[Federal Register Volume 83, Number 234 (Thursday, December 6, 2018)]
[Notices]
[Pages 62933-62936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26399]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84683; File No. SR-CboeEDGA-2018-019]


Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Eliminate the Liquidity Swap Component of the Discretionary 
Range Instruction

November 29, 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 November 23, 2018, Cboe EDGA Exchange, Inc. (the ``Exchange'' 
or ``EDGA'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and 
II, which Items have been prepared by the Exchange. The Exchange filed 
the proposal as a ``non-controversial'' proposed rule change pursuant 
to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder.\4\ 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)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGA Exchange, Inc. (``EDGA'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to eliminate the liquidity swap component of the 
Discretionary Range instruction in connection with the recent 
introduction of a ``high inverted'' fee model.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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 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 purpose of the proposed rule change is to eliminate the 
liquidity swap component of the Discretionary Range instruction in 
connection with the introduction of a ``high inverted'' fee model, as 
discussed in more detail

[[Page 62934]]

below.\5\ All other functionality offered by the Discretionary Range 
instruction would remain unchanged.
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    \5\ A liquidity swap occurs when a resting order that is posted 
to the EDGA Book becomes the remover rather than the adder of 
liquidity for fee purposes.
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    Discretionary Range is an instruction the User \6\ 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.\7\ Because the 
Discretionary Range instruction indicates a willingness by the entering 
User to trade at prices more aggressive than the order's ranked price, 
orders entered with this instruction also liquidity swap with certain 
incoming orders. Specifically, Rule 11.6(d) provides that a resting 
order with a Discretionary Range instruction would remove liquidity 
against: (1) An incoming Post Only order at its displayed or non-
displayed ranked price that does not remove liquidity on entry pursuant 
to Rule 11.6(n)(4), and (2) an incoming order with a time-in-force 
(``TIF'') other than Immediate-or-Cancel (``IOC'') or Fill-or-Kill 
(``FOK'') that is priced within its discretionary range. All other 
orders follow normal handling for the execution of an incoming order 
and remove liquidity when trading with a resting order with a 
Discretionary Range instruction.\8\
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    \6\ The term ``User'' means any Member or Sponsored Participant 
who is authorized to obtain access to the System pursuant to Rule 
11.3. See Rule 1.5(ee).
    \7\ See Rule 11.6(d). An order with a Discretionary Range 
instruction resting on the EDGA Book will execute at its least 
aggressive price when matched for execution against an incoming 
order that also contains a Discretionary Range instruction, as 
permitted by the terms of both the incoming and resting order. Id.
    \8\ For example, an incoming order that executes at the ranked 
price of the Discretionary Range order, or an IOC or FOK order that 
executes at a price within the discretionary range would execute as 
the liquidity remover. Id.
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    The Exchange proposes that a resting order with a Discretionary 
Range instruction would no longer perform a liquidity swap against any 
incoming orders, such that the incoming order would always act as the 
taker of liquidity, and the resting order with a Discretionary Range 
instruction would act as the maker of liquidity. As incoming Post Only 
orders always remove liquidity on entry in an inverted market where it 
is economically beneficial to remove liquidity,\9\ this change would 
chiefly impact the execution of Discretionary Range orders against 
incoming orders with a TIF other than IOC or FOK priced within the 
discretionary range.
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    \9\ See Rule 11.6(n)(4).
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    EDGA has operated with an ``inverted'' fee schedule whereby orders 
that remove liquidity are provided a rebate and orders that add 
liquidity pay a fee.\10\ On November 1, 2018, the Exchange filed an 
immediately effective change to its fee schedule to introduce a ``high 
inverted'' market model that increased both the rebate provided to 
