[Federal Register Volume 85, Number 39 (Thursday, February 27, 2020)]
[Notices]
[Pages 11406-11413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03919]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88264; File No. SR-CboeEDGX-2020-009]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Regarding Solicitation Auction Mechanism (SAM) Fees, Qualified 
Contingent Cross (QCC) Order Rebates, and Automated Improvement 
Mechanism (AIM) Fees

February 21, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 11, 2020, Cboe EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'') 
proposes to amend its Fee Schedule in connection with its recently 
adopted Solicitation Auction Mechanism (``SAM'' or ``SAM Auction'') and 
with Qualified Contingent Cross (``QCC'') orders, as well as make 
certain clarifications in connection with AIM fees. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to modify the Fee Schedule to adopt fees for 
its recently adopted SAM Auction and tiered pricing in connection with 
certain QCC and SAM orders, effective February 3, 2020.
    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 22% of the market share.\3\ 
Thus, in such a low-concentrated and highly competitive market, no 
single options exchange possesses significant pricing power in the 
execution of option order flow. The Exchange believes that the ever-
shifting market share among the exchanges from month to month 
demonstrates that market participants can shift order flow, or 
discontinue use of certain categories of products, in response to fee 
changes. Accordingly, competitive forces constrain the Exchange's 
transaction fees, and market participants can readily trade on 
competing venues if they deem pricing levels at those other venues to 
be more favorable. In response to the competitive environment, the 
Exchange offers specific rates and credits in its fees schedule, like 
that of other options exchanges' fees schedules, which the Exchange 
believes provide incentive to Members to increase order flow of certain 
qualifying orders.
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    \3\ See Cboe Global Markets U.S. Options Market Monthly Volume 
Summary (January 22, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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SAM Overview
    SAM is the Exchange's recently adopted solicited order mechanism 
for larger-sized orders.\4\ By way of background, SAM will provide an 
additional method for market participants to effect orders in a price 
improvement auction for larger-sized orders. SAM includes functionality 
in which a Member (an ``Initiating Member'') may electronically submit 
for execution an order it represents as agent on behalf of a 
customer,\5\ broker dealer, or any other person or entity (``Agency 
Order'') \6\ against any other order it represents as agent (an 
``Initiating Order'', or ``Contra Order''), provided it submits the 
Agency Order for electronic execution into the SAM Auction pursuant to 
Rule 21.21 (SAM Auction for simple orders) or Rule 21.22 (SAM Auction 
for complex orders). The Exchange may designate any class of options 
traded on EDGX Options as eligible for SAM. The Exchange notes that all 
Users, other than the Initiating Member, may submit responses to a SAM 
Auction (``Response Orders''). SAM Auctions take into account SAM 
Responses as well as contra interest resting on the EDGX Options Book 
at the conclusion of the SAM Auction (``unrelated orders''), regardless 
of whether such unrelated orders were already present on the Book when 
the Agency Order was received by the Exchange or were received after 
the

[[Page 11407]]

