
[Federal Register Volume 79, Number 57 (Tuesday, March 25, 2014)]
[Notices]
[Pages 16401-16411]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06461]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71747; File No. SR-EDGX-2014-05]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Adopt a New Order Type Called the 
Mid-Point Discretionary Order

March 19, 2014.
    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 March 7, 2014, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to proposes to [sic] amend: (i) Rule 11.5(c) 
to add a new order type called the Mid-Point Discretionary Order; and 
(ii) Rule 11.8(a)(2)(D) to reflect the priority of Mid-Point 
Discretionary Orders.
    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.

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.

[[Page 16402]]

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 proposes to amend: (i) Rule 11.5(c) to add a new order 
type called the Mid-Point Discretionary Order; and (ii) Rule 
11.8(a)(2)(D) to reflect the priority of Mid-Point Discretionary 
Orders. The proposed Mid-Point Discretionary Order is designed to 
increase displayed liquidity on the Exchange while also providing 
Members the opportunity to achieve price-improvement by enabling the 
order to execute at prices up to and including the mid-point of the 
National Best Bid or Offer (``NBBO'').\3\
---------------------------------------------------------------------------

    \3\ Exchange Rule 1.5(o) defines ``NBBO'' as ``the national best 
bid or offer.'' See also Rule 600(b)(42) of Regulation NMS under the 
Securities Exchange Act of 1934.
---------------------------------------------------------------------------

Proposed Mid-Point Discretionary Order, Rule 11.5(c)(14)

    The Exchange proposes to amend Rule 11.5(c) to add a new order type 
called the Mid-Point Discretionary Order, which is based on and would 
operate similarly to the Mid-Point Discretionary Order on the EDGA 
Exchange, Inc. (``EDGA'').\4\ Like the EDGA Mid-Point Discretionary 
Order, the proposed EDGX Mid-Point Discretionary Order would be a limit 
order that is displayed and pegged to the NBBO with discretion to 
execute at prices to and including the mid-point of the NBBO. 
Therefore, like the EDGA Mid-Point Discretionary Order, the EDGX Mid-
Point Discretionary Order would include two components: (i) A displayed 
price which is pegged to the NBBO; and (ii) a discretionary range 
within which it may generally execute at prices to and including the 
mid-point of the NBBO.\5\ The displayed price of a Mid-Point 
Discretionary Order to buy would be displayed at and pegged to the 
national best bid (``NBB'').\6\ Conversely, the displayed price of a 
Mid-Point Discretionary Order to sell would be displayed at and pegged 
to the national best offer (``NBO'').\7\
---------------------------------------------------------------------------

    \4\ See EDGA Rule 11.5(c)(17). Securities Exchange Act Release 
No. 67226 (June 20, 2012), 77 FR 38113 (June 26, 2012) (SR-EDGA-
2012-22) (Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Adopt the Mid-Point Discretionary Order).
    \5\ As discussed further below, the Exchange notes that the 
proposed Mid-Point Discretionary Order would not include a 
discretionary range where: (i) The NBBO is locked or crossed; (ii) 
for a buy (sell) order, its limit price is equal to or less 
(greater) than the NBB (NBO); or (iii) the price of the Upper Price 
Band equals or moves below an existing Protected Bid or the Lower 
Price Band equals or moves above an existing Protected Offer.
    \6\ Exchange Rule 1.5(o) defines ``NBB'' as ``the national best 
bid.''
    \7\ Exchange Rule 1.5(o) defines ``NBO'' as ``the national best 
offer.''
---------------------------------------------------------------------------

    The displayed prices of Mid-Point Discretionary Orders would be re-
priced to track changes in the NBBO and would receive a new time stamp 
each time they are re-priced. The displayed price and discretionary 
range of a Mid-Point Discretionary Order would maintain the same time 
stamp, even where the displayed price is unchanged but the 
discretionary range changed due to a change in the mid-point of the 
NBBO. Like all discretionary order types, a Mid-Point Discretionary 
Order's sole time stamp would be the one assigned to the displayed 
portion of the order. A Mid-Point Discretionary Order's time stamp 
would only change when the displayed price is adjusted to track changes 
in the NBBO to which it is pegged.
    Mid-Point Discretionary Orders would not independently establish or 
maintain the NBB or NBO; rather, the displayed prices of Mid-Point 
Discretionary Orders would be derived from the then-current NBB or NBO. 
A Mid-Point Discretionary Order would be cancelled if no NBBO exists, 
or, as discussed more fully below, a trading halt is declared by the 
listing market. The proposed Mid-Point Discretionary Order would be 
able to join the Exchange BBO when the Exchange BBO equals the NBBO and 
EDGX Book is locked or crossed by another market. If the proposed Mid-
Point Discretionary Order displayed on the Exchange would create a 
locked or crossed market, the price of the order will be automatically 
adjusted by the System to one minimum price variation below the current 
NBO (for bids) or to one minimum price variation above the current NBB 
(for offers) with no discretion to execute to the mid-point of the 
NBBO.
    As explained below, Mid-Point Discretionary Orders would not be 
eligible to execute against resting Discretionary Orders,\8\ including 
contra-side Mid-Point Discretionary Orders. Mid-Point Discretionary 
Orders would only be eligible to execute at the mid-point of the NBBO 
against Mid-Point Match Orders \9\ and incoming liquidity-removing 
orders when their limit price is equal to the mid-point of the NBBO. 
Mid-Point Discretionary Orders in stocks priced at $1.00 or more would 
only be executed in sub-penny increments when they execute at the mid-
point of the NBBO against contra-side Mid-Point Match Orders.
---------------------------------------------------------------------------

    \8\ See Exchange Rule 11.5(c)(13).
    \9\ Exchange Rule 11.5(c)(7).
---------------------------------------------------------------------------

    Mid-Point Discretionary Orders may include a limit price that would 
specify the highest or lowest prices at which Mid-Point Discretionary 
Orders to buy or sell would be eligible to be executed. For example, if 
a Mid-Point Discretionary Order 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. A Mid-Point Discretionary Order to buy with a limit price that is 
greater than the prevailing NBBO would have discretion to buy up to the 
mid-point of the NBBO and not to its limit price. Absent a limit price 
that is less than the prevailing mid-point of the NBBO, a Mid-Point 
Discretionary Order would retain its discretion to execute at prices up 
to and including the mid-point of the NBBO.\10\
---------------------------------------------------------------------------

    \10\ The Exchange notes that a Mid-Point Discretionary Order's 
discretion to trade up 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 Mid-Point Discretionary Orders, or Non-
Displayed Orders resting on the EDGX Book.
---------------------------------------------------------------------------

    As explained in more detail below, like other discretionary order 
types, Exchange Rule 11.8(a)(2) would require that the discretionary 
range of a Mid-Point Discretionary Order be given lower priority than 
non-displayed limit orders and the reserve quantity of Reserve 
Orders.\11\ In addition, Mid-Point Discretionary Orders would not be 
eligible for routing pursuant to Exchange Rule 11.9(b)(2).
---------------------------------------------------------------------------

    \11\ Exchange Rule 11.5(c)(1).
---------------------------------------------------------------------------

    The Exchange also proposes to address how a Mid-Point Discretionary 
Order would comply with the National Market System Plan, also known as 
Limit Up/Limit Down (``LULD''), established pursuant to Rule 608 of the 
Exchange Act, to address extraordinary market volatility (the ``LULD 
Plan'').\12\ In sum, the LULD Plan sets forth procedures that provide 
for market-wide LULD requirements that are designed to prevent trades 
in individual NMS Stocks from occurring outside of specified price 
bands. The price bands would consist of a Lower Price Band and an Upper 
Price Band for each NMS Stock. Under the LULD Plan, the Exchange is 
required to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the display of offers below 
the

[[Page 16403]]

Lower Price Band and bids above the Upper Price Band for an NMS Stock. 
Like the EDGA Mid-Point Discretionary Order, the proposed EDGX Mid-
Point Discretionary Orders will only execute at their displayed prices 
and not within their 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 in accordance with Exchange Rule 11.9(a)(3). 
Mid-Point Discretionary Orders will resume trading against other orders 
in their discretionary range when the conditions in (i) or (ii) of the 
preceding sentence no longer exist.\13\ For example, assume the NBBO is 
$10.00 x $10.10 and the Price Bands are $9.00 x $10.10. A Mid-Point 
Discretionary Order to buy is entered and is displayed at $10.00, the 
NBB, with discretion to $10.05, the mid-point of the NBBO. The Price 
Bands change to $9.00 x $9.95. The NBBO is updated to $9.95 x $10.10. 
The displayed price of the Mid-Point Discretionary Order is re-priced 
to $9.95, the new NBB, with no discretionary range, since the price of 
the Upper Price Band equals the NBB.
---------------------------------------------------------------------------

