[Federal Register Volume 83, Number 209 (Monday, October 29, 2018)]
[Notices]
[Pages 54401-54411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23505]



[[Page 54401]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84472; File No. SR-BX-2018-025]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
of Amendment No. 1 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 1, To Make Permanent the Retail Price Improvement Program 
Pilot, Which Is Set To Expire on December 31, 2018

October 23, 2018.

I. Introduction

    On July 9, 2018, Nasdaq BX, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to make permanent the Exchange's Retail Price Improvement 
Program Pilot. The proposed rule change was published for comment in 
the Federal Register on July 26, 2018.\3\ On August 31, 2018, the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\4\ On October 11, 2018, the Exchange filed Amendment No. 1 to 
the proposed rule change, which replaced and superseded the proposed 
rule change as originally filed.\5\ The Commission has received no 
comments on the proposed rule change. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as modified by 
Amendment No. 1, from interested persons and this order to institute 
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83681 (July 20, 
2018), 83 FR 35516 (``Notice'').
    \4\ See Securities Exchange Act Release No. 84013, 83 FR 45479 
(September 7, 2018). The Commission designated October 24, 2018, as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \5\ Amendment No. 1 is also publicly available on the 
Commission's website at: https://www.sec.gov/comments/sr-bx-2018-025/srbx2018-025-4523638-176032.pdf.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the 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 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 make permanent the Exchange's pilot RPI 
Program,\7\ currently scheduled to expire the earlier of approval of 
the filing to make this rule permanent or December 31, 2018.
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    \7\ Securities Exchange Act Release No. 73702 (November 28, 
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048) (``RPI 
Approval Order'').
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Background
    In November 2014, the Commission approved the RPI Program on a 
pilot basis.\8\ The Program is designed to attract retail order flow to 
the Exchange, and allow such order flow to receive potential price 
improvement. The Program is currently limited to trades occurring at 
prices equal to or greater than $1.00 per share. Under the Program, a 
class of market participant called a Retail Member Organization 
(``RMO'') is eligible to submit certain retail order flow (``Retail 
Orders'') \9\ to the Exchange. BX members (``Members'') are permitted 
to provide potential price improvement for Retail Orders in the form of 
non-displayed interest that is priced more aggressively than the 
Protected National Best Bid or Offer (``Protected NBBO'').\10\
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    \8\ See id.
    \9\ A ``Retail Order'' is defined in BX Rule 4780(a)(2) by 
referencing BX Rule 4702, and BX Rule 4702(b)(6) says it is an order 
type with a non-display order attribute submitted to the Exchange by 
a RMO. A Retail Order must be an agency order, or riskless principal 
order that satisfies the criteria of FINRA Rule 5320.03. The Retail 
Order must reflect trading interest of a natural person with no 
change made to the terms of the underlying order of the natural 
person with respect to price (except in the case of a market order 
that is changed to a marketable limit order) or side of market and 
that does not originate from a trading algorithm or any other 
computerized methodology.
    \10\ The term Protected Quotation is defined in Chapter XII, 
Sec. 1(19) and has the same meaning as is set forth in Regulation 
NMS Rule 600(b)(58). The Protected NBBO is the best-priced protected 
bid and offer. Generally, the Protected NBBO and the national best 
bid and offer (``NBBO'') will be the same. However, a market center 
is not required to route to the NBBO if that market center is 
subject to an exception under Regulation NMS Rule 611(b)(1) or if 
such NBBO is otherwise not available for an automatic execution. In 
such case, the Protected NBBO would be the best-priced protected bid 
or offer to which a market center must route interest pursuant to 
Regulation NMS Rule 611.
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    The Program was approved by the Commission on a pilot basis running 
one-year from the date of implementation.\11\ The Commission approved 
the Program on November 28, 2014.\12\ The Exchange implemented the 
Program on December 1, 2014 and the pilot has since been extended for a 
one-year period twice, as well as for a six-month period, with it now 
scheduled to expire the earlier of approval of the filing to make this 
rule permanent or December 31, 2018.\13\
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    \11\ See RPI Approval Order, supra note 7 at 72053.
    \12\ Id. at 72049.
    \13\ See Securities Exchange Act Release No. 76490 (November 20, 
2015), 80 FR 74165 (November 27, 2015) (SR-BX-2015-073); Securities 
Exchange Act Release No. 79446 (December 1, 2016), 81 FR 88290 
(December 7, 2016) (SR-BX-2016-065); Securities Exchange Act Release 
No. 82192 (December 1, 2017), 82 FR 57809 (December 7, 2017) (SR-BX-
2017-055); and Securities Exchange Act Release No. 83539 (June 28, 
2018), 83 FR 31203 (July 3, 2018) (SR-BX-2018-026).
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    Specifically, BX Rule 4780(h) will be amended to delete that the 
Program is a pilot and that it is scheduled to expire the earlier of 
approval of the filing to make this rule permanent or December 31, 
2018. BX Rule 4780(h) will continue to say that the Program will be 
limited to securities whose Bid Price on the Exchange is greater than 
or equal to $1.00 per share.
    The SEC approved the Program pilot, in part, because it concluded, 
``the Program is reasonably designed to benefit retail investors by 
providing price improvement to retail order flow.'' \14\ The Commission 
also found that ``while the Program would treat retail order flow 
differently from order flow submitted by other market participants, 
such segmentation would not be inconsistent with Section 6(b)(5) of the 
Act, which requires that the rules of an exchange are not designed to 
permit unfair discrimination.'' \15\ As the SEC acknowledged, the 
retail order segmentation was designed to create greater retail order 
flow competition and thereby increase the amount of this flow to 
transparent and well-regulated exchanges. This would help to ensure 
that retail investors benefit from competitive price improvement that

[[Page 54402]]

exchange-based liquidity providers provide.
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    \14\ See RPI Approval Order, supra note 7 at 72051.
    \15\ Id.
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    As discussed below, the Exchange believes that the Program does not 
harm retail investors. In fact, so far it has provided price 
improvement of more than $4 million since inception to retail investors 
that they may not otherwise have received. As a result, the Exchange 
believes that it is therefore appropriate to make the pilot Program 
permanent.
[GRAPHIC] [TIFF OMITTED] TN29OC18.002