Exchange commenced the SAM Auction. If contracts remain from one or 
more unrelated orders at the time the Auction ends, they are considered 
for participation in the SAM order allocation process.
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    \4\ See Securities Exchange Act Release No. 87692 (December 9, 
2019), 84 FR 68231 (December 13, 2019) (Order Approving a Proposed 
Rule Change To Adopt Rule 21.23 (Complex Solicitation Auction 
Mechanism)) (SR-CboeEDGX-2019-064).
    \5\ The term ``Priority Customer'' means any person or entity 
that is not: (A) A broker or dealer in securities; or (B) a 
Professional. The term ``Priority Customer Order'' means an order 
for the account of a Priority Customer. See Rule 16.1(a)(45). A 
``Professional'' is any person or entity that: (A) Is not a broker 
or dealer in securities; and (B) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s). All Professional orders shall be 
appropriately marked by Options Members. See Rule 16.1(a)(46).
    \6\ The Agency Order must be for at least the minimum size 
designated by the Exchange (which may not be less than 500 standard 
option contracts or 5,000 mini-option contracts). The Initiating 
Member must designate each Agency Order as all-or-none (``AON''). 
See Rule 21.21(a)(3).
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SAM Definitions
    In connection with the proposed SAM-related fees, the Exchange 
proposes to adopt definitions necessary for SAM pricing. First, the 
Exchange proposes to adopt the terms ``SAM'' and ``SAM Auction'' to 
refer to the Solicitation Auction Mechanism. Second, the Exchange 
proposes to adopt the term ``SAM Agency Order'', defined as an order 
represented as agent by a Member on behalf of another party and 
submitted to SAM for potential price improvement pursuant to Rule 21.21 
and Rule 21.23. Third, the Exchange proposes to adopt the terms ``SAM 
Contra Order'' or ``Initiating Order'', defined as an order submitted 
by a Member entering a SAM Agency Order for execution within SAM that 
will potentially execute against the SAM Agency Order pursuant to Rule 
21.21 and 21.23. Finally, the Exchange proposes to adopt the term ``SAM 
Response Order'', to include any order submitted in response to and 
specifically designated to participate in a SAM Auction as well as 
unrelated orders that are received by the Exchange after a SAM Auction 
has begun.
AIM Clarifications
    The Exchange also proposes to update the term ``AIM Responder'' 
order throughout in the Fee Schedule to provide instead for ``AIM 
Response'' orders, as this is more consistent with the term used in 
Rule 5.37(c)(5), which governs Automatic Improvement Mechanism (``AIM' 
[sic] or ``AIM Auction'') Responses, as well as add ``Rule 21.22'' 
(Complex AIM) under the definitions of ``AIM Agency Order'' and ``AIM 
Contra Order'' or ``Initiating Order'', in order to clarify that these 
currently include orders submitted into Complex AIM.
SAM Pricing
    The Exchange proposes to adopt six new fee codes in connection with 
SAM into the Fee Codes and Associated Fees table of the Fee Schedule. 
The Exchange proposes to adopt two fee codes for SAM Agency Orders, fee 
code SA and fee code SC, which will apply to Non-Customer and Customer 
Agency orders, respectively. As proposed, fee code SA will apply to 
Non-Customer SAM Agency Orders that are executed in a SAM Auction and 
will be assessed a fee of $0.20 per contract. Fee code SC will apply to 
Customer SAM Agency Orders that are executed in a SAM Auction and will 
be assessed no charge. Next, the Exchange proposes to adopt two fee 
codes for SAM Contra Orders, fee code SF and fee code SB, which will 
apply to Non-Customer and Customer Contra orders, respectively. Fee 
code SF will apply to Non-Customer SAM Contra Orders executed in an SAM 
Auction and will be assessed a fee of $0.20. Fee code SB will apply to 
Customer SAM Agency Orders executed in a SAM Auction and will be 
assessed no charge. The Exchange also proposes to adopt fee codes SD 
and SE, which will apply to SAM Response Orders in Penny Pilot 
securities and Non-Penny Pilot securities, respectively. As proposed, 
fee code SD will apply to a SAM Response Order that is executed in a 
SAM Auction in a Penny Pilot security, and will be assessed a fee of 
$0.50. Likewise, fee code SE will apply to a SAM Response Order that is 
executed in a SAM Auction in a Non-Penny Pilot security, and will be 
assessed a fee of $1.05.
    In addition, the Exchange proposes to amend footnote 6, which 
currently summarizes pricing for another Exchange auction mechanism, 
AIM, which is substantially similar to that of the SAM Auction. 
Particularly, the Exchange proposes to rename footnote 6 from 
``Automated Improvement Mechanism (``AIM'') Pricing'' to ``AIM and SAM 
Mechanism Pricing'' and incorporate a summary of SAM fees and rebates 
into the existing structure of the table that currently summarizes AIM 
fees and rebates for the same types of auction-related orders. This 
pricing table is intended to provide clarity to Members by summarizing 
in table form the different types of orders submitted into an auction 
and their corresponding fee codes and rates. The Exchange also proposes 
to amend the table footnote appended to the single asterisk, which 
currently states that when an AIM Agency Order executes against one or 
more resting orders that were already on the Exchange's order book when 
the AIM Agency Order was received by the Exchange, the AIM Agency Order 
and the resting order(s) will receive the Standard Fee Rates. The 
proposed change would remove specific references to AIM, thereby 
amending it to refer to only ``Agency Order'', as this footnote is 
applicable in the same manner to both AIM and SAM Agency Orders \7\ and 
makes it clear that for SAM, like AIM currently, the fee structure for 
such an execution would not be altered and instead the Exchange would 
charge a fee or provide a rebate to each side of the transaction as if 
it were a transaction occurring on the Exchange's order book pursuant 
to the Exchange's normal order handling methodology and not in in an 
auction. This is distinguished from SAM Response Orders (like current 
AIM Response Orders), which, as defined, include unrelated orders that 
are received by the Exchange after a SAM Auction has begun and which 
would be charged or provided rebates based specifically on SAM pricing.
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    \7\ The Exchange notes that Customer-to-Customer Immediate Cross 
is not applicable to SAM Auctions.
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SAM Agency Orders and Designated Give Up
    Footnote 5 of the Fee Schedule currently specifies that when an 
order is submitted with a Designated Give Up, as defined in Rule 
21.12(b)(1), the applicable rebates for such orders when executed on 
the Exchange (yielding fee code BC, NC, PC, QA or QM) are provided to 
the Member who routed the order to the Exchange. Pursuant to Rule 
21.12, which specifies the process to submit an order with a Designated 
Give Up, a Member acting as an options routing firm on behalf of one or 
more other Exchange Members (a ``Routing Firm'') is able to route 
orders to the Exchange and to immediately give up the party (a party 
other than the Routing Firm itself or the Routing Firm's own clearing 
firm) who accepts and clears any resulting transaction. Because the 
Routing Firm is responsible for the decision to route the order to the 
Exchange, the Exchange currently provides such Member with the rebate 
when orders that yield fee code BC, NC, PC, QA or CM are executed. In 
connection with the adoption of SAM-related fees, the Exchange proposes 
to add new fee code SC (SAM Agency Customer Order) to the lead-in 
sentence of footnote 5 and to append footnote 5 to fee code SC in the 
Fee Codes and Associated Fees table of the Fee Schedule.
SAM Agency Orders and Break-Up Credits
    In addition, the Exchange also proposes to amend the provision 
regarding Break-Up Credits located under the AIM and SAM Pricing table 
in footnote 6. Specifically, it proposes to rename this provision from 
``AIM Break-Up Credits'' to ``AIM and SAM Break-Up Credits'' and remove 
references to ``AIM'' within the provision as it will apply to agency 
orders submitted in either the AIM (as it does currently) or SAM 
auction that trades with a response order in the respective auction. As