    \12\ See Appendix A to Securities Exchange Act Release No. 67091 
(May 31, 2012) 77 FR 33498 (June 6, 2012).
    \13\ See Securities Exchange Act Release No. 69002 (February 27, 
2013), 78 FR 14394 (March 5, 2013) (SR-EDGA-2013-08) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Amend 
EDGA Rules 1.5, 11.5, 11.8, 11.9 and 11.14 in Connection With the 
Implementation of the National Market System Plan to Address 
Extraordinary Market Volatility).
---------------------------------------------------------------------------

    Furthermore, to comply with the LULD Plan, a Mid-Point 
Discretionary Order 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. Likewise, a Mid-Point Discretionary 
Order 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. When the above conditions no longer exist, 
Mid-Point Discretionary Orders will resume being displayed at and 
pegged to the NBBO. For example, assume the NBBO is $10.00 x $10.10 and 
the Price Bands are $9.00 x $10.10. A Mid-Point Discretionary Order to 
buy is entered and is displayed at $10.00, the NBB, with discretion to 
$10.05, the mid-point of the NBBO. The Price Bands change to $9.00 x 
$9.99. The displayed price of the Mid-Point Discretionary Order is re-
priced to $9.99, the Upper Price Band, with no discretionary range, 
since the price of the Upper Price Band moved below the NBB of $10.00. 
The Price Bands then change to $9.00 x $10.10. The Mid-Point 
Discretionary Order to buy would be displayed at $10.00, the NBB, with 
discretion to $10.05, the mid-point of the NBBO.
    While the proposed EDGX Mid-Point Discretionary Order is based on 
and would operate similarly to the EDGA Mid-Point Discretionary Order, 
the proposed EDGX Mid-Point Discretionary Order would differ from the 
EDGA Mid-Point Discretionary Order in four areas. The main reason for 
these differences is based on the different fee structures on EDGA and 
EDGX. EDGA maintains a taker-maker model where Members receive rebates 
for removing liquidity and pay a fee for adding liquidity.\14\ EDGX 
maintains a maker-taker model where Members pay a fee for removing 
liquidity and receive a rebate for adding liquidity.\15\
---------------------------------------------------------------------------

    \14\ See EDGA Fee Schedule available at http://www.directedge.com/Trading/EDGAFeeSchedule.aspx.
    \15\ See EDGX Fee Schedule available at http://www.directedge.com/Trading/EDGXFeeSchedule.aspx.
---------------------------------------------------------------------------

    First, unlike the EDGA Mid-Point Discretionary Order, the proposed 
EDGX Mid-Point Discretionary Order would not be eligible to execute 
immediately upon entry in the System \16\ at its displayed price.\17\ 
Instead, the proposed EDGX Mid-Point Discretionary Order would be 
eligible to execute at its displayed price only after it has been 
posted to the EDGX Book.\18\ For example, assume the NBBO is $10.00 x 
$10.01. A Discretionary Order to buy at $10.00 with discretion to 
$10.01 is entered on the EDGX Book. A Mid-Point Discretionary Order to 
sell with a limit price of $10.01 would not execute against the resting 
Discretionary Order to buy that is displayed at $10.00 with discretion 
to $10.01. Instead, the Mid-Point Discretionary Order to sell would be 
posted to the EDGX Book and displayed at $10.01, the NBO, with no 
discretionary range because it is at its limit price. A second 
Discretionary Order to buy at $10.00 with discretion to $10.01 is 
entered. The second Discretionary Order to buy is willing to act as a 
liquidity remover and pay a fee. Therefore, similar to functionality on 
other exchanges,\19\ the second Discretionary Order to buy would 
execute against the Mid-Point Discretionary Order to sell at $10.01.
---------------------------------------------------------------------------

    \16\ Exchange 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.''
    \17\ The Exchange notes that the proposed Mid-Point 
Discretionary Order would be permitted to execute at the mid-point 
of the NBBO upon entry into the System.
    \18\ Exchange Rule 1.5(d) defines ``EDGX Book'' as the 
``System's electronic file of orders.''
    \19\ See infra notes 20 thru 28.
---------------------------------------------------------------------------

    If the Exchange would allow for the execution of a Mid-Point 
Discretionary Order at its displayed price immediately upon entry into 
the System, the order would not receive a rebate and instead would be 
subject to the applicable rates for removing liquidity from the EDGX 
Book. Therefore, to avoid being charged a fee, the proposed EDGX Mid-
Point Discretionary Order would not be eligible to execute at its 
displayed price immediately upon entry in the System. In contrast, on 
EDGA, incoming Mid-Point Discretionary Orders may immediately execute 
upon entry and will receive a rebate for doing so. The Exchange 
believes that this approach is designed to accomplish the twin goals in 
implementing this order type--increasing both displayed liquidity and 
liquidity at the mid-point of the NBBO--by posting Mid-Point 
Discretionary Orders at their displayed prices on the EDGX Book with 
discretion to execute to and including the mid-point of the NBBO. The 
Exchange does not believe that its proposal is unique in its 
application of the Exchange's pricing model to the design of the 
functionality. For example, under the New York Stock Exchange, LLC 
(``NYSE'') Retail Liquidity Program, a Type 1 Retail Order, will 
interact only with available contra-side Retail Price Improvement 
(``RPI'') Orders and will not interact with, but instead will by-pass 
other available contra-side interest, including hidden orders priced 
better than RPI Orders, in the NYSE's systems.\20\ The Exchange 
believes that, in order to provide the Retail Order a rebate, the NYSE 
by-passes non-RPI Orders resting on the NYSE's system because those 
resting orders are also expecting a rebate.\21\ Therefore, the NYSE 
permits Type 1 Retail Orders to by-pass resting contra-side interest in 
favor of the RPI Order.\22\
---------------------------------------------------------------------------

    \20\ See NYSE Rule 107C(k)(1).
    \21\ On NYSE, Retail Orders that remove liquidity receive a 
rebate while RPI Orders would pay a fee. See NYSE Fee Schedule 
available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited January 29, 2014).
    \22\ See also Securities Exchange Act Release No. 67347 (July 3, 
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55) (Order 
approving the NYSE's Retail Liquidity Program on a pilot basis).
---------------------------------------------------------------------------

    In addition, a Mid-Point Discretionary Order not executing at its 
displayed price upon arrival is similar to post-only midpoint eligible 
orders offered by other exchanges.\23\ Other exchanges also

[[Page 16404]]

permit otherwise marketable orders to post directly to that exchange 
and execute against later arriving orders. For example, the NYSE 
permits MPL-ALO Orders to not execute upon arrival even if 
marketable.\24\ The NYSE always considers the MPL-ALO the liquidity 
provider, and, therefore, it would never interact with a contra-side 
MPL-ALO order.\25\ Similarly, NYSE Arca, Inc. (``NYSE Arca'') prohibits 
an MPL-ALO Order from executing against an incoming MPL-ALO Order.\26\ 
In both cases, the MPL-ALO Order would execute against later arriving 
contra-side mid-point liquidity ahead of the resting contra-side MPL-
ALO Order. In addition, on the Chicago Board Options Exchange, 
Incorporated (``CBOE''), if a Silent Post-Mid Seeker Order ``is to 
trade upon its arrival into the system (thereby `removing' liquidity), 
it will not trade, but instead rest until another order comes in for it 
to trade against.'' \27\ Finally, BATS Exchange, Inc. (``BATS'') allows 
display-eligible Post Only orders to rest at prices that lock non-
displayed interest, making such non-displayed interest temporarily non-
executable and allowing the contra-side Post Only order to execute 
against later arriving orders notwithstanding such non-displayed 
interest.\28\
---------------------------------------------------------------------------