Definitions
    The Exchange adopted the following definitions under BX Rule 4780. 
First, the term ``Retail Member Organization'' (or ``RMO'') is defined 
as a Member (or a division thereof) that has been approved by the 
Exchange to submit Retail Orders.
    Second, the term ``Retail Order'' is defined by BX Rule 
4702(b)(6)(A) as an order type with a non-display order attribute 
submitted to the Exchange by a RMO. A Retail Order must be an agency 
Order, or riskless principal Order that satisfies the criteria of FINRA 
Rule 5320.03. The Retail Order must reflect trading interest of a 
natural person with no change made to the terms of the underlying order 
of the natural person with respect to price (except in the case of a 
market order that is changed to a marketable limit order) or side of 
market and that does not originate from a trading algorithm or any 
other computerized methodology.\16\
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    \16\ See supra note 9.
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    The criteria set forth in FINRA Rule 5320.03 adds additional 
precision to the definition of ``Retail Order'' by clarifying that an 
RMO may enter Retail Orders on a riskless principal basis, provided 
that (i) the entry of such riskless principal orders meet the 
requirements of FINRA Rule 5320.03, including that the RMO maintains 
supervisory systems to reconstruct, in a time[hyphen]sequenced manner, 
all Retail Orders that are entered on a riskless principal basis; and 
(ii) the RMO submits a report, contemporaneously with the execution of 
the facilitated order, that identifies the trade as riskless principal.
    The term ``Retail Price Improving Order'' or ``RPI Order'' or 
collectively ``RPI interest'' is defined as an Order Type with a Non- 
Display Order Attribute that is held on the Exchange Book in order to 
provide liquidity at a price at least $0.001 better than the NBBO 
through a special execution process described in Rule 4780. A RPI Order 
may be entered in price increments of $0.001. An RPI Order will be 
posted to the Exchange Book regardless of its price, but an RPI Order 
may execute only against a Retail Order, and only if its price is at 
least $0.001 better than the NBBO.\17\ RPI orders can be priced either 
as an explicitly priced limit order or implicitly priced as relative to 
the NBBO with an offset of at least $0.001.
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    \17\ Exchange systems prevent Retail Orders from interacting 
with RPI Orders if the RPI Order is not priced at least $0.001 
better than the Protected NBBO. The Exchange notes, however, that 
price improvement of $0.001 would be a minimum requirement and 
Members can enter RPI Orders that better the Protected NBBO by more 
than $0.001. Exchange systems accept RPI Orders without a minimum 
price improvement value; however, such interest execute at its floor 
or ceiling price only if such floor or ceiling price is better than 
the Protected NBBO by $0.001 or more.
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    The price of an RPI Order with an offset is determined by a 
Member's entry of the following into the Exchange: (1) RPI buy or sell 
interest; (2) an offset from the Protected NBBO, if any; and (3) a 
ceiling or floor price. RPI Orders submitted with an offset are similar 
to other peg orders available to Members in that the order is tied or 
``pegged'' to a certain price, and would have its price automatically 
set and adjusted upon changes in the Protected NBBO, both upon entry 
and any time thereafter. RPI sell or buy interest typically are entered 
to track the Protected NBBO, that is, RPI Orders typically are 
submitted with an offset. The offset is a predetermined amount by which 
the Member is willing to improve the Protected NBBO, subject to a 
ceiling or floor price. The ceiling or floor price is the amount above 
or below which the Member does not wish to trade. RPI Orders in their 
entirety (the buy or sell interest, the offset, and the ceiling or 
floor) will remain non-displayed. The Exchange also allows Members to 
enter RPI Orders that establish the exact limit price, which is similar 
to a non-displayed limit order currently accepted by the Exchange 
except the Exchange accepts sub-penny limit prices on RPI Orders in 
increments of $0.001. The

