[Federal Register Volume 85, Number 39 (Thursday, February 27, 2020)]
[Notices]
[Pages 11426-11436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03915]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88261; File No. SR-CboeEDGA-2019-012]


Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Order 
Disapproving Proposed Rule Change To Introduce a Liquidity Provider 
Protection Delay Mechanism on EDGA

February 21, 2020.

I. Introduction

    On June 7, 2019, Cboe EDGA Exchange, Inc. (``EDGA'' 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 introduce a delay mechanism on 
EDGA. The proposed rule change was published for comment in the Federal 
Register on June 26, 2019.\3\ On August 5, 2019, pursuant to Section 
19(b)(2) of the Exchange Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether the 
proposed rule change should be disapproved.\5\
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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. 86168 (June 20, 
2019), 84 FR 30282 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 86567 (Aug. 5, 
2019), 84 FR 39385 (Aug. 9, 2019). The Commission designated 
September 24, 2019, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
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    On September 24, 2019, the Commission instituted proceedings to 
determine whether to approve or disapprove the proposed rule 
changes.\6\ On December 16, the Commission designated a longer period 
for Commission action on the proposed rule change.\7\ This order 
disapproves the proposed rule change.
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    \6\ See Securities Exchange Act Release No. 87096, 84 FR 51657 
(September 30, 2019) (``Order Instituting Proceedings'' or ``OIP'').
    \7\ See Securities Exchange Act Release No. 87757, 84 FR 70231 
(December 20, 2019).
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II. Description of the Proposed Rule Change

    The Exchange proposes to adopt the Liquidity Provider Protection 
(``LP2'') delay mechanism in order ``to protect liquidity providers and 
thereby enable those liquidity providers to make better markets in 
equity securities traded on the Exchange.'' \8\ As described in detail

[[Page 11427]]

in the Notice,\9\ the LP2 delay mechanism would delay all incoming 
executable orders that would remove liquidity from the EDGA Book, but 
not incoming or outgoing market data, for up to four milliseconds. 
Under the proposal, if book conditions changed such that an incoming 
order was no longer executable against orders resting on the EDGA Book 
(e.g., resting orders on the book are cancelled or modified such that 
they are no longer marketable against the delayed incoming order), the 
incoming order would be released from the queue prior to the completion 
of the 4 millisecond delay.\10\ The LP2 delay mechanism would also 
apply to the cancel, cancel/replace, or modification messages that are 
associated with liquidity taking orders.\11\ The Exchange would apply 
such messages after the liquidity taking order is released from the 
delay mechanism.\12\ At the end of the delay period, incoming orders, 
cancel, cancel/replace, and modification messages subjected to the 
delay mechanism would be processed after the System\13\ has processed, 
if applicable, all messages in the security received by the Exchange 
during such delay period.\14\
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    \8\ See Notice, 84 FR at 30282.
    \9\ See id. at 30283-89.
    \10\ See id. at 30284.
    \11\ See id.
    \12\ See id.
    \13\ The term ``System'' refers to the electronic communications 
and trading facility designated by the Board through which 
securities orders of Users are consolidated for ranking, execution 
and, when applicable, routing away. See EDGA Rule 1.5(cc).
    \14\ See Notice, 84 FR at 30284, n. 11. According to the 
Exchange, an incoming message may be delayed for longer than four 
milliseconds depending on the volume of messages being processed by 
the Exchange. Id.
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    Certain order types, or orders with instructions, that are not 
eligible for execution upon entry would become subject to the LP2 delay 
mechanism when a potential execution is triggered by a subsequent 
incoming order. For example, orders entered with either a Stop Price or 
Stop Limit Price instruction would not be executed until elected, and 
would only be subject to the delay mechanism after the order is 
converted to either a Market Order or Limit Order. Similarly, orders 
entered with a time-in-force instruction of Regular Hours Only would be 
subjected to the delay mechanism when entered into the EDGA Book after 
an opening or re-opening process.\15\
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    \15\ See EDGA Rule 11.7 relating to the opening and re-opening 
process.
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    An incoming order that is not executable upon entry would not be 
subject to the delay mechanism. For example, orders with instructions 
that are not executable when entered due to its order instructions 
(e.g., Minimum Quantity and Post Only) would not be subject to the LP2 
Delay Mechanism. In addition, incoming routable orders that bypass the 
EDGA book would not be subject to the LP2 delay mechanism, but any 
returning, executable remainder of such a routed order would be subject 
to the delay mechanism. The sole exception to a non-executable incoming 
order being subject to the delay would be incoming orders with the 
EdgeRisk Self Trade Protection (``ERSTP'') modifier. ERSTP modifiers 
are an optional risk protection that prevents the execution of orders 
originating from the same market participant identifier, Exchange 
Member identifier or ERSTP Group identifier.\16\ The ERSTP modifier 
would be applied to the order after it is delayed.
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    \16\ See Notice, 84 FR at 30283-84.
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Market Data

    The Exchange proposes that the LP2 delay mechanism would not apply 
to inbound or outbound market data. Current, un-delayed data, would be 
used for all purposes including regulatory compliance and the pricing 
of pegged orders and the quotation and trade data would continue to be 
disseminated, without delay, to the applicable securities information 
processor (``SIP'') and direct market data feeds.\17\
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    \17\ See id.
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Regulation NMS

    In conjunction with the proposed LP2 delay mechanism, the Exchange 
proposes to disseminate a manual, unprotected quotation to the SIP.\18\ 
In addition, because certain Regulation NMS rules related to locked and 
crossed markets would apply differently to EDGA's manual, unprotected 
quotation, compared to its current automated, protected quotation, the 
Exchange proposed to make the two rule changes described below.
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    \18\ Rule 600(a)(37) defines a ``manual quotation'' as any 
quotation other than an automated quotation.
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    First, the Exchange proposes to add new EDGA Rule 11.10(a)(6) to 
provide that a bid (offer) on the EDGA Book is eligible to remain 
posted to the EDGA Book for one second after such bid (offer) is 
crossed by a Protected Offer (Protected Bid). The bid (offer) on the 
EDGA Book will be cancelled if it continues to be higher (lower) than a 
Protected Offer (Protected Bid) after this one second period. Because 
the delayed cancellation behavior set forth by proposed EDGA Rule 
11.10(a)(6) would allow bids and offers on EDGA to remain posted and 
executable for up to one second if crossed by a Protected Bid or 
Protected Offer of another market, the Exchange also proposes to amend 
EDGA Rule 11.10(a)(2) to provide that the Exchange will not execute any 
portion of a bid or offer at a price that is more than the greater of 
five cents or 0.5 percent through the lowest Protected Offer or highest 
Protected Bid, as applicable.
    Second, the Exchange proposes to amend EDGA Rule 11.10(f) related 
to the dissemination and display of Locking Quotations or Crossing 
Quotations.\19\ Because the Exchanges' quotations would be marked 
manual, Rule 610(d)(1)(ii) of Regulation NMS requires that the Exchange 
avoid locking or crossing any quotation in an NMS stock disseminated 
pursuant to an effective national market system plan. The Exchange 
proposes to amend EDGA Rule 11.10(f)(3) to provide that an EDGA 
quotation would not be considered a Locking or Crossing Quotation if 
the quotation being locked or crossed is a manual quotation that is 
allowed to be locked or crossed pursuant to an exemption request 
submitted by the Exchange.\20\
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    \19\ A ``Locking Quotation'' is the display of a bid for an NMS 
stock at a price that equals the price of an offer for such NMS 
stock previously disseminated pursuant to an effective national 
market system plan, or the display of an offer for an NMS stock at a 
price that equals the price of a bid for such NMS stock previously 
disseminated pursuant to an effective national market system plan in 
violation of Rule 610(d) of Regulation NMS. See EDGA Rule 11.6(g). A 
``Crossing Quotation'' is the display of a bid (offer) for an NMS 
stock at a price that is higher (lower) than the price of an offer 
(bid) for such NMS stock previously disseminated pursuant to an 
effective national market system plan in violation of Rule 610(d) of 
Regulation NMS. See EDGA Rule 11.6(c).
    \20\ See Notice, 84 FR at 30285. In the Notice, the Exchange 
notes that it submitted an exemption request to the Commission 
pursuant to Rule 610(e) of Regulation NMS that, if granted by the 
Commission, would permit the Exchange to lock or cross manual 
quotations disseminated by the New York Stock Exchange LLC 
(``NYSE''). Id.; see also Letter from Adrian Griffiths, Assistant 
General Counsel, Cboe, to Vanessa Countryman, Acting Secretary, 
dated June 7, 2019 (requesting exemptive relief from certain 
requirements related to locked and crossed markets pursuant to Rule 
610(e) of Regulation NMS).
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Eliminate or Modify Certain Order Types and Instructions

    The Exchange proposes to eliminate or modify certain order types 
and instructions to reduce System complexity in light of the operation 
of the proposed LP2 delay mechanism. Specifically, the Exchange 
proposes to eliminate the:

[[Page 11428]]

