[Federal Register Volume 83, Number 194 (Friday, October 5, 2018)]
[Notices]
[Pages 50416-50422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21680]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84327; File No. SR-CboeEDGX-2018-041]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Adopt a New Order Type Called the MidPoint Discretionary Order 
(``MDO'') Under Paragraph (g) of Exchange Rule 11.8 and To Amend the 
Definition of the Super Aggressive Instruction Under Paragraph (n)(2) 
of Exchange Rule 11.6

October 1, 2018.
    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 September 19, 2018, Cboe EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with 
the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt a new order type called the 
MidPoint Discretionary Order (``MDO'') under paragraph (g) of Exchange 
Rule 11.8 and to amend the definition of the Super Aggressive 
instruction under paragraph (n)(2) of Exchange Rule 11.6.
    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule 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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts 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 adopt a new order type known as the MDO 
under new paragraph (g) of Exchange Rule 11.8 and to amend the 
definition of the Super Aggressive instruction under paragraph (n)(2) 
of Exchange Rule 11.6.

Proposed MDOs on EDGX

    MDOs are designed to exercise discretion to execute to the midpoint 
of the NBBO and provide price improvement to contra-side orders over 
the NBBO. The proposed MDO would function similarly to the MDO offered 
by EDGA,\5\ but would also include certain aspects that mirror 
functionality currently available through the Discretionary Pegged 
Order and MPL-ALO Order offered by NYSE Arca, as well as the 
Discretionary Peg Order offered by IEX.\6\ The core functionality of 
the proposed MDO, EDGA's MDO, NYSE Arca's Discretionary Pegged Order, 
and IEX's Discretionary Peg Order would be the same--being pegged to 
the NBBO, as applicable, with discretion to execute to the midpoint of 
the NBBO.
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    \5\ See EDGA Rule 11.8(e).
    \6\ See NYSE Arca Rule 7.31-E(h)(3) (defining the Discretionary 
Pegged Order). See also Securities Exchange Act Release No. 78181 
(June 28, 2016), 81 FR 43297 (July 1, 2016) (order approving the 
Discretionary Pegged Order). See NYSE Arca Rule 7.31-E(d)(3)(F). See 
IEX Rule 11.190(a)(3) (defining Pegged Orders and a non-displayed 
order which may be pegged to the inside quote on the same side of 
the market with discretion to the midpoint of the NBBO, i.e., 
Discretionary Peg orders). See also Securities Exchange Act Release 
No. 78101 (June 17, 2016), 81 FR 41141 (June 23, 2016) (order 
approving the IEX exchange application, which included IEX's 
Discretionary Peg Orders and Discretionary Peg Order).
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    Proposed Operation. An MDO would be defined as a Limit Order \7\ 
that is executable at the National Best Bid (``NBB'') for an order to 
buy or the National Best Offer (``NBO'') for an order to sell while 
resting on the EDGX Book,\8\ with discretion to execute at prices to 
and including the midpoint of the NBBO. Upon entry, an MDO will only 
execute against resting orders that include a Super Aggressive 
instruction \9\ priced at the MDO's pegged price if the MDO also 
contains a Displayed instruction \10\ and against orders with a Non-
Displayed Swap (``NDS'') instruction \11\ priced at the MDO's pegged 
price or within its discretionary range. As a result, an MDO will not 
act as a liquidity remover upon entry against resting orders at its 
pegged price or at any price within its discretionary range. Should a 
resting contra-side order within the MDO's discretionary range not 
include an NDS instruction, the incoming MDO will be placed on the EDGX 
Book and its discretionary range shortened to equal the limit price of 
the contra-side resting order. Likewise, where an incoming order with a 
Post Only instruction \12\ does not remove

[[Page 50417]]