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Exchange monitors whether RPI buy or sell interest, adjusted by any 
offset and subject to the ceiling or floor price, is eligible to 
interact with incoming Retail Orders.
    Members and RMOs may enter odd lots, round lots or mixed lots as 
RPI Orders and as Retail Orders respectively. As discussed below, RPI 
Orders are ranked and allocated according to price and time of entry 
into the System consistent with BX Rule 4757 and therefore without 
regard to whether the size entered is an odd lot, round lot or mixed 
lot amount. Similarly, Retail Orders interact with RPI Orders and other 
price-improving orders available on the Exchange (e.g., non-displayed 
liquidity priced more aggressively than the NBBO) \18\ according to the 
Priority and Allocation rules of the Program and without regard to 
whether they are odd lots, round lots or mixed lots. Finally, Retail 
Orders are designated as Type 1 or Type 2 without regard to the size of 
the order.
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    \18\ Other price improving liquidity may include, but is not 
limited to: Booked non-displayed orders with a limit price that is 
more aggressive than the then-current NBBO; midpoint-pegged orders 
(which are by definition non-displayed and priced more aggressively 
than the NBBO); non-displayed orders pegged to the NBBO with an 
aggressive offset, as defined in BX Rule 4780(a)(4) as Other Price 
Improving Contra-Side Interest. Orders that do not constitute other 
price improving liquidity include, but are not limited to: Orders 
with a time-in-force instruction of IOC; displayed orders; limit 
orders priced less aggressively than the NBBO.
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    RPI Orders interact with Retail Orders as follows. Assume a Member 
enters RPI sell interest with an offset of $0.001 and a floor of $10.10 
while the Protected NBO is $10.11. The RPI Order could interact with an 
incoming buy Retail Order at $10.109. If, however, the Protected NBO 
was $10.10, the RPI Order could not interact with the Retail Order 
because the price required to deliver the minimum $0.001 price 
improvement ($10.099) would violate the Member's floor of $10.10. If a 
Member otherwise enters an offset greater than the minimum required 
price improvement and the offset would produce a price that would 
violate the Member's floor, the offset would be applied only to the 
extent that it respects the Member's floor. By way of illustration, 
assume RPI buy interest is entered with an offset of $0.005 and a 
ceiling of $10.112 while the Protected NBBO is at $10.11. The RPI Order 
could interact with an incoming sell Retail Order at $10.112, because 
it would produce the required price improvement without violating the 
Member's ceiling, but it could not interact above the $10.112 ceiling. 
Finally, if a Member enters an RPI Order without an offset (i.e., an 
explicitly priced limit order), the RPI Order will interact with Retail 
Orders at the level of the Member's limit price as long as the minimum 
required price improvement is produced. Accordingly, if RPI sell 
interest is entered with a limit price of $10.098 and no offset while 
the Protected NBBO is $10.11, the RPI Order could interact with the 
Retail Order at $10.098, producing $0.012 of price improvement. The 
System will not cancel RPI interest when it is not eligible to interact 
with incoming Retail Orders; such RPI interest will remain in the 
System and may become eligible again to interact with Retail Orders 
depending on the Protected NBBO. RPI Orders are not accepted during 
halts.
RMO Qualifications and Approval Process
    Under BX Rule 4780(b), any Member may qualify as an RMO if it 
conducts a retail business or routes retail orders on behalf of another 
broker-dealer. For purposes of BX Rule 4780, conducting a retail 
business shall include carrying retail customer accounts on a fully 
disclosed basis. Any Member that wishes to obtain RMO status is 
required to submit: (i) An application form; (ii) supporting 
documentation sufficient to demonstrate the retail nature and 
characteristics of the applicant's order flow \19\ and (iii) an 
attestation, in a form prescribed by the Exchange, that substantially 
all orders submitted by the Member as a Retail Order would meet the 
qualifications for such orders under proposed BX Rule 4780(b). The 
Exchange shall notify the applicant of its decision in writing.
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    \19\ For example, a prospective RMO could be required to provide 
sample marketing literature, website screenshots, other publicly 
disclosed materials describing the retail nature of their order 
flow, and such other documentation and information as the Exchange 
may require to obtain reasonable assurance that the applicant's 
order flow would meet the requirements of the Retail Order 
definition.
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    An RMO is required to have written policies and procedures 
reasonably designed to assure that it will only designate orders as 
Retail Orders if all requirements of a Retail Order are met. Such 
written policies and procedures must require the Member to (i) exercise 
due diligence before entering a Retail Order to assure that entry as a 
Retail Order is in compliance with the requirements of this rule, and 
(ii) monitor whether orders entered as Retail Orders meet the 
applicable requirements. If the RMO represents Retail Orders from 
another broker-dealer customer, the RMO's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order. The RMO must (i) obtain an annual written 
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders 
that entry of such orders as Retail Orders will be in compliance with 
the requirements of this rule, and (ii) monitor whether its broker-
dealer customers' Retail Order flow continues to meet the applicable 
requirements.\20\
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    \20\ The Exchange or another self-regulatory organization on 
behalf of the Exchange will review an RMO's compliance with these 
requirements through an exam based review of the RMO's internal 
controls.
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    If the Exchange disapproves the application, the Exchange provides 
a written notice to the Member. The disapproved applicant could appeal 
the disapproval by the Exchange as provided in proposed BX Rule 
4780(d), and/or reapply for RMO status 90 days after the disapproval 
notice is issued by the Exchange. An RMO also could voluntarily 
withdraw from such status at any time by giving written notice to the 
Exchange.
Failure of RMO To Abide by Retail Order Requirements
    BX Rule 4780(c) addresses an RMO's failure to abide by Retail Order 
requirements. If an RMO designates orders submitted to the Exchange as 
Retail Orders and the Exchange determines, in its sole discretion, that 
those orders fail to meet any of the requirements of Retail Orders, the 
Exchange may disqualify a Member from its status as an RMO. When 
disqualification determinations are made, the Exchange provides a 
written disqualification notice to the Member. A disqualified RMO may 
appeal the disqualification as provided in proposed BX Rule 4780(d) 
and/or reapply for RMO status 90 days after the disqualification notice 
is issued by the Exchange.
Appeal of Disapproval or Disqualification
    BX Rule 4780(d) provides appeal rights to Members. If a Member 
disputes the Exchange's decision to disapprove it as an RMO under BX 
Rule 4780(b) or disqualify it under BX Rule 4780(c), such Member 
(``appellant'') may request, within five business days after notice of 
the decision is issued by the Exchange, that the Retail Price 
Improvement Program Panel (``RPI Panel'') review the decision to 
determine if it was correct.

[[Page 54404]]

    The RPI Panel consists of the Exchange's Chief Regulatory Officer 
(``CRO''), or a designee of the CRO, and two officers of the Exchange 
designated by the Chief Executive Officer of BX. The RPI Panel reviews 
the facts and render a decision within the time frame prescribed by the 
Exchange. The RPI Panel may overturn or modify an action taken by the 
Exchange and all determinations by the RPI Panel constitute final 
action by the Exchange on the matter at issue.
Retail Liquidity Identifier
    Under BX Rule 4780(e), the Exchange disseminates an identifier when 
RPI interest priced at least $0.001 better than the Exchange's 
Protected Bid or Protected Offer for a particular security is available 
in the System (``Retail Liquidity Identifier''). The Retail Liquidity 
Identifier is disseminated through consolidated data streams (i.e., 
pursuant to the Consolidated Tape Association Plan/Consolidated 
Quotation System, or CTA/CQS, for Tape A and Tape B securities, and the 
Nasdaq UTP Plan for Tape C securities) as well as through proprietary 
Exchange data feeds.\21\ The Retail Liquidity Identifier reflects the 
symbol and the side (buy or sell) of the RPI interest, but does not 
include the price or size of the RPI interest. In particular, CQS and 
UTP quoting outputs include a field for codes related to the Retail 
Liquidity Identifier. The codes indicate RPI interest that is priced 
better than the Exchange's Protected Bid or Protected Offer by at least 
the minimum level of price improvement as required by the Program.
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    \21\ The Exchange notes that the Retail Liquidity Identifier for 
Tape A and Tape B securities are disseminated pursuant to the CTA/
CQS Plan. The identifier is also available through the consolidated 
public market data stream for Tape C securities. The processor for 
the Nasdaq UTP quotation stream disseminates the Retail Liquidity 
Identifier and analogous identifiers from other market centers that 
operate programs similar to the RPI Program.
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Retail Order Designations
    Under BX Rule 4780(f), an RMO can designate how a Retail Order 
interacts with available contra-side interest as provided in Rule 4702.
    A Type 1-designated Retail Order will attempt to execute against 
RPI Orders and any other orders on the Exchange Book with a price that 
is (i) equal to or better than the price of the Type-1 Retail Order and 
(ii) at least $0.001 better than the NBBO. A Type-1 Retail Order is not 
routable and will thereafter be cancelled.
    A Type 2-designated Retail Order will first attempt to execute 
against RPI Orders and any other orders on the Exchange Book with a 
price that is (i) equal to or better than the price of the Type-2 
Retail Order and (ii) at least $0.001 better than the NBBO and will 
then attempt to execute against any other order on the Exchange Book 
with a price that is equal to or better than the price of the Type-2 
Retail Order, unless such executions would trade through a Protected 
Quotation. A Type-2 Retail Order may be designated as routable.
Priority and Order Allocation
    Under BX Rule 4780(g), competing RPI Orders in the same security 
are ranked and allocated according to price then time of entry into the 
System. Executions occur in price/time priority in accordance with BX 
Rule 4757. Any remaining unexecuted RPI interest remain available to 
interact with other incoming Retail Orders if such interest is at an 
eligible price. Any remaining unexecuted portion of the Retail Order 
will cancel or execute in accordance with BX Rule 4780(f). The 
following example illustrates this method:

