[Federal Register Volume 84, Number 66 (Friday, April 5, 2019)]
[Notices]
[Pages 13729-13734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06720]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85482; File No. SR-CboeEDGX-2019-012]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing of a Proposed Rule Change To Introduce Retail Priority

April 2, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 18, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to introduce order book priority for equity orders 
submitted on behalf of retail investors. The text of the proposed rule 
change is attached as Exhibit 5 [sic].
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), 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 introduce order book 
priority for equity orders submitted on behalf of retail investors. 
Forty three million U.S. households hold a retirement or brokerage 
account,\3\ and these investors are increasingly turning to the 
equities markets to fund important life goals. It is therefore critical 
that our markets are sensitive to the needs of the investing public. 
The Exchange continuously strives to innovate and improve market 
structure in ways that facilitate ordinary investors achieving their 
investment goals. The proposed introduction of retail priority is 
designed with this objective in mind. The Exchange believes that 
introducing retail priority may provide retail investors with better 
execution quality and better position the Exchange as the ``home'' for 
retail limit orders. This, in turn, will further allow retail liquidity 
to contribute to overall price formation and attract more market 
participants to the Exchange, creating a richer and more diverse 
ecosystem with deeper liquidity. Retail priority would therefore be 
consistent with the goals of the Commission to encourage markets that 
are structured to benefit ordinary investors,\4\ while facilitating 
order interaction and price discovery to the benefit of all market 
participants.
---------------------------------------------------------------------------

    \3\ See The Evolving Market for Retail Investment Services and 
Forward-Looking Regulation--Adding Clarity and Investor Protection 
while Ensuring Access and Choice, Chairman Jay Clayton, Commission 
(May 2, 2018), available at https://www.sec.gov/news/speech/speech-clayton-2018-05-02.
    \4\ See e.g., U.S. Securities and Exchange Commission, Strategic 
Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf (``Commission 
Strategic Plan'').
---------------------------------------------------------------------------

Background
    As defined in EDGX Rule 11.21, a ``Retail Order'' is an agency or 
riskless principal order that meets the criteria of FINRA Rule 5320.03 
\5\ that originates from a natural person and is submitted to the 
Exchange by a Retail Member Organization, provided that no change is 
made to the terms of the order with respect to price or side of market 
and the order does not originate from a trading algorithm or any other 
computerized methodology.\6\ A ``Retail Member Organization'' or 
``RMO'' is a Member (or a division thereof) that has been approved by 
the Exchange under EDGX Rule 11.21 to submit Retail Orders. Pursuant to 
EDGX Rule 11.21(b), which describes the qualification and application 
process for becoming a Retail Member Organization, any member may 
qualify as a Retail Member Organization if it conducts a retail 
business or routes retail orders on behalf of another broker-dealer.
---------------------------------------------------------------------------

    \5\ FINRA Rule 5320.03 clarifies 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.
    \6\ Retail Member Organizations will only be able to designate 
their orders as Retail Orders on either an order-by-order basis 
using FIX ports or by designating certain of their FIX ports at the 
Exchange as ``Retail Order Ports.'' Unless otherwise instructed by 
the Retail Member Organization, a Retail Order will be identified as 
Retail when routed to an away Trading Center. See EDGX Rule 
11.21(d).
---------------------------------------------------------------------------

    Today, the Exchange operates based on a price/display/time priority 
execution algorithm that is similar to those employed by most other 
U.S. equities exchanges.\7\ As such, the first Displayed \8\ order 
resting on the EDGX Book \9\ at a particular price has priority over 
the next order and so on based on the time of order entry. Non-

[[Page 13730]]

Displayed \10\ orders at that price are further categorized into a 
number of priority bands, with orders within each priority band 
prioritized again based on the time of order entry, as provided in EDGX 
Rule 11.9. The generally applicable allocation bands for orders 
executed on the Exchange are described in EDGX Rule 11.9(a)(2)(A), and 
similar allocation bands applicable to orders executed at the midpoint 
of the NBBO are described in EDGX Rule 11.9(a)(2)(B).\11\ The price 
time allocation model has provided significant benefits to the equities 
markets as it encourages increased efficiency by rewarding market 
participants that are the first to provide liquidity at a particular 
price. At the same time, because this allocation methodology 
preferences speed, retail investors may have a more limited ability to 
secure an execution for their non-marketable orders under this model. 
The Exchange believes that retail priority would improve trading 
outcomes for Retail Orders and could perhaps encourage even more retail 
order flow to be entered into the displayed market.
---------------------------------------------------------------------------