liquidity on entry against a resting MDO, the discretionary range of 
the resting MDO will be shortened to equal the limit price of the 
incoming contra-side order with a Post Only instruction. Shortening the 
MDO's discretionary range in such circumstances is intended to avoid 
the discretionary range extending past the contra-side order's limit 
price, which could create a price priority issue should a later order 
be entered and be eligible to execute against the resting MDO within 
its discretionary range but at a price that extends beyond the contra-
side order with a Post Only instruction. Once resting on the EDGX Book, 
an MDO will only act as a liquidity provider against all incoming 
orders that are executable at the resting MDO's pegged price or at any 
price within the resting MDO's discretionary range.\13\
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    \7\ See Exchange Rule 11.8(b). In sum, a Limit Order is an order 
to buy or sell a stated amount of a security at a specified price or 
better.
    \8\ See Exchange Rule 1.5(d).
    \9\ See Exchange Rule 11.6(n)(2).
    \10\ Pursuant to the terms of the Super Aggressive instruction, 
such orders execute against incoming orders with a Post Only 
instruction only when such orders also contain a Displayed 
instruction. See Exchange Rule 11.6(n)(7). As noted below, the 
Exchange also proposes to amend the definition of the Super 
Aggressive instruction to reflect the addition of the MDO order 
type. Further, although an order with a Super Aggressive instruction 
resting at the pegged price of an MDO should be a rare occurrence, 
because orders with a Super Aggressive instruction route to locking 
or crossing quotes at away Trading Centers and an MDO is pegged to 
the NBBO (i.e., the locking price), it is possible to have an order 
with a Super Aggressive instruction at such price based on the 
Exchange's matching and routing logic as well as the Exchange's 
calculation of the NBBO and processing of quote updates. See, e.g., 
Securities Exchange Act Release No. 74072 (January 15, 2015), 80 FR 
3282 (January 22, 2015) (SR-EDGX-2015-02) (describing the Exchange's 
calculation of the NBBO, including router feedback and other 
details).
    \11\ See Exchange Rule 11.6(n)(7).
    \12\ See Exchange Rule 11.6(n)(4).
    \13\ See infra note 15 and accompanying text.
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    An MDO's pegged price and discretionary range would be bound by its 
limit price. For example, an MDO to buy or sell with a limit price that 
is less than the prevailing NBB or higher than the prevailing NBO, 
respectively, would be posted to the EDGX Book at its limit price. The 
pegged prices of an MDO are derived from the NBB or NBO, and cannot 
independently establish or maintain the NBB or NBO. An MDO will 
exercise the least amount of price discretion necessary from its pegged 
price to its discretionary price. An MDO in a stock priced at $1.00 or 
more can only be executed in sub-penny increments when it executes at 
the midpoint of the NBBO.
    Notwithstanding that an MDO may be a Limit Order and include a 
discretionary range, its operation and available modifiers would be 
limited to its description under proposed Rule 11.8(g). Exchange rules 
describe Discretionary Range as an instruction the User may attach to 
an order to buy (sell) a stated amount of a security at a specified, 
displayed or non-displayed ranked price with discretion to execute up 
(down) to another specified, non-displayed price.\14\ The discretionary 
range of an MDO would not operate like the Discretionary Range 
instruction in certain respects. For instance, orders that include a 
Discretionary Range instruction may become a liquidity remover for fee 
purposes despite being posted to the EDGX Book (i.e., a ``liquidity 
swap'') in certain scenarios that are outlined in Exchange Rule 
11.6(d).\15\ The Exchange does not propose for MDOs executed within 
their discretionary range to engage in the liquidity swapping scenarios 
set forth under the description of the Discretionary Range instruction 
under Exchange Rule 11.6(d), including where an MDO's displayed or non-
displayed ranked price is equal to an incoming order with a Post Only 
instruction that does not remove liquidity on entry pursuant to 
Exchange Rule 11.6(n)(4).\16\
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    \14\ See Exchange Rule 11.6(d).
    \15\ The scenarios under Exchange Rule 11.6(d) in which an order 
with a Discretionary Range may liquidity swap but the proposed MDO 
would not are: (i) To the extent an order with a Discretionary Range 
instruction's displayed or non-displayed ranked price is equal to an 
incoming order with a Post Only instruction that does not remove 
liquidity on entry pursuant to Exchange Rule 11.6(n)(4), the order 
with a Discretionary Range instruction will remove liquidity against 
such incoming order; and (ii) any contra-side order with a time-in-
force other than Immediate-or-Cancel or Fill-or-Kill and a price in 
the discretionary range but not at the displayed or non-displayed 
ranked price will be posted to the EDGX Book and then the 
Discretionary Order will remove liquidity against such posted order.