Protected NBBO for security ABC is $10.00--$10.05
Member 1 enters an RPI Order to buy ABC at $10.015 for 500
Member 2 then enters an RPI Order to buy ABC at $10.02 for 500
Member 3 then enters an RPI Order to buy ABC at $10.035 for 500

    An incoming Retail Order to sell 1,000 shares of ABC for $10.00 
executes first against Member 3's bid for 500 at $10.035, because it is 
the best priced bid, then against Member 2's bid for 500 at $10.02, 
because it is the next best priced bid. Member 1 is not filled because 
the entire size of the Retail Order to sell 1,000 is depleted. The 
Retail Order executes against RPI Orders in price/time priority.
    However, assume the same facts above, except that Member 2's RPI 
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to 
sell 1,000 executes first against Member 3's bid for 500 at $10.035, 
because it is the best priced bid, then against Member 2's bid for 100 
at $10.02, because it is the next best priced bid. Member 1 then 
receives an execution for 400 of its bid for 500 at $10.015, at which 
point the entire size of the Retail Order to sell 1,000 is depleted.
    As a final example, assume the same facts as above, except that 
Member 3's order was not an RPI Order to buy ABC at $10.035, but 
rather, a non-displayed order to buy ABC at $10.03. The result would be 
similar to the result immediately above, in that the incoming Retail 
Order to sell 1,000 executes first against Member 3's bid for 500 at 
$10.03, because it is the best priced bid, then against Member 2's bid 
for 100 at $10.02, because it is the next best priced bid. Member 1 
then receives an execution for 400 of its bid for 500 at $10.015, at 
which point the entire size of the Retail Order to sell 1,000 is 
depleted.
    All Regulation NMS securities traded on the Exchange are eligible 
for inclusion in the RPI Program. The Exchange limits the Program to 
trades occurring at prices equal to or greater than $1.00 per share. 
Toward that end, Exchange trade validation systems prevent the 
interaction of RPI buy or sell interest (adjusted by any offset) and 
Retail Orders at a price below $1.00 per share.\22\ For example, if 
there is RPI buy interest tracking the Protected NBB at $0.99 with an 
offset of $0.001 and a ceiling of $1.02, Exchange trade validation 
systems would prevent the execution of the RPI Order at $0.991 with a 
sell Retail Order with a limit of $0.99. However, if the Retail Order 
was Type 2 as defined the Program,\23\ it would be able to interact at 
$0.99 with liquidity outside the Program in the Exchange's order book. 
In addition to facilitating an orderly \24\ and operationally intuitive 
program, the Exchange believes that limiting the Program to trades 
equal to or greater than $1.00 per share enabled it better to focus its 
efforts to monitor price competition and to assess any indications that 
data disseminated under the Program is potentially disadvantaging 
retail orders. As part of that review, the Exchange produced data 
throughout the pilot, which included statistics about participation, 
the frequency and level of price improvement provided by the Program, 
and any effects on the broader market structure.
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    \22\ As discussed above, the price of an RPI is determined by a 
Member's entry of buy or sell interest, an offset (if any) and a 
ceiling or floor price. RPI sell or buy interest typically tracks 
the Protected NBBO.
    \23\ Type 2 Retail Orders are treated as IOC orders that execute 
against displayed and non-displayed liquidity in the Exchange's 
order book where there is no available liquidity in the Program. 
Type 2 Retail Orders can either be designated as eligible for 
routing or as non-routable, as described above.
    \24\ Given the proposed limitation, the Program would have no 
impact on the minimum pricing increment for orders priced less than 
$1.00 and therefore no effect on the potential of markets executing 
those orders to lock or cross. In addition, the non-displayed nature 
of the liquidity in the Program simply has no potential to disrupt 
displayed, protected quotes. In any event, the Program would do 
nothing to change the obligation of exchanges to avoid and reconcile 
locked and crossed markets under NMS Rule 610(d).

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[[Page 54405]]

Rationale for Making the Program Pilot Permanent
    The Exchange established the RPI Program in an attempt to attract 
retail order flow to the Exchange by providing an opportunity price 
improvement to such order flow. The Exchange believes that the Program 
promotes transparent competition for retail order flow by allowing 
Exchange members to submit RPI Orders \25\ to interact with Retail 
Orders. BX also believes that such competition promotes efficiency by 
facilitating the price discovery process and generating additional 
investor interest in trading securities, thereby promoting capital 
formation and retail investment opportunities. The Program will 
continue to be limited to trades occurring at prices equal to or 
greater than $1.00 per share.
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    \25\ A Retail Price Improvement Order is defined in BX Rule 
4780(a)(3) by referencing BX Rule 4702 and BX Rule 4702(b)(5) says 
that it is as an order type with a non-display order attribute that 
is held on the Exchange Book in order to provide liquidity at a 
price at least $0.001 better than the NBBO through a special 
execution process described in Rule 4780.
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    The Exchange believes, in accordance with its filing establishing 
the pilot Program, which BX did ``produce data throughout the pilot, 
which will include statistics about participation, the frequency and 
level of price improvement provided by the Program, and any effects on 
the broader market structure.'' \26\ The Exchange has fulfilled this 
obligation through the reports and assessments it has submitted to the 
Commission since the implementation of the pilot Program.
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    \26\ See Securities Exchange Act Release No. 73410 (October 23, 
2014), 79 FR 64447 at 64450 (SR-BX-2014-048).
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    The SEC stated in the RPI Approval Order that the Program could 
promote competition for retail order flow among execution venues, and 
that this could benefit retail investors by creating additional well-
regulated and transparent price improvement opportunities for 
marketable retail order flow, most of which is currently executed in 
the Over-the-Counter (``OTC'') markets without ever reaching a public 
exchange.\27\ The Exchange believes that the Program does not harm 
retail investors and so far has provided price improvement of more than 
$4 million since inception to retail investors that they may not 
otherwise have received. The data demonstrates that the Program has 
continued to grow over time and the Exchange has not detected any 
negative impact to market quality. The Exchange also has not received 
any complaints or negative feedback concerning the Program.
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    \27\ RPI Approval Order, 79 FR at 72053.
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    As seen in the table below, RMO orders and shares executed have 
continued to rise since the introduction of the Program in December 
2014. RMO executed share volume on BX accounted for 0.05% of total 
consolidated volume in eligible U.S. listed securities in Q4 2017. 
Despite its size relative to total consolidated trading, however, the 
Program has continued to provide some price improvement to RMO orders 
each month with total price improvement during market hours from the 
start of the Program through May 2018 totaling over $4.3 million.
    Retail orders are routed by sophisticated brokers using systems 
that seek the highest fill rates and amounts of price improvement. 
These brokers have many choices of execution venues for retail orders. 
When they choose to route to the Program, they have determined that it 
is the best opportunity for fill rate and price improvement at that 
time.