    \7\ See EDGX Rule 11.12.
    \8\ ``Displayed'' is an instruction the User may attach to an 
order stating that the order is to be displayed by the System on the 
EDGX Book. See EDGX Rule 11.6(e)(1).
    \9\ ``EDGX Book'' means the System's electronic file of orders. 
See EDGX Rule 1.5(d)
    \10\ ``Non-Displayed'' is an instruction the User may attach to 
an order stating that the order is not to be displayed by the System 
on the EDGX Book. See EDGX Rule 11.6(e)(2).
    \11\ In addition, EDGX Rule 11.9(a)(2)(C) describes the sequence 
in which orders are timestamped when re-ranked by the System upon 
clearance of a locking quotation.
---------------------------------------------------------------------------

Retail Priority Proposal
    The Exchange proposes to introduce retail priority in order to 
ensure that non-marketable orders submitted on behalf of retail 
investors can more readily compete for execution with orders entered by 
sophisticated market participants that may be better equipped to 
optimize their place in the intermarket queue. Retail priority would be 
in place during all trading sessions, and would also be available to 
orders entered for participation in the Exchange's opening process and 
the re-opening process following a halt.
    As proposed, the portion of a Retail Order with a Displayed 
instruction would be given allocation priority ahead of all other 
available interest on the EDGX Book. This would be true of both orders 
executed pursuant to the regular priority bands described in EDGX Rule 
11.9(a)(2)(A), and orders priced at the midpoint of the NBBO pursuant 
to EDGX Rule 11.9(a)(2)(B) where Retail Orders subject to Display-Price 
Sliding \12\ would have priority ahead of limit orders entered with 
such an instruction as well as any other orders resting at the midpoint 
of the NBBO.\13\ In addition, since Reserve Orders contain a Displayed 
instruction but include both Displayed and Non-Displayed shares, the 
Reserve Quantity \14\ of Retail Orders would be given priority ahead of 
the Reserve Quantity of other limit orders on the EDGX Book.
---------------------------------------------------------------------------

    \12\ Display-Price Sliding is an order instruction provided for 
compliance with Rule 610(d) of Regulation NMS. See EDGX Rule 
11.6(l)(B).
    \13\ The midpoint of the NBBO is a non-displayed price, and 
therefore orders entered with Display-Price Sliding, which are 
willing to be displayed at the applicable locking or crossing price 
are given priority pursuant to current EDGX Rule 11.9(a)(2)(B).
    \14\ ``Reserve Quantity'' is the portion of an order that 
includes a Non-Displayed instruction in which a portion of that 
order is also displayed on the EDGX Book. See EDGX Rule 11.6(m).
---------------------------------------------------------------------------

    Retail Orders that are not willing to be displayed, or are only 
willing to be displayed at a less aggressive price than the execution 
price, would not receive any special priority. For example, a Retail 
Order that is entered as a MidPoint Peg Order,\15\ which by definition 
is Non-Displayed, would be prioritized along with all other MidPoint 
Peg Orders notwithstanding the fact that it is a Retail Order. 
Similarly, a MidPoint Discretionary Order (``MDO'') \16\ executed 
within its Discretionary Range would receive the same priority as other 
orders entered with a Discretionary Range instruction, regardless of 
whether the MDO is displayed at its pegged price.
---------------------------------------------------------------------------

    \15\ A ``MidpPoint Peg Order'' is a non-displayed Market Order 
or Limit Order with an instruction to execute at the midpoint of the 
NBBO, or, alternatively, pegged to the less aggressive of the 
midpoint of the NBBO or one minimum price variation inside the same 
side of the NBBO as the order. See EDGX Rule 11.8(d).
    \16\ A ``MidPoint Discretionary Order'' is a Limit Order that is 
executable at the NBB for an order to buy or the NBO for an order to 
sell while resting on the EDGX Book, with discretion to execute at 
prices to and including the midpoint of the NBBO. See EDGX Rule 
11.8(g).
---------------------------------------------------------------------------

    The following examples illustrate the proposed implementation of 
retail priority: \17\
---------------------------------------------------------------------------

    \17\ In each example, orders are shown in the order in which 
they are entered.
---------------------------------------------------------------------------

    Example 1: Displayed Retail Order has Priority at a Given Price.

