[Federal Register Volume 84, Number 129 (Friday, July 5, 2019)]
[Notices]
[Pages 32238-32244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14277]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86241; File No. SR-IEX-2019-05]


Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of Proposed Rule Change To Establish a Retail Price Improvement 
Program

June 28, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on June 20, 2019, the Investors Exchange LLC (``IEX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Act,\4\ 
and Rule 19b-4 thereunder,\5\ IEX is filing with the Securities and 
Exchange Commission (``Commission'') a proposed rule change to 
establish a Retail Price Improvement Program.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
website at www.iextrading.com, at the principal office of the Exchange, 
and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
Background
    IEX proposes to adopt new IEX Rule 11.232 to establish a Retail 
Price Improvement Program (``Retail Program''). As proposed, the Retail 
Program is designed to provide retail investors with meaningful price 
improvement opportunities by executing at the Midpoint Price \6\ such 
that Members will be incentivized to add midpoint orders to the 
Exchange above and beyond the already existing and significant midpoint 
liquidity at IEX.
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    \6\ The term ``Midpoint Price'' shall mean the midpoint of the 
NBBO. See IEX Rule 1.160(t). The term ``NBBO'' shall mean the 
national best bid or offer, as set forth in Rule 600(b) of 
Regulation NMS under the Act, determined as set forth in IEX Rule 
11.410(b).
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    As Commission Chairman Jay Clayton noted in a recent speech, forty-
three million U.S. households hold a retirement or brokerage account, 
with $3.6 trillion in balance sheet assets in 128 million customer 
accounts serviced by more than 2,800 registered broker-dealers.\7\ He 
also noted the importance of continued broad, long-term retail 
participation in our capital markets, and that retail investors count 
on the capital markets to fund major life events such as paying for 
their children's higher education or funding their own retirements.\8\
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    \7\ 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.
    \8\ Id.
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    Against this backdrop, the Retail Program is designed to provide 
retail investors with access to the Exchange's already deep pool of 
midpoint liquidity by introducing a new mechanism for retail-oriented 
liquidity provision, thereby providing enhanced opportunities for 
meaningful price improvement at the Midpoint Price. The Exchange 
believes that introducing the Retail Program could provide retail 
investors with better execution quality than they are currently able to 
obtain through existing exchange and over-the-counter (``OTC'') order 
retail programs, by attracting counterparty liquidity to the Exchange 
from Members and their clients seeking to interact with retail 
liquidity.\9\ The Retail Program would therefore be consistent with the 
goals of the Commission to encourage markets that are structured to 
benefit ordinary investors,\10\ while facilitating order interaction 
and price discovery to the benefit of all market participants.
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    \9\ See discussion infra on the desirability of interacting with 
retail liquidity.
    \10\ 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'').
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    As proposed, through the Retail Program, the Exchange would create 
a new class of market participants, Retail Member Organizations 
(``RMOs''), which would be eligible to submit certain retail order flow 
(``Retail orders'') to the Exchange. Any Exchange Member would be 
permitted to provide price improvement to Retail orders in the form of 
interest that is priced to execute at the Midpoint Price, including 
through a new Retail Liquidity Provider

[[Page 32239]]