----------------------------------------------------------------------------------------------------------------
                                                                                RMO shares      Total RMO price
                         Month                            Total RMO orders   executed (market     improvement
                                                           (market hours)         hours)         (market hours)
----------------------------------------------------------------------------------------------------------------
Sep-14.................................................                  0                  0                 $0
Oct-14.................................................                  0                  0                  0
Nov-14.................................................                  0                  0                  0
Dec-14.................................................              4,003            521,587              6,572
Jan-15.................................................             66,903          9,723,791             55,480
Feb-15.................................................             71,204         12,948,664             54,769
Mar-15.................................................             62,216         10,818,042             49,232
Apr-15.................................................             75,558         12,121,577             63,247
May-15.................................................             98,859         16,723,281             81,268
Jun-15.................................................            116,570         20,341,305            100,520
Jul-15.................................................            133,917         22,310,364            111,657
Aug-15.................................................            192,546         30,011,636            194,706
Sep-15.................................................            141,496         23,199,937            110,415
Oct-15.................................................            148,414         25,745,772            128,838
Nov-15.................................................            123,267         20,788,967            120,037
Dec-15.................................................            145,022         24,414,783            140,444
Jan-16.................................................            162,025         30,010,815            181,781
Feb-16.................................................            135,409         27,794,644            173,988
Mar-16.................................................             93,729         17,688,230             88,900
Apr-16.................................................             82,819         15,269,513             78,241
May-16.................................................             70,192         13,336,738             71,145
Jun-16.................................................             76,092         15,356,152             74,035
Jul-16.................................................             65,121         13,532,803             59,305
Aug-16.................................................             78,611         16,412,113             64,231
Sep-16.................................................             84,240         17,368,907             46,792
Oct-16.................................................            146,207         30,827,361             60,624
Nov-16.................................................            103,046         19,744,407             60,391
Dec-16.................................................            168,638         31,003,843             76,025
Jan-17.................................................            140,203         23,474,999             58,887
Feb-17.................................................            139,447         26,643,083             59,372
Mar-17.................................................            161,154         30,595,963             73,250
Apr-17.................................................            126,665         26,587,486             59,141
May-17.................................................            143,927         31,368,371             78,979
Jun-17.................................................            332,266         71,569,426            405,933
Jul-17.................................................            210,309         39,061,892            155,669

[[Page 54406]]

 
Aug-17.................................................            266,762         51,442,492            255,999
Sep-17.................................................            154,846         29,831,646             69,634
Oct-17.................................................            205,399         39,409,251             95,051
Nov-17.................................................            370,064         94,703,209            169,738
Dec-17.................................................            219,528         49,424,240            102,082
Jan-18.................................................            248,419         47,080,453            113,956
Feb-18.................................................            263,576         40,979,066            100,148
Mar-18.................................................            597,460         40,896,277             98,779
Apr-18.................................................          1,095,396         41,067,806             97,015
May-18.................................................          1,031,527         31,843,167             81,199
                                                        --------------------------------------------------------
    Total..............................................          8,353,052      1,193,994,059          4,327,477
----------------------------------------------------------------------------------------------------------------

                                                                                               [GRAPHIC] [TIFF OMITTED] TN29OC18.003
                                                                                               
    The table below shows that between April 2017 and May 2018, roughly 
50% of RMO orders were for 100 shares or less and around 70% of orders 
were for 300 shares or less. Larger orders of 7,500 shares or more 
accounted for approximately 2%, ranging from 0.62% to 3.09%. Although 
large order were a small percentage of total orders, they make up a 
significant portion of total shares ordered, ranging from 21.11% to 
46.22%. Orders of 300 shares or less, which accounted for the vast 
majority of total RMO orders, accounted for only between 4.81% and 
15.38% of total shares ordered.

                                                        Distribution of RMO Orders by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Month                 <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)        >15,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Apr-17............................        49.50        18.53         8.67         9.47         5.69         3.84         2.24          1.38         0.69
May-17............................        46.55        23.79         8.25         8.42         5.26         3.71         2.12          1.29         0.62
Jun-17............................        59.60        13.26         6.62         7.91         4.75         3.48         2.36          1.52         0.51
Jul-17............................        57.30        14.61         7.32         8.50         5.17         3.28         2.00          1.19         0.65
Aug-17............................        56.38        15.19         7.54         8.49         5.23         3.41         1.91          1.22         0.63
Sep-17............................        53.16        16.29         7.69         8.79         5.71         4.05         2.22          1.38         0.70
Oct-17............................        54.28        16.00         7.46         8.65         5.64         3.84         2.15          1.33         0.66
Nov-17............................        47.76        15.30         8.19        10.23         7.38         5.10         2.95          2.04         1.06
Dec-17............................        48.66        15.30         8.27        10.34         6.99         4.82         2.79          1.87         0.98
Jan-18............................        53.60        14.93         7.73         9.20         5.98         4.04         2.28          1.53         0.71
Feb-18............................        58.44        14.58         7.14         8.02         4.93         3.29         1.91          1.14         0.55
Mar-18............................        55.29        17.97         8.63         8.38         5.12         2.64         1.07          0.61         0.28
Apr-18............................        54.52        19.12         9.04         8.31         5.02         2.50         0.87          0.42         0.19
May-18............................        50.44        20.21         9.89         9.10         5.77         2.88         0.96          0.50         0.26
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 54407]]