orders that remove liquidity and the fee paid by orders that add 
liquidity.\11\ With the recent changes to the fee schedule, an order 
that removes liquidity is provided a base rebate of $0.0024 per share, 
and an order that adds liquidity pays a base fee of $0.0030 per 
share.\12\
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    \10\ See Cboe EDGA U.S. Equities Exchange Fee Schedule.
    \11\ See Securities Exchange Act Release No. 84599 (November 15, 
2018), 83 FR 58795 (November 21, 2018) (SR-CboeEDGA-2018-017).
    \12\ Members also have the opportunity to qualify for a lower 
fee or higher rebate based on volume executed on EDGA.
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    Under the current order handling, an order that executes 
immediately on entry, which would ordinarily be paid a rebate of 
$0.0024 per share based on the new high inverted fee structure, could 
instead end up adding liquidity and paying a fee of up to $0.0030 per 
share--i.e., a swing of $0.0054 per share--if the incoming order 
liquidity swaps when trading with a posted order that contains a 
Discretionary Range instruction. For example, assume the national best 
bid and offer is $10.00 x $10.05, and there is an order to buy on the 
EDGA Book priced at $10.00 with discretion to pay up to $10.03. If the 
Exchange were to receive an incoming Day order to sell at $10.02, the 
incoming order would be posted to the EDGA Book and then trade with the 
Discretionary Range order at $10.02 as the adder of liquidity, paying a 
fee of $0.0030 per share instead of receiving the expected rebate of 
$0.0024 per share.
    Although likely to be a rare occurrence, the Exchange believes that 
paying a $0.0030 per share fee in this scenario may be contrary to the 
expectations of Users that enter an order that trades on entry, who may 
instead expect to receive a $0.0024 per share rebate for sending 
marketable order flow to EDGA. The Exchange therefore proposes to 
eliminate the liquidity swap component of the Discretionary Range 
instruction. As proposed, an order entered with a Discretionary Range 
instruction would never perform a liquidity swap with an incoming 
order. Since an order entered with a Discretionary Range instruction 
would not liquidity swap with an incoming order under any 
circumstances, the Exchange proposes to reflect this change by 
providing that any contra-side order that executes against a resting 
order with a Discretionary Range instruction at its displayed or non-
displayed ranked price, or a price in the discretionary range, will 
remove liquidity against the order with a Discretionary Range 
instruction.
    In addition, the Exchange proposes to describe in Rule 11.6(d) how 
the Exchange would handle orders entered with a Discretionary Range 
instruction in the event that it changes its fees such that an incoming 
order with a Post Only instruction does not always remove liquidity on 
entry. As previously discussed, the Exchange is amending the 
Discretionary Range instruction such that orders entered with a 
Discretionary Range instruction would not liquidity swap with incoming 
orders, including orders entered with a Post Only instruction. Instead, 
the Exchange proposes that where an incoming order with a Post Only 
instruction does not remove liquidity on entry pursuant to Rule 
11.6(n)(4) against a resting order with a Discretionary Range 
instruction, the discretionary range of the resting order with a 
Discretionary Range instruction would be shortened to equal the limit 
price of the incoming contra-side order with a Post Only instruction. 
While under an inverted fee schedule incoming orders with a Post Only 
instruction remove liquidity on entry, this language would be relevant 
if the Exchange were to move to a different market model (e.g., maker/
taker). In such an event, the Discretionary Range instruction would 
behave in a manner similar to recently adopted MidPoint Discretionary 
Orders (``MDO'') on its affiliate Cboe EDGX Exchange, Inc. 
(``EDGX'').\13\ Like the proposed handling for EDGA orders entered with 
a Discretionary Range instruction, MDOs on EDGX are not willing to 
perform a liquidity swap, and would instead have their discretionary 
range shortened if an order with a Post Only instruction were to be 
posted within the discretionary range.
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    \13\ See Securities Exchange Act Release No. 84327 (October 1, 
2018), 83 FR 50416 (October 5, 2018) (SR-CboeEDGX-2018-041). The 
Exchange also offers MDOs on EDGA that follow the handling described 
in this filing for orders entered with a Discretionary Range 
instruction. See Rule 11.8(e).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\14\ in general, and 
Section 6(b)(5) of

