[Federal Register Volume 84, Number 195 (Tuesday, October 8, 2019)]
[Notices]
[Pages 53788-53791]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21881]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87200; File No. SR-CboeEDGX-2019-012]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1, To Introduce Retail Priority

October 2, 2019

I. Introduction

    On March 18, 2019, Cboe EDGX Exchange, Inc. (``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to introduce order book priority for equity orders 
submitted on behalf of retail investors. The proposed rule change was 
published for comment in the Federal Register on April 5, 2019.\3\ The 
Commission received five comment letters from four commenters on the 
proposed rule change.\4\ On May 16,

[[Page 53789]]

2019, the Commission extended the time period within which to approve, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change to 
July 4, 2019.\5\ On June 18, 2019, the Exchange filed Amendment No. 1 
to the proposed rule change, which replaced and superseded the proposed 
rule change as originally filed.\6\ On July 2, 2019, the Commission 
published Amendment No. 1 for notice and comment and instituted 
proceedings to under Section 19(b)(2)(B) of the Act \7\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment No. 1.\8\ On August 19, 2019 the Exchange submitted a 
response to comments.\9\ This order approves the proposed rule change, 
as modified by Amendment No. 1.

II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 85482 (April 2, 
2019), 84 FR 13729 (``Notice'').
    \4\ See letters to Vanessa Countryman, Acting Secretary, 
Commission, from Sean Paylor, Trader, AJO, L.P., dated April 25, 
2019 and September 16, 2019 (``AJO Letter 1'' and ``AJO Letter 2'', 
respectively); Joseph Saluzzi and Sal Arnuk, Partners, Themis 
Trading LLC, dated May 8, 2019 (``Themis Letter''); T. Sean Bennett, 
Principal Associate General Counsel, Nasdaq, dated May 9, 2019 
(``Nasdaq Letter''); letter to Eduardo A. Aleman, Deputy Secretary, 
Commission from Stephen John Berger, Global Heady of Government & 
Regulatory Policy, Citadel Securities, dated April 26, 2019 
(``Citadel Letter''). All comments received by the Commission on the 
proposed rule change are available at: https://www.sec.gov/comments/sr-cboeedgx-2019-012/srcboeedgx2019012.htm.
    \5\ See Securities Exchange Act Release No. 85879, 84 FR 23591 
(May 16, 2019).
    \6\ Amendment No. 1 modified the proposed rule change by: (1) 
Adding a proposed definition of ``Retail Priority Order''; (2) 
applying the proposed enhanced priority to ``Retail Priority 
Orders'' instead of ``Retail Orders''; (3) imposing certain 
requirements on Retail Member Organizations that enter ``Retail 
Priority Orders''; (4) removing the proposed requirement that 
``Retail Orders'' must be identified as such on the EDGX Book Feed; 
and (5) requiring that all ``Retail Priority Orders'' be identified 
as such on the EDGX Book Feed. To promote transparency of its 
proposed amendment, when EDGX filed Amendment No. 1 with the 
Commission, it also submitted Amendment No. 1 as a comment letter to 
the file, which the Commission posted on its website and placed in 
the public comment file for SR-CboeEDGX-2019-012 (available at 
https://www.sec.gov/comments/sr-cboeedgx-2019-012/srcboeedgx2019012.htm).
    \7\ 15 U.S.C. 78s(b)(s)(B).
    \8\ See Securities Exchange Act Release No. 86280 (July 2, 
2019), 84 FR 32808 (July 9, 2019) (``Notice of Amendment No. 1''). 
Specifically, the Commission instituted proceedings to allow for 
additional analysis of the proposed rule change's consistency with 
Section 6(b)(5) of the Act, which requires, among other things, that 
the rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' See id. at 32815 (citing 15 U.S.C. 78f(b)(5)).
    \9\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Adrian Griffiths, Assistant General Counsel, EDGX, dated August 
19, 2019 (``EDGX Response Letter'').
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    EDGX proposes to introduce order book priority for Retail Priority 
Orders. In addition, EDGX proposes to require that Retail Priority 
Orders always be designated as such on the EDGX Book Feed.\10\
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    \10\ See EDGX Rule 13.8.
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A. Background