    \16\ Id.
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    While MDOs would function similarly to the MDO offered by EDGA,\17\ 
it would also include certain aspects that mirror functionality 
currently available through the Discretionary Pegged Order and MPL-ALO 
Order offered by NYSE Arca, as well as the Discretionary Peg Order 
offered by IEX.\18\ The core functionality of the proposed MDO, EDGA's 
MDO, NYSE Arca's Discretionary Pegged Order, and IEX's Discretionary 
Peg Order would be the same--being pegged to the NBBO, as applicable, 
with discretion to execute to the midpoint of the NBBO. The 
similarities and differences amongst these order types are explained 
below.
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    \17\ See EDGA Rule 11.8(e).
    \18\ See supra note 6.
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    Similarities to the EDGA MDO. The following aspects of the proposed 
MDO's functionality are identical to functionality of MDOs on EDGA.\19\ 
The proposed EDGX MDO's pegged price and discretionary range would be 
bound by its limit price. An MDO to buy or sell with a limit price that 
is less than the prevailing NBB or higher than the prevailing NBO, 
respectively, would be posted to the EDGX Book at its limit price. The 
pegged prices of an MDO would be derived from the NBB or NBO, and 
cannot independently establish or maintain the NBB or NBO. An MDO in a 
stock priced at $1.00 or more would only be executed in sub-penny 
increments when it executes at the midpoint of the NBBO.\20\
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    \19\ See EDGA Rule 11.8(e).
    \20\ Unlike the EDGA MDO, the proposed EDGX MDO would not 
execute upon entry at sub-penny prices pursuant to Exchange Rule 
11.10(a)(4)(D) because EDGX MDOs will only be eligible for execution 
upon entry against orders with a Super Aggressive instruction at its 
pegged price or against orders with an NDS instruction priced at its 
pegged price or within its discretionary range. Such execution will 
occur at the price of the contra-side order and not at a sub-penny 
increment. See, e.g., Securities Exchange Act Release No. 82087 
(November 15, 2017), 82 FR 55472 (November 21, 2017) (Notice of 
Filing and Immediate Effectiveness of SR-BatsEDGA-2017-29) 
(describing, among other things, when an MDO on EDGA may execute at 
a non-midpoint or sub-penny midpoint).
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    Also like EDGA's MDO,\21\ the proposed EDGX MDO may only contain 
the following time-in-force terms: Day, RHO, GTX, GTD, PRE, PTX, or 
PTD.\22\ Proposed paragraph (2) of Rule 11.8(g) would state that MDOs 
may be entered as a Round Lot or Mixed Lot.\23\ A User may include a 
Minimum Execution Quantity instruction on a MDO with a Non-Displayed 
instruction.\24\ Proposed paragraph (3) of Rule 11.8(g) would state 
that MDOs may be executed during the Early Trading Session, Pre-Opening 
Session, Regular Session, and Post-Closing Session.\25\ An MDO would 
default to a Displayed instruction unless the User \26\ includes a Non-
Displayed instruction on the order.\27\ Proposed paragraph (4) of Rule 
11.8(g) would also specify that a User may elect for an MDO that is 
displayed on the EDGX Book to include the User's market participant 
identifier (``MPID'') by selecting the Attributable instruction.\28\ 
Otherwise, an MDO with a Displayed instruction will automatically 
default to a Non-Attributable \29\ instruction. This is also consistent 
with the current operation of orders that are to be displayed on the 
EDGX Book.\30\ Under proposed paragraph (5) of Rule 11.8(g), MDOs would 
not be eligible for routing pursuant to Exchange Rule 11.11, Routing to 
Away Trading Centers.\31\
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    \21\ See EDGA Rule 11.8(e)(1).
    \22\ Each of these time-in-force instructions are defined in 
Exchange Rule 11.6(q).
    \23\ The terms Round Lot and Mixed Lot are defined in Exchange 
Rule 11.6(s). However, unlike on EDGA, MDOs may not be entered on 
EDGX as an Odd Lot. See EDGA Rule 11.8(e)(2). The term Odd Lot is 
defined in Exchange Rule 11.6(s).
    \24\ See Exchange Rule 11.6(h) for a description of the Minimum 
Execution Quantity instruction. The Exchange understands that EDGA 
plans to submit a proposed rule filing to allow non-displayed EDGA 
MDOs to also include a Minimum Execution Quantity instruction.
    \25\ The terms Early Trading Session, Pre-Opening Session, 
Regular Session, and Post-Closing Session are defined in Exchange 
Rule 1.5(ii), (s), (hh), and (r), respectively. See also EDGA Rule 
11.8(e)(3).
    \26\ See Exchange Rule 1.5(ee).
    \27\ The terms Displayed and Non-Displayed are defined in 
Exchange Rule 11.6(e). See also EDGA Rule 11.8(e)(4).
    \28\ See Exchange Rule 11.6(a). See also EDGA Rule 11.8(e)(4).
    \29\ See Exchange Rule 11.6(a)(1).
    \30\ See, e.g, Exchange Rule 11.8(b)(4).
    \31\ See EDGA Rule 11.8(e)(5).
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    Proposed paragraph (6) of Rule 11.8(g) would describe the operation 
of MDOs under the Plan to Address Extraordinary Market Volatility 
Pursuant to Rule 608

