[Federal Register Volume 84, Number 158 (Thursday, August 15, 2019)]
[Notices]
[Pages 41769-41771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17490]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86619; File No. SR-IEX-2019-05]


Self-Regulatory Organizations; Investors Exchange LLC; Order 
Granting Approval of a Proposed Rule Change to Establish a Retail Price 
Improvement Program

August 9, 2019.

I. Introduction

    On June 20, 2019, Investors Exchange LLC (``IEX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to establish a Retail Price Improvement Program (``Retail 
Program'') on the Exchange. The proposed rule change was published for 
comment in the Federal Register on July 5, 2019.\3\ The Commission has 
received no comments on the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86241 (June 28, 
2019), 84 FR 32238 (``Notice'').
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II. Description of the Proposed Rule Change

    IEX proposes to adopt Exchange Rule 11.232 to establish the Retail 
Program, which the Exchange intends will incentivize IEX Members to add 
midpoint liquidity to the Exchange to provide additional opportunities 
for retail investors to obtain price improvement.
    Specifically, under the Retail Program, IEX Members could apply to 
become a Retail Member Organization (``RMO''), which designation would 
permit them to submit certain agency or riskless principal orders that 
reflect trading interest of a natural person and that are designated 
with a ``Retail Order'' modifier. Any IEX Member will be able to submit 
a new liquidity-providing order type, a Retail Liquidity Provider 
(``RLP'') order, that would only be eligible to execute against an 
incoming ``Retail Order'' from a RMO, generally at the midpoint price 
of the National Best Bid and National Best Offer (``Midpoint Price'').

A. New Definitions

    In connection with the Retail Program, the Exchange proposes three 
new defined terms. First, under existing Exchange Rule 11.190 (Orders 
and Modifiers), the term ``Retail Order'' would be defined as an agency 
order, or a riskless principal order that satisfies the criteria of 
FINRA Rule 5320.03, submitted by a Retail Member Organization, that is 
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. Retail Orders could either be 
Discretionary Peg or Midpoint Peg orders \4\ with a time-in-force of 
Immediate-or-Cancel (``IOC'') or Fill-or-Kill (``FOK''). Second, IEX 
proposes to amend Rule 11.190 to add the defined term ``Retail 
Liquidity Provider order,'' which would be defined as a Discretionary 
Peg order that is only eligible to execute against incoming Retail 
Orders through the execution process described in proposed new IEX Rule 
11.232(e). Finally, under proposed IEX Rule 11.232(a), IEX would define 
the term ``Retail Member Organization'' as an IEX Member (or division 
thereof) that has been approved by the Exchange to submit Retail 
Orders.
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    \4\ Both Discretionary Peg and Midpoint Peg orders are non-
displayed trading interest on the Exchange. See IEX Rule 
11.190(a)(9) and (10).
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B. Retail Member Organizations

    Under proposed Rule 11.232(b), 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. An IEX Member 
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, such as sample marketing 
literature, website screenshots, or other publicly disclosed material 
describing the Member's retail order flow; and (3) an attestation, in a 
form prescribed by the Exchange, that substantially all orders 
submitted as Retail Orders would meet the qualifications under the 
Retail Program.
    If approved as a RMO, the IEX Member 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

[[Page 41770]]

that entry as a Retail Order is in compliance with the requirements the 
Retail Program; and (ii) monitor whether orders entered as Retail 
Orders meet the applicable requirements under the Retail Program. If a 
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. Additionally, 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 the Retail Program; and 
(ii) monitor whether Retail Order flow routed on behalf of such other 
broker-dealers meets the applicable requirements of the Retail 
Program.\5\ The Exchange also proposes rules setting forth procedures 
for addressing a RMO's failure to comply with the Retail Program 
requirements.\6\
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    \5\ The Exchange represents that 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. See 
id., at 32239 n.17.
    \6\ New IEX Rules 11.232(b), (c), and (d) would set forth the 
procedures governing the Exchange's review of an RMO application, 
how the Exchange would reject an RMO application or disqualify a 
Member that has already been approved as an RMO, and how a Member 
could appeal a rejected RMO application or disqualification. See 
Notice, supra note 3, at 32239-40.
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C. Priority and Allocation

    Proposed IEX Rule 11.232(e) sets forth the rules governing priority 
and order allocation for the Retail Program. Specifically, Retail 
Liquidity Provider orders in the same security would be ranked and 
allocated according first to price and then to time of entry into the 
IEX System. Upon entry into the IEX System, a Retail Order would seek 
to execute against resting contra-side orders in price/time priority in 
accordance with current IEX Rule 11.230 (Order Execution) and also 
subject to the following provisions set forth in new IEX Rule 
11.232(e):
     A Retail Order to buy (sell) will execute upon entry 
against sell (buy) orders resting on the IEX Order Book in the 
following order:
    1. displayed sell (buy) orders at the National Best Offer (National 
Best Bid) during a locked or crossed market;
    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.\7\
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    \7\ In the Notice, the Exchange provides examples illustrating 
how these priority rules would operate. See id., at 32240.