[[Page 11408]]

proposed, the Break-Up Credits will apply to the Member that submitted 
an Agency Order (i.e., either an AIM or SAM Agency Order), including a 
Member who routed an order to the Exchange with a Designated Give Up, 
when the Agency Order trades with a Response Order (i.e., an AIM or SAM 
Response Order, as applicable). The Exchange proposes to adopt a Break-
Up Credit for qualifying SAM Agency Order of $0.15 per contract in both 
Penny Pilot and Non-Penny Pilot securities.
Marketing Fees and SAM Pricing
    The Fee Schedule currently contains a section entitled ``Marketing 
Fees'', which specifies that marketing fees are charged to all Market 
Makers who are counterparties to a trade with a Customer, with certain 
exceptions, including the exclusion of AIM Pricing set forth in 
footnote 6. The Exchange proposes to extend the marketing exclusion to 
orders subject to SAM Pricing set forth in footnote 6.
QCC Initiator Rebate Overview
    The Exchange currently provides functionality that allows for 
participants on the Exchange to submit QCC orders to the Exchange and 
its Fee Schedule correspondingly provides for various fee codes and 
rates in connection with different types of QCC orders. Specifically, 
footnote 7 currently provides for the QCC Initiator Rebate and provides 
a rebate of $0.05 to a Member that submits a QCC Agency Order to the 
Exchange when at least one side of the transaction is of Non-Customer 
capacity. The QCC Initiator Rebate is currently provided to all Members 
submitting QCC Agency Orders, yielding either fee code QA \8\ or fee 
code QM, \9\ to the Exchange, including a Member who routed an order to 
the Exchange with a Designated Give Up (as discussed above). Also as 
discussed in detail above, the Exchange operates in a highly-
competitive market by which competitive forces constrain the Exchange's 
transaction fees and market participants can readily trade on competing 
venues if they deem pricing levels at those other venues to be more 
favorable. In response to the competitive environment, the Exchange 
offers, among other things, tiered pricing which provides Members 
opportunities to qualify for higher rebates or reduced fees where 
certain volume criteria and thresholds are met. Tiered pricing provides 
an incremental incentive for Members to strive for higher tier levels, 
which provides increasingly higher benefits or discounts for satisfying 
increasingly more stringent criteria. For example, the Exchange 
currently offers various Customer volume tiers under footnote 1 which 
provide enhanced rebates for qualifying Customer orders that meet 
certain add liquidity thresholds, as well as eight Market Maker volume 
tiers under footnote 2 which provide reduced fees for qualifying Market 
Maker order that meet certain add liquidity thresholds.
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    \8\ Appended to QCC Customer Agency orders and assessed no 
charge.
    \9\ Appended to QCC non-Customer Agency orders and assessed a 
standard fee of $0.08.
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QCC Initiator/Solicitation Rebate Tiers
    The Exchange proposes to modify the QCC Initiator Rebate, as well 
as provide a ``Solicitation'' Rebate, to apply per tier of 
incrementally increasing volume thresholds. First, the Exchange notes 
that it proposes to add the fee codes appended to SAM Agency orders, SA 
and SC, to the list of fee codes (i.e., QA and QM \10\) currently 
eligible for the rebate provided under footnote 7. Accordingly, it also 
proposes to update the name of the table under footnote 7 and the 
description therein to refer to the ``QCC Initiator/Solicitation 
Rebate''. Next, the Exchange proposes to remove the single rebate rate 
of $0.05 per contract in all securities and replace it with six new 
tiers that correspond to increasingly higher volume thresholds and 
increasingly higher rebates. Particularly, the Exchange proposes to 
add: Tier 1, which will provide no rebates for Members that submit 
qualifying orders (i.e., QA, QM, SA and SC) totaling 0 to 99,999 
contracts per month; Tier 2, which will provide a rebate of $0.05 per 
contract for Members that submit qualifying orders totaling 100,000 to 
199,999 contracts per month; Tier 3, which will provide a rebate of 
$0.07 per contract for Members that submit qualifying orders totaling 
200,000 to 499,999 contracts per month; Tier 4, which will provide a 
rebate of $0.09 per contract for Members that submit qualifying orders 
totaling 500,000 to 749,999 contracts per month; Tier 5, which will 
provide a rebate of $0.10 per contract for Members that submit 
qualifying orders totaling 750,000 to 999,999 contracts per month; and 
Tier 6, which will provide a rebate of $0.11 per contract for Members 
that submit qualifying orders totaling 1,000,000 or more contracts per 
month.
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    \10\ QA is appended to a QCC Customer Agency Order and assessed 
no charge and QM is appended to a QCC Non-Customer Agency order and 
assessed a fee of $0.08.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\11\ in general, and furthers the 
requirements of Section 6(b)(4),\12\ in particular, as it is designed 
to provide for the equitable allocation of reasonable dues, fees and 
other charges among its facilities and does not unfairly discriminate 
between customers, issuers, brokers or dealers.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
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    As stated above, the Exchange operates in a highly-competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. The Exchange is only one of 
several options venues to which market participants may direct their 
order flow, and it represents a small percentage of the overall market. 
The proposed fee changes reflect a competitive pricing structure 
designed to incentivize market participants to direct their order flow 
to the Exchange's price improvement auction and/or their QCC order 
flow, which the Exchange believes would enhance market quality to the 
benefit of all Members. Overall, the Exchange believes that its 
proposed adoption of fees in connection with the SAM Auction, and 
volume-based tiers for QCC and SAM Agency Orders is consistent with 
Section 6(b)(4) of the Act in that the proposed fees are reasonable, 
equitable and not unfairly discriminatory. The Exchange believes that 
the proposed fees are reasonable, equitable, and not unfairly 
discriminatory in that competing options exchanges, including the 
Exchange's affiliated options exchanges or the Exchange itself, offer 
substantially the same fees and credits in connection with similar 
price improvement auctions,\13\ as well as