     Discretionary Range instruction \21\ and the MidPoint 
Discretionary Order (``MDO''); \22\
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    \21\ Discretionary Range is an optional instruction that a User 
may attach to an order to buy (sell) a stated amount of a security 
at a specified, displayed or non-displayed ranked price with 
discretion to execute up (down) to another specified, non-displayed 
price. See EDGA Rule 11.6(d).
    \22\ A Midpoint Discretionary Order is a limit order to buy that 
is pegged to the NBB, with discretion to execute at prices up to and 
including the midpoint of the NBBO, or a limit order to sell that is 
pegged to the NBO, with discretion to execute at prices down to and 
including the midpoint of the NBBO. See EDGA Rule 11.8(e).
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     Pegged instruction,\23\ including the Market Peg \24\ and 
Primary Peg \25\ instruction;
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    \23\ Pegged is an instruction to automatically re-price an order 
in response to changes in the NBBO, and can be entered as either a 
Market Peg or Primary Peg. See EDGA Rule 11.6(j).
    \24\ Market Peg is an order instruction to peg an order to the 
NBB, for a sell order, or the NBO, for a buy order. See EDGA Rule 
11.6(j)(1).
    \25\ Primary Peg is an order instruction to peg an order to the 
NBB, for a buy order, or the NBO, for a sell order. See EDGA Rule 
11.6(j)(2).
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     Supplemental Peg Orders; \26\ and
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    \26\ Supplemental Peg Orders are non-displayed Limit Orders that 
are eligible for execution at the NBB for a buy order and NBO for a 
sell order against an order that is in the process of being routed 
to an away Trading Center if such order that is in the process of 
being routed away is equal to or less than the aggregate size of the 
Supplemental Peg Order interest available at that price. See EDGA 
Rule 11.8(g).
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     Non-Displayed Swap and Super Aggressive instructions.\27\
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    \27\ Currently, when an order entered with an NDS or Super 
Aggressive instruction is locked by an incoming order with a Post 
Only instruction that would not remove liquidity based on the 
economic impact of removing liquidity on entry compared to resting 
on the order book and subsequently providing liquidity, the order 
with the NDS or Super Aggressive instruction is converted to an 
executable order and will remove liquidity against such incoming 
order. If an order that does not contain a Super Aggressive 
instruction maintains higher priority than one or more Super 
Aggressive eligible orders, the Super Aggressive eligible order(s) 
with lower priority will not be converted and the incoming order 
with a Post Only instruction will be posted or cancelled in 
accordance with Rule 11.6(n)(4). This does not apply to orders 
entered with an NDS instruction. See EDGA Rule 11.6(n)(2), (n)(7).
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    In addition, the Exchange proposes to modify the:
     MidPoint Peg Order (``MPO'') \28\ by eliminating the 
optional functionality that allows a User to: (1) Peg the order to the 
less aggressive midpoint or one minimum price variation inside the same 
side of the NBBO, and (2) opt for executions during a locked market;
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    \28\ MPOs are non-displayed, market or limit orders with an 
instruction to execute at the midpoint of the NBBO, or, 
alternatively, pegged to the less aggressive of the midpoint of the 
NBBO or one minimum price variation inside the same side of the NBBO 
as the order. See EDGA Rule 11.9(c)(9).
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     Price Adjust \29\ and Display-Price Sliding \30\ 
instructions to eliminate the functionality to allow orders with these 
instructions to adjust multiple times to a more aggressive price in 
response to changes to the prevailing NBBO; \31\
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    \29\ Price Adjust is an order instruction requiring that where 
an order would be a locking quotation or crossing quotation of an 
external market if displayed by the System on the EDGA Book at the 
time of entry, the order will be displayed and ranked at a price 
that is one minimum price variation lower (higher) than the locking 
price for orders to buy (sell). See EDGA Rule 11.6(l)(1)(A).
    \30\ Display-Price Sliding is an order instruction requiring 
that where an order would be a locking quotation or crossing 
quotation of an external market if displayed by the System on the 
EDGA Book at the time of entry, will be ranked at the locking price 
in the EDGA Book and displayed by the System at one minimum price 
variation lower (higher) than the locking price for orders to buy 
(sell). See EDGA Rule 11.6(l)(1)(B).
    \31\ See EDGA Rule 11.6(l)(1)(A)(i),(B)(iii).
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     Post Only \32\ instruction to (1) limit the use of the 
instruction to displayed orders and MPOs and (2) eliminate the ability 
of such orders to execute on an incoming basis; and
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    \32\ Post Only is an order instruction that would allow an 
otherwise marketable incoming order to (1) cancel or (2) post to the 
System in a manner that complies with Regulation NMS and forego an 
execution with a resting order on the EDGA book unless the execution 
would be economically beneficial when considered in tandem with the 
applicable Exchange fee or rebate for taking liquidity. See EDGA 
Rules 11.6(n)(4), 11.9, and 11.10(a)(4).
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     Market Maker Peg Orders to require the use of a Post Only 
instruction with such orders.\33\
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    \33\ A Market Maker Peg Order is designed to assist market 
makers maintain compliance with their continuous quoting 
obligations. Specifically, it is a limit order that is automatically 
priced by the System at the Designated Percentage away from the then 
current NBB (in the case of an order to buy) or NBO (in the case of 
an order to sell), or if there is no NBB or NBO at such time, at the 
Designated Percentage away from the last reported sale from the 
responsible single plan processor.
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    Finally, the Exchange proposes conforming changes to rules 
referencing the current Post Only functionality that would permit an 
incoming order to be executed.\34\
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    \34\ See e.g., EDGA Rule 11.6(l)(A)(4),(B)(4) and EDGA Rule 
11.8(c)(5).
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III. Discussion

A. The Applicable Standard for Review

    Under Section 19(b)(2)(C) of the Exchange Act,\35\ the Commission 
shall approve a proposed rule change of a self-regulatory organization 
(``SRO'') if it finds that such proposed rule change is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to such organization.\36\ The Commission 
shall disapprove a proposed rule change if it does not make such a 
finding.\37\ Rule 700(b)(3) of the Commission's Rules of Practice 
states that the ``burden to demonstrate that a proposed rule change is 
consistent with the [Exchange Act] and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements . . . is not 
sufficient.''\38\ Rule 700(b)(3) also states that ``the description of 
a proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding.'' \39\ Any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations.\40\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\41\
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    \35\ 15 U.S.C. 78s(b)(2)(C).
    \36\ 15 U.S.C. 78s(b)(2)(C)(i).
    \37\ 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700(b)(3).
    \38\ 17 CFR 201.700(b)(3).
    \39\ Id.
    \40\ See id.
    \41\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (DC Cir. 2017).
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    The Commission concludes that the Exchange has not met its burden 
to show that approval of the proposed rule change is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange.\42\ In 
particular, as discussed below, the Exchange has not met its burden 
with respect to Section 6(b)(5) of the Exchange Act, which requires, 
among other things, that the rules of a national securities exchange be 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest

[[Page 11429]]

and not to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\43\
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    \42\ In disapproving the 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). The 
Commission recognizes that some commenters stated that the proposal 
would help foster competition. See, e.g., Letter from Steve 
Crutchfield, Head of Market Structure, CTC Trading Group, LLC, dated 
October 28, 2019 (``CTC Letter II'') at 1-2. But, for the reasons 
discussed throughout, the Commission is disapproving the proposed 
rule change because the Exchange has not met its burden to 
demonstrate that the proposed rule change is consistent with the 
Exchange Act.
    \43\ 15 U.S.C. 78f(b)(5).
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B. Whether EDGA Has Met Its Burden To Demonstrate That the Proposal Is 
Designed Not To Permit Unfair Discrimination

    The proposed rule change is discriminatory in that the Exchange 
would delay incoming executable orders by 4 milliseconds, which would 
allow market participants with orders on the EDGA book that are not 
subject to the delay up to 4 milliseconds to cancel or modify their 
orders. A discriminatory proposal, however, is not inconsistent with 
the Exchange Act if the discrimination permitted is not unfair. The 
Commission has previously stated that ``a proposed access delay that is 
only imposed on certain market participants or certain types of orders 
would be scrutinized to determine whether or not the discriminatory 
application of that delay is unfair.'' \44\ In analyzing whether the 
Exchange has met its burden to demonstrate that its proposal is 
consistent with Section 6(b)(5) of the Exchange Act,\45\ the Commission 
examines below whether the record supports the Exchange's assertions 
that the LP2 delay mechanism is designed to not permit unfair 
discrimination.
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    \44\ See Securities Exchange Act Release No. 78102; 81 FR 40785, 
40792 n.75 (June 23, 2016) (Commission Interpretation Regarding 
Automated Quotations Under Regulation NMS). See also Securities 
Exchange Act Release No. 77406, 81 FR 15765 (Mar 24, 2016) (File No. 
10-222) (Order Instituting Proceedings on IEX's Form 1 with 
discussion related to the potentially unfair discriminatory 
application of an access delay to advantage an affiliated outbound 
routing broker).
    \45\ 15 U.S.C. 78f(b)(5).
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1. The Exchange's Basis for a Four Millisecond Delay