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.00--Displayed, Non-Retail Order
Order 2: Buy 100 shares @ $10.00--Displayed, Retail Order
Order 3: Sell 100 shares @ $10.00

    A Retail Order entered with a Displayed instruction would have 
priority over Non-Retail Orders at the same price. As a result, Order 3 
would trade with Order 2 for 100 shares @ $10.00, securing a timely 
execution for the retail investor.
    Example 2: Better Priced Non-Retail Order has Priority.

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.00--Retail Order
Order 2: Buy 100 shares @ $10.01--Non-Retail Order
Order 3: Sell 100 shares @ $10.00

    Allocations would continue to be prioritized based on price. 
Although Retail Orders entered with a Displayed instruction would have 
priority over Non-Retail Orders at the same price, they would not have 
priority over Non-Retail Orders at a better price. As a result, Order 3 
would trade with the better priced Order 2 for 100 shares @$10.01.
    Example 3: No Retail Priority for Non-Displayed Orders.

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.01--Non-Displayed, Non-Retail Order
Order 2: Buy 100 shares @ $10.01--Non-Displayed, Retail Order
Order 3: Sell 100 shares @ $10.00

    A Retail Order entered with a Non-Displayed instruction is not 
eligible for retail priority. As a result, Order 3 trades with Order 1 
for 100 shares @ $10.01 based on time priority. Retail Orders would 
need to be submitted with a Displayed or Reserve instruction to qualify 
for the benefits of retail priority, which should encourage displayed 
retail liquidity.
    Example 4: No Retail Priority in Discretionary Range.

NBBO: $10.00 x $10.10
Order 1: Buy 100 shares @ $10.00 + $0.03 Discretion--Non-Retail Order
Order 2: Buy 100 shares @ $10.00 + $0.03 Discretion--Retail Order
Order 3: Sell 100 shares @ $10.02

    Retail Orders would only have priority if willing to be displayed 
at the execution price. Although orders entered with a Discretionary 
Range instruction may be displayed at their ranked price, the execution 
would occur at a non-displayed price within the Discretionary Range. As 
a result, Order 3 trades with Order 1 for 100 shares @$10.02 based on 
time priority.\18\
---------------------------------------------------------------------------

    \18\ If Order 3 was to sell 100 shares @ $10.00 then retail 
priority would be observed at the displayed price and Order 3 would 
trade with Order 2 for 100 shares @ $10.00.
---------------------------------------------------------------------------

    Example 5: Retail Reserve Order has Displayed and Non-Displayed 
Priority.

NBBO: $10.00 x $10.10
Order 1: Buy 500 @ $10.00--Non-Retail Reserve Order, 100 shares 
displayed
Order 2: Buy 500 @ $10.00--Retail Reserve Order, 100 shares displayed
Order 3: Sell 300 @ $10.00


[[Page 13731]]


    A Retail Order entered as a Reserve Order would have retail 
priority for both displayed and non-displayed size. However, any 
Reserve Quantity would be executed after other orders with a higher 
priority, including the displayed size available from Non-Retail 
Orders. As a result, Order 3 would trade 100 shares @ $10.00 with Order 
2 based on retail priority, then would trade 100 shares @ $10.00 with 
Order 1. After exhausting the available displayed size, Order 3 would 
trade the remaining 100 shares @ $10.00 with Order 2 based on retail 
priority.
    Example 6: Display-Price Sliding Retail Orders are Eligible for 
Priority at Midpoint.

NBBO: $10.00 x $10.01
EDGX BBO: $10.00 x $10.02
Order 1: Buy 100 shares @ $10.01--Book Only, Display-Price Sliding, 
Non-Retail Order
Order 2: Buy 100 shares @ $10.01--Book Only, Display-Price Sliding, 
Retail Order
Order 3: Sell 100 shares @ $10.01--Post Only
Order 4: Sell 100 shares @ $10.00