[[Page 11409]]

volume-based incentives in connection with QCC and/or Solicitation 
orders,\14\ as the Exchange now proposes.
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    \13\ See MIAX Options Fee Schedule, Section 1(a)(v), ``MIAX 
Price Improvement Mechanism (``PRIME'') Fees, which provides for 
comparable rates for similar response, contra, and agency type 
orders submitted into its PRIME auctions. For example, it assesses a 
fee of $0.50 (Penny Classes) and $0.99 (non-Penny Classes) for PRIME 
responses, and offers a break-up credit of $0.25 (Penny Classes) and 
$0.60 (non-Penny Classes) for PRIME Agency orders; NYSE American 
Options Fee Schedule, Section I(G), ``CUBE Auction Fees and 
Credits'', which assesses a fee of $0.50 (Penny Classes) and $0.99 
(non-Penny Classes) for CUBE (its Customer Best Execution Auction) 
responses, and offers a break-up credit of $0.25 (Penny Classes) and 
$0.60 (non-Penny Classes) for PRIME Agency orders, and an Initiating 
Participant Credit (akin to an Agency Order) of $0.30 (Penny Pilot) 
and $0.70 (non-Penny Pilot); and Nasdaq ISE Rules, Options 7 Pricing 
Schedule, Section 3, which provides a Facilitation and Solicitation 
Break-Up Rebate of $0.15, the same as proposed herein. See generally 
EDGX Options Exchange Fee Schedule, ``Fee Codes and Associated 
Fees'', which provide the same or comparable rates for corresponding 
response, contra, and agency orders in AIM; see also ``AIM Break-Up 
Credits'', which offers a credit of $0.25 for AIM Agency Orders in 
Penny Pilot securities and $0.60 for such orders in non-Penny Pilot 
securities.
    \14\ See Nasdaq ISE Rules, Options 7 Pricing Schedule, Section 
6A, ``QCC and Solicitation Rebate'', which currently assesses the 
same rebate amounts for the same increasing increments of contracts, 
as proposed herein, for qualified QCC and/or other solicited 
crossing orders; and Nasdaq Phlx Rules, Options 7 Pricing Schedule, 
Section 4, ``QCC Rebate Schedule'', which currently assesses the 
same rebate amounts for the same increasing increments of contracts, 
as proposed herein, for qualified QCC orders. See also Cboe Options 
Fees Schedule, ``QCC Rate Table'', which assesses a flat credit of 
$0.10 per contract (which is on the higher-end of the range of 
tiered rebates proposed herein) for QCC Initiators.
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SAM Definitions and AIM Clarifications
    The Exchange believes that the proposed SAM-related definitions are 
reasonable and equitable as they are consistent with the corresponding 
Exchange Rules that govern the SAM Auction as well as consistent, to 
the extent possible, with the corresponding AIM-related definitions 
currently in the Fee Schedule. Also, the proposed update to ``AIM 
Response'' orders is reasonably designed to be more consistent with the 
term used in Rule 21.19(c)(5), which governs AIM Auction Responses.
SAM Pricing
    The Exchange's proposal establishes fees and rebates regarding SAM, 
which promotes price improvement to the benefit of market participants. 
The Exchange believes that the adoption of the SAM Auction on the 
Exchange will encourage market participants, and in particular 
liquidity providers on the Exchange, to compete to provide 
opportunities for price improvement for large-sized orders in a 
competitive auction process. The Exchange believes that its proposal is 
reasonable designed to allow the Exchange to recoup the costs 
associated with implementing and maintaining SAM while also 
incentivizing its use, which benefits all market participants. The 
Exchange notes that the proposed SAM fees and pricing structure is 
reasonable and equitable as it is comparable to the fees and structure 
currently in place for the same type of orders submitted into the 
Exchange's AIM Auction (i.e., Response, Contra, and Agency, 
distinguished between Customer and Non-Customer and Penny Pilot and 
Non-Penny Pilot securities). In particular, the proposed fees and 
rebate structure in relation to SAM orders are designed to promote 
order flow through SAM and, in particular, to attract Customer 
liquidity, which benefits all market participants by providing 
additional trading opportunities at improved prices. This, in turn, 
attracts increased large-order flow from liquidity providers which 
facilitates tighter spreads and potentially triggers a corresponding 
increase in order flow originating from other market participants.
    The Exchange further notes that, generally, the proposed fee and 
rebate schedule is reasonably designed because it is within the range 
of fees and rebates assessed by other exchanges employing similar fee 
structures for price improvement mechanisms.\15\ Other competing 