    The Exchange stated that the proposal is designed to protect 
liquidity providers by reducing the effectiveness of certain harmful 
latency arbitrage strategies employed by a small number of liquidity 
takers and thereby promote improvements to market quality.\46\ 
Specifically, the Exchange asserted that the reduced risk of adverse 
selection for market makers would result in increased displayed 
liquidity with tighter spreads and greater size on the Exchange.\47\ 
According to the Exchange, the potential for trading at stale prices 
increases risk for firms that wish to provide liquidity to the market, 
and harms market quality by causing liquidity providers to enter quotes 
with either a wider spread or a smaller size than they may otherwise 
display.\48\ The Exchange believes that a ``meaningful portion'' of any 
savings earned by liquidity providers would be passed on to investors 
in the form of better market quality and benefit the majority of 
investors.\49\
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    \46\ See Letters from Adrian Griffiths, Assistant General 
Counsel, Cboe Global Markets, dated August 22, 2019 (``Exchange 
Response Letter I'') at 1, and dated December 20, 2019 (``Exchange 
Response Letter II'') at 4.
    \47\ See Exchange Response Letter I at 1.
    \48\ See Notice at 30289. The Exchange also stated ``that the 
LP2 delay mechanism would promote liquidity provision without 
unfairly discriminating against specific segments of the market'' 
and that it is appropriate to provide protection for orders that 
provide liquidity because these orders provide an important service 
to the market and face asymmetric risks due to the fact that the 
market may move while they are posted to the order book. See id. at 
30290.
    \49\ See Exchange Response Letter II at 5.
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    A commenter supporting the proposal asserted that the term latency 
arbitrage ``generally means using dedicated microwave towers to 
transmit order information from one location to another to trade the 
same or correlated financial instrument based on information that is a 
few milliseconds away from becoming available to all market 
participants.'' \50\ This commenter stated that the 4 millisecond delay 
``would neutralize the difference between commodity fiber connections 
and microwave networks.'' \51\ In contrast, several commenters opposing 
the proposal asserted that the proposed rule change did not identify 
the problem (i.e., cross-asset latency arbitrage) with sufficient 
specificity or detail to establish the scope of the problem to be 
addressed or the magnitude of the problem on the Exchange.\52\ Five 
commenters indicated that the data provided by EDGA was inadequate to 
establish the extent of the negative impact of cross-asset latency 
arbitrage on the EDGA market.\53\ Two commenters indicated that the 
term ``latency arbitrage'' was too broad and not clearly defined, and 
expressed concern that beneficial hedging activity for Exchange Traded 
Funds (``ETFs'') or by options liquidity providers in the underlying 
markets could be caught in the definition of latency arbitrage.\54\ Two 
commenters did not believe that EDGA offered credible evidence to 
establish how the proposal would reduce cross-market latency 
arbitrage.\55\
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    \50\ See Letter from Eric Swanson, CEO, XTX Markets LLC 
(Americas), dated July 16, 2019 (``XTX Letter I'') at 2.
    \51\ See XTX Letter I at 5.
    \52\ See Letters from: Stephen John Berger, Managing Director, 
Global Head of Government and Regulatory Policy, Citadel Securities, 
dated July 16, 2019 (``Citadel Letter I'') at 6-7; Joanna Mallers, 
Secretary, FIA Principal Traders Group, dated July 16, 2019 (``FIA 
Letter I'') at 2; ''); Joanna Mallers, Secretary, FIA Principal 
Traders Group, dated October 21, 2019 (``FIA Letter II'') at 1-2; 
Tyler Gellasch, Executive Director, Healthy Markets, dated July 16, 
2019 (``Healthy Markets Letter I'') at 6; Tyler Gellasch, Executive 
Director, Healthy Markets Association, dated Oct. 21, 2019 
(``Healthy Markets Letter II'') at 2; R.T. Leuchtkafer, dated 
October 21, 2019 (``Leuchtkafer Letter IV'') at 1, 3; Theodore R. 
Lazo, Managing Director and Associate General Counsel, SIFMA, dated 
July 18, 2019 (``SIFMA Letter'') at 2.
    \53\ See Citadel Letter I at 6-7; FIA Letter I at 2; FIA Letter 
II at 1-2; Healthy Markets Letter I at 6; Healthy Markets Letter II 
at 2; Leuchtkafer Letter IV at 1, 3; SIFMA Letter at 2.
    \54\ See Citadel Letter II at 3 n.5; FIA Letter II at 1-2.
    \55\ See Healthy Markets Letter II at 2; Letter from R.T. 
Leuchtkafer, dated February 7, 2020 (``Leuchtkafer Letter V'') at 2. 
One of these commenters also believed that EDGA did not establish 
the taxonomy of cross-market latency arbitrage that the proposal 
would seek to address, or to what extent market participants would 
use the ``time advantage'' contemplated by the proposal. Healthy 
Markets Letter II at 2.
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    In order to (1) establish the extent of the latency arbitrage issue 
on EDGA, (2) explain how the LP2 delay mechanism would resolve the 
latency arbitrage issue without permitting unfair discrimination, and 
(3) demonstrate that 4 milliseconds was an appropriate duration for the 
LP2 delay mechanism, the Exchange provided a markout analysis (i.e., an 
analysis of execution costs) for EDGA liquidity providers in SPY during 
July 2019.\56\ The Exchange stated that the charts demonstrated whether 
a liquidity provider attempted and failed to cancel or replace their 
quotation within 4 milliseconds after an execution and the price 
differential between the execution price and the midpoint price at the 
time of the trade and the milliseconds following an execution.\57\ The 
Exchange also asserted that the charts showed that ``the midpoint price 
move[d] dramatically in the milliseconds immediately following 
transactions in this category, and often involved a handful of faster 
firms that are routinely able to predict and profit from prices that 
are about to change.'' \58\ According to the Exchange, the markout 
analysis represented ``the majority of trading activity conducted on 
the Exchange, [and] showed relatively stable prices following an 
execution.'' \59\ The Exchange also included a similar markout analysis 
for other securities during July 2019.\60\ The Exchange concluded, 
based on the markout analysis, that investors that are not actively 
engaging in latency arbitrage would not be harmed by the LP2 delay 
mechanism and would continue to be able to access liquidity at similar 
prices

[[Page 11430]]

after the 4 millisecond delay because ``published quotations are 
relatively stable immediately following an execution.'' \61\ The 
Exchange also concluded that concerns related to ``the possibility that 
a published quotation may not be accessible because a liquidity 
provider cancels its orders before an investor can access the published 
bid or offer'', were unwarranted because the data showed that prices 
are ``relatively stable for most investors'' after an execution, and 
the liquidity would likely be available notwithstanding the 
introduction of the delay.\62\ The Exchange stated that ``the 
[p]roposal is likely to make it less profitable to engage in latency 
arbitrage while not materially affecting the ability of ordinary 
investors to access liquidity on EDGA.'' \63\
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    \56\ See Exchange Response Letter I at 3.
    \57\ See id. at 3-4.
    \58\ See id. at 3.
    \59\ See id. at 4.
    \60\ See id. at Appendix.
    \61\ See id. at 5.
    \62\ See id.
    \63\ See Exchange Response Letter I at 5-6.
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    In response to the Exchange's markout analysis, one commenter 
supporting the proposal stated that the Exchange's markout analysis 
could be used to measure the reduction in adverse selection on executed 
transactions.\64\ In contrast, two commenters opposing the proposal did 
not believe that the Exchange's markout analysis established the 
latency arbitrage problem on the Exchange or that the proposal would 
necessarily provide an effective counter measure.\65\ One commenter 
suggested that the Exchange's markout analysis did not necessarily show 
stale quotes being picked off by latency arbitrageurs out of Chicago, 
but rather may demonstrate that either (1) the SPY signal for the 
cancellation of orders is coming from somewhere geographically closer 
than Chicago, or (2) that EDGA market makers could be utilizing 
connections that are faster than fiber.\66\ This commenter believed 
that the Exchange's markout analysis could be evidence that the 
proposal may provide EDGA market makers with an ``investor-funded 
subsidy'' of $900 a day or more in SPY.\67\ This commenter also 
suggested that the data likely shows the effect of investor equities 
market sweeps as opposed to latency arbitrage activity based on the 
futures markets in Chicago.\68\ Another commenter believed that the 
markout data did not provide evidence of stale prices, but rather 
showed that liquidity providers try, but fail, to cancel their quotes 
before receiving an execution more often when the price is moving 
compared to when the price is stable.\69\ This commenter believed that 
the execution prices for failed cancellations ``very likely matched the 
executed prices on other exchanges as investors executed orders against 
existing market-maker quotes and other resting orders.'' \70\ This 
commenter also believed the data was consistent with the ``standard'' 
broker-dealer practice of sweeping the top-of-book across all exchanges 
on behalf of both institutional and retail investors seeking to fill 
orders that are equal to, or larger than, the size at the NBB or 
NBO.\71\
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    \64\ See Letter from Eric Swanson, CEO, XTX Markets LLC 
(Americas), dated October 18, 2019 (``XTX Letter III'') at 2.
    \65\ See FIA Letter II at 2; Letter from R.T. Leuchtkafer, dated 
September 9, 2019 (``Leuchtkafer Letter III'') at 2-3; Leuchtkafer 
Letter IV at 4-5; Leuchtkafer Letter V at 2.
    \66\ See Leuchtkafer Letter III at 2-3; Leuchtkafer Letter IV at 
4-5.
    \67\ See Leuchtkafer Letter III at 5; Leuchtkafer Letter IV at 
9.
    \68\ See Leuchtkafer Letter III at 6.
    \69\ See FIA Letter II at 2.
    \70\ See id. at 2.
    \71\ See id.
---------------------------------------------------------------------------