(``RLP'') order that is only eligible to execute against a Retail 
order.
    IEX is already among the largest exchanges when measuring the 
volume of executions at the Midpoint Price. Based on informal 
discussions with several Members, IEX believes that some of the orders 
sent to IEX today that seek to access this midpoint liquidity originate 
with retail customers. Furthermore, several IEX Members firms' primary 
business is on behalf of retail clients, which indicates that at least 
some of IEX's current midpoint executions result from incoming retail 
orders seeking price improvement compared to the NBBO, even if IEX does 
not currently have the means to identify the exact percentage. IEX 
therefore expects that the introduction of Retail and RLP orders will 
result in a balanced mix of retail brokerage firms and their 
wholesaling partners submitting Retail orders to IEX to access both 
IEX's existing midpoint liquidity and the additional midpoint liquidity 
IEX anticipates from the Retail Program.?>[FEDREG][VOL]*[/VOL][NO]*[/
NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
    If the Commission approves this proposed rule change, the Exchange 
will submit a separate proposal to amend its Price List in connection 
with the Retail Program. Under that proposal, the Exchange would 
initially not charge any fees for executions of either Retail orders or 
RLP orders.
Definitions
    The Exchange proposes to adopt the following definitions under 
existing IEX Rule 11.190 (Orders and Modifiers) and proposed IEX Rule 
11.232 (Retail Price Improvement Program). First, the term ``Retail 
order'' would be defined as an agency or riskless principal order that 
satisfies the criteria of FINRA Rule 5320.03, which is submitted by a 
Retail Member Organization, designated with a ``Retail order'' 
modifier, and reflects 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.\11\ An order from a natural person can include orders 
submitted on behalf of accounts that are held in a corporate legal 
form--such as an Individual Retirement Account, Corporation, or a 
Limited Liability Company--that have been established for the benefit 
of an individual or group of related family members, provided that the 
order is submitted by an individual.\12\ Retail orders would either be 
Discretionary Peg or Midpoint Peg orders with a Time-in-Force of IOC or 
FOK, and would only be eligible to trade at the Midpoint Price.\13\
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    \11\ See proposed Rule 11.190(15).
    \12\ Id.
    \13\ See proposed Rule 11.232(a)(2). As with all pegged orders, 
Retail orders may only trade during the Regular Market Session. See 
IEX Rule 11.190(a)(3)(E).
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    Second, the term ``Retail Member Organization'' (or ``RMO'') would 
be defined as an IEX Member (or division thereof) that has been 
approved by the Exchange to submit Retail orders.\14\
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    \14\ See proposed Rule 11.232(a)(1).
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    Finally, the term ``Retail Liquidity Provider order'' (or ``RLP 
order'') would be defined as a Discretionary Peg order that is only 
eligible to execute against Retail orders through the execution process 
described in proposed Rule 11.232(e).\15\
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    \15\ See proposed Rule 11.232(a)(3).
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Retail Member Organization Qualifications and Approval Process
    Under proposed IEX Rule 11.232, any IEX Member (or a division 
thereof) could qualify as an RMO if it conducts a retail business or 
handles retail orders on behalf of another broker-dealer. Any IEX 
Member that wishes to obtain RMO status would be required to submit: 
(1) An application form; (2) supporting documentation sufficient to 
demonstrate the retail nature and characteristics of the applicant's 
order flow; \16\ and (3) an attestation, in a form prescribed by the 
Exchange, that substantially all orders submitted as Retail orders 
would meet the qualifications under proposed IEX Rule 11.232.
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    \16\ For example, a prospective RMO could be required to provide 
sample marketing literature, website screenshots, other publicly 
disclosed materials describing the Member's retail order flow, and 
any other documentation and information requested by the Exchange.
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    An RMO would be 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 IEX 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 an RMO does not itself conduct a retail 
business but routes Retail orders on behalf of another broker-dealer, 
the RMO's supervisory procedures must be reasonably designed to assure 
that the orders it receives from such other broker-dealer that are 
designated 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 other broker-dealer that sends 
the RMO 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 Retail order flow routed on behalf 
of such other broker-dealers meets the applicable requirements.\17\
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    \17\ FINRA, 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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    After an applicant submits the RMO application form, supporting 
documentation, and attestation, the Exchange would notify the applicant 
of the Exchange's decision in writing. A disapproved applicant would be 
able to request an appeal of such disapproval by the Exchange and/or 
reapply for RMO status 90 days after the disapproval notice is issued 
by the Exchange. Additionally, an RMO may voluntarily withdraw from 
such status at any time by giving written notice to the 
Exchange.?>[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT]
Failure of Retail Member Organization To Abide by Retail Order 
Requirements
    The proposed Retail Program also sets forth procedures for 
addressing an RMO's failure to abide by the Retail Program's Retail 
order requirements. If an RMO designates orders submitted to the 
Exchange as Retail orders, and the Exchange determines, in its sole 
discretion, that such orders fail to meet any of the requirements set 
forth in proposed IEX Rule 11.232(a)(2), the Exchange may disqualify a 
Member from its status as an RMO. When disqualification determinations 
are made, the Exchange shall provide a written disqualification notice 
to the Member.
Appeal of Disapproval or Disqualification
    Proposed IEX Rule 11.232(d) would provide a mechanism through which 
Members could appeal either the Exchange's disapproval of its 
application to become an RMO or the Exchange's disqualification of a 
previously-approved RMO from the Retail Program. If a Member disputes 
the Exchange's decision to disapprove it as an RMO under proposed IEX 
Rule 11.232(b) or disqualify it as an RMO under IEX Rule 11.232(c), the 
Member may request, within five business days after notice of the 
decision is issued by the Exchange, that the RMO Panel

[[Page 32240]]

