
[Federal Register Volume 78, Number 93 (Tuesday, May 14, 2013)]
[Notices]
[Pages 28269-28272]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11368]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69539; File No. SR-EDGX-2013-16]


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

May 8, 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 May 1, 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
    Currently, Footnote 1 of the Exchange's fee schedule provides that 
Members may qualify for the Mega Tier rebate of $0.0035 per share for 
all liquidity posted on EDGX where Members add or route at least 2 
million shares of average daily volume (``ADV'') prior to 9:30 a.m. or 
after 4:00 p.m. (includes all flags except 6) and add a minimum of 35 
million shares of ADV on EDGX in total, including during both market 
hours and pre- and post-trading hours (hereinafter referred to as the 
``$0.0035 Mega Tier Rebate''). Members also may qualify for the Mega 
Tier but will earn a rebate of $0.0032 per share for all liquidity 
posted on EDGX if they add or route at least 4 million 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 Total Consolidated Volume (``TCV'') on a 
daily basis measured monthly, including during both market hours and 
pre- and post-trading hours (hereinafter referred to as the ``$0.0032 
Mega Tier Rebate''). Currently, for meeting the aforementioned criteria 
(the $0.0035 Mega Tier Rebate or the $0.0032 Mega Tier Rebate), Members 
will pay a reduced rate for removing liquidity of $0.0029 per share for 
Flags N, W, 6, BB, PI, and ZR (hereinafter referred to as the $0.0029 
Reduced Rate). Where a Member does not meet the criteria for either the 
$0.0035 Mega Tier Rebate or $0.0032 Mega Tier Rebate, then a removal 
rate of $0.0030 per share applies.
    The Exchange proposes to amend Footnote 1 of its fee schedule to 
provide that if Members qualify for the $0.0035 Mega Tier Rebate, they 
can also qualify for a separate reduced rate for removing and/or 
routing liquidity of $0.0020 per share for Flags N, W, 6, 7, BB, PI, 
RT, and ZR (hereinafter referred to as the $0.0020 Reduced Rate). The 
Exchange proposes to append Footnote 1 to Flags 7 and RT (the routing 
flags) to signify a rate change from the routing rates of $0.0030 per 
share if the criteria of Footnote 1 is met. Footnote 1 is already 
appended to the other above-mentioned flags.
    The Exchange notes that Members that qualify for the $0.0035 Mega 
Tier Rebate would no longer qualify for the $0.0029 Reduced Rate and 
may only qualify for the $0.0020 Reduced Rate. The Exchange also 
proposes to add the following language to the end of the paragraph 
regarding the $0.0035 Mega Tier Rebate: Where a Member does not meet 
the aforementioned criteria, then a rate of $0.0030 per share applies.
    In addition, the Exchange proposes to separate out the criteria for 
the $0.0035 Mega Tier Rebate and the $0.0032 Mega Tier Rebate by 
separating out the tiers and accompanying reduced rates into their own 
paragraphs. Lastly, the Exchange proposes to add ``per share'' 
following the amount of the reduced rate in the paragraph regarding the 
$0.0032 Mega Tier Rebate, as well as to use the term ``aforementioned'' 
instead of ``for the Mega Tier.'' Therefore, the final two sentences in 
the paragraph will now read as follows: ``In addition, for meeting the 
aforementioned criteria, Members will pay a reduced rate for removing 
liquidity of $0.0029 per share for Flags N, W, 6, BB, PI, and ZR. Where 
a Member does not meet the aforementioned criteria, then a removal rate 
of $0.0030 per share applies.''
    The Exchange proposes to implement this amendment to its fee 
schedule on May 1, 2013.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\4\ in general, and 
furthers the objectives of Section 6(b)(4),\5\ 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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    \4\ 15 U.S.C. 78f.
    \5\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposal to provide that if Members

[[Page 28270]]