    \23\ See NYSE Rules 13(e) (providing that the NYSE's Mid-Point 
Passive Liquidity (``MPL'') Order may include an ``Add Liquidity 
Only'' (``ALO'') modifier which would prohibit the order from 
executing upon arrival even if marketable). See Securities Exchange 
Act Release No. 71330 (January 16, 2014), 79 FR 3895 (January 23, 
2014) (SR-NYSE-2013-71) (Order Approving the MPL Order stating that 
the proposed MPL Order could provide market participants with better 
control of their execution costs). An MPL order with an ALO modifier 
(``MPL-ALO order'') is always considered the liquidity providing 
order, and, therefore, would never interact with a contra-side MPL-
ALO order. See Securities Exchange Act Release No. 71488 (February 
5, 2014), 79 FR 8215 (February 11, 2014) (SR-NYSE-2014-07) 
(providing that, ``[i]f triggered to trade, an MPL-ALO Order will be 
eligible to trade with both arriving and resting contra-side 
interest, but will not trade with a contra-side MPL-ALO Order''). 
Executions would be allocated amongst the arriving and resting 
contra-side interest in accordance with NYSE Rule 72. Id. Once 
posted, the NYSE's MPL-ALO Order would be considered a ``liquidity 
provider'' and be eligible to receive a rebate. See Liquidity 
Indicator 2 in the NYSE Fee Schedule available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited 
January 29, 2014). See the Nasdaq Stock Market LLC (``Nasdaq'') Rule 
4751(f)(11) (Mid-Point Peg Post Only Order). Nasdaq's Mid-Point Peg 
Post Only Order may also not execute upon arrival even if 
marketable. See example 1 in http://www.nasdaqtrader.com/content/productsservices/trading/MPPO_factsheet.pdf (describing Nasdaq's 
Mid-Point Peg Post Only Order functionality).
    \24\ See NYSE Rules 13(e) (providing that the NYSE's MPL Order 
may include an ALO modifier which would prohibit the order from 
executing upon arrival even if marketable). See Securities Exchange 
Act Release No. 71330 (January 16, 2014), 79 FR 3895 (January 23, 
2014) (SR-NYSE-2013-71) (Order Approving the MPL Order stating that 
the proposed MPL Order could provide market participants with better 
control of their execution costs).
    \25\ See Securities Exchange Act Release No. 71488 (February 5, 
2014), 79 FR 8215 (February 11, 2014) (SR-NYSE-2014-07) (providing 
that, ``[i]f triggered to trade, an MPL-ALO Order will be eligible 
to trade with both arriving and resting contra-side interest, but 
will not trade with a contra-side MPL-ALO Order''). Once posted, the 
NYSE's MPL Order would be considered a ``liquidity provider'' and be 
eligible to receive a rebate. See Liquidity Indicator 2 in the NYSE 
Fee Schedule available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited January 29, 2014).
    \26\ See NYSE Arca Rules 7.31(h)(5) and (nn). NYSE Arca permits 
a member to elect that a marketable MPL-ALO Order interact with a 
resting MPL-ALO Order. See also Securities Exchange Act Release No. 
67652 (August 14, 2012), 77 FR 50189 (August 20, 2012) (SR-NYSEArca-
2012-83). If both the resting interest and the incoming MPL-ALO 
Order are designated to interact, the incoming MPL-ALO Order would 
be considered the liquidity taker and subject to applicable fees. 
Id.; see also Liquidity Indicator 2 in the NYSE Fee Schedule 
available at https://usequities.nyx.com/markets/nyse-equities/trading-fees (last visited January 29, 2014).
    \27\ See CBOE Rule 51.8(g)(12); Securities Exchange Act Release 
No. 67548 (July 31, 2012), 77 FR 46783 (August 6, 2012) (SR-CBOE-
2012-49). See also Nasdaq Rule 4751(f)(11) (Mid-Point Peg Post Only 
Order). Nasdaq's Mid-Point Peg Post Only Order may also not execute 
upon arrival even if marketable. See example 1 in http://www.nasdaqtrader.com/content/productsservices/trading/MPPO_factsheet.pdf (describing Nasdaq's Mid-Point Peg Post Only Order 
functionality).
    \28\ See Securities Exchange Act Release No. 64475 (May 12, 
2011), 76 FR 28830 (May 18, 2011) (Notice of Filing of Proposed Rule 
Change by BATS Exchange, Inc. to Amend BATS Rule 11.9, Entitled 
``Orders and Modifiers'' and BATS Rule 11.13, Entitled ``Order 
Execution''); see also Securities Exchange Act Release No. 64754 
(June 27, 2011), 76 FR 38712 (July 1, 2011) (Order Approving a 
Proposed Rule Change to Amend BATS Rule 11.9, Entitled ``Orders and 
Modifiers'' and BATS Rule 11.13, Entitled ``Order Execution'').
---------------------------------------------------------------------------

    Second, Mid-Point Discretionary Orders would also not be eligible 
to execute against resting Discretionary Orders, including contra-side 
Mid-Point Discretionary Orders. For example, assume the NBBO is $10.00 
x $10.02. A Discretionary Order to buy at $10.00 with discretion to 
$10.01 is entered on the EDGX Book. A Mid-Point Discretionary Order to 
buy is also entered and displayed at $10.00, the NBB, with discretion 
to $10.01, the mid-point of the NBBO. A Mid-Point Discretionary Order 
to sell would not execute against the Discretionary Order to buy or the 
Mid-Point Discretionary to buy at $10.01, the mid-point of the 
NBBO.\29\ Instead, the Mid-Point Discretionary Order to sell would be 
posted to the EDGX Book and displayed at $10.02, the NBO, with 
discretion to execute to $10.01, the mid-point of the NBBO. The 
Exchange is proposing these restrictions so that it may offer a low 
cost pricing structure for the EDGX Mid-Point Discretionary Order. On 
EDGA, a Mid-Point Discretionary Order may execute against resting 
Discretionary Orders, including contra-side Mid-Point Discretionary 
Orders, because both orders would pay a fee. However, on EDGX, if the 
Exchange were to allow Mid-Point Discretionary Orders to execute 
against each other, the provider of liquidity would receive a rebate 
while the taker of liquidity would be charged no fee. Members electing 
to use the proposed Mid-Point Discretionary Order would forego the 
above described execution opportunities to receive the associated low 
cost pricing structure. Members willing to pay a fee for broader 
execution opportunities at the mid-point of the NBBO could instead 
choose to utilize Mid-Point Match Orders.
---------------------------------------------------------------------------

    \29\ As discussed above, the proposed EDGX Mid-Point 
Discretionary Order would not be eligible to execute immediately 
upon entry in the System at its displayed price, but would be 
permitted upon entry to execute at the mid-point of the NBBO. See 
supra note 17.
---------------------------------------------------------------------------

    Third, Mid-Point Discretionary Orders 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 price is equal to 
the mid-point of the NBBO.\30\ Members utilizing these order types are 
explicitly adding liquidity at the mid-point of the NBBO and, thereby, 
provide the benefit of price improving liquidity to Users. Restricting 
the orders against which a Mid-Point Discretionary Order may execute to 
those orders that are designed to explicitly add liquidity at the mid-
point of the NBBO is a reasonable means by which to encourage Members 
to add committed mid-point liquidity. In addition, these restrictions 
also enable the Exchange to offer a low cost pricing structure for the 
EDGX Mid-Point Discretionary Order because both Mid-Point Match Orders 
and incoming liquidity-removing orders would be charged a fee, enabling 
the Exchange to provide a rebate or no fee to the proposed Mid-Point 
Discretionary Order.
---------------------------------------------------------------------------

    \30\ For a description of the proposed order interaction, see 
infra, Example No. 2 under the heading ``Mid-Point Discretionary 
Orders Entered with Limit Prices'' and the first example under the 
heading ``Sub-Penny Executions''.
---------------------------------------------------------------------------

    Fourth, on EDGA, in the event a trading halt is declared by the 
listing market, a resting Mid-Point Discretionary Orders would be 
eligible for execution once the trading halt is lifted by the listing 
market. Conversely, on EDGX, in the event a trading halt is declared by 
the listing market, any Mid-Point Discretionary Orders resting on the 
EDGX Book would be immediately cancelled. As described above, the 
approach taken by EDGX is a result of its maker-taker fee structure and 
serves to avoid a situation where Mid-Point Discretionary Order would 
be assessed a take fee when the market re-opens. As discussed above in 
regard to execution of Mid-Point Discretionary Orders upon entry into 
the System, this approach is

[[Page 16405]]

also consistent with the treatment of a Mid-Point Discretionary Order 
that contains a post only instruction at its displayed price.