(``RMO Panel'') review the decision to determine if it was correct.
    The RMO Panel shall consist of the Exchange's Chief Regulatory 
Officer (``CRO''), or a designee of the CRO, and two officers of the 
Exchange designated by the Exchange's Chief Operating Officer 
(``COO''). The RMO Panel shall review the facts and render a decision 
within the time frame prescribed by the Exchange. The RMO Panel may 
overturn or modify an action taken by the Exchange under proposed IEX 
Rule 11.232. A determination by the RMO Panel shall constitute final 
action by the Exchange.
    Additionally, under the proposed Retail Program, any IEX Member 
that was either disapproved as an RMO under proposed IEX Rule 11.232(b) 
or disqualified as an RMO under IEX Rule 11.232(c) could reapply for 
RMO status a minimum of 90 days after the date it receives its 
disapproval or disqualification notice from the Exchange.
Priority and Order Allocation
    As proposed, Retail Liquidity Provider orders in the same security 
would be ranked and allocated according to price then time of entry 
into the System.\18\ Retail orders would seek to execute upon entry 
into the System at the Midpoint Price.\19\ Retail Liquidity Provider 
orders would interact with Retail orders as follows:
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    \18\ See proposed Rule 11.132(e)(1).
    \19\ See proposed Rule 11.132(e)(2).
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    A Retail order will seek to execute upon entry into the System at 
the Midpoint Price against orders resting on the Order Book in price/
time priority in accordance with Rule 11.230, subject to the following:
    A Retail order to buy (sell) shall execute upon entry against sell 
(buy) orders resting on the Order Book in the following order:
    (1) Displayed sell (buy) orders at the NBO \20\ (NBB) during a 
locked or crossed market;
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    \20\ The term ``NBO'' shall mean the national best offer, and 
the term ``NBB'' shall mean the national best bid, as set forth in 
Rule 600(b) of Regulation NMS under the Act, determined as set forth 
in IEX Rule 11.410(b).
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    (2) non-displayed orders priced to trade at the Midpoint Price; 
followed by
    (3) Retail Liquidity Provider orders priced to trade at the 
Midpoint Price.
    The following examples illustrate how IEX would handle orders under 
this proposed new rule:
    Assume the following facts:
    (1) NBBO for security ABC is $10.00-$10.10.\21\
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    \21\ For purposes of these examples, assume it is not a period 
of quote instability as set forth in IEX Rule 11.190(g).
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    (2) User 1 \22\ enters a Retail Liquidity Provider order to buy ABC 
at $10.05 for 500 shares.
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    \22\ The term ``User'' shall mean any Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to IEX Rule 11.130.
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    (3) User 2 then enters an unpriced Discretionary Peg order to buy 
500 shares of ABC.
    (4) User 3 then enters a Midpoint Peg order to buy 500 shares of 
ABC at $10.04.
    Example 1: RMO enters a Retail order to sell 800 shares of ABC. The 
order will first execute against the full size of User 2's buy order, 
and then execute against 300 shares of User 1's buy order, at which 
point the entire size of the Retail order to sell 800 shares is 
depleted. In this example the Retail order does not execute against 
User 3's buy order because the order is not priced to execute at 10.05, 
the current Midpoint Price.
    Example 2: Assume the same facts above, except that User 2's 
unpriced Discretionary Peg order to buy ABC is for 100 shares. The 
incoming Retail order to sell 800 shares executes first against User 
2's buy order for 100 shares at $10.05, then against User 1's buy order 
for 500 shares at $10.05. The Retail order still does not execute 
against User 3's buy order because the order is not priced to execute 
at 10.05, the current Midpoint Price. The Retail order is filled for 
600 shares and the balance of 200 shares is cancelled back to the RMO.
    Example 3: Assume the same facts as Example 1, except that User 3 
enters a non-displayed limit order to buy 300 shares of ABC at 10.05. 
The incoming Retail order to sell 800 shares executes first against 
User 3's order for 300 shares (because it has priority over User 2's 
Discretionary Peg order pursuant to IEX Rule 11.220(a)(C)(viii)) and 
then against User 2 for the remaining 500 shares, completing the Retail 
order's 800 share quantity. User 1's buy order is not executed because 
it is ranked behind Users 2 and 3.?>[FEDREG][VOL]*[/VOL][NO]*[/
NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
Implementation
    The Exchange proposes that all securities traded on the Exchange 
would be eligible for inclusion in the Retail Program. Assuming that 
the Commission approves this proposed rule change, the Exchange will 
implement the proposed rule change within 90 days of approval and 
provide at least ten (10) days' notice to Members and market 
participants of the implementation timeline.
Comparison to Existing Retail Programs
    As described above, the proposed Retail Program is a simple 
approach designed to provide retail investors with the opportunity for 
meaningful price improvement (by executing at the Midpoint Price), by 
attracting counterparty liquidity to the Exchange from Members and 
their clients seeking to interact with retail liquidity.
    IEX understands that many professional market participants, such as 
market makers, view interacting with orders of retail investors as more 
desirable than interacting with orders of other professional market 
participants. For example, as the Commission staff noted in a 2016 
memorandum to the Equity Market Structure Advisory Committee (``EMSAC 
Memorandum''), ``[m]arket makers are interested in retail customer 
order flow because retail investors are, on balance, less informed than 
other traders about short-term price movements . . . [and t]rading 
against retail customer order flow enables market makers to avoid 
adverse selection by informed professional traders and to more reliably 
profit from market-making activity.'' The EMSAC Memorandum also 
described that ``[a]fter market makers internalize the relatively 
uninformed retail customer order flow, the informed order flow that 
remains is left for the exchanges to absorb . . . [and that t]ypically, 
dealers that pay to receive retail customer order flow will guarantee 
executions of that order flow with some amount of average price 
improvement over the national best bid or offer (``NBBO'') and with a 
separate payment to retail brokers for directing customer orders to 
them.'' \23\
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    \23\ See January 26, 2016 Memorandum entitled ``Certain Issues 
Affecting Customers in the Current Equity Market Structure'' from 
the staff of the Commission's Division of Trading and Markets, 
available at https://www.sec.gov/spotlight/equity-market-structure/issues-affecting-customers-emsac-012616.pdf.
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    Consistent with the EMSAC Memorandum's conclusions, and based on 
informal discussions with market participants and the knowledge and 
experience of its staff, IEX believes that market makers and other 
sophisticated market participants generally value interacting with 
retail orders because they are smaller and not likely to be part of a 
larger parent order that can move a stock price, causing a loss to the 
market maker. For example, a retail order to buy 200 shares is probably 
just an order for 200 shares. In contrast, a 200-share buy order from a 
more sophisticated institutional market participant may be part of a 
100,000-share parent order. If the market maker sells to the 200-share 
child order,