qualify for the $0.0035 Mega Tier Rebate, they can also qualify for the 
$0.0020 Reduced Rate represents an equitable allocation of reasonable 
dues, fees, and other charges because it incentivizes Members to add 
liquidity to the EDGX Book \6\ as well as remove and/or route liquidity 
through the Exchange. The 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 also believes that the $ 0.0020 Reduced Rate 
makes EDGX a more attractive venue to take liquidity from or route 
liquidity through, which brings a higher quality of order flow to the 
EDGX Exchange and supports price discovery on EDGX. Finally, the 
Exchange believes that the discounted removal and/or routing rate of 
$0.0020 per share will also help it to grow its market share as new 
takers who are incentivized to achieve the $0.0035 Mega Tier Rebate 
would send additional volume to the Exchange or remove additional 
shares from the Exchange in future trading opportunities. Volume-based 
rebates that also include removal and/or routing fee reductions as a 
result of meeting such volume-based rebate such as the one proposed 
herein have been widely adopted 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 introduction 
of higher volumes of orders into the price and volume discovery 
processes. In addition, the Exchange also believes that these proposed 
amendments are non-discriminatory because they apply uniformly to all 
Members.
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    \6\ As described in Exchange Rule 1.5(d).
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    In particular, the $0.0035 Mega Tier rebate is reasonable in that 
it is competitive with Nasdaq's Routable Order Program (``ROP''),\7\ 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.\8\ Similar to Nasdaq's 
program, the $0.0035 Mega Tier is also aimed at encouraging greater 
participation on EDGX by Members that represent retail customers.\9\ 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. 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 \10\ and pre and post-session routing, 
respectively, which are used by retail investors and are similar to 
Nasdaq's SCAN routing strategy.\11\ 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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    \7\ See Nasdaq Equity Trader Alert 2013-8, http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2013-8. See also, The 
Nasdaq Stock Market LLC, Price List--Trading Connectivity, http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.
    \8\ See Securities Exchange Act Release No. 68905 (February 12, 
2013), 78 FR 11716 (February 19, 2013) (SR-NASDAQ-2013-023).
    \9\ 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).
    \10\ As defined in Exchange Rule 11.9(b)(2).
    \11\ 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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    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. EDGX 
further believes that the proposed program is not discriminatory 
because it is offered 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 \12\ and flags ZA/ZR in Footnote 4 of its fee schedule.
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    \12\ 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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    The Exchange also believes that the criteria for the $0.0035 Mega 
Tier Rebate also represents an equitable allocation of reasonable dues, 
fees, and other charges since higher rebates and proposed reduced fees 
for removal of liquidity and/or routing are directly correlated with 
more stringent criteria.
    For example, in order for a Member to qualify for the $0.0035 Mega 
Tier Rebate, the Member would have to add or route at least 2 million 
shares of ADV during pre- and post-trading hours and add a minimum of 
35 million shares of ADV on EDGX in total, including during both market 
hours and pre- and post-trading hours in order to obtain the $0.0020 
Reduced Rate for routing and/or removal of liquidity fees. The criteria 
for this tier is the most stringent of all other tiers on the 
Exchange's fee schedule 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. In addition, the Exchange assigns a higher value to this 
resting 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. Furthermore, 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

[[Page 28271]]

considering the relative illiquidity of the pre- and post-trading hour 
sessions. The Exchange believes that offering a higher rebate and 
reduced fees for removal of liquidity and/or routing incentivizes 
Members to provide liquidity during these trading sessions.
    In order to qualify for the next best tier after the Mega Tier (at 
$0.0033), 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 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 March 2013, this 
would amount to 30 million shares, at least 2 million shares of which 
are Non-Displayed Orders. The criteria for this tier is 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 in addition to 
adding or routing at least 2 million shares of ADV during pre- and 
post-trading hours to earn a rebate of $0.0035 per share and be 
eligible for lower removal and/or routing fees ($0.0020 Reduced Rate). 
As discussed, the criteria for the 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 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 \13\ and other similar tiers on 
NYSE Arca \14\ and BATS BZX,\15\ 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 provide a reduced fee for orders routed to certain market 
centers.
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    \13\ See Securities Exchange Act Release No. 68166 (November 6, 
2012), 77 FR 67695 (November 13, 2012) (SR-EDGX-2012-46).
    \14\ The Exchange's discounted removal rate from $0.0030 per 
share to $0.0020 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 Equities, 
Inc. 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.
    \15\ Lower routing fees for routing through an exchange to reach 
another destination are common on BATS BZX Exchange in particular, 
which offers ``one under'' pricing. BATS BZX Exchange provides a 
discounted fee for Destination Specific Orders routed to certain of 
the largest market centers measured by volume (NYSE, NYSE Arca and 
NASDAQ), which, in each instance has been $ 0.0001 less per share 
for orders routed to such market centers by the BATS BZX Exchange 
than such market centers currently charge for removing liquidity. 
See BATS BZX Exchange Fee Schedule, http://cdn.batstrading.com/resources/regulation/rule_book/BATS-Exchanges_Fee_Schedules.pdf.
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    The Exchange also notes that it operates in a highly-competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive. The proposed rule change reflects a competitive pricing 
structure designed to incent market participants to direct their order 
flow to the Exchange. The Exchange believes that the proposed rates are 
equitable and non-discriminatory in that they apply uniformly to all 
Members. The Exchange believes the fees and credits remain competitive 
with those charged by other venues and therefore continue to be 
reasonable and equitably allocated to Members.

B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. The Exchange does not believe these changes represent a 
significant departure from previous pricing offered by the Exchange or 
pricing offered by the Exchange's competitors. Additionally, Members 
may opt to disfavor EDGX's pricing if they believe that alternatives 
offer them better value. Accordingly, EDGX does not believe that the 
proposed changes will impair the ability of Members or competing venues 
to maintain their competitive standing in the financial markets.
    The Exchange believes its proposal will increase intermarket 
competition and possibly encourage the Exchange's competitors to make 
competitive responses. The Exchange believes the proposal will increase 
intermarket competition because it is comparable in financial 
incentives and criteria to Nasdaq's ROP, as described above, in that 
both require the addition of 35 million shares or more per day on 
average of liquidity, at least 2 million shares per day on average must 
be provided during pre and post-trading hours. The Exchange believes 
that its proposal will have no burden on intramarket competition 
because the rate applies uniformly to all Members.

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 \16\ and Rule 19b-4(f)(2) \17\ thereunder. At 
any time within 60 days of the filing of such proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 rule-comments@sec.gov. Please include 
File Number SR-EDGX-2013-16 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-2013-16. 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

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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-2013-16 and should be 
submitted on or before June 4, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
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    \18\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-11368 Filed 5-13-13; 8:45 am]
BILLING CODE 8011-01-P