    Due to the Display-Price Sliding instruction, both Order 1 and 
Order 2 are originally ranked at $10.01 and displayed at $10.00 to 
avoid locking the National Best Offer at $10.01.\19\ Then, because of 
the Post Only instruction, Order 3 posts and displays on the EDGX Book 
at $10.01. Since there is displayed interest now resting on the same 
side of the order book, Order 4 is eligible for execution on entry at 
the midpoint price of $10.005--i.e., one-half minimum price variation 
better than Order 3.\20\ At the midpoint of the NBBO, a Retail Order 
subject to Display-Price Sliding that is willing but unable to display 
at or better than the execution price would have priority over other 
orders. As a result, Order 4 would trade with Order 2 for 100 shares @ 
$10.005, securing a timely execution for the retail investor.
---------------------------------------------------------------------------

    \19\ An order with a Display-Price Sliding instruction that 
would be a locking quotation on entry is instead ranked at the 
locking price and displayed at a price that is one minimum price 
variation less aggressive than the locking price. See EDGX Rule 
11.6(l)(B).
    \20\ See EDGX Rule 11.6(l)(1)(B)(v); EDGX Rule 11.10(a)(4)(D).
---------------------------------------------------------------------------

Retail Attribution
    A Retail Member Organization on EDGX has the option of designating 
Retail Orders to be identified as such on the EDGX Book Feed,\21\ which 
may increase potential execution opportunities for that order. Today, 
pursuant to EDGX Rule 11.21(f), this designation may be made on either 
an order-by-order or port-by-port basis,\22\ thereby giving members 
flexibility in how they would like their Retail Orders attributed on 
the Exchange. To support the introduction of retail priority, the 
Exchange proposes to instead provide that Retail Orders will always be 
designated as such on the EDGX Book Feed.\23\ Although Retail Member 
Organizations have the choice today to determine which Retail Orders 
would be marked as such on market data, the Exchange believes that it 
is important to ensure that orders given retail priority would be 
considered attributable. Designating Retail Orders on the EDGX Book 
Feed will increase transparency by informing market participants when 
there is retail investor interest available to trade on the Exchange, 
thereby allowing market participants to make informed routing 
decisions, including the decision to route contra-side interest to 
trade with such Retail Orders. Although the Exchange would remove the 
optionality previously available under EDGX Rule 11.21(f), based on the 
Exchange's experience with attribution, this approach has the potential 
to increase execution opportunities for Retail Orders (and other non-
marketable orders) by encouraging additional order flow to be routed to 
the Exchange to trade with resting Retail Orders.\24\
---------------------------------------------------------------------------

    \21\ See EDGX Rule 13.8.
    \22\ A Retail Member Organization that instructs the Exchange to 
identify all its Retail Orders as Retail on a Retail Order Port is 
able to override such setting and designate any individual Retail 
Order from that port as Attributable or as Non-Attributable, as set 
forth in Rule 11.6(a). See EDGX Rule 11.21(f).
    \23\ The retail indicator on the EDGX Book Feed would indicate 
that the order is a Retail Order and would not provide the market 
participant identifier (``MPID'') of the entering firm. Members may 
separately include an Attributable instruction on their orders 
pursuant to Rule 11.6(a) if they would also like MPID attribution.
    \24\ Prior to the original introduction of retail attribution, 
the Exchange conducted a study that found that Retail Orders 
received an 18% higher execution rate when members used Attributable 
Orders to include their MPID in the published quote on the EDGX Book 
Feed. See Securities Exchange Act Release No. 72016 (April 24, 
2014), 79 FR 24463 (April 30, 2014) (SR-EDGX-2014-13).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\25\ in general, and 
Section 6(b)(5) of the Act,\26\ 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.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has consistently emphasized the need to ensure that 
the U.S. capital markets are structured with the interests of retail 
investors in mind, and recently highlighted its focus on the ``long-
term interest of Main Street Investors'' as the agency's number one 
strategic goal for fiscal years 2018 to 2022.\27\ The Exchange believes 
that retail priority is consistent with the goals of the Commission to 
ensure that the equities markets continue to serve the needs of the 
investing public. Specifically, introducing retail priority would 
protect investors and the public interest by giving retail investors 
the tools needed to compete for executions on non-marketable order flow 
submitted to a national securities exchange. The Exchange is committed 
to innovation that improves the quality of the equities markets, and 
believes that retail priority may increase the attractiveness of the 
Exchange for the execution of Retail Orders submitted on behalf of the 
millions of ordinary investors that rely on these markets for their 
investment needs.
---------------------------------------------------------------------------

    \27\ See Commission Strategic Plan, supra note 4.
---------------------------------------------------------------------------