exchanges offer different fees and rebates for agency orders, contra-
side orders, and responder orders to the auction in a manner similar to 
the proposal. Other competing exchanges also charge different rates for 
transactions in their price improvement mechanisms for customers versus 
their non-customers in a manner similar to the proposal. The Exchange 
believes the fee and rebate schedule as proposed continues to reflect 
differentiation among different market participants typically found in 
options fee and rebate schedules.
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    \15\ See supra note 12.
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    In particular, the Exchange believes that charging market 
participants, other than Customers, a higher effective rate for certain 
SAM transactions is reasonable, equitable, and not unfairly 
discriminatory because these types of market participants are more 
sophisticated and have higher levels of order flow activity and system 
usage. Facilitating this level of trading activity requires a greater 
amount of Exchange system resources than that of Customers, and thus, 
generates greater ongoing operational costs for the Exchange. 
Therefore, the Exchange believes that the proposed fees for SAM Non-
Customer Agency and Contra Orders are reasonably designed to provide 
associated revenue to allow the Exchange to promote and maintain SAM 
and continue to enhance its services, which is beneficial to all market 
participants. Also, the Exchange believes that the proposed fee for SAM 
Non-Customer Agency and Contra orders ($0.20 per contract) is 
reasonable because it encourages participation in SAM by offering a 
rate that is equivalent to or better than most other price improvement 
auctions offered by other options exchanges as well as the Exchange 
itself.\16\
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    \16\ See e.g. MIAX Options Fee Schedule, Section 1(a)(v), ``MIAX 
Price Improvement Mechanism (``PRIME'') Fees, which provides that 
PRIME Customer Agency orders are also free of charge and PRIME Non-
Customer Agency orders are assessed a higher fee of $0.30, see also 
Cboe Options Fees Schedule, ``Rate Table--All Products Excluding 
Underlying Symbol List A (34)(13)'', which also assesses a fee of 
$0.20 for Non-Customer Agency orders submitted into its AIM and SAM 
auctions; and EDGX Options Fee Schedule, ``Fee Codes and Associated 
Fees'', which also assesses a fee of $0.20 for Non-Customer Contra 
orders submitted into its AIM auction, which is substantially 
similar to the SAM auction.
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    The Exchange believes that the SAM Customer Agency and Contra 
Orders are reasonable because Customer volume is important as it 
attracts continuous liquidity, including from Market Makers to the 
Exchange, which benefits all market participants by providing more 
trading opportunities. An increase in Market Maker activity, in turn, 
may facilitate tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants, 
contributing to increased price discovery and a more robust 
marketplace. The Exchange also notes that the options industry has a 
long history of providing preferential pricing to Customer orders in 
order to incentivize increased, and important, Customer order flow 
through a fee and rebate schedule in order to attract professional 
liquidity providers. The Exchange's current Fee Schedule currently does 
so in many places, particularly in relation to its similar auction, 
AIM, as do the fees structures in relation to auctions of multiple 
other exchanges.\17\ Indeed, the proposed new fees and rebates for SAM 
are generally intended to encourage greater Customer trade volume to 
the Exchange in line with industry practice.
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    \17\ See supra note 12.
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    Moreover, the Exchange believes that assessing no charge on SAM 
Customer Agency and Contra Orders and assessing a fee of $0.20 for SAM 
Non-Customer Agency and Contra Orders is equitable and not unfairly 
discriminatory. First, the Exchange notes that the respective fees will 
apply the same to all similarly situated participants. Second, the 
Exchange again notes that not assessing a fee on SAM Customer orders 
while assessing a fee on SAM Non-Customer orders is in line with an 
industry practice intended to increase in Customer order flow in order 
to attract greater volume and liquidity and provide for tighter spreads 
and more trading opportunities at improve prices to the benefit of all 
market participants.
    Regarding the proposed fees for SAM Response Orders, the Exchange 
believes