[[Page 32241]]

execution of the balance of the parent order may move the market up 
above the price at which the market maker sold.
    The proposed rule change leverages IEX's existing market structure 
to provide enhanced price improvement opportunities for retail 
customers by incentivizing Members and their clients to provide 
liquidity to the orders of retail investors. The IEX Retail Program is 
similar to NYSE Rule 107C, governing NYSE's Retail Liquidity Program 
(``NYSE RLP'') which was recently approved on a permanent basis by the 
Commission.\24\ The proposed rule change is similar to the NYSE RLP 
with a few key distinctions, as described below. The proposed Retail 
Program is also similar to the Commission-approved retail pilot 
programs of NYSE Arca,\25\ Cboe BYX \26\ and Nasdaq BX \27\ (``Current 
Retail Pilot Programs''), also with several differences as highlighted 
below.
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    \24\ See Securities Exchange Act Release No. 85160 (February 15, 
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28) (approving 
NYSE RLP on a permanent basis). See also SR-NYSE-2019-26, Securities 
Exchange Act Release No. 85930 (May 23, 2019) adopting substantially 
similar rules for securities traded on the NYSE Pillar Platform on 
an immediately effective basis.
    \25\ See Securities Exchange Act Release No. 71176 (December 23, 
2013), 78 FR 79524 (December 30, 2013) (SR-NYSEArca-2013-107) 
(approving NYSE Arca retail pilot program).
    \26\ See Securities Exchange Act Release No. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019) (approving 
Cboe BYX retail pilot program).
    \27\ See Securities Exchange Act Release No. 73702 (November 28, 
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048) (approving 
NASDAQ BX retail pilot program).
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     More price improvement for retail investors. The proposed 
rule change would provide more price improvement for retail customers 
than the NYSE RLP, because a Retail order on IEX could only execute at 
the Midpoint Price, as opposed to the minimum $.001 price improvement 
that the NYSE RLP can provide.\28\ IEX believes that its approach is 
preferable because executed Retail orders in stocks priced equal to or 
greater than $1.00 will receive a minimum of $0.005 in price 
improvement (half of the smallest bid/ask spread) compared to lesser 
amounts in the NYSE RLP \29\ and the amount of price improvement is 
transparent by rule, rather than being dependent on the pricing of the 
contra-side non-displayed order. IEX's proposed Retail Program would 
also provide greater price improvement than the Current Retail Pilot 
Programs because those three retail pilot programs also allow for 
execution at sub-penny prices, as opposed to the IEX proposal which 
would only allow for execution at the Midpoint Price.
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    \28\ The Exchange is not seeking an exemption under Rule 612 of 
Regulation NMS with respect to the ``Sub-Penny Rule'' because it 
will not accept or rank orders priced greater than $1.00 per share 
in an increment smaller than $0.01.
    \29\ See supra note 24, at 5759 (``Table 1''), which reflects 
average price improvement of $0.0014-$0.0019 during the period 
January 2016-December 2017. The NYSE RLP is limited to securities 
priced equal to or greater than $1.00.
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     RLP orders available to all Members. Unlike the NYSE RLP, 
IEX's Retail Program will not limit or discriminate among its Members 
and their clients, and will allow all Members and their clients to 
submit RLP orders that seek to interact and provide price improvement 
to incoming Retail orders. Because the order type is designed to create 
as much new price improvement opportunity for retail investors as 
possible, IEX does not believe that there is any reason to limit usage 
to a privileged group of Members. This aspect of the IEX Retail Program 