Examples

    The following examples demonstrate how a Mid-Point Discretionary 
Order would operate in various scenarios.
Mid-Point Discretionary Orders Entered Without Limit Prices
    Example No. 1. Assume the NBBO is $10.00 x $10.03, resulting in a 
mid-point of $10.015. A Mid-Point Discretionary Order to buy 100 shares 
is entered without a limit price. The Mid-Point Discretionary Order 
would be displayed at $10.00, the NBB, with discretion to buy up to 
$10.015, the mid-point of the NBBO.
     A contra-side market order or marketable limit order to 
sell 100 shares at $10.00 would execute against the Mid-Point 
Discretionary Order to buy at $10.00 for 100 shares.
     A contra-side limit order to sell 100 shares at $10.01 
would execute against the Mid-Point Discretionary Order to buy at 
$10.01 for 100 shares.
     A contra-side limit order to sell 100 shares at $10.02 
would not execute against the Mid-Point Discretionary Order to buy 
because the Mid-Point Discretionary Order had discretion to buy only up 
to the mid-point of the NBBO of $10.015. The limit order to sell would 
be displayed at $10.02, resulting in a new NBBO mid-point of $10.01.
    Example No. 2. Assume the NBBO is $10.00 x $10.03, resulting in a 
mid-point of $10.015. A Mid-Point Discretionary Order to buy 100 shares 
is entered without a limit price. The Mid-Point Discretionary Order 
would be displayed at $10.00, the NBB, with discretion to buy up to 
$10.015, the mid-point of the NBBO.\31\
---------------------------------------------------------------------------

    \31\ This example is designed to illustrate that the displayed 
price of a Mid-Point Discretionary Order entered without a limit 
price would continue to move in tandem with, and be displayed at, 
changes in the NBB (for buy orders) and the NBO (for sell orders). 
The Mid-Point Discretionary Order would receive a new time stamp 
each time it is re-priced.
---------------------------------------------------------------------------

     Assume the NBBO changes to $10.01 x $10.06, resulting in a 
new NBBO mid-point of $10.035. The displayed price of the Mid-Point 
Discretionary Order would be adjusted to $10.01, the NBB, with 
discretion to buy up to $10.035, the new NBBO mid-point.
     If the NBBO changes once again to $10.03 x $10.05 
resulting in a new NBBO mid-point of $10.04, the displayed price of the 
Mid-Point Discretionary Order would be adjusted to $10.03, the new NBB, 
with discretion to buy up to $10.04, the new NBBO mid-point.
    Example No. 3. Assume the NBBO is $10.00 x $10.03, resulting in a 
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered 
to buy 100 shares without a limit price. The Mid-Point Discretionary 
Order would be displayed at $10.00, the NBB, with discretion to buy up 
to $10.015, the mid-point of the NBBO. Assume further that the EDGX 
Book contains two other displayed orders to buy 100 shares each at 
$10.00, both with time priority over the Mid-Point Discretionary Order. 
Assume further that there is a displayed resting order to buy at $9.99 
on the EDGX Book, and no other market is publishing a bid at $10.00.
     A contra-side market order to sell 200 shares would 
execute against the two buy orders with time priority over the Mid-
Point Discretionary Order at $10.00. The Mid-Point Discretionary Order 
to buy would remain on the EDGX Book and be re-price at $9.99 because 
it could not independently establish or maintain the NBB or NBO--
rather, its displayed price would be derived from the NBB and NBO.\32\
---------------------------------------------------------------------------

    \32\ This example assumes that no other market is displaying a 
quote at the NBBO. A Mid-Point Discretionary Order that would 
independently establish or maintain the NBBO would be cancelled back 
to the Member.
---------------------------------------------------------------------------

     The Mid-Point Discretionary Order would be displayed at 
$9.99 with discretion to trade up to $10.01 (assuming the NBO remained 
at $10.03), and the resting buy order at $9.99 would maintain time 
priority over the Mid-Point Discretionary Order.

Mid-Point Discretionary Orders Entered With Limit Prices

    The following examples demonstrate how a Mid-Point Discretionary 
Order entered with a limit price would operate:
    Example No. 1. Assume the NBBO is $10.00 x $10.03, resulting in an 
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered 
to buy 100 shares with a limit price of $10.03. The Mid-Point 
Discretionary Order would be displayed at $10.00, the NBB, with 
discretion to buy up to $10.015, the mid-point of the NBBO.
     A contra-side market order or marketable limit order to 
sell 100 shares at $10.00 would execute against the Mid-Point 
Discretionary Order to buy at $10.00 for 100 shares.
     A contra-side limit order to sell 100 shares at $10.01 
would execute against the Mid-Point Discretionary Order to buy at 
$10.01 for 100 shares.
     A contra-side limit order to sell 100 shares at $10.02 
would not execute against the Mid-Point Discretionary Order to buy 
because the Mid-Point Discretionary Order had discretion to buy only up 
to the mid-point of the NBBO of $10.015. The limit order to sell would 
be displayed at $10.02, resulting in a new NBBO mid-point of $10.01.
    Example No. 2. Assume the NBBO is $10.00 x $10.04, resulting in a 
NBBO mid-point of $10.02. A Mid-Point Discretionary Order is entered to 
buy 100 shares with a limit price of 10.03. The Mid-Point Discretionary 
Order would be displayed at $10.00, the NBB, with discretion to buy up 
to $10.02, the mid-point of the NBBO.
     A contra-side limit order to sell 100 shares at $10.02 
would execute against the Mid-Point Discretionary Order to buy at the 
NBBO mid-point of $10.02 for 100 shares.
     A contra-side limit order to sell 100 shares at $10.01 
would execute against the Mid-Point Discretionary Order to buy at 
$10.01 for 100 shares.
    Example No. 3. Assume the NBBO is $10.01 x $10.06, resulting in a 
NBBO mid-point of $10.035. A Mid-Point Discretionary Order is entered 
to buy 100 shares with a limit price of 10.03. The Mid-Point 
Discretionary Order to buy would be displayed at $10.01, the NBB, with 
discretion to buy up to $10.03, and not the NBBO mid-point of 10.035, 
because the NBBO mid-point would be higher than the Mid-Point 
Discretionary Order's limit price of $10.03.
     A contra-side limit order to sell 100 shares at $10.03 
would execute against the Mid-Point Discretionary Order to buy at 
$10.03.
     A contra-side limit order to sell 100 shares at $10.02 
would execute against the Mid-Point Discretionary Order to buy at 
$10.02.
    Example No. 4. Assume the NBBO is $10.03 x $10.05, resulting in a 
NBBO mid-point of $10.04. A Mid-Point Discretionary Order is entered to 
buy 100 shares with a limit price of 10.03. The displayed price of the 
Mid-Point Discretionary Order to buy would be $10.03, its limit price 
and the current NBB. Therefore, the Mid-Point Discretionary Order would 
not have discretion to trade up to the NBBO mid-point of $10.04 because 
that exceeds its limit price of $10.03.
     If the NBBO changed to $10.04 x $10.06, resulting in a new 
NBBO mid-point of $10.05, the Mid-Point Discretionary Order to buy 
would be posted to the EDGX Book at its limit price of $10.03 and be 
displayed as a limit order with no discretion because the NBB and the 
NBBO mid-point exceed its limit price of $10.03.

[[Page 16406]]

     However, if the NBBO again changed to $10.02 x $10.03, 
then the Mid-Point Discretionary Order would again be displayed at 
$10.02, the NBB, with discretion to trade up to $10.025, the new NBBO 
mid-point.
    Example No. 5. Assume from Example No. 4 above that the NBBO 
remains $10.04 x $10.06, with a NBBO mid-point of $10.05, and the Mid-
Point Discretionary Order to buy continues to be posted to the EDGX 
Book and displayed at its limit price of $10.03. The EDGX Book contains 
a displayed order to buy 100 shares at $10.04 and two separate 
displayed orders to buy 100 shares each at $10.03 with time priority 
over the Mid-Point Discretionary Order. Assume further that there is 
also a displayed order to buy 100 shares at $10.02 on the EDGX Book, 
and no other market is publishing a bid at either $10.03 or $10.04.
     A contra-side market order to sell 300 shares would 
execute first against the buy order on the book at $10.04, and then 
against the two buy orders on the book with time priority over the Mid-
Point Discretionary Order at $10.03. The Mid-Point Discretionary Order 
to buy at $10.03 would remain on the EDGX Book. This execution would 
result in a new NBBO of $10.03 x $10.06. However, the Mid-Point 
Discretionary Order would be re-priced to $10.02 because it could not 
independently establish or maintain an NBB or NBO--rather, its 
displayed price would be derived from the then current NBB and NBO. The 
Mid-Point Discretionary Order would be displayed at $10.02 with 
discretion to trade up to $10.03, its limit price (assuming the NBO 
remained at $10.06). The Mid-Point Discretionary Order would receive a 
new time stamp with time priority behind the resting buy order at 
$10.02.