                                                    Distribution of RMO Shares Ordered by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Month                 <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)        >15,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Apr-17............................         3.04         4.63         4.42         8.78        10.06        12.89        13.89         16.06        26.23
May-17............................         3.28         6.49         4.49         8.34         9.98        13.38        14.28         16.05        23.71
Jun-17............................         2.47         3.78         3.95         8.89        10.15        13.74        17.06         20.07        19.88
Jul-17............................         2.82         4.20         4.36         9.31        10.78        12.94        14.44         16.47        24.67
Aug-17............................         2.80         4.28         4.42         9.21        10.84        13.21        13.55         16.63        25.08
Sep-17............................         2.88         4.16         3.98         8.36        10.50        14.04        14.17         16.78        25.14
Oct-17............................         2.89         4.31         4.09         8.73        11.02        14.04        14.49         17.11        23.32
Nov-17............................         1.80         3.01         3.26         7.48        10.45        13.51        14.27         18.89        27.33
Dec-17............................         2.00         3.17         3.48         8.02        10.45        13.46        14.18         18.35        26.91
Jan-18............................         2.50         3.78         4.01         8.82        11.05        13.94        14.30         18.35        23.26
Feb-18............................         3.25         4.52         4.52         9.34        11.08        13.87        14.53         16.86        22.02
Mar-18............................         5.73         6.96         6.80        12.44        14.90        14.65        11.00         12.34        15.17
Apr-18............................         7.27         8.11         7.84        13.68        16.23        15.46        10.29          9.51        11.61
May-18............................         6.31         7.54         7.50        13.09        16.40        15.66        10.00          9.80        13.70
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Distribution of RMO Shares Executed by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Month                 <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)        >15,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Apr-17............................        11.39        15.32        11.28        16.25        12.77        10.87         9.27          9.25         3.61
May-17............................        10.86        20.10        10.47        13.77        11.37        10.58         8.96          9.44         4.45
Jun-17............................         7.65        10.05         8.48        14.31        11.28        11.85        12.00         18.69         5.68
Jul-17............................        10.07        12.67        10.18        15.57        12.94        11.79         9.97         10.27         6.56
Aug-17............................         9.93        12.98        10.89        17.05        14.16        11.94         9.38          8.23         5.45
Sep-17............................        11.36        13.46        10.12        16.01        13.80        13.07         8.60          8.61         4.97
Oct-17............................        10.83        13.37        10.07        16.40        14.46        12.48         9.47          7.96         4.96
Nov-17............................         7.04        10.64        10.14        19.81        18.19        13.96         9.04          7.10         4.09
Dec-17............................         8.25        11.27        10.37        19.49        17.05        13.33         8.82          7.13         4.28
Jan-18............................         9.93        12.43        10.92        19.37        16.07        12.66         8.49          6.49         3.64
Feb-18............................        12.63        14.31        11.81        19.45        15.07        11.22         6.81          5.55         3.16
Mar-18............................        13.92        15.35        11.92        19.14        14.77        10.05         6.35          5.49         3.00
Apr-18............................        14.81        15.76        11.86        18.35        13.47        10.21         6.75          5.41         3.39
May-18............................        13.65        15.78        12.38        18.77        13.92        10.57         6.25          5.27         3.40
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The table below shows the average and median sizes of RMO removing 
orders.

                      Average and Median RMO Sizes
------------------------------------------------------------------------
                                                      RMO taking order
                                                            size
                       Year                        ---------------------
                                                       Avg       Median
------------------------------------------------------------------------
Apr-17............................................        863        111
May-17............................................        802        180
Jun-17............................................        743         82
Jul-17............................................        739        100
Aug-17............................................        753        100
Sep-17............................................        841        100
Oct-17............................................        793        100
Nov-17............................................      1,103        150
Dec-17............................................      1,044        132
Jan-18............................................        844        100
Feb-18............................................        690        100
Mar-18............................................        512        100
Apr-18............................................        454        100
May-18............................................        517        100
------------------------------------------------------------------------

    The data provided by the Exchange describes a valuable service that 
delivers some price improvement in a transparent and well-regulated 
environment. The Program represents just a fraction of retail orders, 
most of which are executed off-exchange by a wide range of order 
handling services that have considerably more market share and which 
operate pursuant to different rules and regulatory requirements. BX 
found no data or received any customer feedback that indicated any 
negative impact of the Program on overall market quality or for retail 
investors.
    As discussed more fully below, the reports and assessments provided 
by the Exchange to the SEC have covered (i) the economic impact of the 
Program on the entire market; (ii) the economic impact of the Program 
on execution quality; (iii) whether only eligible participants are 
accessing Program liquidity; (iv) whether the Program is attracting 
retail participants; (v) the net benefits of the Program on 
participants; (vi) the overall success in achieving intended benefits; 
and (vii) whether the Program can be improved.
1. Economic Impact of the RPI Program on the Entire Market
    The Exchange sees no way to detect a market-wide impact from a 
Program of this size. The entire size of the Program is smaller than 
the normal day-to-day fluctuations of market share between different 
venues. Any positive or negative impact of this Program is eclipsed by 
much larger forces affecting order flow, execution quality and quote 
competition. For example, during the time that the Program has been in 
effect, off-exchange trading has varied from 33%-40% of consolidated 
volume, with much larger variation in individual stocks. Meanwhile the 
Program averages less than 0.1% of consolidated volume. The combination 
of substantial variation in other market factors and very little 
variation in the Program eliminates the ability of statistical tests to 
indicate causation.
    The Program is intended to attract off-exchange order flow back to 
transparent and well-regulated exchange trading systems. Given current 
market structure, BX believes that the Program does not harm retail 
investors and it so far has provided price improvement of more than $4 
million since inception to retail investors that they may not otherwise 
have received. The Program may also improve overall market quality by 
attracting desirable order flow and liquidity-providers back to the 
vigorous order competition available on-exchange.
    Using correlation tests and visualization the Exchange failed to 
detect a significant relationship between the amount of RMO volume 
traded on BX and measurements of overall market quality. The results of 
correlation tests against 30-second realized spreads show minimal to no 
correlation.