    In response, the Exchange disagreed with the comment related to its 
markout analysis that reducing adverse selection risk for liquidity 
providers would effectively serve as a ``subsidy'' for liquidity 
providers.\72\ The Exchange stated that ``only a very small minority of 
market participants are capable of targeting millisecond or microsecond 
level price changes, and the benefits the [p]roposal would offer in 
terms of reduced adverse selection risk for liquidity providers would 
come primarily from the reduced ability of those firms to continue 
engaging in potentially harmful latency arbitrage strategies.'' \73\ 
The Exchange also stated that liquidity providers would not benefit at 
the expense of investors, but rather that investors could ``more 
accurately'' be considered the ultimate beneficiaries of the 
proposal.\74\ The Exchange also stated that while certain commenters 
were dubious as to whether the benefits received by a liquidity 
provider under the proposal would be passed on to investors, such 
factual questions could only be answered ``with finality'' by 
implementing the proposed delay mechanism and attempting to improve the 
market.\75\
---------------------------------------------------------------------------

    \72\ See Exchange Response Letter II at 5.
    \73\ See id. at 5.
    \74\ See id. at 5.
    \75\ See id. at 5-6.
---------------------------------------------------------------------------

    Certain commenters cited to studies suggesting that the TSX Alpha 
speedbump (i.e., an intentional, asymmetric delay for otherwise 
marketable orders in a market with a taker/maker or inverted fee 
structure) increased transaction costs and decreased market quality in 
the Canadian equities markets.\76\ In response, the Exchange stated 
that these commenters failed to mention the results of a subsequent 
study by Canadian regulators that found that the TSX Alpha speedbump 
``did not adversely affect the quality of Canadian equity markets'' or 
the results of an analysis that found ``no evidence'' of market quality 
being negatively impacted.\77\ While the Exchange acknowledged the 
material differences between the instant proposal and the randomized 1-
3 millisecond, asymmetric, intentional delay implemented on TSX Alpha 
as well as significant differences between the U.S. and Canadian 
equities markets,\78\ it also stated that to the extent that the 
analysis by the Canadian regulators is instructive it demonstrates the 
value of market innovation similar to the instant proposal.\79\
---------------------------------------------------------------------------

    \76\ See e.g., Chen, Haoming et al., The value of a Millisecond: 
Harnessing Information in Fast, Fragmented Markets, SSRN (Nov. 18, 
2017), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860359 (``Australian Study''); see also OIP 
supra note 6, notes 139-146 and accompanying text, for a summary of 
the comments referenced by the Exchange.
    \77\ See Exchange Response Letter I at 10. The Exchange 
referenced a joint study on the impact of the TSX Alpha redesign, 
which included the implementation of a randomized 1-3 millisecond 
speedbump, conducted by the Investment Industry Regulatory 
Organization of Canada (``IIROC'') and the Bank of Canada, as well 
as a review of the market quality impact of the TSX Alpha speedbump 
conducted by the Ontario Securities Commission (``Canadian 
Studies''). See id. at 10-11; see also Exchange Response Letter II 
at 10.
    \78\ See Exchange Response Letter I at 11.
    \79\ See id.
---------------------------------------------------------------------------

    Four commenters opposing the proposal did not believe that the 
analyses conducted by Canadian regulators, and referenced by the 
Exchange, necessarily supported the Exchange's assertions.\80\ One 
commenter stated that the empirical data obtained from the asymmetric 
delay introduced by TSX Alpha in the Canadian equity markets is not 
sufficient or conclusive as to whether an asymmetric delay should be 
introduced in U.S. equity markets.\81\ This commenter emphasized that 
the IIROC and Bank of Canada study found ``no evidence'' that the TSX 
Alpha speedbump impacted certain market-

[[Page 11431]]

wide measures.\82\ One commenter noted that while the IIROC and Bank of 
Canada study did not find that the TSX Alpha speedbump impacted market-
wide liquidity, it did find that certain market participants, such as 
buy-side investors, were negatively impacted by higher price impacts 
and effective spreads.\83\ Another commenter stated that the IIROC and 
Bank of Canada study ``fails to provide evidence that the proposed 
speedbump will actually benefit investors.'' \84\ Another commenter 
stated that the evidence from the ``reasonably comparable'' asymmetric 
delay implemented on the TSX Alpha exchange in the Canadian equity 
market showed that institutional and retail investor concerns related 
to an increase in quote fading and a decline in fill rates were 
legitimate.\85\ This commenter stated that neither of the Canadian 
Studies disputed the conclusion of the Australian study \86\ that the 
implementation of the asymmetric speedbump enabled fast liquidity 
providers to ``fade'' away from liquidity taking orders across multiple 
venues and quote fading increased by 46% on average.\87\ This commenter 
did a separate analysis of quote fading on TSX Alpha using Canadian 
exchange data and reached conclusions that it believed were consistent 
with the Australian study.\88\ Two commenters pointed out that, as per 
an Ontario Securities Commission review, market participants reported a 
decrease in fill rates on TSX Alpha, particularly for orders that were 
expected to sweep through multiple price levels or be routed to 
multiple marketplaces simultaneously (e.g., institutional orders).\89\
---------------------------------------------------------------------------

    \80\ See Letter from Stephen John Berger, Managing Director, 
Global Head of Government and Regulatory Policy, Citadel Securities, 
dated October 21, 2019 (``Citadel Letter II'') at 4; Leuchtkafer 
Letter IV at 7; Letter from Rick A. Fleming, Investor Advocate, 
Office of the Investor Advocate at the U.S. Securities and Exchange 
Commission, dated December 13, 2019 (``Investor Advocate Letter'') 
at 8; Letter from Doug Clark, Chairman, and James Toes, President & 
CEO, Security Traders Association, dated October 21, 2019 (``STA 
Letter'') at 2.
    \81\ See STA Letter at 2.
    \82\ See id. at 4.
    \83\ See Leuchtkafer Letter IV at 7.
    \84\ Investor Advocate Letter at 8.
    \85\ See Citadel Letter II at 4.
    \86\ See note 77 supra.
    \87\ See Citadel Letter II at 4.
    \88\ See id. The commenter found the following for price-level 
depleting trade clusters based on their analysis: (1) Quote fading 
on TSX Alpha ``immediately and significantly'' increased following 
the implementation of the asymmetric speedbump in September 2015; 
(2) these elevated quote fading rates persisted, as data over the 
last 12 months showed that approximately 70-80% of the quoted volume 
on TSX Alpha is being cancelled without executing; and (3) this 
contrasts with quote fading rates of approximately 30% on other 
inverted venues and approximately 20% on maker-taker venues. See id. 
at 4-5.
    \89\ See Citadel Letter II at 4; Leuchtkafer Letter IV at 7.
---------------------------------------------------------------------------

    The Exchange responded that the analysis of the Canadian market 
conducted by one commenter \90\ was ``unhelpful'' and had ``fundamental 
flaws''.\91\ The Exchange stated that evidence from the Canadian 
markets suggests that investors using a combination of strategies 
designed to take advantage of the TSX Alpha speedbump ``may benefit 
from improved market quality without sacrificing order interaction.'' 
\92\ The Exchange stated that evidence from Canadian market studies had 
shown an increase in trade size on TSX Alpha following the introduction 
of its speedbump, and suggested that market participants may be able to 
get their orders filled on a single venue such as EDGA due to the 
expected increase in liquidity.\93\ The Exchange indicated that 
although a chart published by TSX Alpha in December 2019 shows that 
proprietary and high speed participants may experience lower order 
interaction rates, as intended, order interaction rates remain high for 
retail and institutional orders routed by broker-dealers ``that have 
taken appropriate steps'' to account for the TSX Alpha speedbump.\94\ 
The Exchange believed that, while broker-dealers may need to change 
their routing methodologies, a delay mechanism similar to that on TSX 
Alpha could benefit U.S. equities investors ``without harming their 
ability to access needed liquidity.'' \95\
---------------------------------------------------------------------------

    \90\ See Citadel Letter II at 4.
    \91\ Exchange Response Letter II at 11.
    \92\ See id. at 11.
    \93\ See id.
    \94\ See id. at 12.
    \95\ See id.
---------------------------------------------------------------------------