Thus, RLP orders would have last priority when interacting with an 
incoming Retail Order. As noted earlier, Retail Orders are either IOC 
or FOK. Therefore, any Retail Orders not executed pursuant to the above 
execution priority would be cancelled.

D. Conforming Changes

    Finally, the Exchange proposed to delete current IEX Rule 
11.340(d)(4), which, in relevant part, states that the Exchange does 
not operate a retail liquidity program.\8\
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    \8\ IEX Rule 11.340 governs the Tick Size Pilot Plan and 
currently is not in effect due to the expiration of the Tick Size 
Pilot.
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E. Comparison to Other Retail Programs

    In the Notice,\9\ the Exchange discusses how its Retail Program 
compares to, among others, the retail programs of the New York Stock 
Exchange (``NYSE'') and Nasdaq BX (``BX''), which the Commission 
recently approved to become permanent during the pilot periods for each 
respective program.\10\ IEX highlights the substantive differences 
between several features of its program and the programs of other 
exchanges.\11\ Among other things, for example, the Exchange explains 
that the price improvement offered by its Retail Program would be a 
Midpoint Price execution instead of a minimum $0.001 above the NBBO or 
exchange best bid and offer. IEX also notes that any of its Members 
would be eligible to submit an RLP order, whereas use of a similar 
order type on NYSE is restricted, and that RLP orders on IEX would not 
have higher execution priority over non-RLP orders.\12\
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    \9\ See id., at 32240-42.
    \10\ See Securities Exchange Act Release Nos. 85160 (February 
15, 2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28) 
(approving NYSE Retail Liquidity Program on a permanent basis); 
86194 (June 25, 2019), 84 FR 31385 (July 1, 2019) (SR-BX-2019-011) 
(approving Nasdaq BX Retail Price Improvement Program on a permanent 
basis). The Commission notes that at the time that this proposed 
rule change was filed, the Nasdaq BX Retail Price Improvement 
Program had not yet been approved on a permanent basis.
    \11\ See Notice, supra note 3, at 32240-42.
    \12\ See id., at 32240.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to establish the Retail Program is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Sections 6(b)(5) \14\ and 6(b)(8) \15\ of the Exchange 
Act. Section 6(b)(5) of the Exchange Act requires that the rules of a 
national securities exchange be designed, among other things, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Section 6(b)(8) of the 
Exchange Act requires that the rules of a national securities exchange 
not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78f(b)(8).
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    Under IEX's proposed Retail Program, IEX will operate a process by 
which Members could qualify to become RMOs, thereby permissioning them 
to submit certain liquidity-taking Retail Orders to IEX for execution, 
generally, at the Midpoint Price. Any Member could submit liquidity-
providing RLP orders, which will be Discretionary Peg orders that are 
only eligible to execute against the designated Retail Orders. Retail 
Orders would be able to execute against the proposed RLP orders as well 
as certain other orders on the Exchange's order book as specified in 
proposed IEX Rule 1.232(e).
    The Commission notes that the Exchange's proposed Retail Program is 
substantively different in several respects than the retail liquidity 
programs operated by certain other national securities exchanges and, 
thus, does not present all of the same issues raised by those programs. 
The Commission notes that IEX provided a fulsome discussion of the 
distinctions between its proposed Retail Program and the programs 
operated by other exchanges. In particular, IEX described its proposed 
Retail Program as ``leverage[ing] IEX's existing market structure'' and 
discussed how IEX will: (1) Allow executions at Midpoint Prices instead 
of any subpenny price; (2) not disseminate when an RLP order is on the 
book, which could serve as an incentive to only route Retail Orders to 
IEX when the presence of an RLP order is disseminated; (3) have no 
impact on order book priority and give RLP orders