    Although the Commission has approved other allocation methodologies 
for equities trading,\28\ most equities exchanges, including EDGX, 
continue to determine priority based on a price/display/time allocation 
model today. This has contributed to deep and liquid markets for equity 
securities as liquidity providers compete to be the first to establish 
a particular price. At the same time, ordinary investors may not be 
able to compete with market makers and other automated liquidity 
providers to be the first to set a new price. Importantly, retail 
investors, in contrast to their professional counterparts, tend to have 
longer investment time horizons and are not in the business of 
optimizing queue placement under a time based allocation model. Thus, 
in order to facilitate the needs of these ordinary investors, the 
Exchange believes that an alternative approach is needed.
---------------------------------------------------------------------------

    \28\ Nasdaq PSX, for example, operates with a price setter pro 
rata model that rewards liquidity providers that set the best price 
and then rewards other market participants that enter larger sized 
orders. See Securities Exchange Act Release No. 72250 (May 23, 
2014), 79 FR 31147 (May 30, 2014) (SR-Phlx-2014-24).
---------------------------------------------------------------------------

    The proposed introduction of retail priority is designed, first and 
foremost, to benefit retail investors by increasing both the likelihood 
and speed with which their non-marketable orders are executed. Unlike 
marketable retail order flow that is routinely executed in full on

[[Page 13732]]

entry at the national best bid or offer or better, non-marketable 
retail order flow has to compete for execution with orders entered by 
sophisticated market participants that may be quicker to establish a 
new price. As shown in the chart below,\29\ the Exchange has found that 
in 2018, of volume executed from retail limit orders, 28.3% joined the 
national best bid or offer (``NBBO'') on entry, 17.8% were priced 
better than the inside, and 49.4% were priced worse than the inside.
---------------------------------------------------------------------------

    \29\ Based on Retail Orders entered by members that have 
completed a retail attestation.
[GRAPHIC] [TIFF OMITTED] TN05AP19.001

    Although potentially beneficial for all Retail Orders that do not 
trade immediately on entry, the Exchange believes that retail priority 
would be particularly beneficial to Retail Orders that join the NBBO, 
as there would often already be a queue at this price. Introducing 
retail priority would thus give retail investors the ability to compete 
for an execution for these orders, and may therefore improve trading 
outcomes. As such, the Exchange believes that the proposed rule change 
is consistent with the goals of the Exchange, and of the Commission, to 
ensure that market structure evolves in ways that protect ordinary 
investors that participate in the capital markets. Furthermore, since 
retail priority is designed to improve trading outcomes for ordinary 
investors, the Exchange also believes that it may encourage retail 
brokers to route additional non-marketable retail order flow to the 
EDGX Book, which may broaden execution opportunities for other market 
participants. If successful in attracting retail order flow to the 
Exchange, the proposed rule change would benefit market participants by 
increasing the diversity of order flow with which other they can 
interact on a national securities exchange, thereby increasing order 
interaction and contributing to price formation.
    Giving queue priority to ordinary investors is not a novel concept 
in the securities markets. In fact, customer priority has a long 
tradition in the options market where orders entered on behalf of non-
broker dealer public customers have historically been afforded priority 
over orders submitted by registered broker dealers. Today, most options 
exchanges, including the Exchange's equity options platform (``EDGX 
Options''),\30\ employ a customer priority execution algorithm where 
orders submitted by a subset of public customers with more limited 
trading activity (i.e., ``Priority Customers'') \31\ are provided order 
book priority ahead of orders submitted by broker-dealers or other 
market professionals at the same price. This allocation model, which 
was first introduced by the International Securities Exchange LLC 
(``ISE'') in its current retail focused form a decade ago,\32\ ensures 
that orders from Priority Customers are executed ahead of similarly 
priced interest from sophisticated market participants. The Exchange 
believes that the time has come to introduce a similar concept for the 
equities market in order to facilitate the needs of retail investors 
that increasingly rely on these markets.
---------------------------------------------------------------------------

    \30\ See EDGX Rule 21.8(d)(1).
    \31\ The term ``Priority Customer'' refers to any person or 
entity that is not a broker or dealer in securities and does not 
otherwise qualify as a ``Professional'' by virtue of placing more 
than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). See e.g., EDGX 
Rules 16.1(a)(46),(47).
    \32\ See Securities Exchange Act Release No. 59287 (January 23, 
2009), 74 FR 5694 (January 30, 2009) (SR-ISE-2006-26).
---------------------------------------------------------------------------