    EDGX operates based on price/display/time priority, similar to many 
other equities and options exchanges.\11\ Under this framework, a 
better priced order maintains priority over an order at a worse price. 
At a particular price, the first Displayed \12\ order resting on the 
EDGX Book \13\ at a particular price has priority over the next order 
and so on based on the time of order entry. Non-Displayed \14\ 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.
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    \11\ See EDGX Rule 11.9.
    \12\ ``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).
    \13\ ``EDGX Book'' means the System's electronic file of orders. 
See EDGX Rule 1.5(d).
    \14\ ``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).
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    Under EDGX rules, a ``Retail Order'' is defined as an agency or 
riskless principal order that meets the criteria of FINRA Rule 5320.03 
\15\ 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.\16\ A ``Retail Member Organization'' 
(``RMO'') is a Member (or a division thereof) that has been approved by 
the Exchange under EDGX Rule 11.21 to submit Retail Orders. EDGX Rule 
11.21(b) describes the qualification and application process for 
becoming a Retail Member Organization; generally, 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.
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    \15\ FINRA Rule 5320.03 clarifies that an Retail Member 
Organization 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 Retail 
Member Organization maintains supervisory systems to reconstruct, in 
a time sequenced manner, all Retail Orders that are entered on a 
riskless principal basis; and (ii) the Retail Member Organization 
submits a report, contemporaneously with the execution of the 
facilitated order, that identifies the trade as riskless principal.
    \16\ 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).
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B. Retail Order Priority

    The Exchange proposes to amend EDGX Rule 11.9 to introduce order 
book priority benefits exclusively to Retail Orders that are entered on 
behalf of retail investors that enter a limited number of equity orders 
each trading day. Such orders are being defined by the Exchange as a 
``Retail Priority Order.'' \17\ To qualify as a Retail Priority Order, 
the order must be a Retail Order, as defined in EDGX Rule 11.21(a)(2), 
that is entered on behalf of a person that does not place more than 390 
equity orders per day on average during a calendar month for its own 
beneficial account(s).\18\ All orders entered on behalf of a retail 
customer would be counted to determine whether a customer's Retail 
Orders could be identified as Retail Priority Orders. This would 
therefore include both orders routed to other exchanges and orders that 
are not entered as Retail Orders (e.g., because the price of such 
orders is modified by a broker-dealer algorithm).\19\
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    \17\ See proposed EDGX Rule 11.9, Interpretations and Policies 
.01.
    \18\ Id. The Exchange states that 390 orders per day represents 
one order entered each minute during regular trading hours--i.e., 
from 9:30 a.m. ET to 4:00 p.m. ET. See supra note 8, Notice of 
Amendment No. 1 at 32809.
    \19\ The Exchange also addresses how to count parent/child 
orders and cancel/replace orders when determining whether the 390 
order per day threshold has been exceeded. As proposed, parent/child 
orders would be counted as a single order--i.e., a ``parent'' order 
that is broken into multiple ``child'' orders by a broker or dealer, 
or by an algorithm housed at a broker or dealer or by an algorithm 
licensed from a broker or dealer, but which is housed with the 
customer, would count as one order even if the ``child'' orders are 
routed across multiple exchanges. In addition, with one exception 
for parent/child orders, any order that cancels and replaces an 
existing order would count as a separate order. An order that 
cancels and replaces any ``child'' order resulting from a ``parent'' 
order that is broken into multiple ``child'' orders, would not count 
as a new order. See supra note 8 at 32809-10.
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    Pursuant to the proposal, RMOs that enter Retail Priority Orders 
would be required to have reasonable policies and procedures in place 
to ensure that such orders are appropriately represented on

[[Page 53790]]

the Exchange.\20\ Such policies and procedures should provide for a 
review of retail customers' activity on at least a quarterly basis.\21\ 
Retail Orders for any retail customer that had an average of more than 
390 orders per day during any month of a calendar quarter would not be 
eligible to be entered as Retail Priority Orders for the next calendar 
quarter.\22\ RMOs would be required to conduct a quarterly review and 
make any appropriate changes to the way in which they are representing 
orders within five business days after the end of each calendar 
quarter.\23\ While RMOs would only be required to review their accounts 
on a quarterly basis, if during a quarter the Exchange identifies a 
retail customer for which orders are being represented as Retail 
Priority Orders but that has averaged more than 390 orders per day 
during a month, the Exchange would notify the RMO, and the RMO would be 
required to change the manner in which it is representing the retail 
customer's orders within five business days.\24\ The Exchange notes 
that the proposed provisions relating to the obligations of RMOs are 
similar to the obligations applicable to the Priority Customer 
designation in the options industry.\25\
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    \20\ See proposed EDGX Rule 11.9, Interpretations and Policies 
.02.
    \21\ Id.
    \22\ See proposed EDGX Rule 11.9, Interpretations and Policies 
.02(a).
    \23\ Id.
    \24\ See proposed EDGX Rule 11.9, Interpretations and Policies 
.02(b).
    \25\ See Notice of Amendment No. 1, supra note 8, at 32810.
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    As described more fully in Amendment No. 1, that portion of a 
Retail Order with a Displayed instruction would be given allocation 
priority ahead of all other available interest on the EDGX Book.\26\ 
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 Priority Orders subject to Display-Price Sliding 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. In addition, 
since Reserve Orders contain a Displayed instruction but include both 
Displayed and Non-Displayed shares, the Reserve Quantity of Retail 
Priority Orders would be given priority ahead of the Reserve Quantity 
of other limit orders on the EDGX Book. Retail Priority 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. This priority for Retail Orders would be in place 
during all trading sessions and would be available to orders entered 
for participation in the Exchange's opening process and the re-opening 
process following a halt.\27\
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    \26\ Id.
    \27\ Id.
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C. Retail Order Attribution