[[Page 50418]]

of Regulation NMS under the Act (the ``Limit Up-Limit Down Plan'').\32\ 
Pursuant to Exchange Rule 11.10(a)(3), an MDO to buy would be re-priced 
to the Upper Price Band \33\ where the price of the Upper Price Band 
moves below an existing Protected Bid.\34\ An MDO to sell will be re-
priced to the Lower Price Band \35\ where the price of the Lower Price 
Band moves above an existing Protected Offer.\36\ MDOs will only 
execute at their pegged 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. When the 
conditions in (i) or (ii) of the preceding sentence no longer exist, 
MDOs will resume trading against other orders in their Discretionary 
Range and being pegged to the NBBO.
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    \32\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (the ``Limit Up-Limit Down 
Release''). See also EDGA Rule 11.8(e)(6).
    \33\ As defined in the Limit Up-Limit Down Plan.
    \34\ Id.
    \35\ Id.
    \36\ Id.
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    Pursuant to proposed paragraph (7) of Rule 11.8(g), any unexecuted 
portion of an MDO that is resting on the EDGX Book would receive a new 
time stamp each time its pegged price is automatically adjusted in 
response to changes in the NBBO.\37\
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    \37\ See EDGA Rule 11.8(e)(7).
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    Proposed paragraph (8) of Rule 11.8(g) would describe the operation 
of MDOs during a locked or crossed market.\38\ With respect to an MDO 
with either a Displayed instruction or a Non-Displayed instruction, 
when the EDGX Book is crossed by another market, the MDO's pegged price 
will be automatically adjusted to the current NBO (for bids) or the 
current NBB (for offers) with no discretion to the midpoint of the 
NBBO. If an MDO displayed on the Exchange would be a Locking Quotation 
or Crossing Quotation,\39\ the displayed 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 
midpoint of the NBBO.
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    \38\ See EDGA Rule 11.8(e)(8).
    \39\ The terms Locking Quotation or Crossing Quotation are 
defined in Exchange Rule 11.6(g) and (c), respectively.
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    Differences with the EDGA MDO. As highlighted above, the proposed 
MDO would operate identically to EDGA's MDO \40\ in nearly all 
respects, however, as proposed, it will function differently in two 
areas. These differences are based on functionality included as part of 
NYSE Arca's Discretionary Pegged Order and MPL-ALO Order as well as 
IEX's Discretionary Pegged Order \41\ and are designed to provide Users 
with increased control over which price points their order may execute 
upon entry as well as when the order would act as a liquidity provider 
or remover once resting on the EDGX Book. These differences are: (i) 
The proposed EDGX MDO would only execute upon entry against resting 
orders that include a Super Aggressive instruction priced at the MDO's 
pegged price (if the MDO also contained a Displayed instruction) and 
against orders with an NDS instruction priced at the MDO's pegged price 
or within its discretionary range; and (ii) the proposed EDGX MDO would 
not engage in liquidity swapping behavior once resting on the EDGX Book 
as other orders with a Discretionary Range instruction may do, 
including the EDGA MDO. As a preliminary note, once posted to the EDGX 
Book, the proposed MDO would share the same core functionality as 
EDGA's MDO, NYSE Arca's Discretionary Pegged Order and IEX's 
Discretionary Peg Order--executable at the NBB for an order to buy or 
the NBO for an order to sell, with discretion to execute at prices to 
and including the midpoint of the NBBO. Additional similarities with 
NYSE Arca's Discretionary Pegged Order and MPL-ALO Order as well as 
IEX's Discretionary Pegged Order are explained below.
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    \40\ See EDGA Rule 11.8(e).
    \41\ See supra note 6.
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    First, an EDGX MDO would only execute upon entry against resting 
orders that include a Super Aggressive instruction priced at the MDO's 
pegged price if the MDO also contains a Displayed instruction and 
against orders with an NDS instruction priced at the MDO's pegged price 
or within its discretionary range. This would allow the MDO to ensure 
it would act as a liquidity adder even when executing upon entry. 
Orders with either a Super Aggressive instruction or NDS instruction 
are willing to engage in a liquidity swap with an incoming order priced 
at its limit price.\42\ In such case, an incoming MDO to buy (sell) 
would execute against an order to sell (buy) with either a Super 
Aggressive instruction or NDS instruction priced at the NBB (NBO). 
Similarly, an incoming MDO to buy (sell) would execute against an order 
to sell (buy) with an NDS instruction priced within its discretionary 
range. In both cases, the incoming MDO would act as the liquidity adder 
and the resting order with either a Super Aggressive or NDS instruction 
would act as the liquidity remover. In contrast, on EDGA an incoming 
MDO with a Displayed instruction will also execute on entry within its 
discretionary range against an order with a Super Aggressive 
instruction, not just at the price of the NBB (for a sell MDO) or NBO 
(for a buy MDO).
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    \42\ See paragraphs (n)(2) and (7) of Exchange Rule 11.6.
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    The Exchange believes it is reasonable to execute resting orders 
with an NDS instruction within the incoming MDO's discretionary range 
but not execute orders with a Super Aggressive instruction within the 
incoming MDO's discretionary range due to the different purposes of 
each order instruction. Orders including the Super Aggressive 
instruction will route to an away Trading Center that displays an order 
that either locks or crosses the limit price of the Super Aggressive 
order. Pursuant to Rule 11.6(n)(2), orders with a Super Aggressive 
instruction will likewise execute against incoming orders with a Post 
Only instruction and a Displayed instruction that are priced equal to 
its limit price. In general, Users of the Super Aggressive instruction 
tend to use it for best execution purposes because the order 
instruction enables the order to be routed away or executed locally 
when an order is displayed at a price equal to or better than the 
order's limit price. Furthermore, a User submitting an order with a 
Super Aggressive instruction wishes to execute against displayed 
liquidity either at its price or better, and if priced within the 
discretionary range of an incoming MDO order, that MDO would be 
displayed not at the price of the order with a Super Aggressive 
instruction, but rather the NBB/NBO to which it is pegged. For best 
execution, the intention of a User submitting an order with a Super 
Aggressive instruction is to ensure an execution at the best available 
price of a displayed order on another Trading Center or against an 
incoming order that would have been displayed on the EDGX Book but for 
the execution and is willing to engage in a liquidity swap on the 
Exchange to ensure an execution. Conversely, an order with an NDS 
instruction is not routable and engages in a liquidity swap only to 
execute against an incoming order that would lock it. Orders with an 
NDS instruction and Super Aggressive instruction differ on how they 
interact with contra-side orders--orders with a Super Aggressive 
instruction execute against displayed liquidity only while