is similar to the Current Retail Pilot Programs, which also do not 
limit which Members can submit specialized retail liquidity providing 
orders that only interact with retail orders.
     No dissemination of data identifying Retail orders on 
proprietary data feeds. IEX would not disseminate when an RLP order is 
on the order book on any proprietary data feeds, as opposed to the NYSE 
RLP and the Current Retail Pilot Programs, each of which disseminates 
retail liquidity providing orders on its proprietary data feeds. IEX 
believes that such dissemination could create unnecessary complexity, 
as well as a skewed and unduly limited view of the liquidity available 
to trade with Retail orders. RLP orders on IEX will simply be more dark 
liquidity priced to execute at the Midpoint Price. As described above, 
Retail orders will be able to execute against any order priced to 
execute at the Midpoint Price and RLP orders are just additive. Even in 
the absence of resting RLP orders, a Retail order could execute against 
existing order types. Thus, there will be no impact on consolidated or 
proprietary market data feeds, no flickering disseminations, and no 
inadvertent incentive to only route Retail orders to IEX when the 
presence of RLP order interest is being disseminated.?>[FEDREG][VOL]*[/
VOL][NO]*[/NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
     Uniform execution priority. Retail orders on IEX would 
execute against available contra-side interest in a uniform manner, 
with RLP orders having lower priority than other liquidity providing 
orders priced to trade at the Midpoint Price. In contrast, the NYSE RLP 
and Current Retail Pilot Programs enable retail liquidity providing 
orders to gain higher priority than other liquidity providing orders by 
virtue of the ability to provide subpenny pricing, which results in 
immaterial price improvement. IEX believes that its approach is 
superior because it would provide for meaningful price improvement 
without complicating the market with orders priced and ranked based on 
immaterial, nonstandard subpenny increments. IEX also believes that it 
is appropriate for RLP orders to have lower priority than other orders 
priced to trade at the Midpoint Price because RLP orders are only 
available to Retail orders.
     No exception relief needed for tick size trading 
increments. The IEX Retail Program will operate in accordance with 
existing tick size trading increments. IEX is not requesting any 
exemptive relief in order to enable ranking and/or pricing orders in 
otherwise impermissible increments. As described above, this approach 
avoids enabling immaterial price improvement, as well as the 
concomitant complexity that such an approach can lead to.
     No impact on order book priority. IEX's approach will also 
not impact order book priority, as is the case with the proposal by 
Cboe EDGX Exchange, Inc to introduce retail order priority.\30\
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    \30\ See Securities Exchange Act Release No. 85482 (April 2, 
2019), 84 FR 13729 (April 5, 2019) (SR-CboeEDGX-2019-012) (proposing 
rule change to give order book priority for equity orders submitted 
on behalf of retail investors).
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    The Exchange believes that the above distinctions between its 
proposed rule change and the NYSE RLP and Current Retail Pilot Programs 
reflect a simple approach designed to provide better execution quality 
to retail investors, at a lower cost.
Modification to Rule 11.340
    Finally, the Exchange proposes to delete Rule 11.340(d)(4), which 
currently states in relevant part that the Exchange does not operate a 
retail liquidity program. If the Commission approves the proposed 
Retail program, the text in Rule 11.340(d)(4) would no longer be 
accurate, and should therefore be deleted.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\31\ in general, and furthers the objectives of Section 
6(b)(5),\32\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating

[[Page 32242]]