[[Page 54408]]

    Additionally, through time series visualization BX detects no 
significant changes in BX market quality measures during the life of 
the pilot Program. Metrics including quoted spreads, volatility, 
realized spreads, and depth were examined using executions on BX and 
the NBBO weighted by volume executed on BX. Both quoted and realized 
spreads did not show any dramatic changes following the implementation 
of the Program or as it gained traction over time. Consolidated trade-
to-trade volatility appears to have decreased slightly in the middle of 
the Program.
2. Economic Impact of the BX RPI Program on Execution Quality
    To assess the execution quality of the Program, BX focused on 
symbol-day combinations when during market hours: (i) An RMO execution 
occurred on BX, (ii) a non-RMO execution occurred on BX, and (iii) a 
tape-eligible trade occurred on BX. Symbol day combinations are 
aggregated to overall daily statistics by either a simple average or by 
volume weighting by RMO executed volume during market hours.\28\ This 
results in the number and identity of symbols captured in each daily 
average changing from day to day. Using this data, the Exchange 
examined whether the economic outcomes for RMO trades differs from non-
RMO trades and/or all trades.
---------------------------------------------------------------------------

    \28\ Both RMO and non-RMO execution quality values are weighted 
by RMO volume and a very small number of extreme outlier symbol-day 
stats have been removed from the analysis.
---------------------------------------------------------------------------

    When comparing average price improvement for RMO and non-RMO 
executions for a subset of 100 stocks with the largest number of RMO 
shares executed, the price improvement seen in RMO and non-RMO trades 
is comparable over the life of the Program. When volume weighting the 
average price improvement by RMO volume to emphasize those stock/day 
combinations with the highest volume traded in RMO, average price 
improvement on BX for both RMO and non-RMO trades appear generally 
comparable over time, with RMO price improvement generally beating non- 
RMO. Note that this price improvement measure does not take rebates 
into account.
    In the subset of active RMO symbols, RMO volume-weighted effective 
and realized spreads for RMO and all executions, which includes RMO 
executions, are generally comparable throughout the duration of the 
Program.
    Similar to regular, liquidity-taking orders on BX, the Program 
offers inverted pricing where RMO orders receive a rebate (on top of 
the price improvement they receive) when executing against RPI 
liquidity, while there is a fee associated with RPI orders which post 
non-displayed, price-improving liquidity. RPI orders are charged 
$0.0025 per share. Retail Orders currently receive a rebate of $0.0021 
per share when executing against RPI liquidity, a rebate of $0.0000 per 
share when executing against other hidden, price-improvising liquidity, 
and a rebate of $0.0017 per share when executing against other 
displayed liquidity on the BX book.
3. Are Only Eligible Participants Accessing Program Liquidity
    Only RMOs that have been approved by BX can enter RMO orders that 
access the Program liquidity, and the BX trading system does not allow 
non-RMO orders to access RPI providing orders. The BX trading system 
does not allow non-RMO orders to access RPI providing orders. BX Rule 
4780(c) enables BX at its sole discretion to disqualify RMO members 
that submit orders that fail to meet any of the requirements of the 
rule.
4. Is the Program Attracting Retail Participation
    The Program has attracted some retail orders to the Exchange and 
participation in the Program has continued to increase over time. The 
Exchange believes that the Program provided tangible price improvement 
and transparency to retail investors through a competitive pricing 
process.
    Brokers route retail orders to a wide range of different trading 
systems. The Program offers a transparent and well-regulated option 
providing competition and price improvement. BX believes that it has 
achieved its goal of attracting retail order flow to BX and, as stated 
above, it has resulted in a significant price improvement to retail 
investors through a competitive pricing process. The Exchange also has 
not detected any negative impact to market quality or to retail 
investors as the Program has continued to grow over time.

[[Page 54409]]

[GRAPHIC] [TIFF OMITTED] TN29OC18.004

    On average, an RMO execution continues to get more price 
improvement than the minimum $0.001 price improvement required of an 
RPI liquidity-providing order in the Program, and over time the price 
improvement seen on BX in non-RMO orders does not appear to be 
negatively impacted by the introduction of the Program.
5. Net Benefits of the Program on Participants
    From the beginning of 2017 through January 2018, 97.9% of RMO 
shares ordered and 98.5% of RMO shares executed were RMO Type 1 orders, 
while the remainder were RMO Type 2 orders. Type 1 orders had an 
aggregated fill rate of 19.2%, while Type 2 orders had a fill rate of 
4.1% in this timeframe.
    Of the RMO Type 1 executions, 94.9% of shares were executed against 
RPI liquidity and 5.1% against other non-RPI price-improving hidden 
liquidity. Of the RMO Type 2 executions, 23.7% of shares were executed 
against RPI liquidity, 14% against other non-RPI price-improving hidden 
liquidity, and 62.3% against other liquidity on the BX book. None of 
the Type 2 orders entered included routing instructions to allow for 
executions away from BX.
    The Exchange believes that the Program through retail order 
segmentation does create greater retail order flow competition and 
thereby increases the amount of this flow to BX. This helps to ensure 
that retail investors benefit from the price improvement that liquidity 
providers are willing to provide. The Program promotes competition for 
retail order flow by allowing Exchange members to submit RPI Orders to 
interact with Retail Orders. Such competition promotes efficiency by 
facilitating the price discovery process and generating additional 
investor interest in trading securities, thereby promoting capital 
formation.
    The Program also promotes competition for retail order flow among 
execution venues, and this benefits retail investors by creating 
additional price improvement opportunities for marketable retail order 
flow, most of which is currently executed in the OTC markets without 
ever reaching a public exchange. The Exchange believes that it has 
achieved its goal of attracting retail order flow to BX, and has 
resulted in price improvement to retail investors through a competitive 
pricing process. The data also demonstrates that the Program has 
continued to grow over time and the Exchange has not detected any 
negative impact to market quality or to retail investors.
6. Overall Success in Achieving Intended Benefits
    The Program has demonstrated the effectiveness of a transparent, 
on-exchange retail order price improvement functionality, and while 
small relative to total consolidated volume, has achieved its goals of 
attracting retail order flow and providing those orders with price 
improvement totaling tens of thousands of dollars each month.
    The Program provides additional competition to the handling of 
retail orders. The added opportunity for price improvement provides 
pressure on other more established venues to increase the price 
improvement that they provide. By doing this, the Exchange believes 
that the Program may have a greater positive effect than the market 
share would directly indicate.
7. Can the Program Be Improved
    The Program provides a transparent, well-regulated, and competitive 
venue for retail orders to receive price improvement. The size of the 
Program is somewhat limited by the rules that prevent BX from matching 
features offered by non-exchange trading venues. Nonetheless, the 
Exchange believes the Program is worthwhile and it will continue to 
look for ways to further innovate and improve the Program. The Exchange 
believes that making the pilot permanent is appropriate and through 
this filing seeks to make permanent the current operation of the 
Program.