[[Page 41771]]

lower priority than other liquidity providing orders priced to trade at 
the midpoint; and (4) operate within existing tick size trading 
increments.\16\
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    \16\ See Notice, supra note 3, at 32241.
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    The proposal includes qualification and application rules for RMOs, 
an appeal process for disapproved RMOs, requirements for RMOs to 
include written policies and procedures to ensure that Retail Orders 
are bona fide, required annual attestations from RMOs with respect to 
Retail Orders, and a process for disqualification of RMOs with appeal 
procedures. The Commission believes that the proposal with respect to 
RMOs is consistent with the Exchange Act as it is reasonably designed 
to ensure that RMOs submit only bona fide Retail Orders to the program 
and, thus, helps ensure that the program is operated in the interests 
of investor protection and consistent with the public interest. All IEX 
Members would have an opportunity to become a RMO if desired, and the 
Commission believes that the proposal sets forth a fair and reasonable 
process to become and remain a RMO.
    The Exchange asserts that while the Retail Program would 
differentiate among its Members, it believes that such differentiation 
is not unfairly discriminatory because the Retail Program is designed 
to promote a competitive process for retail executions on a registered 
exchange while providing retail investors with the potential to receive 
meaningful price improvement.\17\ The Exchange notes that, under the 
respective retail programs of NYSE, BX, and others, there is existing 
precedent for differentiation and limited segmentation of incoming 
retail order flow and liquidity providing order flow that seeks to 
execute against such incoming retail flow.\18\ IEX also asserts that, 
as with the NYSE and BX programs, its Retail Program is designed to 
provide an additional competitive alternative for retail orders by 
offering certain incentives for broker-dealers to bring more of their 
retail order flow onto a public exchange.\19\
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    \17\ See Notice, supra note 3, at 32242.
    \18\ See supra notes 9-12 and accompanying text.
    \19\ See Notice, supra note 3, at 32242.
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    The Commission believes that proposals involving segmentation of 
order flow on a national securities exchange--even if such order flow 
is retail or offers price improvement to retail orders- must be 
carefully evaluated. In this instance, the Commission believes that the 
Retail Program is reasonably designed, within the Exchange's existing 
market structure, to attract retail order flow to a registered national 
securities exchange, while offering the opportunity for retail 
investors to potentially benefit from midpoint executions.\20\
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    \20\ The Commission has previously recognized that market 
participants and some exchanges distinguish between individual 
retail investors, whose orders are considered desirable by liquidity 
providers because such retail investors are presumed on average to 
be less informed about short-term price movements, and professional 
traders, whose orders are presumed on average to be more informed 
about short term price movements. The Commission has also recognized 
that, because of this distinction, some liquidity providers may be 
more inclined to offer price improvement to retail orders. See 
Securities Exchange Act Release Nos. 73702 (November 28, 2014), 79 
FR 72049 (December 4, 2014) (SR-BX-2014-048) (approving the BX 
Retail Price Improvement Program on a pilot basis).
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    The Commission also believes that providing RLP orders lower 
execution priority against Retail orders than other orders priced to 
trade at the Midpoint Price is not designed to permit unfair 
discrimination or impose an unnecessary or inappropriate burden on 
competition. The Commission notes that the RLP order type would be 
available to all IEX Members, and Members seeking to interact with 
retail order flow on IEX also would be able to submit non-RLP orders 
for Midpoint Price executions, which would be given higher priority 
than RLP orders. Given the restrictions on RLP orders (i.e., they would 
only interact with incoming Retail Orders), it is appropriate that RLP 
orders would not impact order book priority and not enjoy a competitive 
advantage, in the form of enhanced priority or execution opportunities, 
over other resting orders, but rather would yield priority to them. 
Further, IEX will allow any Member to submit RLP orders, which provides 
fair and broad access to this new order type and should promote 
competition by removing barriers to its use on the Exchange.
    Further, the Exchange explains that requiring a Retail Order to be 
either a 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 with Midpoint Price improvement.\21\ This 
approach provides for potentially meaningful price improvement while 
utilizing order types that operate within the current minimum trading 
increment rules. To the extent it is successful, the proposal could 
facilitate and promote competition between exchanges and the over-the-
counter market and potentially bring more retail order flow to a public 
exchange. As such, the proposal 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.
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    \21\ See Notice, supra note 3, at 32243.
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    Accordingly, the Commission finds the design of the Retail Program 
within the current market structure to be consistent with the Act, 
including the requirements of Section 6(b)(5) and Section 6(b)(8) of 
the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\22\ that the proposed rule change (SR-IEX-2019-05), be, 
and it hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-17490 Filed 8-14-19; 8:45 am]
 BILLING CODE 8011-01-P