transactions in securities, and 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. 
Specifically, the Exchange believes that the proposed rule change is 
consistent with these principles because it is designed to increase 
competition among execution venues and offer the potential for 
meaningful price improvement to orders of retail investors, including 
through incentivizing market participants to provide additional 
liquidity to execute against the orders of retail investors.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(5).
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    As discussed in the Purpose section, IEX's proposed Retail Program 
is a simple, transparent approach designed to provide opportunities for 
meaningful price improvement for Retail orders by incentivizing 
additional non-displayed resting interest priced to trade at the 
Midpoint Price.
    Section 6(b)(5) of the Act prohibits an exchange from establishing 
rules that treat market participants in an unfairly discriminatory 
manner. However, Section 6(b)(5) of the Act does not prohibit exchange 
members or other broker-dealers from discriminating, so long as their 
activities are otherwise consistent with the federal securities laws. 
And IEX understands that broker-dealers commonly differentiate between 
customers based on the nature and profitability of their business.
    While the Retail Program would differentiate among its Members, the 
Exchange believes that such differentiation is not unfairly 
discriminatory but rather is designed to promote a competitive process 
for retail executions while providing retail investors with the 
potential to receive meaningful price improvement. There is ample 
precedent for differentiation of retail order flow in the existing 
approved programs of other national securities exchanges.\33\ As the 
Commission has recognized, retail order segmentation was designed to 
create additional competition for retail order flow, leading to 
additional retail order flow to the exchange environment and ensuring 
that retail investors benefit from the better price that liquidity 
providers are willing to give their orders.\34\
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    \33\ See supra notes 24, 25, 26, and 27.
    \34\ See supra note 24 at 40679.
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    The Commission consistently highlights 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 its number one strategic 
goal for fiscal years 2018 to 2022. The Exchange believes its Retail 
Program would serve the retail investing public by providing them with 
the opportunity for meaningful price improvement on eligible trades.
    The Exchange notes that several other national securities 
exchanges, including NYSE as described herein, have for several years 
operated retail liquidity programs that include market segmentation 
whereby retail orders receive execution priority in specified 
circumstances.\35\ A NYSE rule filing to make its retail liquidity 
pilot program permanent was recently approved by the Commission 
notwithstanding market segmentation. IEX understands that these 
programs were designed to promote competition for retail order flow 
among execution venues, most of which continues to be executed in the 
OTC markets rather than on exchanges.\36\ Similarly, IEX's Retail 
Program is designed to provide an additional competitive alternative 
for retail orders. IEX believes that it is appropriate to provide 
incentives to bring more retail order flow to a public exchange. As 
described in the Purpose section, these incentives include the 
opportunity for retail orders to receive meaningful price improvement, 
while also providing all Members with the opportunity to execute 
against such orders.
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    \35\ See NYSE Rule 107C, NYSE Arca Equities Rule 7.44, Cboe Rule 
11.24, and NASDAQ BX Rule 4780.
    \36\ See Securities Exchange Act Release No. 67347 (July 3, 
2012), 77 FR 40673, 40679 (July 10, 2012) (SR-NYSE-2011-55) (order 
approving NYSE RLP pilot program).
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    IEX believes that the proposed distinctions between its Retail 
Program and the NYSE RLP, as well as similar Current Retail Pilot 
Programs, will enhance competition among exchange venues. IEX further 
believes that this structure is designed to foster competition among 
exchanges and OTC markets, as well as to protect investors and the 
public interest, and is therefore consistent with the Act. IEX also 
believes that the segmentation in its Retail Program, as proposed, is 
less significant than in the NYSE RLP and the Current Retail Pilot 
Programs for two reasons. First, non-RLP orders priced to execute at 
the Midpoint Price have higher priority than RLP order. And second, any 
Member, or clients thereof, can enter an RLP order. This structure is 
designed to facilitate a broader interaction between Retail orders and 
those of all IEX market participants, rather than a more constrained 
approach whereby retail orders interact primarily with a segmented pool 
of liquidity providing orders of privileged members.?>[FEDREG][VOL]*[/
VOL][NO]*[/NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT]
    IEX believes that its proposed eligibility criteria for submission 
of a Retail order are consistent with the Act in that they are designed 
to provide reasonable assurance that such orders are on behalf of 
actual retail investors, as opposed to professional market 
participants. In this regard, IEX notes that the definition of a Retail 
order clearly specifies that it must reflect the trading interest of a 
natural person (including orders placed on behalf of accounts held in a 
corporate legal form such as Individual Retirement Accounts, so long as 
the order is submitted by an individual) without algorithmic or 
computerized methodology changes to the order (except to change a 
market order to a marketable limit order). Further, as proposed, a 
Retail order can only be submitted by a Member that has been approved 
by IEX as an RMO, based upon appropriate criteria that provide 
reasonable assurances to IEX that the RMO will only identify orders as 
Retail orders in conformance with applicable IEX rules, as proposed. 
The proposed criteria and approval process are substantially similar to 
the definition of Retail Order in NYSE Rule 107C(a)(3) as well as 
comparable provisions of the rules of Current Retail Pilot Programs. 
The definition also includes additional clarifying text to explicitly 
include orders placed on behalf of accounts held in a corporate legal 
form such as Individual Retirement Accounts so long as the order is 
submitted by an individual, which is based on the definition of 
``Designated Retail Order'' in the Nasdaq Stock Market (``Nasdaq'') 
pricing schedule.\37\ Thus, IEX does not believe that its proposed 
criteria and approval process for submission of Retail orders raises 
any new or novel issues not already considered by the Commission.
---------------------------------------------------------------------------

    \37\ See Equity 7, Section 118.
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    IEX also believes that the proposed RMO approval, disapproval, and 
disqualification rules are consistent with the Act in that they provide 
a fair process for determining whether a Member qualifies as an RMO, as 
well as for appeals of denials thereof. These processes are also 
substantially similar to comparable provisions in NYSE Rule 107C(b) and 
the rules of Current Retail Pilot Programs.
    The Exchange further believes that it is consistent with the Act to 
structure its proposed Retail Program such that a Retail order must be 
a Discretionary Peg order or Midpoint Peg order with a Time-in-Force of 
IOC or FOK, and is