[[Page 54410]]

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\29\ in general, and with 
Section 6(b)(5) of the Act,\30\ in particular, in that 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, and, in general to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f.
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that making the pilot Program permanent is 
consistent with these principles because the Program is reasonably 
designed to attract retail order flow to the exchange environment, 
while helping to ensure that retail investors benefit from the better 
price that liquidity providers are willing to give their orders. During 
the pilot period, BX has provided data and analysis to the Commission, 
and this data and analysis, as well as the further analysis in this 
filing, shows that the Program has operated as intended and is 
consistent with the Act.
    Additionally, the Exchange believes the proposed rule change is 
designed to facilitate transactions in securities and to remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system because the competition promoted by the 
Program facilitates the price discovery process and potentially 
generate additional investor interest in trading securities. Making the 
pilot Program permanent will allow the Exchange to continue to provide 
the Program's benefits to retail investors on a permanent basis and 
maintain the improvements to public price discovery and the broader 
market structure. The data provided by BX to the SEC staff demonstrates 
that the Program provided tangible price improvement and transparency 
to retail investors through a competitive pricing process.
    As described below in BX's statement regarding the burden on 
competition, the Exchange also believes that it is subject to 
significant competitive forces. For all of these reasons, the Exchange 
believes that the proposal is consistent with the Act.

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. BX 
believes that making the Program permanent would continue to enhance 
competition for retail order flow among execution venues and contribute 
to the public price discovery process.
    The Exchange believes that the data supplied to the Commission and 
experience gained over the life of the pilot have demonstrated that the 
Program creates price improvement opportunities for retail orders that 
are equal to what would be provided under OTC internalization 
arrangements, thereby benefiting retail investors and increasing 
competition between execution venues. BX also believes that making the 
Program permanent will promote competition between execution venues 
operating their own retail liquidity programs. Such competition will 
lead to innovation within the market, thereby increasing the quality of 
the national market system.
    Additionally, the Exchange notes that it operates in a highly 
competitive market in which market participants can easily direct their 
orders to competing venues, including off-exchange venues. In such an 
environment, the Exchange must continually review, and consider 
adjusting the services it offers and the requirements, it imposes to 
remain competitive with other U.S. equity exchanges.
    For the reasons described above, BX believes that the proposed rule 
change reflects this competitive environment.

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

    No written comments were either solicited or received.

III. Proceedings To Determine Whether To Approve or Disapprove SR-BX-
2018-025, as Modified by Amendment No.1, and Grounds for Disapproval 
Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \31\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\32\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Sections 
6(b)(5) \33\ and 6(b)(8) \34\ of the Act. Section 6(b)(5) of the Act 
requires that the rules of a national securities exchange be designed, 
among other things, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. Section 
6(b)(8) of the Act requires that the rules of a national securities 
exchange not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \32\ Id.
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In Amendment No. 1, the Exchange provides an analysis of what it 
considers to be the economic benefits for retail investors and the 
marketplace flowing from operation of the Program. With regard to the 
effect of the Program on the broader market, the Exchange states that 
it has not detected any negative impact to market quality, that it 
``sees no way to detect a market-wide impact'' from the Program given 
the Program's size, and that ``substantial variation in other market 
factors and very little variation in the Program eliminates [sic] the 
ability of statistical tests to indicate causation.'' \35\
---------------------------------------------------------------------------

    \35\ See supra Secton II.A.1.1, Economic Impact of the RPI 
Program on the Entire Market.
---------------------------------------------------------------------------

    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the [SRO] 
that proposed the rule change.'' \36\ The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative Commission 
finding,\37\ and any failure of an SRO to provide this information may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that

[[Page 54411]]

a proposed rule change is consistent with the Act and the applicable 
rules and regulations.\38\ Moreover, ``unquestioning reliance'' on an 
SRO's representations in a proposed rule change would not be sufficient 
to justify Commission approval of a proposed rule change.\39\
---------------------------------------------------------------------------

    \36\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \37\ See id.
    \38\ See id.
    \39\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
---------------------------------------------------------------------------

    The Commission believes that it should seek public comment on 
Amendment No. 1. The Commission questions whether the information and 
analysis provided by the Exchange in Amendment No. 1 support the 
Exchange's conclusions that the Program ``has demonstrated the 
effectiveness of a transparent, on-exchange retail order price 
improvement functionality, and while small relative to total 
consolidated volume, has achieved its goals of attracting retail order 
flow and providing those orders with price improvement totaling tens of 
thousands of dollars each month.'' The Commission also questions 
whether the Exchange has provided sufficient information and analysis 
concerning the Program's impact on the broader market; for example 
whether the Program has not had a material adverse impact on market 
quality. As noted above, the Exchange states that it has not detected 
any negative impact to market quality, and suggests that the size of 
the Program prevents the Exchange from providing additional information 
to support the view that the Program has not had a material adverse 
impact on market quality. The Commission believes it is appropriate to 
institute proceedings to allow for public comment on Amendment No. 1, 
sufficient consideration and comment on the issues raised herein, any 
potential response to comments or supplemental information provided by 
the Exchange, and any additional independent analysis by the 
Commission. The Commission believes that these issues raise questions 
as to whether the Exchange has met its burden to demonstrate, based on 
the data and analysis provided, that permanent approval of the Program 
is consistent with the Act, and specifically, with its requirements 
that the Program be designed to perfect the mechanism of a free and 
open market and the national market system, protect investors and the 
public interest, and not be unfairly discriminatory; or not impose an 
unnecessary or inappropriate burden on competition.\40\
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    \40\ See 15 U.S.C. 78f(b)(4), (5), and (8).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Exchange Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\41\
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    \41\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 19, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 3, 2018.
    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-BX-2018-025 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 Numbers SR-BX-2018-025. 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 these filings 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-BX-2018-025 and should be submitted on 
or before November 19, 2018. Rebuttal comments should be submitted by 
December 3, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23505 Filed 10-26-18; 8:45 am]
 BILLING CODE 8011-01-P