Operation of the Mid-Point Discretionary Order during a Locked or 
Crossed Market

    Example No. 1. Assume the NBBO is $10.03 x $10.03 resulting in a 
locked market. The Exchange BBO is $10.00 x $10.03. A Mid-Point 
Discretionary Order to buy with a limit price of $10.04 is entered. 
Because the Mid-Point Discretionary Order would cross the NBO of 
$10.03, it is displayed on the EDGX Book at $10.02, one minimum price 
variation away from the NBO with no discretionary range. The Exchange 
BBO is now adjusted to $10.02 x $10.03.
    Example No. 2. Assume the NBBO is $10.03 x $10.03 resulting in a 
locked market. The Exchange BBO is $10.00 x $10.03. A Mid-Point 
Discretionary Order to buy with a limit price of $10.02 is entered. The 
Mid-Point Discretionary Order is posted to the EDGX Book at $10.02 with 
no discretionary range. The Exchange BBO is updated to $10.02 x $10.03.
    Example No. 3. Assume the NBBO is $10.03 x $10.03 resulting in a 
locked market. The Exchange BBO is $10.00 (400 shares) x $10.03 (100 
shares).\33\ A Mid-Point Discretionary Order to sell with a limit price 
of $10.02 is entered. The Mid-Point Discretionary Order joins the 
Exchange NBO and is posted to the EDGX Book at $10.03 because it does 
not independently establish the NBO and there are displayed sell orders 
on the EDGX Book. The Exchange BBO is updated to $10.00 (400 shares) x 
$10.03 (200 shares).
---------------------------------------------------------------------------

    \33\ This example assumes that the Exchange BBO equals the NBBO 
and did not create a locked or crossed market.
---------------------------------------------------------------------------

    Example No. 4. Assume the NBBO is $10.04 x $10.03 resulting in a 
crossed market. The Exchange BBO is $10.00 x $10.03. A Mid-Point 
Discretionary Order to buy with a limit price of $10.04 is entered. 
Because the Mid-Point Discretionary Order would cross the NBO of 
$10.03, it displayed on the EDGX Book at $10.02, one minimum price 
variation away from the NBO with no discretionary range. The Exchange 
BBO is now adjusted to $10.02 x $10.03.
    Example No. 5. Assume the NBBO is $10.05 x $10.02 resulting in a 
crossed market. The Exchange BBO is $10.00 x $10.02. A Mid-Point 
Discretionary Order to buy with a limit price of $10.01 is entered. The 
Mid-Point Discretionary Order is posted to the EDGX Book at $10.01 
because it does not lock or cross the NBO. The Exchange BBO is updated 
to $10.01 x $10.02.
    Example No. 6. Assume the NBBO is $10.05 x $10.03 resulting in a 
crossed market. The Exchange BBO is $10.00 (400 shares) x $10.03 (100 
shares).\34\ A Mid-Point Discretionary Order to sell with a limit price 
of $10.03 is entered. The Mid-Point Discretionary Order joins the 
Exchange NBO and is posted to the EDGX Book at $10.03 because it does 
not independently establish the NBO and there are displayed sell orders 
on the EDGX Book. The Exchange BBO is updated to $10.00 (400 shares) x 
$10.03 (200 shares).
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

Sub-Penny Executions

    Mid-Point Discretionary Orders in stocks priced at $1.00 or more 
would only be executed in sub-penny increments when they execute at the 
mid-point of the NBBO against contra-side Mid-Point Match Orders. Mid-
Point Discretionary Orders are not eligible to execute against contra-
side Mid-Point Discretionary Orders at the mid-point of the NBBO. Mid-
Point Discretionary Orders would execute against all other order types 
solely in whole penny increments. Mid-Point Discretionary Orders would 
not be displayed or ranked in sub-penny increments.
    Example No. 1. Assume the NBBO is $10.00 x $10.03, resulting in a 
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered 
to buy 100 shares with a limit price of $10.02. The Mid-Point 
Discretionary Order would be displayed at $10.00, the NBB, with 
discretion to buy up to $10.015, the mid-point of the NBBO.
     A contra-side Mid-Point Match order sell 100 shares would 
execute against the Mid-Point Discretionary Order to buy at the NBBO 
mid-point of $10.015.
     Alternatively, a contra-side Mid-Point Discretionary Order 
to sell 100 shares would be displayed at $10.03, the NBO, with 
discretion to sell to $10.015, the mid-point of the NBBO. The Mid-Point 
Discretionary Order to sell would not execute against the Mid-Point 
Discretionary Order to buy at the NBBO mid-point of $10.015 because 
Mid-Point Discretionary Orders are not eligible to execute against 
contra-side Mid-Point Discretionary Orders at the mid-point of the 
NBBO.
    Example No. 2. Assume the NBBO is $10.00 x $10.03, resulting in a 
NBBO mid-point of $10.015. A Mid-Point Discretionary Order is entered 
to buy 100 shares with a limit price of $10.02. The Mid-Point 
Discretionary Order would be displayed at $10.00, the NBB, with 
discretion to buy up to $10.015, the mid-point of the NBBO. Assume the 
NBBO changes to $10.02 x $10.05, resulting in a new NBBO mid-point of 
$10.035.
     The Mid-Point Discretionary Order to buy would be 
displayed at $10.02, the NBB, with no discretion to trade above $10.02 
to the NBBO mid-point of $10.035 because its limit price prevents 
executions above $10.02. A contra-side Mid-Point Match Order to sell 
100 shares is entered but would not execute against the Mid-Point 
Discretionary Order to buy at $10.02, because the NBBO mid-point of 
$10.035 would exceed its limit price. The Mid-Point Match Order to sell 
would be entered on the EDGX Book at the mid-point of the NBBO.

Proposed Amendments to Rule 11.8(a)

    The Exchange proposes to amend Rule 11.8(a)(2)(D) to reflect the 
priority that Mid-Point Discretionary Orders would have when they are 
executed within their discretionary range. Rule 11.8(a)(2) states, in 
sum, that the System

[[Page 16407]]

shall execute equally priced trading interest in time priority in the 
following order: (i) Displayed size of limit orders; (ii) Mid-Point 
Match Orders; (ii) non-displayed limit orders and the reserve quantity 
of Reserve Orders; (iii) discretionary range of discretionary orders as 
set forth in current Rule 11.5(c)(13); and (iv) Route Peg Orders as set 
forth in current Rule 11.5(c)(17).
    When Mid-Point Discretionary Orders execute at their displayed 
price, they would have the same priority as that of the displayed size 
of limit orders, in accordance with Rule 11.8(a)(2)(A). However, when 
they execute within their discretionary range, the Exchange proposes 
that they would have the same priority as the discretionary range of 
Discretionary Orders, as set forth in Rule 11.8(a)(2)(D). Therefore, 
the Exchange is proposing to amend Rule 11.8(a)(2)(D) to account for 
the priority of Mid-Point Discretionary Orders when they act within 
their discretionary range.
    Example. Assume the NBBO is $10.00 x $10.04, resulting in a NBBO 
mid-point of $10.02. A Mid-Point Discretionary Order is entered to buy 
100 shares with a limit price of $10.02. A Non-Displayed order to buy 
100 shares at $10.02 is subsequently entered. The Mid-Point 
Discretionary Order would be displayed at $10.00, the NBB, with 
discretion to buy up to $10.02, the NBBO mid-point.
     A contra-side limit order to sell 100 shares at $10.02 
would execute against the Non-Displayed order, and not the Mid-Point 
Discretionary Order, since Non-Displayed orders would have priority 
over the discretionary range of Mid-Point Discretionary Orders in 
accordance with Rule 11.8(a)(2).
    In addition, the Exchange proposes new Rule 11.8(a)(9) to address 
the priority of orders when a Mid-Point Discretionary Order is posted 
the EDGX Book. Where orders to buy (or sell) are made at the same 
price, Exchange Rule 11.8(a)(2) generally 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. As described above, the proposed EDGX Mid-Point 
Discretionary Order would not be eligible to execute immediately upon 
entry in the System at its displayed price.\35\ Instead, the proposed 
EDGX Mid-Point Discretionary Order would be eligible to execute at its 
displayed price only after it has been posted to the EDGX Book. 
Therefore, the Exchange proposes to add subparagraph (9) to Rule 
11.8(a) to clarify that, in accordance with proposed Rule 11.5(c)(14), 
where a Mid-Point Discretionary Order does not execute against certain 
marketable contra-side interest resting on the EDGX Book, it will, 
notwithstanding Exchange Rule 11.8(a)(2) described above, be posted 
directly to the EDGX Book and will be eligible to execute against later 
arriving marketable contra-side orders.
---------------------------------------------------------------------------