[[Page 50419]]

an order with an NDS instruction will execute against an order that 
locks it, regardless of whether the contra-side order would have been 
displayed. Therefore, the Exchange believes it is reasonable to execute 
an incoming MDO against a resting order with an NDS instruction priced 
within its discretionary range as the NDS order is aggressively seeking 
to execute against incoming orders at its limit price and is willing to 
act as a liquidity remover to do so.
    The above-proposed behavior is similar to the operation of NYSE 
Arca's MPL-ALO order, which also does not act as a liquidity remover 
upon entry.\43\ Specifically, NYSE Arca's MPL-ALO order will only 
execute upon entry against a resting order that includes a Non-Display 
Remove modifier which, like the NDS and Super Aggressive instructions, 
enables that order to switch from a liquidity adder to a remover. This 
is also similar to NYSE Arca's ALO Order which will also only trade 
with resting contra-side orders that include a Non-Display Remove 
Modifier.\44\
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    \43\ See NYSE Arca Rule 7.31-E(d)(3)(F) and (e)(2)(B)(iv) 
(stating that, unless the resting order includes a Non-Display 
Remove modifier which enable that order to switch from a liquidity 
adder to a remover, an ALO order will only trade with arriving 
contra-side interest).
    \44\ See NYSE Arca Rule 7.31-E(e)(2). The only time an ALO Order 
will execute upon entry is when the resting order includes the Non-
Display Remove Modifier.
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    Second, EDGA's MDO would perform a liquidity swap when executed 
within its Discretionary Range as set forth in EDGA Rule 11.6(d). The 
proposed EDGX MDO would not. However, not performing a liquidity swap 
within the discretionary range is identical to the operation of NYSE 
Arca's Discretionary Pegged Order.\45\ The proposed MDO would also not 
liquidity swap at its pegged price once resting on the EDGX Book. This 
is similar to NYSE Arca's ALO Order.\46\
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    \45\ See NYSE Arca Rule 7.31-E(h)(3) (the rule does not provide 
for a liquidity swap to occur within the order's discretionary 
range).
    \46\ See NYSE Arca Rule 7.31-E(e)(2) (stating that an ALO order 
will not remove liquidity from the NYSE Arca Book, and will be re-
priced to avoid a locked or crossed market). An ALO order will only 
act as a liquidity taker where it crosses an order resting on the 
NYSE Arca Book. Because it is pegged to the NBBO, the proposed MDO 
would never cross an order resting on the EDGX Book.
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    Order Priority. The Exchange also proposes to amend Exchange Rule 
11.9 to describe the execution priority of the proposed MDO when it is 
resting on the EDGX Book. The proposed priority of MDOs on EDGX would 
be identical to the priority of MDOs on EDGA.\47\ In general, where 
orders to buy (sell) are entered into the System at the same price, the 
order clearly established as the first entered into the System at such 
particular price shall have precedence at that price, up to the number 
of shares of stock specified in the order. Under paragraph (a)(2)(A) of 
Rule 11.9, the System currently ranks equally priced trading interest 
resting on the EDGX Book in time priority in the following order: The 
portion of a Limit Order with a Displayed instruction; Limit Orders 
with a Non-Displayed instruction; orders with a Pegged and Non-
Displayed instruction; the Reserve Quantity of Limit Orders; Limit 
Orders executed within their Discretionary Range; and Supplemental Peg 
Orders. For purposes of MDO priority, the Exchange proposes that the 
pegged price of an MDO, whether displayed or non-displayed, be treated 
like a Limit Order that is resting on the EDGX Book. Accordingly, the 
pegged prices of MDOs displayed on the EDGX Book will have the same 
priority as displayed Limit Orders. Likewise, the pegged price of an 
MDO that is not displayed will have the same priority as Limit Orders 
with a Non-Displayed instruction, and therefore will not be treated for 