    The Commission has approved other equities proposals to introduce 
meaningful market structure benefits for retail investors in recent 
years. For example, in 2012, the Commission approved proposals filed by 
the New York Stock Exchange LLC (``NYSE'') and its affiliate NYSE Amex 
LLC (``Amex'') to introduce retail price improvement programs.\33\ 
Those programs were designed to provide price improvement opportunities 
for retail investors on a national securities exchange by allowing 
liquidity providers to give sub-penny price improvement to their orders 
pursuant to an exemption granted from Rule 612 of Regulation NMS. 
Similar programs now exist on a number of exchanges, including the 
Exchange's affiliate, Cboe BYX Exchange, Inc.

[[Page 13733]]

(``BYX''),\34\ and have provided millions of dollars of price 
improvement to ordinary investors.\35\ When approving such retail price 
improvement programs on a pilot basis, the Commission consistently 
found that the pilots were consistent with the Act because they were 
``reasonably designed to benefit retail investors'' and could ``promote 
competition for retail order flow among execution venues.'' The 
benefits to retail investors in the form of meaningful price 
improvement opportunities similarly animated the Commission's recent 
approval of the NYSE retail liquidity program on a permanent basis.\36\ 
Although retail priority is designed to increase fill rates and speed 
of execution rather than price improvement, the Exchange believes that 
it could have a similarly meaningful impact on execution quality for 
ordinary investors that trade in the public market. Furthermore, retail 
priority would complement existing retail price improvement programs by 
offering market structure benefits to non-marketable retail order flow 
that cannot participate in those programs.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release No. 67347 (July 3, 
2012), 77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-
2011-84).
    \34\ See Securities Exchange Act Release No. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019). Nasdaq BX 
Inc. (``BX'') similarly operates its own retail price improvement 
program. See Securities Exchange Act Release No. 73702 (November 28, 
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048).
    \35\ See e.g. Securities Exchange Act Release No. 83831 (August 
13, 2018), 83 FR 41128 (August 17, 2018) (SR-CboeBYX-2018-014).
    \36\ See Securities Exchange Act Release No. 85160 (February 15, 
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28).
---------------------------------------------------------------------------

    Similarly, in 2017, the Commission approved a proposed rule change 
by The Nasdaq Stock Market LLC (``Nasdaq'') to introduce the ``Extended 
Life Priority Order Attribute'' for Retail Orders that were willing to 
remain on the book unaltered for a period of one second (``Retail 
Extended Life Order'' or ``Retail ELO'').\37\ As proposed, displayed 
orders entered on Nasdaq with the Retail ELO attribute were to be 
provided a higher priority than other orders resting on the Nasdaq 
order book. When the Commission approved this proposed rule change, it 
opined that the proposal ``should benefit retail investors by providing 
enhanced order book priority to retail order flow that is not 
marketable upon entry,'' and that ``[s]uch enhanced order book priority 
could result in additional or more immediate execution opportunities on 
the [e]xchange for resting retail orders that otherwise would be 
farther down in the order book queue, and thereby enhance execution 
opportunities for retail investors.'' \38\ The same is true of the 
Exchange's retail priority proposal, which would provide similar 
benefits to retail investors without the additional complexity of 
requiring that the order be willing to exist unaltered on the order 
book for a specified period of time. While the Exchange believes that 
the majority of retail investors have a longer investment time horizon 
and therefore do not actively manage their trading interest at sub-
second time intervals, the Exchange believes that a broader principle 
of retail priority may be more effective in encouraging retail brokers 
to route order flow to the Exchange.
---------------------------------------------------------------------------

    \37\ See Securities Exchange Act Release No. 81097 (July 7, 
2017), 82 FR 32386 (July 13, 2017) (SR-NASDAQ-2016-161) (``Retail 
ELO Approval''). Nasdaq ultimately decided not to implement Retail 
ELO following Commission approval, and has since introduced a 
``Midpoint Extended Life Order'' that is not limited to retail 
participation.
    \38\ Id.
---------------------------------------------------------------------------