[[Page 11410]]

that assessing a fee of $0.50 per contract for orders in Penny Pilot 
Securities and a fee of $1.05 per contract for orders in Non-Penny 
Pilot Securities is reasonable because this associated revenue will 
also contribute to the Exchange's maintenance and enhancement of SAM. 
Similar to that described above, the proposed fees in connection with 
SAM Response Orders are also reasonable as they are similar to, or 
within the range of, fees and rebates assessed by other exchanges 
employing similar fee structures for price improvement mechanisms, and 
are identical to the fees currently assessed by the Exchange for 
comparable AIM Response Orders.\18\ Other competing exchanges offer 
different fees and rebates for agency orders, contra-side order, and 
responders to the auction in a manner similar to the proposal. Further, 
the proposed fee for such orders is equitable and not unfairly 
discriminatory because it will apply the same rates to all 
participants' SAM Response orders and will vary only based on whether 
the security is a Penny Pilot Security or a Non-Penny Pilot Security.
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    \18\ See supra note 12.
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    The Exchange further believes its proposal represents a reasonable 
and equitable allocation of dues and fees in that the proposal would 
treat an unrelated order, as well as a SAM Agency Order that executes 
against such order, differently depending on whether the unrelated 
order was already resting on the Exchange's order book at the time the 
SAM Agency Order was received or was received after the SAM Auction had 
begun. The Exchange believes that this proposal is reasonable, 
equitable, and not unfairly discriminatory as the Fee Schedule 
currently provides that unrelated orders and Agency Orders in the AIM 
Auction (which, as noted, is substantially similar to the SAM Auction) 
will be treated in the same manner that is being proposed for unrelated 
and Agency Orders in a SAM Auction. As proposed, an unrelated order 
would be considered a SAM Responder Order if received after the SAM 
Auction had commenced. As a result, both the SAM Agency Order executing 
against such order and such order itself would be assessed fees and 
provided rebates according to the proposed SAM pricing. The Exchange 
believes this is a reasonable and equitable allocation of dues and 
fees, and is not unreasonably discriminatory, because it ensures that 
market participants are treated similarly with respect to their 
executions against SAM Agency Orders. To do otherwise, to the extent 
fees are higher pursuant to SAM pricing than under the Exchange's 
Standard Fee Rates, would potentially incentivize a market participant 
that wished to participate in an auction to nonetheless avoid sending 
orders to the Exchange that are not targeted towards the auction and 
instead send orders to the Exchange's order book generally, knowing 
that such orders would still be considered in the auction. In contrast, 
as proposed, to the extent an unrelated order was already present on 
the Exchange's order book when a SAM Agency Order is received, such 
unrelated order, if executed in an Auction, as well as the SAM Agency 
Order against which it trades would be charged a fee or provided a 
rebate as if the transaction occurred on the Exchange's order book 
pursuant to the Exchange's normal order handling methodology and not in 
SAM. The Exchange similarly believes this is a reasonable and equitable 
allocation of dues and fees, and is not unreasonably discriminatory, 
because it will ensure that the participant that had established 
position on the Exchange's order book first, the unrelated order, is 
not impacted with respect to applicable fees or rebates despite the 
later arrival of a SAM Agency Order that commences an Auction.
SAM Agency Orders and Designated Give Up
    The Exchange believes that the proposal to add new fee code SC to 
the lead-in sentence of footnote 5 and to append footnote 5 to fee code 
SC is a reasonable and equitable allocation of fees and dues and is not 
unreasonably discriminatory because, as is currently the case pursuant 
to footnote 5 and Rule 21.12(b)(1), the proposal simply makes clear 
that a firm acting as a Routing Firm that routes SAM Agency Orders to 
the Exchange will be provided applicable rebates, including any SAM 
Break-Up Credits, based on the Routing Firm's decision to route the 
order to the Exchange.
SAM Agency Orders and Break-Up Credits
    With respect to the proposal to adopt SAM-related Break-Up Credits 
under footnote 6, the Exchange believes this is reasonable because it 
encourages use of SAM and because Break-Up Credits are currently 
applied in the same manner to similar AIM Agency Orders. Specifically, 
the Exchange believes that the proposed Break-Up Credits for SAM Agency 
Orders would encourage increased Agency Order flow to SAM Auctions, 
thereby potentially increasing the initiation of and volume executed 
through SAM Auctions. Additional auction order flow provides market 
participants with additional trading opportunities at improved prices. 
The Exchange also believes that the proposed SAM Break-Up Credits of 
$0.15 for both a Penny Pilot Security and a Non-Penny Pilot Security 
are reasonable and equitable as this credit is in line with a 
corresponding break-up fee for a price improvement auction offered by 
another options exchange.\19\ Also, the proposed SAM Break-Up Credits 
are not unreasonably discriminatory because such credits are equally 
available to all Members submitting SAM Agency Orders to the Exchange. 
In addition, the Exchange believes that it is reasonable and equitable 
to update the language in the Break-Up Credit section of footnote 6, to 
make clear that a Routing Firm will be provided any applicable SAM or 
AIM Break-Up Credits.
---------------------------------------------------------------------------

    \19\ See supra note 12, Nasdaq ISE Facilitation and Solicitation 
Break-Up Rebate.
---------------------------------------------------------------------------