priority purposes like other orders with a Pegged and Non-Displayed 
instruction. As such, the Exchange proposes to amend paragraph 
(a)(2)(D)(i) of Rule 11.9 to specify that the pegged prices of an MDO 
will be treated as a Limit Order for purposes of order priority under 
Exchange Rule 11.9(a)(2)(A). The Exchange proposes to amend paragraph 
(a)(2)(A)(v) of Rule 11.9 to specify that MDOs executed within their 
Discretionary Range maintain the same priority as Limit Orders executed 
within their Discretionary Range. The above proposed priority sequence 
is consistent with the priority of MDOs on EDGA.\48\
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    \47\ See generally EDGA Rule 11.9(a).
    \48\ See EDGA Rule 11.9(a)(2)(A)(vi) and (a)(2)(C)(i).
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    Paragraph (a)(2)(B) of Rule 11.9 sets forth separate priority for 
orders executed at the midpoint of the NBBO. Where orders to buy (sell) 
are priced at the midpoint of the NBBO, the order clearly established 
as the first shall have precedence at the mid-point of the NBBO, up to 
the number of shares of stock specified in the order. Orders at the 
midpoint of the NBBO resting on the EDGX Book are executed in following 
order: Limit Orders to which the Display-Price Sliding instruction has 
been applied; Limit Orders with a Non-Displayed instruction; Orders 
with a Pegged instruction; MidPoint Peg Orders; the Reserve Quantity of 
Limit Orders; and Limit Orders executed within their Discretionary 
Range. Like proposed above for the general priority of orders, the 
Exchange proposes to amend paragraph (a)(2)(B)(vi) of Rule 11.9 to 
specify that MDOs executed within their Discretionary Range at the 
midpoint of the NBBO shall have the same priority as Limit Orders 
executed within their Discretionary Range.
    Examples. The following examples illustrate the operation of the 
proposed MDO when resting on the EDGX Book. Assume the NBBO is $10.00 
by $10.04. There is a displayed MDO to buy at $10.02 on the EDGX Book 
that is pegged to the NBB at $10.00 with discretion to execute to 
$10.02, the midpoint of the NBBO. A Limit Order to buy at $10.00 with a 
Displayed instruction is then entered. Next, a Limit Order to sell at 
$10.00 with a Non-Displayed instruction is entered. The Limit Order to 
sell would execute against the MDO to buy at $10.00, with the MDO 
exercising no discretion. The displayed MDO has time priority ahead of 
the displayed Limit order to buy. The pegged price of a displayed or 
non-displayed MDO has the same priority as displayed or non-displayed 
Limit Orders, respectively, that are resting on the EDGX Book at the 
same price.
    Assume the same facts as above but that the MDO instead included a 
Non-Displayed instruction. In that case, the Limit Order to sell would 
execute as a liquidity remover against the displayed Limit Order to buy 
at $10.00 because displayed orders always have priority over non-
displayed orders at the same price.
    The following example illustrates the operation of a resting MDO on 
the EDGX Book and an incoming Limit Order that also includes a Post 
Only instruction. Assume again the NBBO is $10.00 by $10.04 resulting 
in a midpoint of $10.02. There is a resting MDO to buy at $10.02 
displayed on the EDGX Book that is pegged to the NBB at $10.00 with 
discretion to execute to $10.02, the midpoint of the NBBO. A Limit 
Order to sell at $10.01 with a Non-Displayed instruction and Post Only 
instruction is then entered. No execution occurs. The MDO to buy 
resting on the EDGX Book would only act as a liquidity provider and the 
incoming order to sell with Post Only instruction will not remove 
liquidity. Therefore, the MDO to buy resting on the EDGX Book would 
have its discretionary range shortened from $10.02 to $10.01, which is 
the price of the incoming Limit Order to sell. The Limit Order with a 
Non-Displayed instruction to sell will be posted to the EDGX Book at 
$10.01, its limit price.
    The MDO's discretionary range is shortened to avoid the following 
priority issue that may result from an