    Currently, RMOs that submit Retail Orders to the Exchange have the 
option of identifying Retail Orders as such on the EDGX Book Feed.\28\ 
In the instant proposal, EDGX is requiring that Retail Priority Orders 
always be designated as such on the EDGX Book Feed.\29\ Retail Orders 
that are not designated as Retail Priority Orders could continue to be 
attributed or not, at the discretion of the RMO.
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    \28\ See EDGX Rule 11.21(f).
    \29\ See proposed EDGX Rule 11.21(f).
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III. Comment Summary

    The Commission received five comment letters from four commenters 
on the proposed rule change.\30\ All four commenters express concerns 
about the proposed rule change, as initially proposed. Following the 
publication of Amendment No. 1, the one of the four commenters 
submitted another comment letter that expresses continuing concerns 
about the proposed rule change, as amended.
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    \30\ See supra note 4.
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    Two commenters expressed concerns about the Exchange's initial 
definition of ``Retail Order,'' both noting that the definition does 
not adequately distinguish retail investors' orders from active 
professional traders' orders, potentially resulting in the granting of 
queue priority to professional traders.\31\ One commenter stated that 
this would impair market quality, undermine the intended benefits for 
bona fide retail investors, adversely affect institutional investor 
fill rates, and impair the provision of displayed liquidity.\32\ This 
commenter also suggested that active professional orders could more 
easily implement spread capture models by simply trading back-and-forth 
at the top of the queue.\33\ This commenter further suggested that the 
Exchange should amend the definition of ``Retail Order'' and noted that 
the options markets use a definition of ``professional customer'' to 
distinguish them from retail customers.\34\ The other commenter 
expressed concern that the Exchange has not addressed issues with 
enforcing the Retail Order definition, by, among other things, failing 
to adequately consider investor protection issues raised by the 
proposed rule change.\35\ This commenter stated that the Exchange does 
not provide any detail on how it would protect investors from the 
misuse of retail priority and believes that the Exchange must provide 
more detail on how it will protect investors.\36\
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    \31\ See Citadel Letter, supra note 4, at 1-2; Nasdaq Letter, 
supra note 4, at 1.
    \32\ See Citadel Letter, supra note 4, at 1-2.
    \33\ See Citadel Letter, supra note 4, at 2.
    \34\ See Citadel Letter, supra note 4, at 2.
    \35\ See Nasdaq Letter, supra note 4, at 1.
    \36\ See Nasdaq Letter, supra note 4, at 2.
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    One commenter stated that the initial rule proposal is ``the 
quintessential example of customer discrimination.'' \37\ This 
commenter noted that the initial rule proposal is purportedly designed 
with ordinary investors in mind, but the Retail Order designation can 
only be utilized by a minority of ordinary investors, noting that 
pension funds and institutional managers trading on behalf of 
``ordinary investors'' would not receive the benefit of order 
priority.\38\ This commenter maintained that the proposed order type 
discriminates against a significant portion of ordinary investors as 
initially proposed and even as amended.\39\
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    \37\ See AJO Letter 1, supra note 4, at 2-3.
    \38\ See AJO Letter 1, supra note 4, at 1; see also AJO Letter 
2, supra note 4, at 2.
    \39\ See AJO Letter 1, supra note 4, at 4; see also AJO Letter 
2, supra note 4, at 2, 4.
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    Three commenters expressed concerns relating to the requirement, as 
set forth in the initial proposal, that Retail Orders will be 
designated as such on the EDGX Book Feed.\40\ Two of these commenters 
stated that only those market participants who purchase the appropriate 
EDGX proprietary data feeds will have access to this information, and 
identifying Retail Orders will allow these market participants to 
identify institutional orders.\41\ One commenter suggested that this 
places these market participants at an ``informational advantage over 
others.'' \42\ Another commenter stated that such order information 
leakage will result in increased adverse selection for institutional 
investors and also believes that the unique data will make the relevant 
EDGX data feed more valuable and likely encourages consumers of those 
data feeds to continue purchasing these data feeds.\43\ One commenter 
noted that institutional investors have no ability to opt out, unlike 
Retail Member Organizations that could