    The Exchange also believes that it is appropriate and not unfairly 
discriminatory to provide enhanced priority benefits solely to Retail 
Orders as the proposal is designed specifically to ensure that retail 
investors can compete for executions with sophisticated market 
participants. In today's highly automated and efficient market, retail 
investors have a more limited opportunity to compete for an execution 
based purely on the time an order is placed. While sophisticated, 
latency sensitive market participants can compete to be the first at 
any particular price, retail investors with longer investment horizons 
cannot compete in the same fashion. The proposed introduction of retail 
priority would ensure that non-marketable Retail Orders get filled 
first when there is available contra-side interest, and thereby improve 
investment outcomes for ordinary investors. The Commission has 
consistently held that it is consistent with the Act to offer certain 
advantages to retail customers,\39\ and the proposal follows a line of 
other initiatives to improve the retail investor experience in the 
public markets. The Exchange believes that it is an important goal of 
both the Exchange and the Commission to ensure that our market 
structure continues to benefit retail investors by providing the tools 
that they need to invest in the capital markets. Although there are 
many ways to achieve that goal, the Exchange believes that doing so 
requires innovation in how Retail Orders are handled on the national 
securities exchanges in order to attract that order flow back to the 
displayed market.
---------------------------------------------------------------------------

    \39\ Where the interest of long-term investors, such as the 
retail investors whose experience this filing is attempting to 
improve, diverges from that of short-term professional traders, the 
Commission ``repeatedly has emphasized that its duty is to uphold 
the interests of long-term investors.'' See Securities Exchange Act 
Release No. 61358 (January 14, 2010), 75 FR 3593 (January 21, 2010) 
(File No. S7-02-10) (``Concept Release on Equity Market 
Structure'').
---------------------------------------------------------------------------

    The Exchange also believes that it is consistent with the public 
interest and the protection of investors to provide retail priority 
exclusively to those orders that contain a Displayed or Reserve 
instruction. The goals of the proposed rule change are twofold. First, 
the proposed change is designed to facilitate better trading outcomes 
for retail investors, which may encourage retail brokers to send 
additional retail order flow to the Exchange. Second, the proposed 
change is designed to encourage additional displayed retail liquidity, 
which could contribute to price discovery and encourage additional 
order flow and liquidity from other market participants. Although the 
first purpose could be achieved without limiting retail priority to 
orders that contain a Displayed component at a particular price, the 
second is only achieved when such orders are displayed to the broader 
market. For that reason, recent priority enhancements for retail 
investors, such as Nasdaq's Retail ELO, have also focused on displayed 
interest that could improve quote quality and contribute to a vibrant 
market.
    Finally, the Exchange believes that it is consistent with just and 
equitable principles of trade to require that all Retail Orders that 
are eligible for retail priority be considered retail attributable as 
this would allow other market participants to gauge the available size 
in orders that would be eligible for retail priority. Today, Retail 
Member Organizations are given the choice as to whether to designate an 
order on the EDGX Book Feed as attributable to a retail investor, which 
may improve the chance of securing an execution. Although Retail Member 
Organizations would no longer have the option to submit eligible Retail 
Orders as non-attributable, the transparency achieved by so designating 
these orders is important to the proper functioning of a market where 
such orders would be eligible for priority. Furthermore, members would 
ultimately be able to decide which orders to designate into the EDGX 
Book as Retail Orders, thereby retaining the ability to control which 
orders are publicly attributed to retail investors. Priority Customer 
orders entered on the EDGX Options platform are similarly designated as 
such on the Exchange's market data feeds today, and the Exchange 
believes that this has contributed positively to the overall market 
environment.

[[Page 13734]]

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. Rather, the proposed rule 
change is designed to increase inter-market competition for retail 
order flow, and intra-market competition for orders as market 
participants compete to transact with Retail Orders entered on the EDGX 
Book. The proposed rule change represents an effort by the Exchange to 
enhance the ability for retail investors to participate effectively on 
a national securities exchange without unnecessarily burdening 
competition. Although retail priority would be limited to retail 
investors, the Exchange does not believe that this produces an 
unnecessary burden on competition as these changes are necessary to 
attract Retail Orders to a national securities exchange where they may 
interact with a wide range of market participants. If successful, the 
Exchange believes that retail priority would enhance competition by 
encouraging retail brokers to route increased order flow to the public 
markets, creating a more vibrant and competitive trading environment 
that benefits all market participants.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2019-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeEDGX-2019-012. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeEDGX-2019-012 and should be 
submitted on or before April 26, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06720 Filed 4-4-19; 8:45 am]
BILLING CODE 8011-01-P