[[Page 32243]]

only eligible to trade at the Midpoint Price. As described above, the 
Exchange has structured its proposed Retail Program to provide that 
Retail orders will trade at the Midpoint Price, so that such orders 
receive meaningful price improvement. Further, and as discussed in the 
Purpose section, only permitting Retail orders to be executed at the 
Midpoint Price is designed to be a simple approach that does not 
introduce unnecessary complexity to the order entry and execution 
process on IEX. All orders, including Retail orders, will continue to 
be priced and ranked in standard increments and pursuant to existing 
priority.
    The Exchange believes that introducing a program that provides and 
encourages additional liquidity and price improvement to Retail orders 
is appropriate because retail investors are typically less 
sophisticated than professional market participants and therefore would 
not have the type of technology to enable them to compete with such 
market participants. Therefore, the Exchange believes that it is 
consistent with the public interest and the protection of investors to 
provide retail investors with these enhanced opportunities.
    In addition, the Exchange believes that providing for execution of 
Retail orders only at the Midpoint Price is also designed to facilitate 
Members' compliance with their best execution obligations when acting 
as agent on behalf of a Retail order.\38\ Specifically, as noted in 
FINRA Regulatory Notice 15-46 (Guidance on Best Execution Obligations 
in Equity, Options and Fixed Income Markets), when conducting its 
review of execution quality in any security, a firm should consider, 
among other things, whether it could obtain mid-point price improvement 
on one venue versus less price improvement on another venue.\39\
---------------------------------------------------------------------------

    \38\ All IEX Members that handle customer orders as agent are 
required to be FINRA members, and therefore are subject to FINRA 
guidance. See 17 CFR 240.15b9-1(a).
    \39\ See FINRA Regulatory Notice 15-46, endnote 25 available at: 
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf.
---------------------------------------------------------------------------

    The Exchange also believes that specifying that a Retail order must 
be Discretionary Peg order or Midpoint Peg order with a Time-in-Force 
of IOC or FOK is designed to maximize the opportunity for such orders 
to be executed on IEX and receive such price improvement against 
resting interest on IEX priced to trade at the Midpoint Price. Thus, 
IEX believes that this approach is designed to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and further the investor protection and public interest 
objectives of Section 6(b) of the Act, by establishing a structure that 
is designed to facilitate the provision of meaningful price improvement 
for orders of retail investors.
    The Exchange believes that its priority and order execution 
approach for the Retail Program is consistent with the Act. As 
discussed in the Purpose section, the Exchange understands that a large 
majority of orders from retail investors are executed in the OTC 
market, and exchange retail programs have not attracted a significant 
volume.\40\ While there are likely a variety of reasons for this, the 
IEX Retail Program is designed to provide meaningful incentives for 
Members to send orders of retail investors to IEX as well as for market 
participants to provide liquidity to Retail orders. Currently, retail 
orders are routed across different wholesalers and dark pools. The 
Exchange believes that creating an exchange retail program specifically 
designed to provide midpoint executions for retail investors will help 
grow that overall opportunity for exchange price improvement and 
introduce additional, healthy competition to the benefit of the retail 
investor.
---------------------------------------------------------------------------

    \40\ See supra note 24, at 5762 (``Although the Program provides 
the opportunity to achieve significant price improvement, the 
Program has not generated significant activity. . . . The Program's 
share of NYSE volume during [in 2016-17] was below 
0.4%'').?>[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT]
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    As discussed in detail above, the Exchange believes that the 
opportunity to obtain meaningful price improvement for Retail orders 
should operate as a powerful incentive for Members to send retail 
orders to IEX. Based on publicly available information, IEX notes that 
other exchange retail programs provide less price improvement 
overall,\41\ and believes that OTC retail programs guarantee to execute 
retail orders at prices better than the NBBO but not necessarily at the 
midpoint of the NBBO.\42\ While IEX typically has a deep pool of non-
displayed liquidity priced to execute at the Midpoint Price, a key 
aspect of IEX's Retail Program is to further incentivize Members and 
their clients to enter additional non-displayed interest, including 
interest that will only trade with Retail orders. As discussed in the 
Purpose section, IEX believes that many professional market 
participants view interacting with orders of retail investors as 
desirable. Further, IEX understands that some market participants may 
be hesitant to enter resting interest to trade in public markets 
because of the risk of being subjected to latency arbitrage by more 
sophisticated market participants leveraging fast proprietary market 
data feeds and connectivity along with predictive strategies to chase 
short-term price momentum and successfully target resting orders at 
unstable prices. IEX also believes that retail investors are unlikely 
to have such technological advantages and as a result, certain market 
participants, including buy-side and other fundamental investors, may 
be more willing to enter resting interest to trade on a public 
exchange, and to allow that interest to rest for a longer period of 
time, if they were assured that their orders would not be subject to 
latency arbitrage by more sophisticated market participants. As the 
stock and exchange trading product values fluctuate throughout the day, 
professional market participants will be able to utilize the RLP order 
type to provide liquidity to Retail orders at times when they might 
otherwise be unwilling to do so because of the differences between 
Retail and non-Retail orders described above. These market participants 
would have the additional flexibility to submit both RLP and non-RLP 
mid-point orders, and switch between them based on intraday values, 
resulting in enhanced mid-point liquidity throughout the trading day.
---------------------------------------------------------------------------