[[Page 53791]]

choose to submit orders that would qualify as Retail Orders if so 
designated, but are submitted without applying such designation.\44\
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    \40\ See Nasdaq Letter, supra note 4, at 2-3; AJO Letter 1, 
supra note 4 at 2; Themis Letter, supra note 4 at 2.
    \41\ See AJO Letter 1, supra note 4, at 2; Themis Letter, supra 
note 4, at 1-2.
    \42\ See AJO Letter 1, supra note 4, at 2.
    \43\ See Themis Letter, supra note 4, at 2.
    \44\ See AJO Letter 1, supra note 4, at 3.
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    In its response letter, EDGX states that the proposal, as modified 
by Amendment No. 1, limits retail priority to only a subset of Retail 
Orders (i.e., Retail Priority Orders) and therefore renders the 
information leakage question ``moot'' because the RMO would retain the 
choice of whether or not to attribute the order.\45\ EDGX also notes 
that because only a subset of Retail Orders would be required to be 
attributed on the EDGX Book Feed, market participants would not be able 
to infer that any non-attributable order is an institutional order.\46\
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    \45\ See EDGX Response Letter, supra note 9 at 2. One commenter 
maintained that there is still ``information leakage'' which will 
permit institutional orders to be identified after the Exchange 
amended the original proposal to remove the requirement that all 
retail orders be attributed. See AJO Letter 2, supra note 4, at 2.
    \46\ Id.
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    EDGX responds to the concern raised by a commenter regarding the 
possible abuse of retail order priority by noting that the Exchange has 
limited retail priority to orders entered on behalf of investors that 
enter only a limited number of equity order each trading day, and 
asserting that the Exchange has an effective regulatory program to 
address member compliance with the retail priority order 
requirements.\47\ EDGX also states that its Regulatory Division intends 
to implement enhancements to its current regulatory program designed to 
oversee RMO compliance with the retail priority rules to ensure that 
orders entered with a priority attribute are appropriately marked.\48\
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    \47\ See EDGX Response Letter, supra note 9 at 3.
    \48\ Id.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No.1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\49\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\50\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, 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 that the rules are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \49\ In approving this proposed rule change the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposal represents a 
reasonable effort to enhance the ability of bona fide retail trading 
interest to compete for executions with orders entered by other market 
participants that may be better equipped to optimize their place in the 
intermarket queue.\51\ Under the proposal, bona fide retail orders will 
be in a position to compete for executions as long as they are 
qualified as such and attributed as such, which should lead to 
increased or more immediate execution opportunities on the Exchange for 
resting Retail Priority Orders. Furthermore, in order to qualify as a 
Retail Priority Order, the Exchange is requiring RMOs that enter Retail 
Priority Orders to have reasonable policies and procedures in place to 
ensure that such order are appropriately represented on the 
Exchange.\52\ RMOs also must conduct a quarterly review of retail 
customers' activity and make any appropriate changes to the way in 
which the RMO is representing orders within five business days after 
the end of each calendar quarter. In addition, if the Exchange 
identifies a retail customer whose orders are being represented by an 
RMO that exceed 390 order per day during a month, the Exchange will 
notify the RMO and the RMO will be required to change the manner in 
which it is representing the retail customer's orders within five 
business days. The Commission also notes that the Exchange's Regulatory 
Division intends to implement enhancements to its current regulatory 
program designed to oversee RMO compliance with the retail priority 
rules to ensure that orders entered with a priority attribute are 
appropriate marked.\53\
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    \51\ Under existing EDGX Rules, to qualify as a RMO, Members 
must submit to the Exchange, among other things, an attestation that 
substantially all orders submitted as Retail Orders will qualify as 
such, and must have written policies and procedures that are 
reasonably designed to ensure that the Member will only designate 
orders as Retail Order if all the requirements of a Retail Order are 
met. In addition, if the Member represents Retail Orders from 
another broker-dealer customer, that Member's supervisory procedures 
must be reasonably designed to assure that the orders it receives 
from such broker dealer customer that it designates as Retail Orders 
meet the definition of a Retail Order. Such Members also must (i) 
obtain an annual written representation from each broker-dealer 
customer that sends it orders to be designated as Retail Orders that 
entry of such orders as Retail Orders will be in compliance with the 
requirements specified by the Exchange, and (ii) monitor whether its 
broker-dealer customer's Retail Order flow continues to meet the 
applicable requirements. See generally EDGX Rule 11.21(b).
    \52\ See proposed EDGX Rule 11.9, Interpretations and Policies 
.02.
    \53\ Id.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act \54\ and the rules and regulations thereunder 
applicable to a national securities exchange.
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    \54\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\55\ that the proposed rule change, as modified by Amendment No. 1 
(SR-CboeEDGX-2019-012) be, and hereby is, approved.
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    \55\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21881 Filed 10-7-19; 8:45 am]
BILLING CODE 8011-01-P