    \35\ See supra notes 16 thru 19 and accompanying text. Mid-Point 
Discretionary Orders would also not be eligible to execute against 
resting Discretionary Orders, including contra-side Mid-Point 
Discretionary Orders. See supra notes 29 and accompanying text; see 
also infra notes 47 thru 48 and accompanying text.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with Section 6(b) of the Act \36\ and further the objectives of Section 
6(b)(5) of the Act,\37\ because they are designed 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, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Proposed Mid-Point Discretionary Order, Rule 11.5(c)(14)

    The Exchange believes that the proposed Mid-Point Discretionary 
Order is designed 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 because it would provide Users \38\ 
with an order type that may result in the efficient execution of such 
orders and provide additional flexibility and increased functionality 
to the Exchange's System and its Users. Specifically, the Exchange 
believes that Users may receive more efficient order executions by 
providing them greater flexibility to be displayed at the NBBO with 
discretion to execute up to and including the mid-point of the NBBO, 
resulting in the potential benefit of price improvement. The proposed 
Mid-Point Discretionary Order is designed to increase displayed 
liquidity on the Exchange while also enhancing execution opportunities 
at the mid-point of the NBBO. Promotion of displayed liquidity at the 
NBBO enhances market quality for all Users and promotes competition 
amongst market centers. Therefore, the Exchange believes that the 
proposed Mid-Point Discretionary Order will promote just and equitable 
principles of trade and perfect the mechanism of a free and open market 
and a national market system because it is designed to: (i) Contribute 
to the displayed liquidity on the Exchange at the NBBO while providing 
additional opportunities for price improvement, which would, in turn, 
benefit competition due to improvements to overall market quality; and 
(ii) increase competition between exchanges offering similar 
functionality.
---------------------------------------------------------------------------

    \38\ Exchange Rule 1.5(ee) defines ``User'' as ``any Member or 
Sponsored Participant who is authorized to obtain access to the 
System pursuant to [Exchange] Rule 11.3.''
---------------------------------------------------------------------------

    The proposed Mid-Point Discretionary Order is similar to and based 
on the Mid-Point Discretionary Order on EDGA.\39\ While the proposed 
EDGX Mid-Point Discretionary Order would function similarly to the 
existing Mid-Point Discretionary Order on EDGA, the order types would 
differ in four areas. The Exchange does not believe that these 
differences are significant or presents unique issues with respect to 
the consistency of the Mid-Point Discretionary Order with the 
requirements of the Act. The Exchange believes these differences are 
reasonable due to the different fee structures on EDGA and EDGX and are 
designed to encourage explicitly priced liquidity at the mid-point of 
the NBBO, while enabling the Exchange to offer a low cost pricing 
structure for the order type. EDGA maintains a taker-maker model where 
Members receive rebates for removing liquidity and pay a fee for adding 
liquidity.\40\ EDGX maintains a maker-taker model where Members pay a 
fee for removing liquidity and receive a rebate for adding 
liquidity.\41\
---------------------------------------------------------------------------

    \39\ See EDGA Rule 11.5(c)(17). Securities Exchange Act Release 
No. 67226 (June 20, 2012), 77 FR 38113 (June 26, 2013) (SR-EDGA-
2012-22) (Notice of Filing and Immediate Effectiveness Of Proposed 
Rule Change to Adopt the Mid-Point Discretionary Order).
    \40\ See EDGA Fee Schedule available at http://www.directedge.com/Trading/EDGAFeeSchedule.aspx.
    \41\ See EDGX Fee Schedule available at http://www.directedge.com/Trading/EDGXFeeSchedule.aspx.
---------------------------------------------------------------------------

    First, unlike the EDGA Mid-Point Discretionary Order, the proposed 
EDGX Mid-Point Discretionary Order would not be eligible to execute 
immediately upon entry in the System at its displayed price. Instead, 
the proposed EDGX Mid-Point Discretionary Order would be eligible to 
execute at its displayed price only after it has been posted to the 
EDGX Book. If the Exchange would allow for the execution of a Mid-Point 
Discretionary Order at its displayed price immediately upon entry into 
the System, the order would not receive a rebate and instead would be 
subject to the applicable rates for removing liquidity from the EDGX

[[Page 16408]]

Book. Therefore, to avoid being charged a fee, the proposed EDGX Mid-
Point Discretionary Order would not be eligible to execute at its 
displayed price immediately upon entry in the System.\42\ It would be 
eligible to execute at its displayed price against incoming liquidity 
removing orders because such orders are willing to accept the immediate 
execution and not post to the EDGX Book. Orders resting on the EDGX 
Book are willing to forgo an execution against the incoming Mid-Point 
Discretionary Order at its displayed price here because the User is 
expecting to receive a rebate once posted to the EDGX Book. The 
Exchange believes that this approach is designed to accomplish the twin 
goals in implementing this order type--increasing both displayed 
liquidity and liquidity at the mid-point of the NBBO on the EDGX Book. 
In addition, the Exchange believes this would optimize available 
displayed liquidity for incoming orders and provide price improvement 
at the mid-point of the NBBO. The Exchange does not believe that its 
proposal is unique in its application of the Exchange's pricing model 
to the design of the functionality.\43\
---------------------------------------------------------------------------

    \42\ In contrast, on EDGA, incoming Mid-Point Discretionary 
Orders may immediately execute upon entry and will receive a rebate 
for doing so.
    \43\ See supra notes 20 thru 28 and accompanying text.
---------------------------------------------------------------------------

    The Exchange does not believe that there is anything novel or 
controversial about permitting otherwise marketable orders to post to 
the EDGX Book and execute against later arriving orders in a fully 
transparent manner that is consistent with pre-existing rules of other 
exchanges described above.\44\ Permitting otherwise marketable orders 
to post directly to that exchange is designed to provide Users with 
better control over their execution costs. It allows Users to post 
aggressively priced liquidity, as such Users have certainty as to the 
fee or rebate they will receive from the Exchange if their order is 
executed. Without such ability, the Exchange believes that certain 
Users would simply post less aggressively priced liquidity, and prices 
available for market participants, including retail investors, would 
deteriorate. Members remain focused on their trading costs, and in a 
pricing environment characterized by fees on one side of a trade being 
used to fund rebates on the other side, it is entirely understandable 
that some Members may wish to structure their trading activity in a 
manner that is more likely to avoid a fee and earn a rebate.\45\ 
Therefore, the Exchange believes Mid-Point Discretionary Order not 
executing at their displayed price upon arrival furthers the objectives 
of Section 6(b)(5) of the Act,\46\ because it is designed 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. The Exchange believes this to be the case even if, as described 
above, a Mid-Point Discretionary Order will execute in certain 
circumstances against a later arriving contra-side order when there is 
non-displayed contra-side interest resting on the Exchange's order book 
at that price. As discussed above, this order, once resting, is 
expecting to receive a rebate for any execution.
---------------------------------------------------------------------------