    \41\ See e.g., supra note 29.
    \42\ See supra note 23.
---------------------------------------------------------------------------

    Thus, IEX believes that by providing an order type that only 
executes against retail orders, other market participants may be 
incentivized to enter additional resting interest on IEX. Accordingly, 
the Exchange further believes that it is consistent with the Act for 
RLP orders to only execute against Retail orders so as to incentivize 
the entry of RLP orders and thereby provide meaningful price 
improvement to Retail orders. In addition, to the extent that the RLP 
order structure is successful in incentivizing the entry of resting 
interest by buy-side and other fundamental investors, it would reduce 
unnecessary intermediation of Retail orders, which is consistent with 
the purposes of Section 6(b)(5) of the Act to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system as well as with Section 11A of the Act in that it is designed to 
provide enhanced opportunities for investor orders to be executed 
without the participation of a dealer, as described above.\43\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78k-1(a)(1)(c)(v).
---------------------------------------------------------------------------

    At the same time, the Exchange believes that, given the benefit of

[[Page 32244]]

trading only with Retail orders, it is consistent with the Act for RLP 
orders to have lower execution priority than other orders priced to 
trade at the Midpoint Price. IEX believes that a healthy market 
includes interaction between a diverse array of market participants and 
is not seeking to establish a segmented pool within the Exchange. 
Accordingly, IEX believes that providing other orders priced to trade 
at the Midpoint Price with higher priority is an appropriate balancing 
of these competing considerations.
    Finally, the Exchange believes that the deletion of Rule 11.340(d) 
pertaining to the expired Tick Size Pilot Plan,\44\ which currently 
states in relevant part that the Exchange does not operate a retail 
liquidity program is consistent with the Act because, if the Commission 
approves the proposed rule change, the provision will be inaccurate. 
Notwithstanding that the Tick Size Pilot expired at the close of 
trading on September 28, 2018, continued inclusion of this provision 
could engender confusion on the part of Members and other market 
participants as to IEX's Retail Program. Consequently, the Exchange 
believes that it is consistent with the Act to delete the provision to 
ensure accuracy and consistency in IEX's rules.
---------------------------------------------------------------------------

    \44\ See IEX Trading Alert #2018-035 (Tick Size Pilot Program 
Expiration), available at https://iextrading.com/alerts/#/35.
---------------------------------------------------------------------------

    In sum, the Exchange submits that its proposed Retail Program is a 
simple approach designed to provide an opportunity for retail 
customers' orders to receive meaningful price improvement in a manner 
consistent with the approved retail programs of other exchanges, but 
without certain complexities that IEX believes are unnecessary for its 
program. Thus, IEX believes that the proposed Retail Program is 
consistent with the Act in that it is designed 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. Further, IEX does not believe that the proposal raises any 
new or novel issues not already considered by the 
Commission.?>[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, IEX 
believes that introducing a Retail Program would continue to enhance 
competition and execution quality for retail order flow among execution 
venues and contribute to the public price discovery process.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition since competing venues 
have and can continue to adopt similar retail programs, subject to the 
SEC rule change process. The Exchange operates in a highly competitive 
market in which market participants can easily direct their orders to 
competing venues, including off-exchange venues.
    The Exchange also does not believe that the proposed rule change 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act. While orders 
submitted by some Members will be treated differently, as described in 
the Purpose section, those differences are not based on the type of 
Member entering orders but on whether the order is for a retail 
customer, and there is no restriction on whether a Member can handle 
retail customer orders. Further, any Member can enter an RLP order.
    Finally, the Exchange does not believe that deleting Rule 
11.340(d), pertaining to the expired Tick Size Pilot Plan, will impose 
any burden on competition since it is merely designed to remove a 
conflicting rule provision.

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

    Written comments were neither solicited nor received.

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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-IEX-2019-05 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-IEX-2019-05. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet 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 offices 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-IEX-2019-05, and should be submitted on 
or before July 26, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14277 Filed 7-3-19; 8:45 am]
 BILLING CODE 8011-01-P?>