Marketing Fees and SAM Pricing
    The Exchange believes its proposal to expand the exclusions listed 
in the marketing fees section to also exclude orders subject to SAM 
Pricing set forth in footnote 6 is reasonable and equitable because the 
rates for Market Makers for orders subject to SAM Pricing are allocated 
as an all-inclusive rate (i.e., the same SAM ``Non-Customer'' rate 
applies to Market Makers as it would a proprietary firm or other 
liquidity provider) but would increase such rates to a level higher 
than that paid by other Non-Customer participants if Marketing Fees 
were also assessed on Market Makers' SAM transactions. The Exchange 
believes that it is reasonable and equitable to waive the marketing fee 
as it applies to Market Maker orders subject to SAM pricing, and 
consequently assess the same fees for Market Maker and all other Non-
Customer orders in SAM, because the application of marketing fees to 
Market Maker orders in SAM may discourage Market Maker participation in 
the SAM Auction. The Exchange recognizes that Market Makers are the 
primary liquidity providers in the options markets, and particularly, 
during auctions. Thus, the Exchange believes Market Makers provide the 
most accurate prices reflective of the true state of the market and are 
primarily responsible for encouraging more aggressive quoting and 
superior price improvement during an auction. By waiving the marketing 
fees for such orders the Exchange aims to incentivize Market Maker 
participation in SAM. The Exchange does not believe that this proposal 
is

[[Page 11411]]

unfairly discriminatory as the marketing fees currently apply only to 
Market Makers and the proposed change is uniformly excluding Market 
Maker orders subject to SAM pricing from the marketing fees, thus, 
uniformly applying the proposed SAM rates for Non-Customer orders to 
all Non-Customers. Also, the Exchange notes that Market Maker 
executions subject to the similar AIM price improvement auction are 
currently excluded from marketing fees, as are market makers on another 
options exchange that provides for similar marketing fees and auction 
pricing.\20\
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    \20\ See MIAX Options Fee Schedule, Section 1(b), ``Marketing 
Fees'', which provides that the exchange will not assess a marketing 
fee to market makers for agency orders, as well as other orders, 
executed in the exchange's PRIME auction.
---------------------------------------------------------------------------

QCC Initiator/Solicitation Rebate Tiers
    The Exchange believes the proposed adoption of a Solicitation 
Rebate, and modification of the QCC Initiator Rebate, to apply by tiers 
are reasonable because they provide opportunities for Members to 
receive higher rebates by providing for incrementally increasing 
volume-based criteria they can reach for. The Exchange again notes that 
volume-based incentives and discounts have been widely adopted by other 
exchanges,\21\ and believes that the proposed tiers are reasonable, 
equitable and non-discriminatory because they are open to all Members 
on an equal basis.
---------------------------------------------------------------------------

    \21\ See supra note 13.
---------------------------------------------------------------------------

    The Exchange believes the proposed QCC Initiator/Solicitation 
Rebate tiers are reasonable means to encourage Members to increase 
their liquidity on the Exchange, particularly in connection with 
additional QCC and/or Solicitation Agency Order flow to the Exchange in 
order to benefit from the proposed enhanced rebates. The Exchange 
believes that the proposed tiers are reasonable in that they provide an 
ample number of opportunities for a Member to receive an enhanced 
rebate for qualifying orders. The proposed tiers provide an incremental 
incentive for Members to strive for the highest tier levels, which 
provide increasingly higher rebates for incrementally more QCC 
Initiator/Solicitation volume achieved, which the Exchange believes is 
a reasonably designed incentive for Members to grow their QCC Initiator 
and/or Solicitation order flow to receive the enhanced rebates. The 
Exchange notes that it currently experiences little to no QCC volume on 
the Exchange, and therefore believes that all Members are similarly 
situated and incentivized to achieve the proposed tiers upon the 
implementation of such tiers. The Exchange additionally notes that, if 
a Member does not reach a tier between Tiers 2 and 6, the Member will 
still receive no charge on qualifying orders submitted (per Tier 1). 
The Exchange believes that incentivizing greater QCC Initiator and/or 
Solicitation order flow would provide more opportunities for 
participation in QCC trades or in the SAM Auction, thus increasing 
opportunities for price improvement. The Exchange also notes that any 
overall increased liquidity that may result from the proposed tier 
incentives benefits all investors by offering additional flexibility 
for all investors to enjoy cost savings, supporting the quality of 
price discovery, promoting market transparency and improving investor 
protection. The Exchange also believes that proposed enhanced rebates 
are reasonable based on the difficulty of satisfying each proposed 
tiers' volume criteria and ensures the proposed rebates and thresholds 
appropriately reflect the incremental difficulty to achieve each 
ascending tier. The proposed enhanced rebate and volume amounts are the 
same on other options exchanges that provide tiered rebates or credits 
for QCC and/or solicitation orders.\22\ The Exchange believes that the 
proposal represents an equitable allocation of fees and is not unfairly 
discriminatory because it applies uniformly to all Members that chose 
to submit QCC Agency Orders or a SAM Agency Orders, and each has a 
reasonable opportunity to satisfy any of the proposed tiers' criteria, 
which, as stated, the Exchange believes is reasonably designed to be 
incrementally more difficult per ascending tier.
---------------------------------------------------------------------------