[[Page 50420]]

internally crossed market issue. Assume a Limit Order to sell at $10.02 
with a Non-Displayed instruction is subsequently entered. Absent the 
shortening of the buy MDO's discretionary range to $10.01, the sell 
Limit Order at $10.02 would have executed against the resting buy MDO 
with discretion to $10.02, creating a priority issue for the first sell 
Limit Order that is ranked at $10.01.
    Assume the same facts as the preceding example, but that the first 
sell Limit Order with a Post Only instruction to sell was priced at 
$9.99. In that case, the Limit Order to sell would execute against the 
resting MDO to buy at $10.00 in accordance with Exchange Rule 
11.6(n)(4), receiving one cent of price improvement. The MDO would 
remain the liquidity provider and the Limit Order to sell would act as 
the liquidity remover.
    The following examples illustrate the operation of the proposed MDO 
upon entry. Assume again the NBBO is $10.00 by $10.04 resulting in a 
midpoint of $10.02. There is a non-displayed order with an NDS 
instruction to sell at $10.00 resting on the EDGX Book. An MDO to buy 
with a Displayed instruction is entered that, if posted to the EDGX 
Book, would be pegged to the NBB at $10.00 with discretion to execute 
to $10.02, the midpoint of the NBBO. In such case, the MDO to buy would 
execute against the resting order with an NDS instruction to sell at 
$10.00 because the MDO's pegged price equals the limit price of the 
order with an NDS instruction. The incoming MDO would act as the 
liquidity adder and the order with an NDS instruction would act as the 
liquidity remover. The same result would occur if the order to sell 
resting on the EDGX Book included a Super Aggressive instruction rather 
than an NDS instruction. However, if the order to sell resting on the 
EDGX book did not include either a Super Aggressive instruction or NDS 
instruction, no execution would occur and the MDO order to buy would be 
posted to the EDGX Book at $10.00 with its discretionary range 
shortened from $10.02 to $10.00, which is the price of the resting non-
displayed order to sell.
    Assume the same facts as the preceding example but that the non-
displayed order with an NDS instruction to sell resting on the EDGX 
Book is priced at $10.01 rather than $10.00. The resting order with an 
NDS instruction to sell is priced within the discretionary range of the 
incoming MDO to buy. The MDO to buy would execute against the resting 
order with an NDS instruction to sell at $10.01 because the MDO's 
discretionary range includes a price equal to the limit price of the 
order with an NDS instruction. The incoming MDO would act as the 
liquidity adder and the order with an NDS instruction would act as the 
liquidity remover.
    Assume instead that the non-displayed order to sell resting on the 
EDGX Book did not include an NDS instruction. No execution would occur 
and the order to sell would remain on the EDGX Book. The incoming MDO 
to buy would be posted to the EDGX Book at $10.00 with its 
discretionary range shortened from $10.02 to $10.01, which is the price 
of the resting non-displayed order to sell. Like in an above example, 
the MDO's discretionary range is shortened to avoid the following 
priority issue that may result from an internally crossed market issue. 
Assume a Limit Order to sell at $10.02 with a Non-Displayed instruction 
is subsequently entered. Absent the shortening of the buy MDO's 
discretionary range to $10.01, the sell Limit Order at $10.02 would 
have executed against the resting buy MDO with discretion to $10.02, 
creating a priority issue for the first sell Limit Order that is ranked 
at $10.01.
    Assume instead that the order to sell at $10.01 resting on the EDGX 
Book included a Super Aggressive instruction rather than an NDS 
instruction. No execution would occur because the order with a Super 
Aggressive instruction is priced within the discretionary range of the 
incoming MDO. The order with a Super Aggressive instruction would 
remain on the EDGX Book until it is eligible to be routed away or 
executed. The incoming MDO would be posted to the EDGX Book at $10.00 
with its discretionary range shortened from $10.02 to $10.01, which is 
the price of the resting non-displayed order to sell with a Super 
Aggressive instruction.
Proposed Amendment to Super Aggressive Instruction
    In addition to the adoption of MDOs, the Exchange proposes to amend 
Rule 11.6(n)(2), which defines the Super Aggressive instruction. 
Specifically, the current definition states that when any order with a 
Super Aggressive instruction is locked by an incoming order with a Post 
Only instruction and a Displayed instruction that does not remove 
liquidity pursuant to Rule 11.6(n)(4), the order with a Super 
Aggressive instruction is converted to an executable order and will 
remove liquidity against such incoming order. Consistent with the 
proposed operation of MDOs, the Exchange proposes to add reference to 
MDOs with a Displayed instruction as another order against which a 
resting order with a Super Aggressive instruction will interact, 
converting to an executable order and removing liquidity against such 
order.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \49\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \50\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78f(b).
    \50\ 15 U.S.C. 78f(b)(5).
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    The proposed MDO would remove impediments to and promote just and 
equitable principles of trade because it would provide Users with an 
optional order type that is designed to exercise discretion to execute 
to the midpoint of the NBBO, enhancing order execution opportunities at 
the Exchange that provide price improvement opportunities over the 
NBBO. The proposed rule change would also remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system by potentially increasing liquidity at the NBBO and to midpoint 
of the NBBO on the Exchange, thereby improving execution opportunities 
for market participants at these price points and enhancing the quality 
of the EDGX Book. The Exchange designed the proposed order type to 
include functionality that is included as part of similar order types 
offered by other exchanges to provide Users with increased control over 
which price points their order may execute upon entry as well as when 
the order would act as a liquidity provider or remover once resting on 
the EDGX Book.
    As proposed, MDOs on the Exchange would operate similarly to NYSE 
Arca's Discretionary Pegged Orders and IEX's Discretionary Peg Order, 
except that both of the IEX and NYSE Arca order types include 
``crumbling quote'' functionality and neither order type is able to be 
displayed on the applicable exchange's order book.\51\
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    \51\ See supra note 6.
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    The EDGX proposed MDO also operates identically to EDGA's MDO,\52\ 
except in two scenarios. These differences are: (i) The proposed EDGX

[[Page 50421]]

MDO would only execute upon entry against resting orders that include a 
Super Aggressive instruction priced at the MDO's pegged price if the 
MDO also contains a Displayed instruction and against orders with an 
NDS instruction priced at the MDO's pegged price or within its 
discretionary range; and (ii) the proposed EDGX MDO would not engage in 
liquidity swapping behavior as other orders with a Discretionary Range 
instruction may do, including the EDGA MDO. Ensuring that an EDGX MDO 
will act as a liquidity adder even upon entry promotes just and 
equitable principles of trade because Users of the proposed EDGX MDO 
would have greater control over their orders in exchange for providing 
enhanced execution opportunities at prices more aggressive than the 
midpoint of the NBBO to incoming contra-side orders when the MDO is 
posted to the EDGX Book. The proposed MDO would share the same core 
functionality as EDGA's MDO, NYSE Arca's Discretionary Pegged Order and 
IEX's Discretionary Peg Order--executable at the NBB for an order to 
buy or the NBO for an order to sell, with discretion to execute at 
prices to and including the midpoint of the NBBO.
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    \52\ See EDGA Rule 11.8(e).
---------------------------------------------------------------------------