[[Page 62935]]

the Act,\15\ in particular, in that it is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, to promote just and equitable principles of 
trade, and, in general, to protect investors and the public interest 
and not to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange offers a Discretionary Range instruction that allows 
Users to specify a non-displayed discretionary price in addition to a 
displayed or non-displayed ranked price. As part of this instruction, 
an order entered with a discretionary price would liquidity swap in 
certain scenarios described in Rule 11.6(d), including when trading 
within the order's discretionary range against an incoming order that 
is entered with a TIF other than IOC or FOK. The Exchange believes that 
this result is undesirable under an inverted fee structure since the 
order that is negatively impacted by the swap from a rebate to a fee is 
the incoming order, and not the resting order that has opted into this 
handling by including a Discretionary Range instruction. Furthermore, 
this issue would be exacerbated under the new high inverted fee 
structure since the difference between the base fee for adding 
liquidity and base rebate for removing liquidity is now $0.0054 per 
share. The Exchange therefore believes that eliminating the possibility 
of this liquidity swap is consistent with the public interest and the 
protection of investors.
    With this change no resting orders on EDGA would liquidity swap 
with an incoming order, thereby ensuring that the incoming order would 
be the taker of liquidity, and paid the applicable rebate rather than 
charged an unexpected fee. Although certain other order instructions 
offered by the Exchange (e.g., Super Aggressive and Non-Displayed Swap) 
\16\ contain a liquidity swap component, those order instructions do 
not liquidity swap under an inverted fee structure where a Post Only 
order would always remove liquidity on entry. The Exchange believes 
that amending its order handling, as proposed, to ensure a similar 
result in cases that involve the Discretionary Range instruction would 
promote just and equitable principles of trade.
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    \16\ See Rule 11.6(n)(2), (n)(7).
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    Finally, the Exchange believes that the proposed operation of the 
Discretionary Range instruction where an order with a Post Only 
instruction posts in the discretionary range is consistent with the 
protection of investors and the public interest. While the Exchange 
currently operates under an inverted fee schedule where an incoming 
order with a Post Only instruction would remove liquidity on entry, the 
Exchange believes that it would be appropriate to shorten the 
discretion of a resting order with a Discretionary Range instruction if 
necessary due to an incoming order with a Post Only instruction posting 
at a price within the discretionary range, which would be possible, for 
example, in the event the Exchange were to introduce a maker/taker 
market model. Shortening the order'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 order within its discretionary range but at 
a price that extends beyond the contra-side order with a Post Only 
instruction. As mentioned in the purpose section of this proposed rule 
change, similar behavior is already implemented for MDOs on EDGX.\17\
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    \17\ See note 13 supra.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
designed to eliminate the possibility that a liquidity swap could cause 
an incoming order that was expecting to receive a rebate as a remover 
of liquidity to instead pay a fee. The Exchange believes that the 
proposed handling accords with the expectation of its Users when 
sending order flow to EDGA, which operates under an inverted fee model 
that generally incentivizes marketable order flow that removes 
liquidity on entry. The Exchange therefore believes that the proposed 
rule change would promote a fair and competitive market in securities 
traded on EDGA.

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 \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 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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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \20\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ 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. Waiver 
of the operative delay would allow the Exchange to immediately amend 
its rules to change its handling of orders entered with a Discretionary 
Range instruction so that such orders, when resting, no longer may 
liquidity swap with incoming orders with which they execute. The 
Exchange believes that eliminating this potential for a liquidity swap 
would be more consistent with the expectation of Exchange participants 
who submit orders that trade on entry and, in light of the Exchange's 
inverted fee structure, may expect to receive a rebate for such 
executions instead of incurring a fee due to a liquidity swap. The 
Exchange also believes that waiver of the operative delay will reduce 
the possibility that Exchange participants are inadvertently 
disadvantaged by a recent Exchange fee schedule change introducing 
higher fees and rebates. For these reasons, 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

[[Page 62936]]

designates the proposed rule change operative upon filing.\22\
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
    \22\ 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).
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    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-CboeEDGA-2018-019 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-CboeEDGA-2018-019. 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-CboeEDGA-2018-019, and should be 
submitted on or before December 26, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26399 Filed 12-4-18; 8:45 am]
BILLING CODE 8011-01-P


