
executions.\21\ Moreover, the EMC Order would not impact the price
discovery function of the NYSE's and NASDAQ's respective closing
processes by replicating only market-on-close type orders, as opposed
to limit-on-close orders, and the Exchange would only execute those EMC
Orders that naturally paired off and effectively cancelled each other
out. Any unmatched EMC Orders would be routed to the applicable Listing
Market for execution in that Listing Market's closing process.
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\21\ It is the Exchange's intention, upon the Commission
approval of the EMC Order, to offer executions of EMC Orders, to the
extent matched on the Exchange, at zero cost for at least some
period of time. It is further the Exchange's intention that, if and
when it determines to charge a fee for the execution on the Exchange
of an EMC Order, such fee would be less than the fee charged by the
applicable Listing Market.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \22\ and furthers the objectives of
Section 6(b)(5) of the Act,\23\ in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
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In particular, the proposed rule change would remove impediments to
and perfect the mechanisms of a free and open market and a national
market system, and foster cooperation and coordination with persons
engaged in facilitating transactions in securities, by promoting
competition among national securities exchanges in the execution of
matching closing price orders without disrupting the price discovery
process of NYSE's and NASDAQ's respective closing processes. The EMC
Order would be neutral to price discovery, as it would only execute on
the Exchange against a matching contra-side EMC Order. Any imbalance
resulting from unmatched EMC Orders to the buy or sell side would be
routed to the applicable Listing Market for execution in their
respective closing processes. The proposed rule change would protect
investors and the public interest by encouraging the NYSE and NASDAQ to
compete for market orders in their closing processes.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
[[Page 47902]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule changes.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-EDGX-2012-33 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-2012-33. 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-2012-33 and should be
submitted on or before August 31, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19611 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P