    One commenter stated that while the EDGA proposal is designed to 
reduce the overall execution risk for a certain class of liquidity 
providers (i.e., market makers), with the ``hope'' that these market 
makers voluntarily respond by taking on the additional risk of quoting 
tighter spreads for longer durations and with greater size, there is no 
requirement for them to do so, and furthermore the likelihood that 
these market makers will use the speedbump to avoid the execution risk 
presented by the orders of ordinary investors should be considered.\96\ 
This commenter also stated that although the proposal describes 
potential benefits for retail and institutional investors in the 
market, there is no guarantee that such improvements would occur.\97\ 
One commenter opposing the proposal believed that overall market 
quality would not improve because EDGA liquidity providers would tend 
to join existing quotes in order to maximize their ability to observe 
away executions.\98\ Two commenters believed the proposal was unlikely 
to incentivize EDGA liquidity providers to set new price levels that 
would establish the NBBO, and would instead more often result in EDGA 
liquidity providers posting prices equal to or inferior to the NBBO set 
by liquidity providers on other exchanges.\99\ One commenter stated 
that EDGA did not analyze its key assertion that the application of the 
LP2 delay mechanism would improve market quality in the light of the 
Exchange's inverted (i.e., taker/maker) fee structure,\100\ and one 
commenter stated that inverted markets set new prices only ``a very 
small amount of the time'' because typically liquidity providers that 
are improving price on an inverted venue do not also pay to post, 
because to do so is to pay twice.\101\ The latter commenter expected 
that to the extent EDGA remains an inverted venue and the proposal does 
not contemplate a change in fee type, EDGA would rarely set new 
prices.\102\ One commenter believed EDGA did not provide ``any data or 
analysis regarding how many members could be expected to increase 
quoting as a result'' of the proposal,\103\ while another commenter 
indicated that EDGA did not provide ``any estimate of what its market 
makers will return to investors via tighter spreads and larger 
quotes.'' \104\ This commenter also noted that the proposal would not 
require market makers to improve their quotes, and suggested that more 
stringent quoting obligations could be added to EDGA's rulebook.\105\ 
Another commenter indicated the proposal could potentially lead to 
decreased fill rates, misleading market-wide statistics, and altered 
execution prices.\106\ Two commenters expressed concern about the 
proposal's potential impact on transaction costs,\107\ and one of these 
commenters referenced a study on the impact of the intentional, 
randomized, asymmetric delay implemented on TSX Alpha which purportedly 
concluded that there was a negative impact on

[[Page 11432]]

liquidity in the Canadian equities market and increased, market-wide 
costs for liquidity takers.\108\ In response to concerns about whether 
there would be market quality improvements, the Exchange suggested that 
reducing the cost of adverse selection for liquidity providers would 
allow them to improve their quotations and increase available liquidity 
throughout the trading day.\109\
---------------------------------------------------------------------------

    \96\ Investor Advocate Letter at 4-5.
    \97\ See id.
    \98\ See Letter from Mark D. Epley, Executive Vice President & 
Managing Director, General Counsel, and Jennifer W. Han, Associate 
General Counsel, Managed Funds Association, dated October 22, 2019 
(``MFA Letter II'') at 3.
    \99\ See Citadel Letter II at 8; FIA Letter II at 2. One 
commenter explained that because EDGA is an inverted venue, matching 
the NBBO may also result in being routed to first in light of the 
rebate provided to the liquidity taker. See Citadel Letter II at 8
    \100\ See Citadel Letter I at 10.
    \101\ See STA Letter at 5.
    \102\ See id.
    \103\ See Healthy Markets Letter I at 7.
    \104\ See Leuchtkafer Letter V at 1.
    \105\ See id. at 1-2.
    \106\ See Healthy Markets Letter II at 8.
    \107\ See Letter from Tim Lang, Chief Executive Officer, ACS 
Execution Services, dated Oct. 21, 2019 (``ACS Letter'') at 2; MFA 
Letter II at 2.
    \108\ See ACS Letter at 2.
    \109\ See Exchange Response Letter II at 4; see also Section 
III.B.1.a supra for further discussion of market quality 
improvements that the Exchange anticipates would result from the 
proposed LP2 delay mechanism.
---------------------------------------------------------------------------

    The Commission concludes that the Exchange has not met its burden 
to demonstrate that the proposed rule change is consistent with Section 
6(b)(5) of the Exchange Act,\110\ and the applicable rules and 
regulations thereunder. In particular, the Commission does not believe 
that the Exchange has supported its assertions and demonstrated that 
the LP2 delay mechanism is appropriately tailored to address latency 
arbitrage and not permit unfair discrimination. Commenters raised 
questions as to whether the proposed LP2 delay mechanism is 
appropriately tailored to its stated purpose, which is to reduce the 
risk of adverse selection to market makers, improve displayed liquidity 
on the Exchange, and thereby potentially enable market makers to offer 
tighter quotes and greater size. The Exchange has not demonstrated why, 
in light of these questions, the proposal is consistent with the Act. 
For example, the Exchange points to the differentials between the 
geographical latencies for microwave and fiber optic connections 
currently experienced between the Chicago Mercantile Exchange (``CME'') 
data center in Aurora, IL and the Exchange's primary data center in 
Secaucus, NJ with the apparent assumption, unsupported by analysis or 
evidence, that opportunistic trading firms use the latest microwave 
connections and EDGA liquidity providers use traditional fiber 
connections. The Exchange, however, fails to demonstrate why it is 
appropriate to apply the 4 millisecond delay to incoming executable 
orders that would remove liquidity from the EDGA Book for all equities 
securities traded on the Exchange instead of limiting the application 
of the delay to incoming, executable orders for those securities that 
have a futures counterpart, or other relationship to trading on the 
CME, and generate opportunities for latency arbitrage from that venue. 
In addition, the Exchange has not demonstrated the extent to which 
latency arbitrage is a problem on its market or how the proposal is 
tailored to the problem by, for instance, providing an estimate of the 
percentage of trading activity on the Exchange (for example, orders, 
trades, share volume, or dollar volume) affected by signals from the 
futures markets.
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The limited empirical information provided by the Exchange does not 
adequately demonstrate either the extent of the problem of latency 
arbitrage that the Exchange seeks to address or that the proposal would 
be sufficiently tailored to address the identified problem. As noted 
above, the Exchange provided markout data to (1) establish the extent 
of the latency arbitrage issue on EDGA, (2) explain how the LP2 delay 
mechanism would resolve the latency arbitrage issue without permitting 
unfair discrimination, and (3) demonstrate that 4 milliseconds was an 
appropriate duration for the LP2 delay mechanism. The charts provided 
by the Exchange showed trading activity for three ETFs that are often 
traded in relation to an actively traded futures contract (SPY, TLT, 
and GLD) and three common stocks included in the S&P 500 index (CCI, 
MSFT, and UTX). The Exchange concluded that trades were likely executed 
at a stale price where prices immediately moved against the resting 
order in the milliseconds following the trade on EDGA (i.e., the 
Exchange contends that the missed cancel analysis illustrates the 
impact of trades where the liquidity provider understands that it is 
quoting a stale price but is unable to revise its published bid or 
offer before its quotation is accessed by a faster market participant). 
However, because the Exchange did not (1) explain why it chose these 
six symbols, (2) explain why these symbols are representative of 
equities securities that are traded on the Exchange for which the LP2 
delay mechanism would apply, or (3) provide data on the relative sizes 
of the two groups of orders in its analysis, it is not possible to 
fully analyze the charts or to independently verify the Exchange's 
conclusions. Accordingly, the EDGA markout analysis does not provide a 
sufficient basis to support an affirmative finding that the proposed 
rule change is consistent with the Act.\111\
---------------------------------------------------------------------------

    \111\ See 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------

    The Exchange stated that the results of the Canadian studies 
related to the TSX Alpha speedbump could be instructive with regard to 
demonstrating the value of introducing innovative market structure 
solutions similar to the instant proposal to the U.S. equities markets. 
However, the Commission believes that because the delay on TSX Alpha is 
a shorter, randomized delay of 1-3 milliseconds, and there are material 
differences between the Canadian and U.S. equities markets, the effects 
of the intentional delay on TSX Alpha in the Canadian equities market 
are not wholly relevant to assess the potential impact of this proposed 
rule change on the U.S. equities markets, in general, and market 
quality (e.g., width, displayed size, and effective spreads during 
different periods of market volatility) in particular. Accordingly, 
given the failure of the Exchange to demonstrate why the differences 
between the fixed LP2 delay mechanism and the randomized TSX Alpha 
delay mechanism are immaterial, the Commission does not believe that 
the findings and conclusions of the various TSX Alpha studies provide a 
sufficient basis to support an affirmative finding that this proposed 
rule change is consistent with the Act.\112\
---------------------------------------------------------------------------

    \112\ See id.
---------------------------------------------------------------------------

    The Exchange and supporting commenters assert that the proposal 
will bolster EDGA market quality and reduce the existing problem of 
latency arbitrage and argue that therefore the proposal would not 
permit unfair discrimination. However, such assertions do not 
demonstrate that the proposal would not permit unfair discrimination. 
Specifically, as noted above, the Commission does not believe that the 
EDGA markout analysis or the TSX Alpha studies can be relied upon to 
determine that the proposed rule change is consistent with the 
Act.\113\
---------------------------------------------------------------------------

    \113\ See id.#
---------------------------------------------------------------------------

2. Discrimination Between Liquidity Takers and Liquidity Providers
    Commenters supporting the proposal believed that the intentional 4 
millisecond delay was a ``reasonable'' \114\ or ``appropriate'' \115\ 
length because the time correlates to the transmission of data between 
data centers located in the New York-New Jersey metro area and those 
located in the Chicago area.\116\ One of these commenters indicated 
that latencies related to matching engines occur naturally during the 
course of normal operation for ``many . . . exchanges'', and these 
natural latencies could exceed the duration of the LP2 delay mechanism 
by several orders of magnitude.\117\ A commenter opposing the proposal 
indicated that the proposed 4 millisecond delay did not appear to

[[Page 11433]]

exceed the stated transmission time from Illinois to New Jersey, and on 
that basis questioned how the proposal could achieve its stated 
objective.\118\ This commenter did not believe that the proposed rule 
change should be tied to the use and operation of current technology 
and questioned whether the length of the delay would need to be 
modified as technology and the time required to transmit data 
evolves.\119\
---------------------------------------------------------------------------