    \44\ See supra notes 20 thru 28 and accompanying text.
    \45\ See e.g., Securities Exchange Act Release No. 69194 (March 
20, 2013), 78 FR 18386 at 18391 n. 29 (March 26, 2013) (SR-Phlx-
2013-24) (Notice of Filing of Proposed Rule Change); see also 
Securities Exchange Act Release No. 69452 (April 25, 2013), 78 FR 
25512 at 25514 (May 1, 2013) (Order Approving SR-PHLX-2013-24) 
(stating that the Midpoint Peg Post-Only Order ``is intended to 
provide market participants with better control over their execution 
costs and to provide a means to offer price improvement 
opportunities'').
    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Second, Mid-Point Discretionary Orders would also not be eligible 
to execute against resting Discretionary Orders, including contra-side 
Mid-Point Discretionary Orders. The Exchange believes precluding the 
above executions promotes 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 Members the opportunity to 
achieve price-improvement at prices up to and including the mid-point 
of the NBBO. On EDGA, a Mid-Point Discretionary Order may execute 
against resting Discretionary Orders, including contra-side Mid-Point 
Discretionary Orders, because both orders would pay a fee. However, on 
EDGX, if the Exchange were to allow Mid-Point Discretionary Orders to 
execute against each other, the provider of liquidity would receive a 
rebate while the taker of liquidity would be charged no fee. Members 
willing to pay a fee for broader execution opportunities at the mid-
point of the NBBO could instead choose to utilize Mid-Point Match 
Orders. Precluding Mid-Point Discretionary Orders from executing as 
discussed above follows the precedent established by other order types, 
such as Post Only Orders, in which Members choose to forgo some 
execution opportunities to avoid paying a fee.\47\ Since the Exchange 
does not offer a Post Only Mid-Point Match Order,\48\ Mid-Point 
Discretionary Orders provide a means to interact with liquidity at the 
mid-point of the NBBO, while having the added benefit of not incurring 
a fee. In exchange, the User of a Mid-Point Discretionary Order 
foregoes certain execution opportunities and therefore incurs risk of 
not receiving an execution. The above restriction would provide a Mid-
Point Discretionary Order the opportunity to become a liquidity 
provider and receive a rebate. Furthermore, the Exchange believes that 
this approach is consistent with the Exchange's belief that Mid-Point 
Discretionary Orders would be utilized primarily by Members seeking 
access to liquidity at the mid-point of the NBBO while seeking to not 
be charged a fee. The proposed Mid-Point Discretionary Order is 
designed to provide Members with better control over their execution 
costs and with a means to offer price improvement opportunities. As 
stated above, Members remain focused on their trading costs and may 
wish to structure their trading activity in a manner that is more 
likely to control those costs. Other Members may prefer execution 
certainty and are less cost-sensitive, and would thus be less likely to 
use the Mid-Point Discretionary Order. Based on the foregoing, the 
Exchange believes precluding Mid-Point Discretionary Orders from 
executing against each other is designed to promote just and equitable 
principles of trade because it would enable Members to achieve 
potential price improvement and a low cost fee structure by using the 
proposed Mid-Point Discretionary Order.
---------------------------------------------------------------------------

    \47\ See supra notes 20 thru 28 and accompanying text. A ``Post 
Only Order'' is precluded from executing against orders resting on 
the EDGX Book upon entry in the System and receives a rebate for 
adding liquidity. See Exchange Rule 11.5(c)(5); see also, EDGX Fee 
Schedule available at http://www.directedge.com/Trading/EDGXFeeSchedule.aspx. NYSE Arca permits members to designate a limit 
order as ``No Mid-Point Execution'', so that the limit order will 
ignore mid-point priced orders. NYSE Arca Rule 7.31(h)(5).
    \48\ For securities priced at or above $1.00, Mid-Point Match 
Orders incur a fee regardless of whether they add or remove 
liquidity at the mid-point of the NBBO. See Flags MM and MT on the 
EDGX Fee Schedule available at http://www.directedge.com/Trading/EDGXFeeSchedule.aspx.
---------------------------------------------------------------------------

    Third, the Exchange believes that limiting the circumstance within 
which a Mid-Point Discretionary Order may execute against orders at the 
mid-point of the NBBO is designed to promote just and equitable 
principles of trade by incentivizing Members to submit orders that 
explicitly contribute to liquidity at the mid-point of the NBBO while 
also enabling the Exchange to provide a low cost pricing structure for 
the order type.

[[Page 16409]]

The proposed Mid-Point Discretionary Order would only be eligible to 
execute at the mid-point of the NBBO against contra-side Mid-Point 
Match Orders and incoming liquidity-removing orders when their limit 
price equals the mid-point of the NBBO. Members utilizing these order 
types are explicitly adding liquidity at the mid-point of the NBBO and, 
thereby, provide the benefit of price improving liquidity to Users and 
their incoming orders. Restricting the orders against which a Mid-Point 
Discretionary Order may execute to those orders that are designed to 
explicitly add liquidity at the mid-point of the NBBO is a reasonable 
means by which to encourage Members to add committed mid-point 
liquidity. The Exchange believes that encouraging orders that 
explicitly add liquidity at the mid-point of the NBBO, rather than by 
happenstance, would enhance price improvement opportunities on the 
Exchange by seeking to increase the overall liquidity on the Exchange 
at the mid-point of the NBBO. The Exchange believes restricting the 
orders against which the proposed Mid-Point Discretionary Order may 
execute at the mid-point of the NBBO to Mid-Point Match Orders promotes 
just and equitable principles of trade because it is designed to 
encourage the use of Mid-Point Match Orders, motivating Members seeking 
price improvement to direct their orders to EDGX because they would 
have a heightened expectation of liquidity at the midpoint of the NBBO. 
In addition, these restrictions also enable the Exchange to offer a low 
cost pricing structure for the EDGX Mid-Point Discretionary Order 
because both Mid-Point Match Orders and incoming liquidity-removing 
orders would be charged a fee, enabling the Exchange to provide a 
rebate or no fee to the proposed Mid-Point Discretionary Order.
    Fourth, on EDGA, in the event a trading halt is declared by the 
listing market, a resting Mid-Point Discretionary Orders would be 
eligible for execution once the trading halt is lifted by the listing 
market. Conversely, on EDGX, in the event a trading halt is declared by 
the listing market, any Mid-Point Discretionary Orders resting on the 
EDGX Book would be immediately cancelled. As described above, the 
approach taken by EDGX is a result of its maker-taker fee structure and 
serves to avoid a situation where Mid-Point Discretionary Orders would 
be assessed a take fee when the market re-opens. As discussed above in 
regard to execution of Mid-Point Discretionary Orders upon entry into 
the System, this approach is also consistent with the treatment of a 
Mid-Point Discretionary Order as containing a post only instruction at 
its displayed price.
    The Mid-Point Discretionary Order would also be similar to the 
Exchange's existing Pegged Order \49\ and Mid-Point Match Order 
because, like these order types, a Mid-Point Discretionary Order would 
receive a new time stamp each time it was automatically adjusted, and 
it would not be eligible for routing pursuant to Rule 11.9(b)(2). Like 
a Pegged Order, a Mid-Point Discretionary Order's displayed price would 
be pegged to and automatically adjusted in response to changes to the 
NBB or NBO. Also, like a Pegged Order, if the proposed Mid-Point 
Discretionary Order displayed on the Exchange would lock the market, 
the price of the order will be automatically adjusted by the System to 
one minimum price variation below the current NBO (for bids) or to one 
minimum price variation above the current NBB (for offers). In 
addition, the Mid-Point Discretionary Order will also be similar to the 
Exchange's Mid-Point Match Order, because both would be eligible to 
receive sub-penny executions at the mid-point of the NBBO. However, 
unlike the Mid-Point Match Order, the Mid-Point Discretionary Order 
includes a displayed component, which would provide the added benefit 
of transparency. The proposed Mid-Point Discretionary Order would also 
be similar to the Exchange's existing Discretionary Order in that it 
would include a displayed order at a specified price (an objectively 
determined price based on the prevailing NBB or NBO) and a non-
displayed order at a specified price (an objectively determined price 
based on the mid-point of the NBBO), subject to any limits the User 
attaches the Mid-Point Discretionary Order. The Exchange believes that 
this proposed order type would benefit its Users by offering greater 
flexibility to display liquidity at the NBBO with discretion generally 
to execute to the NBBO mid-point, resulting in additional opportunities 
for price improvement for contra-side orders.
---------------------------------------------------------------------------

    \49\ Exchange Rule 11.5(c)(6).
---------------------------------------------------------------------------

    The Exchange further believes that the proposed Mid-Point 
Discretionary Order is designed to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
because it is based on and would enable the Exchange to offer an order 
type that would compete with similar order types on other exchanges. 
For example, the Mid-Point Discretionary Order is similar to NYSE 
Arca's Pegged Order \50\ and Discretionary Order.\51\ NYSE Arca's 
Pegged Order is defined as a ``limit order to buy or sell a stated 
amount of a security at a displayed price set to track the current bid 
or ask of the NBBO in an amount specified by the User. . . . A Pegged 
Order may be designated as a . . . Discretionary Order.'' NYSE Arca 
defines a Discretionary Order to be ``[a]n order to buy or sell a 
stated amount of a security at a specified, undisplayed price (the 
`discretionary price'), in addition to at a specified, displayed price 
(`displayed price').'' The Mid-Point Discretionary Order is similar to 
Arca's Pegged Order when it is designated as a Discretionary Order 
insofar as the displayed components of both are designed to track the 
prevailing NBB and NBO. While the undisplayed component of the Mid-
Point Discretionary Order presents a variation on the undisplayed 
component of Arca's order type, insofar as the former sets a more 
specific parameter on the discretionary aspect of the order (i.e., to 
execute to the mid-point of the NBBO), the Exchange does not believe 
that such variation presents unique issues with respect to the 
consistency of the Mid-Point Discretionary Order with the requirements 
of the Act.
---------------------------------------------------------------------------

    \50\ NYSE Arca Rule 7.31(cc).
    \51\ NYSE Arca Rule 7.31(h)(2)
---------------------------------------------------------------------------

    The proposed Mid-Point Discretionary Order is also not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers because the proposed Mid-Point Discretionary Order would be 
available to all Members on a uniform basis.

Proposed Amendment to Rule 11.8(a)

    The Exchange also believes its proposal to amend Rule 11.8(a)(2) to 
reflect the priority that Mid-Point Discretionary Orders is designed to 
promote just and equitable principles of trade. Rule 11.8(a)(2) states, 
in sum, that the 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; (ii) non-displayed limit orders 
and the reserve quantity of Reserve Orders; (iii) discretionary range 
of Discretionary Orders as set forth in current Rule 11.5(c)(13); and 
(iv) Route Peg Orders as set forth in current Rule 11.5(c)(17). Under 
the proposal, when Mid-Point Discretionary Orders execute at their 
displayed price, they would have the same priority as that of the 
displayed size of limit orders, in accordance with Rule 11.8(a)(2)(A). 
However, when they execute within their discretionary range, the 
Exchange

[[Page 16410]]

proposes that they maintain priority behind Mid-Point Match Orders but 
maintain the same priority as the discretionary range of Discretionary 
Orders. The Exchange believes the proposed priority for the 
discretionary range of Mid-Point Discretionary Orders is consistent 
with the Act because it continues to provide priority to displayed 
orders on the Exchange and to orders that are designed to provide 
liquidity at a set price level, such as the mid-point of the NBBO or 
the limit price of a Reserve Order. Lastly, the Exchange notes that the 
proposed priority for the discretionary range or Mid-Point 
Discretionary Orders on EDGX is identical to the priority for the 
discretionary range of Mid-Point Discretionary Orders on EDGA.\52\
---------------------------------------------------------------------------

    \52\ See EDGA Rule 11.8(a)(2). See also BATS Rule 11.12(a)(2) 
(placing the discretionary range of discretionary order last in 
priority behind the displayed size of limit order, non-displayed 
limit orders, pegged orders, mid-point peg orders and the reserve 
size of orders); Securities Exchange Act Release No. 67226 (June 20, 
2012), 77 FR 38113 (June 26, 2012) (SR-EDGA-2012-22) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Adopt 
the Mid-Point Discretionary Order).
---------------------------------------------------------------------------

    The Exchange also believes it is reasonable and appropriate that 
the displayed price and discretionary range of a Mid-Point 
Discretionary Order maintain the same time stamp, even when the 
displayed price is unchanged but the discretionary range changed due to 
a new mid-point of the NBBO being established. It is well founded that 
the price priority of a discretionary order is based on its displayed 
price and not its discretionary range.\53\ Should the discretionary 
range widen or decrease as a result of a new mid-point of the NBBO 
being established, the time stamp and priority of the displayed price 
would remain unchanged so long as the NBBO that the order is pegged to 
did not change.
---------------------------------------------------------------------------

    \53\ NYSE Arca permits Pegged Orders to also be designated as 
Discretionary Orders. See NYSE Arca Rule 7.31(cc) and 7.31(h)(2). In 
such case, Discretionary Orders are ranked based on their displayed 
price, not discretionary range, and continue to be ranked at their 
displayed price when the discretionary portion of the order is 
decremented. See NYSE Arca Rule 7.36(1)(C).
---------------------------------------------------------------------------

    In addition, the Exchange believes proposed subparagraph (9) to 
Rule 11.8(a) furthers the objectives of Section 6(b)(5) of the Act,\54\ 
because it is designed 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. The Exchange believes that 
permitting otherwise marketable orders to post directly to the EDGX 
Book is reasonable because it is designed to provide Users with better 
control over their execution costs. Once posted to the EDGX Book, the 
proposed EDGX Mid-Point Discretionary Order would receive a rebate if 
executed at its displayed price. This allows Users to post aggressively 
priced liquidity by providing certainty as to the fee or rebate they 
will receive from the Exchange if their order is executed. In addition, 
as stated above, the Exchange does not believe that there is anything 
novel or controversial about permitting otherwise marketable orders to 
post to the EDGX Book and execute against later arriving orders in a 
fully transparent manner that is consistent with pre-existing rules of 
other exchanges.\55\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b)(5).
    \55\ See supra notes 42 thru 48 and accompanying text.
---------------------------------------------------------------------------

    Lastly, the Exchange believes it is reasonable for a Mid-Point 
Discretionary Order to retain its time stamp and priority in relation 
to other Discretionary Orders when the discretionary range widens or 
decreases in response to a new mid-point of the NBBO being established. 
A Mid-Point Discretionary Order's discretionary range is capped by the 
mid-point of the NBBO, which is an objectively determined price that 
the User cannot independently establish. As stated above, no price 
priority is afforded to orders based on their discretionary range. 
Therefore, a Mid-Point Discretionary Order's discretionary range would 
not receive a new time stamp when the discretionary range widens or 
decreases in response to a new mid-point of the NBBO being established; 
nor would the order's priority be changed in relation to other 
Discretionary Orders on the EDGX Book.

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

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change 
would increase intermarket competition among the exchanges because the 
Mid-Point Discretionary Order will directly compete with a similar 
order types offered by other exchanges.\56\ The Exchange believes that 
Users may receive more efficient order executions by providing them 
greater flexibility to be displayed at the NBBO with discretion to 
execute to the mid-point of the NBBO, resulting in the potential 
benefit of price improvement. Promotion of displayed liquidity at the 
NBBO enhances market quality for all market participants and promotes 
competition amongst market enters. The Exchange believes that the 
proposed Mid-Point Discretionary Order will contribute to the displayed 
liquidity on the Exchange, which would, in turn, benefit competition 
due to improvements to the overall market quality of the Exchange. The 
proposed rule change would not burden intramarket competition because 
the Mid-Point Discretionary Order would be available to all Members on 
a uniform basis.
---------------------------------------------------------------------------

    \56\ See NYSE Arca Rules 7.31(cc), 7.31(h)(2), 7.31(h)(5), and 
7.31(nn), Nasdaq Rules 4751(f)(4) and 4751(11) [sic], BATS Rule 
11.9(c)(8), NYSE Rule 13, and CBOE Rule 51.8(g)(12).
---------------------------------------------------------------------------

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 written comments from its Members or other interested parties.

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 up to 90 days (i) as the 
Commission may designate 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 such 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. In particular, the Commission seeks 
comment on the following:
     Would the Mid-Point Discretionary Order create 
opportunities for queue-jumping strategies by executing against later-
arriving orders rather than against identically-priced orders already 
resting on the order book?
     Is it consistent with fair and orderly markets to prevent 
Mid-Point Discretionary Orders from executing against contra-side 
orders with prices that are within the net economic range (limit price 
with fee/rebate) specified in such orders?

[[Page 16411]]

     Would leaving Mid-Point Discretionary Orders resting on 
the order book even in the presence of contra-side orders with prices 
that are within the net economic range (limit price with fee/rebate) 
specified in the Mid-Point Discretionary Order add unnecessary 
complexity to the Exchange's priority rules and the equity markets 
generally?
    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-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 20549-1090, 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 
available publicly. All submissions should refer to File Number SR-
EDGX-2014-05, and should be submitted on or before April 15, 2014.
---------------------------------------------------------------------------

    \57\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06461 Filed 3-24-14; 8:45 am]
BILLING CODE 8011-01-P