    The proposed differences with the EDGA MDO are based on NYSE Arca's 
ALO Order, MPL-ALO order and Discretionary Pegged order as well as 
IEX's Discretionary Peg Order and are designed to provide Users with 
additional control over their order upon entry as well as certainty 
that their order would act as a liquidity provider. Specifically, the 
proposed behavior is similar to the operation of NYSE Arca's MPL-ALO 
order which will also not act as a liquidity remover upon entry.\53\ 
NYSE Arca's MPL-ALO order will only execute upon entry against a 
resting order that includes a Non-Display Remove modifier which, like 
the NDS and Super Aggressive instructions, enables that order to switch 
from a liquidity adder to a remover. This is also similar to NYSE 
Arca's ALO Order which will only execute upon entry when the resting 
order includes the Non-Display Remove Modifier.\54\
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    \53\ See NYSE Arca Rule 7.31-E(d)(3)(F) and (e)(2)(B)(iv) 
(stating that, unless the resting order includes a Non-Display 
Remove modifier which enables that order to switch from a liquidity 
adder to a remover, an ALO order will only trade with arriving 
contra-side interest).
    \54\ See NYSE Arca Rule 7.31-E(e)(2).
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    The proposed operation of the EDGX MDO enables it to act as a 
liquidity provider while increasing its opportunities to rest on the 
EDGX Book and seek to execute against incoming orders at prices equal 
to or more aggressive than the midpoint of the NBBO. Therefore, the 
EDGX MDO promotes just and equitable principles of trade by increasing 
the potential price improvement opportunities for incoming orders that 
may execute against a resting MDO within its discretionary range. The 
proposed rule change would facilitate transactions in securities and 
improve trading within the national market system.
    The Exchange believes it is reasonable to execute resting orders 
with an NDS instruction within the incoming MDO's discretionary range 
but not execute orders with a Super Aggressive instruction within the 
incoming MDO's discretionary range due to the different purposes of 
each order instruction. As stated above, Users of the Super Aggressive 
instruction tend to use it for best execution purposes because the 
order instruction enables the order to be routed away or executed 
locally when an order is displayed at a price equal to or better than 
the order's limit price. Conversely, an order with an NDS instruction 
is not routable and only executes against an incoming order that would 
lock it. The User of the NDS instruction is generally agnostic to 
whether the order is displayed on an away Trading Center or priced at 
the NBBO. It simply seeks to execute against an order that is priced at 
its limit price and engages in a liquidity swap to do so, even if the 
contra-side interest contains a Non-Displayed instruction.
    Under the proposal and in accordance with Exchange Rule 
11.9(a)(2)(A), when MDOs execute at their pegged displayed price, they 
would have the same priority as that of displayed Limit Orders. 
Similarly, when MDOs execute at their non-displayed pegged price, they 
would have the same priority as that of non-displayed Limit Orders. 
When MDOs execute within their Discretionary Range in general or at the 
midpoint of the NBBO, the Exchange proposes that they maintain the same 
priority as a Limit Order executed within its Discretionary Range. The 
Exchange believes the proposed priority 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. Lastly, the Exchange 
notes that the proposed priority is identical to the priority for MDOs 
on EDGA.\55\
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    \55\ See EDGA Rule 11.9(a)(2).
---------------------------------------------------------------------------

    The Exchange's proposed modification to the Super Aggressive 
instruction will ensure that the definition of such instruction is 
consistent with the proposed functionality of the MDO order type, as 
described above.
    For the reasons set forth above, the Exchange believes the proposal 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system, and, in general, protects 
investors and the public interest.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. On 
the contrary, the Exchange believes the proposed MDO promotes inter-
market competition because it will enable the Exchange to offer 
functionality similar to that offered by NYSE Arca and IEX.\56\ The 
proposed EDGX MDO will improve competition because it provides enhanced 
execution opportunities at prices equal to or more aggressive than the 
midpoint of the NBBO to incoming contra-side orders, improving the 
overall competiveness of the Exchange. The Exchange also believes the 
proposed rule change will not impact intra-market competition because 
it will be available to all Users. Therefore, the Exchange does not 
believe the proposed rule change will result in any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \56\ See supra note 6.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No comments were solicited or received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \57\ and Rule 19b-
4(f)(6) thereunder.\58\
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    \57\ 15 U.S.C. 78s(b)(3)(A).
    \58\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.

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[[Page 50422]]

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \59\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \60\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing, noting 
that use of MDOs on the Exchange is optional, similar functionality is 
already offered by other market centers, and operative delay waiver 
would allow the Exchange to make the proposed functionality available 
to Exchange Users more promptly. The Commission believes that waiver of 
the 30-day operative delay is consistent with the protection of 
investors and the public interest. Accordingly, the Commission hereby 
waives the operative delay and designates the proposed rule change 
operative upon filing.\61\
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    \59\ 17 CFR 240.19b-4(f)(6).
    \60\ 17 CFR 240.19b-4(f)(6)(iii).
    \61\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2018-041 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-CboeEDGX-2018-041. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeEDGX-2018-041, and should be 
submitted on or before October 26, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
---------------------------------------------------------------------------

    \62\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21680 Filed 10-4-18; 8:45 am]
 BILLING CODE 8011-01-P