    \114\ See CTC Letter II at 4.
    \115\ See XTX Letter III at 5.
    \116\ See CTC Letter I at 3; XTX Letter I at 5.
    \117\ See CTC Letter II at 5.
    \118\ See Healthy Markets Letter II at 3 n.6. In the Notice, the 
Exchange stated that the proposed delay would negate the advantages 
that ``opportunistic trading firms that use the latest microwave 
connections have over liquidity providers using traditional fiber 
connections.'' Notice at 30284. The Exchange stated that Quincy Data 
advertised a latency of 4.005 milliseconds for its high speed 
microwave connection, or about half the 7.75 milliseconds of latency 
experienced over a fiber connection provided by ICE Global Network. 
See Notice, 84 FR at 30284 n.10.
    \119\ See Healthy Markets Letter II at 4.
---------------------------------------------------------------------------

    The Exchange restated its belief that an intentional delay of four 
milliseconds is an appropriate duration in order to negate the 
advantages that opportunistic trading firms using the latest microwave 
connections have over liquidity providers using traditional fiber 
connections.\120\ In response to whether the proposal would 
successfully protect liquidity providing orders on the EDGA book given 
that the length of the delay is shorter than the transmission time from 
Illinois to New Jersey, the Exchange stated that a four millisecond 
delay is appropriate because the respective transmission times over 
fiber and high speed microwave connections is approximately 7.75 
milliseconds and 4.005 milliseconds, and opportunistic trading firms 
with microwave connections use the resulting 3.745 millisecond 
``advantage'' to ``race to the equities market and trade at potentially 
stale prices'' before EDGA liquidity providers can update their 
quotations.\121\
---------------------------------------------------------------------------

    \120\ See Exchange Response Letter II at 8.
    \121\ See id. at 9.
---------------------------------------------------------------------------

    The Exchange also stated that its own analysis suggested that a 
four millisecond delay would not be material for investors with long 
term investment horizons because these investors would not be sensitive 
to millisecond level price changes.\122\ The Exchange stated that such 
investors should have the ability to make tradeoffs in the public 
markets similar to those that are available in OTC markets, where a 
number of broker-dealers offer conditional orders that are only 
executable after a firm-up period that can range between 500 
milliseconds and two seconds depending on the firm.\123\ The Exchange 
stated that market participants that choose to use this functionality 
in OTC markets have decided that the value of the execution provided by 
such orders outweighs the time it may take to receive that execution 
(i.e., they value the quality of the execution over its 
immediacy).\124\ The Exchange also stated that broker-dealers often 
make tradeoffs between the speed of an execution and other factors, 
such as price improvement and liquidity, and noted that NASDAQ 
introduced a midpoint extended life order that contains a built-in 
speedbump of 500 milliseconds.\125\
---------------------------------------------------------------------------

    \122\ See id.
    \123\ See id. at 10.
    \124\ See Exchange Response Letter II at 10.
    \125\ See id. at 9.
---------------------------------------------------------------------------

    Commenters supporting the proposal asserted that the proposed rule 
change is not unfairly discriminatory toward any particular type of 
market participant.\126\ Specifically, one of these commenters stated 
that the LP2 delay mechanism is a targeted response to a known problem 
(i.e., latency arbitrage) and that the mechanism would reduce costs for 
most market participants, enhance market quality in the form of better 
displayed prices and larger size, and lower the barrier to entry for 
new market making firms.\127\ This commenter also stated that the 
proposed delay mechanism: (1) Targets the particular trading activity 
of latency arbitrage as opposed to a type of market participant, and 
(2) protects all liquidity adding orders as opposed to orders from a 
subset of market participants.\128\ In addition, the commenter stated 
that market participants that engage in latency arbitrage may not be 
readily defined or grouped by one aspect of their overall trading 
activity, and will typically adapt their businesses and activities to 
accommodate the specific market structure of each product and 
market.\129\ The other commenter argued that the proposal was not 
unfairly discriminatory because all market participants who send limit 
orders would be treated ``equally and therefore fairly,'' since all 
limit orders from all of these market participants would be eligible 
for protection by the LP2 delay mechanism.\130\ This commenter also 
stated that the proposal was not unfairly discriminatory because 
liquidity providers may be picked off by participants with speed 
advantages related to exchange connectivity or market data processing 
and therefore incur greater risks than liquidity takers.\131\ The 
commenter stated that reducing the degree of an existing disparity 
(i.e., reducing the magnitude of the risk being assumed by liquidity 
providers) could not constitute unfair discrimination.\132\ This 
commenter further stated that as long as the orders of liquidity takers 
are not correlated with microsecond-level price dislocations, they 
should expect to receive the same fill rate under the proposal as they 
receive today.\133\ The commenter stated that the likelihood of a 
market maker backing away during the delay would be small because the 
``natural liquidity demands'' of investors and end users are 
uncorrelated with microsecond or millisecond level price 
dislocations.\134\
---------------------------------------------------------------------------

    \126\ See CTC Letter II at 3; XTX Letter III at 3.
    \127\ See XTX Letter III at 3.
    \128\ See id.
    \129\ See XTX Letter III at 3.
    \130\ See CTC Letter II at 3.
    \131\ See id.
    \132\ See id.
    \133\ See id. at 4.
    \134\ See id. at 2.
---------------------------------------------------------------------------

    In contrast, other commenters raised concerns that the proposed 
rule change would permit unfair discrimination against liquidity takers 
because EDGA liquidity providers could use the 4 millisecond delay to 
observe executions on other venues, and then cancel their displayed 
quotes in anticipation of a similar order being routed to EDGA.\135\ 
Several of these commenters expressed concern that EDGA liquidity 
providers would be able to modify or cancel their displayed quotes 
while an executable, incoming order was being subjected to the LP2 
delay mechanism, indicating that this capability would allow liquidity 
providers to back away from their quotes while creating uncertainty for 
liquidity takers, including many retail and institutional investors, in 
terms of their ability to access publicly displayed orders, which could 
serve to degrade quote quality on EDGA.\136\ Another commenter asserted 
that the proposed LP2 delay mechanism ``essentially provides all market 
participants with resting orders a free option to modify or cancel 
their orders before execution,'' and thus ``[s]ometimes a liquidity 
taking order would receive an execution, and other times it would 
not.'' \137\ Several commenters believed that such quote fading could 
lead to poor execution outcomes for institutional investors,

[[Page 11434]]

such as a decline in fill rates,\138\ and two commenters indicated that 
this would negatively impact firms that send orders simultaneously to 
more than one execution venue in order to obtain the desired size 
through mechanisms such as intermarket sweep orders.\139\ A commenter 
characterized the 4 millisecond window afforded by the delay as the 
``economic equivalent of a `last look' '' since a liquidity provider 
could use market data to anticipate the timing of incoming orders 
delayed by the speedbump.\140\ A commenter suggested that the 
differential in the execution prices related to quote fading by 
liquidity providers would be akin to a fee that is imposed on 
institutional investors.\141\ A commenter stated that EDGA did not 
provide data to evaluate the proposal's impact on different types of 
market participants, for example, the Exchange did not evaluate the 
frequency with which liquidity providers would reprice or cancel orders 
as a result of the LP2 delay mechanism, the impact on retail and 
institutional orders, and the impact on ETF market makers.\142\
---------------------------------------------------------------------------

    \135\ See ACS Letter at 2; Citadel Letter II at 6, 10; Letter 
from Ray Ross, Chief Technology Officer, Clearpool, dated Oct. 21, 
2019 (``Clearpool Letter II'') at 3; FIA Letter II at 2; Healthy 
Markets Letter II at 3; ICI Letter at 1; Leuchtkafer Letter IV at 1-
2; MFA Letter II at 1-2.
    \136\ See ACS Letter at 2; Citadel Letter II at 2; ICI Letter at 
2; MFA Letter II at 3; STA Letter at 3.
    \137\ See Healthy Markets Letter III at 8.
    \138\ See Citadel Letter II at 2; Clearpool Letter II at 3; MFA 
Letter II at 1-2.
    \139\ See Citadel Letter II at 10; MFA Letter II at 1-2.
    \140\ See Citadel Letter II at 6.
    \141\ See MFA Letter II at 2.
    \142\ See Citadel Letter I at 7.
---------------------------------------------------------------------------