    \22\ See supra note 13, Nasdaq ISE QCC and Solicitation Rebate; 
and Nasdaq Phlx QCC Rebate Schedule.
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Rather, as discussed above, 
the Exchange believes that the proposed change would encourage the 
submission of additional order flow to a public exchange, thereby 
promoting market depth, execution incentives and enhanced execution 
opportunities, as well as price discovery and transparency for all 
Members. As a result, the Exchange believes that the proposed change 
furthers the Commission's goal in adopting Regulation NMS of fostering 
competition among orders, which promotes ``more efficient pricing of 
individual stocks for all types of orders, large and small.''
    The Exchange believes that the proposed rule change does not impose 
any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
believes that the proposed change to adopt SAM pricing would not impose 
any burden on intramarket competition, but rather, serves to increase 
intramarket competition by incentivizing members to direct their 
orders, and, in particular, Customer orders, to the Exchange's SAM 
Auction, in turn providing for more opportunities to compete at 
improved prices. The proposed SAM-related fees and Break-Up Credits 
will apply uniformly to all Members that submit such qualifying orders 
(e.g., all Members have the opportunity to choose to submit a SAM 
Response order and all Members' SAM Response orders will be assessed 
the same fee according to the proposed rates). To the extent that there 
is a differentiation between proposed fees assessed to Customers as 
opposed to other market participants, the Exchange believes that this 
is appropriate because preferential pricing to Customers is a long-
standing options industry practice to incentivize increased Customer 
order flow through a fee and rebate schedule in order to attract 
professional liquidity providers. Indeed, the proposed fee changes 
serve to enhance Customer volume on the Exchange because Customer 
volume continues to attract liquidity, including Market Maker activity, 
by providing more trading opportunities. As stated, increased Market 
Maker activity may facilitate tighter spreads potentially triggering an 
additional corresponding increase in order flow from other market 
participants and contributing to increased price discovery and overall 
enhancing quality of the market. The Exchange also notes that the 
options industry has a long history of providing preferential pricing 
to Customers orders in order. The Exchange's current Fee Schedule 
currently provides preferential pricing to Customer orders in many 
places, particularly in relation to its similar auction, AIM, as do the 
fees structures in relation to auctions of multiple other 
exchanges.\23\
---------------------------------------------------------------------------

    \23\ See supra note 12.
---------------------------------------------------------------------------

    Further, the Exchange believes that the proposed fees and rebates 
generally for participation in the SAM Auction will not impose a burden 
on intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the

[[Page 11412]]

proposed rates are based on the total cost for participants to transact 
as respondents to the Auction as compared to the cost for participants 
to engage in non-Auction electronic transactions on the Exchange.
    In addition to this, the Exchange notes that the proposed exclusion 
of marketing fees for orders subject to SAM pricing will not impose a 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the waiver of the 
marketing fee as it applies to Market Maker orders subject to SAM 
pricing will ensure that pricing for all Non-Customer SAM orders will 
be the same for Market Makers and all other Non-Customers, thus, 
encouraging Market Maker participation in the SAM Auction, an important 
source of price discovery and price improvement during an auction.
    Finally, the Exchange believes that the proposed QCC Initiator/
Solicitation Rebate does not impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act as it applies uniformly to all market participants 
that choose to submit qualifying orders. As stated, the tiers represent 
a reasonable ascension of criteria difficulty and greater rebates, and 
at the very least, if a Member submits a qualifying order they will 
still be assessed no charge (per Tier 1).
    Next, the Exchange believes the proposed rule change does not 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As previously 
discussed, the Exchange operates in a highly competitive market. 
Members have numerous alternative venues they may participate on and 
direct their order flow, including 15 other options exchanges. 
Additionally, the Exchange represents a small percentage of the overall 
market. Based on publicly available information, no single options 
exchange has more than 22% of the market share.\24\ Therefore, no 
exchange possesses significant pricing power in the execution of order 
flow. Indeed, participants can readily choose to send their orders to 
other exchanges and off-exchange venues if they deem fee levels at 
those other venues to be more favorable. As noted above, the Exchange 
believes that the proposed pricing for the SAM Auction is comparable to 
that of other exchanges offering similar electronic price improvement 
mechanisms, and the Exchange believes that, based on general industry 
practice and experience, the price-improving benefits offered by an 
auction justify and offset the transaction costs associated with such 
auction [sic] The Exchange again notes that the proposed pricing and 
volume ranges are identical to that of other options exchanges for QCC 
initiator orders and/or solicitation orders.\25\ Moreover, the 
Commission has repeatedly expressed its preference for competition over 
regulatory intervention in determining prices, products, and services 
in the securities markets. Specifically, in Regulation NMS, the 
Commission highlighted the importance of market forces in determining 
prices and SRO revenues and, also, recognized that current regulation 
of the market system ``has been remarkably successful in promoting 
market competition in its broader forms that are most important to 
investors and listed companies.'' The fact that this market is 
competitive has also long been recognized by the courts. In 
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .''. Accordingly, the Exchange 
does not believe its proposed fee change imposes any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
---------------------------------------------------------------------------

    \24\ See supra note 3.
    \25\ See supra note 13.
---------------------------------------------------------------------------

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \26\ and paragraph (f) of Rule 19b-4 \27\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeEDGX-2020-009 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeEDGX-2020-009. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish

[[Page 11413]]

to make available publicly. All submissions should refer to File Number 
SR-CboeEDGX-2020-009 and should be submitted on or before March 19, 
2020.
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03919 Filed 2-26-20; 8:45 am]
 BILLING CODE 8011-01-P