    In response to comments that the proposal would permit unfair 
discrimination, the Exchange acknowledged that the instant proposal is 
different than the Commission-approved delays on IEX and American and 
stated that the differences associated with the LP2 delay mechanism 
would serve to ``enhance displayed liquidity and benefit investors.'' 
\143\ The Exchange also stated that the commenters ``miss[ed] the 
point'' because a ``truly symmetric delay would do nothing to protect 
investors' orders.'' \144\ The Exchange noted that the LP2 delay 
mechanism, like the delays on IEX and American, would protect resting 
orders, but unlike the IEX and American delays, this proposal would not 
rely on exchange driven algorithms and would enable liquidity providers 
to ``improve displayed prices.'' \145\ The Exchange also asserted that 
the proposal is not unfairly discriminatory because the LP2 delay 
mechanism would apply to a subset of orders on EDGA (i.e., liquidity 
taking orders) but not others (i.e., liquidity adding orders), because 
the relevant differences between such orders, and in particular the 
``free option'' provided by price-setting quotations, justifies 
protecting orders that provide liquidity to investors (i.e., liquidity 
adding orders).\146\ The Exchange stated that (1) ``all market models 
necessarily involve treating certain orders differently from others in 
some manner based on one or more identifiable characteristics,'' (2) 
market operators must make certain determinations about what sort of 
market model would promote the maintenance of fair, orderly, and 
efficient markets, and (3) competitive forces, measured by order flow 
and market share, would ultimately dictate the efficacy of the market 
model.\147\ The Exchange also stated that while liquidity providers are 
most directly impacted by latency arbitrage, ``market participants that 
access . . . liquidity on national securities exchanges'' are also 
affected because the ``ability for investors to trade with a published 
quotation and obtain a quality execution depends on the ability for 
liquidity providers to offer their best prices and sizes to the 
market.'' \148\ The Exchange stated it was important to protect 
liquidity providers ``given the service that they provide to the 
market, and the asymmetric risks'' they assume.\149\ The Exchange 
stated that the LP2 delay mechanism should largely eliminate adverse 
selection risks for liquidity providers, who otherwise must price such 
risks into their posted quotations--and the benefits of this reduced 
risk would accrue to investors as well as liquidity providers, since 
liquidity providers would be competing to offer the best quoted prices 
on the EDGA book.\150\ The Exchange stated that reducing the cost of 
adverse selection for liquidity providers would allow them to improve 
their quotations and increase available liquidity throughout the 
trading day.\151\
---------------------------------------------------------------------------

    \143\ See Exchange Response Letter I at 6.
    \144\ See id.
    \145\ See Exchange Response Letter I at 7.
    \146\ See Exchange Response Letter II at 2-3.
    \147\ Exchange Response Letter II at 3.
    \148\ See Exchange Response Letter I at 7.
    \149\ See id.
    \150\ See Exchange Response Letter II at 5.
    \151\ See id. at 4.
---------------------------------------------------------------------------

    The Exchange also stated that the crux of the disagreement about 
whether the proposal was unfairly discriminatory was substantively 
related to ``who would benefit'' and ``whether the Exchange would 
ultimately be successful in its goal of improving market quality for 
investors.'' \152\ The Exchange asserted that the proposal is ``plainly 
not unfairly discriminatory'' because it ``would offer strong 
incentives for liquidity providers to improve quote quality, and hence 
execution quality for investors, and would do so by offering an 
innovative solution to investors on a purely voluntary basis.'' \153\ 
The Exchange stated that all market participants that are not engaged 
in the latency arbitrage strategies could benefit from the proposal, 
``either th[r]ough submitting liquidity providing orders that benefit 
directly from the LP2 delay mechanism, or through submitting liquidity 
removing orders that may benefit from improved market quality.'' \154\ 
The Exchange also referenced a prior comment letter to convey that 
although high-frequency liquidity providers may be the immediate 
beneficiaries of the asymmetric speedbump, benefits are likely to be 
passed on to investors as well.\155\ The Exchange also stated that the 
proposal is distinguishable from ``last look'' functionality on the 
foreign exchange markets because EDGA liquidity providers would not 
have the opportunity to avoid executions with an incoming marketable 
order after it has been presented for execution.\156\ Rather, the 
Exchange stated that liquidity providers would continue to set quoted 
prices based on available market information, and the liquidity taking 
order would only become known when the order is presented for execution 
after exiting the delay mechanism.\157\
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    \152\ See Exchange Response Letter II, supra note 9, at 3; see 
also Section III.B.1.d supra for further discussion of the impact of 
the proposal on market quality.
    \153\ Exchange Response Letter I at 9.
    \154\ Exchange Response Letter II at 2.
    \155\ See Exchange Response Letter II at 4 (referencing the 
letter from Joshua Mollner, Assistant Professor, Kellogg School of 
Management, Northwestern University, and Markus Baldauf, Assistant 
Professor, Sauder School of Business, University of British 
Columbia, dated September 12, 2019 (``Mollner & Baldauf Letter'').
    \156\ See Exchange Response Letter I at 15.
    \157\ See id. at 15-16.
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    As expressed by certain concerned commenters, unfair discrimination 
against liquidity takers could result because EDGA liquidity providers 
could use the 4 millisecond delay to observe executions on other venues 
and then cancel or modify their displayed quotes in anticipation of a 
similar order being routed to EDGA.\158\ The Exchange has identified 
that it could be problematic for a market participant to observe an 
execution on one exchange and use such market information in 
conjunction with its speed advantage to effect an execution against a 
soon to be stale quotation on another exchange (i.e., latency 
arbitrage). However, the Exchange has not demonstrated why a 4 
millisecond delay, that is designed to mimic the differentials in the

[[Page 11435]]

geographic latency between data centers located in northern New Jersey 
and Illinois, is also appropriate to protect against latency arbitrage 
when the relevant data centers are both located in northern New Jersey 
and the geographic latency differential would presumably be less than 4 
milliseconds.
---------------------------------------------------------------------------

    \158\ See ACS Letter at 2; Citadel Letter II at 6, 10; FIA 
Letter II at 2; Healthy Markets Letter II at 3; ICI Letter at 1; 
Leuchtkafer Letter IV at 1-2; MFA Letter II at 1-2.
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    The Exchange \159\ and supporting commenters \160\ reason that the 
LP2 delay mechanism applies equally to all market participants 
submitting incoming executable orders and therefore the proposal would 
not permit unfair discrimination. However, the Exchange has not 
provided specific analysis or demonstrated that the proposed rule 
change would not permit unfair discrimination against liquidity taking 
orders that are not related to latency arbitrage as they would be 
treated in the same manner as orders engaged in latency arbitrage that 
the Exchange seeks to target in its effort to protect EDGA liquidity 
providers.\161\
---------------------------------------------------------------------------

    \159\ See Notice, 84 FR at 30290-1.
    \160\ See note 123, supra.
    \161\ See 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------

    The Exchange and supporting commenters also suggest that the 
proposal would not permit unfair discrimination because liquidity 
providers provide a valuable service to the market and assume 
disproportionate risks compared to liquidity takers. While the 
Commission agrees that liquidity providers add value to the markets and 
assume certain financial risks in providing liquidity, the Commission, 
for the reasons described above, concludes that the Exchange has not 
provided sufficiently detailed and specific analysis that demonstrates 
that the LP2 delay mechanism's benefits to liquidity providers makes 
the discriminatory impact on liquidity takers not unfair.\162\ The 
Exchange also has not explained why providing a benefit without a 
corresponding obligation (e.g., quoting or enhanced quoting 
obligations) to liquidity providers is consistent with the Act when the 
proposed rule permits discrimination against liquidity takers.
---------------------------------------------------------------------------

    \162\ See id.
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    Lastly, the Exchange and supporting commenters state that the 
proposal would not permit unfair discrimination because liquidity 
takers would be able to adapt to better use the LP2 delay mechanism. 
However, a market participant's ability to adapt its business model or 
alter its trading strategies in response to this proposed rule does 
not, by itself, demonstrate that the proposal would not permit unfair 
discrimination, and the Exchange has not provided adequate analysis to 
support its assertion.\163\
---------------------------------------------------------------------------

    \163\ See 17 CFR 201.700(b)(3).
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3. Discrimination Between Slow and Fast Liquidity Providers
    Supporting commenters did not believe that the proposal would 
increase the risk of adverse selection for market participants unable 
to update their quotes within the four millisecond delay period.\164\ 
One of these commenters characterized the concern that the proposal 
favored sophisticated traders and would result in the orders of 
institutional investors being left to absorb the negative impact of 
latency arbitrage strategies as ``meritless.'' \165\
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    \164\ See CTC Letter II at 4; XTX Letter III at 4.
    \165\ See XTX Letter III at 4.
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    In contrast, several commenters opposing the proposal expressed 
concern that slower liquidity providers on EDGA could be unfairly 
discriminated against due to continued exposure to adverse selection 
risk as a result of the delay.\166\ Specifically, any investor with a 
limit order at the EDGA BBO who does not have the ability to cancel or 
modify such order within 4 milliseconds would be at risk of receiving 
an adverse execution because of opportunistic traders.\167\ A commenter 
believed that in order to take advantage of the proposal, liquidity 
providers would likely need high-speed data feeds from EDGA and the 
CME, high-speed networks between Chicago and New Jersey, and co-located 
servers in EDGA's data center, among other items.\168\ This commenter 
indicated that because retail market participants cannot compete on 
millisecond timeframes, and ``only a very small minority of market 
participants are certain to directly benefit'' from the proposal, the 
proposal is unfairly discriminatory.\169\ A commenter stated that ``the 
facially neutral proposal appears tailored to have a disparate impact 
on various EDGA liquidity providers'' although the proposal ties its 
benefit to a specific market behavior (i.e., the ability to react to 
price movements within 4 milliseconds), rather than limiting the 
benefit to specified market participants, such as registered market 
makers.\170\ This commenter believed that the proposal intentionally 
discriminates in favor of liquidity providers that can modify their 
quotes within 4 milliseconds of a price change, and that the resting 
orders of all other classes of investors would be left exposed to the 
``alleged predatory arbitrage behavior.'' \171\
---------------------------------------------------------------------------

    \166\ See ACS Letter at 2; Citadel Letter II at 6-7; Healthy 
Markets Letter II at 4; ICI Letter at 1-2; Investor Advocate Letter 
at 4-5; Leuchtkafer Letter IV at 3; MFA Letter II at 2.
    \167\ See ICI Letter at 2; Investor Advocate Letter at 4.
    \168\ See Leuchtkafer Letter IV at 2-3.
    \169\ See Leuchtkafer Letter V at 1. This commenter also 
distinguished the instant proposal from a recent IEX proposal to add 
a discretionary limit order type designed to protect liquidity 
providers from potential adverse selection by latency arbitrage 
trading strategies, noting that the IEX proposal would be 
``available to everyone'' as opposed to a smaller group of market 
participants. See id. at 3.
    \170\ Investor Advocate Letter at 4-5.
    \171\ See id. at 4.
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    In response to commenter concerns that certain liquidity providers 
would be unable to react to cross-market signals and modify or cancel a 
quote during the four millisecond delay, the Exchange stated that 
liquidity providers could submit midpoint peg orders that would 
automatically reprice during the four millisecond delay and indicated 
that ``a very significant amount of institutional order flow is managed 
through broker-dealer algorithms that could respond to market 
information in less than this timeframe.'' \172\ Two commenters 
supporting the proposal stated that agency brokers could utilize 
commercially available passive algorithms that could process market 
signals to reprice or cancel orders within the four millisecond delay 
period in order to benefit investors.\173\ A commenter stated that 
various service providers, broker-dealers, and even exchanges (i.e., 
IEX) could provide such an algorithm to effect cancels in the case of 
various adverse market signals, including price moves in correlated 
instruments or ``crumbling quotes.'' \174\ This commenter also stated 
that under the proposal a broader group (i.e., everyone able to cancel 
or modify an order within the 4 millisecond during the LP2 delay), 
beyond just the fastest firms, would be able to benefit.\175\ A 
commenter also stated that while institutional investors that send an 
order to sweep the top of book liquidity across multiple exchanges 
could see a decline in fill rates, these market participants could 
adapt their routing strategies to attain higher fill rates.\176\

[[Page 11436]]

The Exchange also stated that, just as in other instances where market 
participants have adapted in response to a market structure initiative, 
broker-dealers may need to modify their order handling procedures to 
make the ``best use'' of the LP2 delay mechanism by, for instance, 
accounting for the 4 millisecond delay when routing orders to multiple 
exchanges the way many broker-dealers currently monitor latency on a 
real-time basis using heat maps or other strategies to improve order 
routing outcomes and obtain best execution for clients.\177\
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    \172\ See Exchange Response Letter I at 10.
    \173\ See CTC Letter II at 4; XTX Letter III at 4.
    \174\ See CTC Letter II at 4.
    \175\ See id.
    \176\ See Letter from Eric Swanson, CEO, XTX Markets LLC 
(Americas), dated July 31, 2019 (``XTX Letter II'') at 3-4; XTX 
Letter III at 3. Specifically, this commenter suggested that (1) 
orders could be ``staged'' into the marketplace to account for the 
LP2 delay (e.g., route order to EDGA first, wait out the duration of 
the LP2 delay mechanism, and then route additional orders to other 
exchanges), or (2) in the absence of staging the sweep, 
institutional investors could seek to access EDGA liquidity when 
EDGA could fulfill the size of what previously would have been a 
market sweep order. See XTX Letter II at 3-4.
    \177\ See Exchange Response Letter II at 11.
---------------------------------------------------------------------------

    A commenter opposing the proposal contended that, notwithstanding 
unsupported claims to the contrary (by the Exchange and supporters of 
the proposal), ``substantially all commercially available algorithms 
are unable to process and respond to cross-asset and cross-market 
signals within 4 milliseconds the way [supporters of the proposal 
can],'' which would result in retail and institutional investors being 
disadvantaged.\178\ Another opposing commenter disagreed with a prior 
commenter that suggested institutional investors modify their routing 
strategies to mitigate the potential impact of quote fading.\179\ This 
commenter stated that this suggestion asks institutional investors ``to 
assume the risk that the market will move against them while holding 
back on sending orders to all exchanges other than EDGA'' and suggested 
the proposed workaround would be ineffective, especially if other 
exchanges were to introduce similar asymmetric speedbumps.\180\
---------------------------------------------------------------------------

    \178\ See Citadel Letter II at 7.
    \179\ See MFA Letter II at 2.
    \180\ See id.
---------------------------------------------------------------------------

    The Commission concludes that the proposal is discriminatory and 
the Exchange has not demonstrated that the proposal would not be 
unfair. The Exchange has not demonstrated that the proposal is 
sufficiently tailored to its stated purpose, which is to improve 
displayed liquidity on the Exchange by reducing the risk of adverse 
selection to liquidity providers, thereby potentially enabling 
liquidity providers to offer tighter quotes and greater size. For 
instance, as discussed above, the Exchange has not provided support for 
a fundamental premise of this proposed rule change--that liquidity 
takers use the latest microwave connections and EDGA liquidity 
providers use traditional fiber connections, and liquidity takers are 
able to use the resulting speed differential to effect latency 
arbitrage on the Exchange. The Exchange does not differentiate between 
latency arbitrage and other trading activity such as hedging activity 
by ETFs or options liquidity providers. Further, the Exchange does not 
provide specific analysis as to why it is appropriate to apply the 4 
millisecond delay to all incoming executable orders that would remove 
liquidity from the EDGA Book from all market participants as opposed to 
tailoring a response to target the trading of a relatively small number 
of market participants who engage in latency arbitrage. In addition, 
the Exchange has not demonstrated why a 4 millisecond delay is 
sufficient time to effectively protect a wide range of market 
participants from the latency arbitrage issue identified by the 
Exchange as the basis for the proposed rule change.\181\
---------------------------------------------------------------------------

    \181\ See 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------

    Finally, certain commenters expressed concern that if certain 
liquidity providers were unable to cancel or modify their quotes during 
the 4 millisecond delay but other liquidity providers were able to do 
so, the slower liquidity providers would continue to face the risk of 
adverse selection after the implementation of the LP2 delay mechanism. 
In other words, the proposal could unfairly discriminate against slower 
liquidity providers because they would be exposed to bear the full 
brunt of the latency arbitrage problems on the Exchange. While the 
Exchange, and commenters supporting of the proposal, stated that 
existing, commercially available algorithms could level the playing 
field against sophisticated (i.e., fast) liquidity providers, other 
commenters question the viability of these algorithms. Notably, the 
Exchange provided no evidence to support its assertion relating to the 
viability of commercially available algorithms such as, for instance, 
availability, cost, performance or actual use of these algorithms.\182\
---------------------------------------------------------------------------

    \182\ See id.
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C. Other Comments

    Other issues have been raised by commenters, including the 
potential impact of the proposal on competition \183\ and broker-dealer 
obligations related to best execution,\184\ whether EDGA's manual, 
unprotected quotes should be included in the SIP,\185\ and whether 
certain aspects of the proposal would increase the complexity of the 
national market system.\186\ Ultimately, however, additional discussion 
on these topics is unnecessary, as they do not bear on the basis for 
the Commission's decision to disapprove the proposal. On the record 
before us, for the independently sufficient reasons discussed in more 
detail above, we have concluded that the Exchange has not met its 
burden to show that approval of the proposed rule change is 
appropriate. Accordingly, it is not necessary for us to consider either 
the relevance of such other concerns to our statutory review of this 
proposed rule change or the merits of the concerns themselves.
---------------------------------------------------------------------------

    \183\ See ACS Letter at 2; Citadel Letter II at 6, 8-10; CTC 
Letter II at 1-2, 6-7; Exchange Response Letter I at 8-9; ICI Letter 
at 2; STA Letter at 2, 4; XTX Letter III at 8.
    \184\ See ACS Letter at 2; Citadel Letter II at 2-3; CTC Letter 
II at 6; Citadel Letter II at 5, 11; Healthy Markets Letter II at 7; 
ICI Letter at 1; Leuchtkafer Letter IV at 11; STA Letter supra note 
8; XTX Letter III at 7.
    \185\ See ACS Letter at 2; Citadel Letter II at 11; Clearpool 
Letter II at 1-2; CTC Letter II at 5; Healthy Markets Letter II at 
6; Leuchtkafer Letter IV at 9-11; Leuchtkafer Letter V at 2-3; STA 
Letter at 3; XTX Letter III at 6.
    \186\ See Clearpool Letter II at 3; Letter from Tom Quaadman, 
Executive Vice President, Center for Capital Markets 
Competitiveness, U.S. Chamber of Commerce (dated October 18, 2019) 
(``CMC Letter); ICI Letter at 1, 3; Investor Advocate Letter at 6.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange, and, in particular, with Sections 6(b)(5) of the Act.\187\
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\188\ that the proposed rule change (SR-CboeEDGA-2019-012) be, and 
hereby is, disapproved.
---------------------------------------------------------------------------

    \188\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\189\
---------------------------------------------------------------------------

    \189\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03915 Filed 2-26-20; 8:45 am]
 BILLING CODE 8011-01-P


