[Federal Register Volume 85, Number 137 (Thursday, July 16, 2020)]
[Notices]
[Pages 43269-43272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15304]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89291; File No. SR-CboeEDGA-2020-019]


Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend the Fee Schedule Applicable to Its Equities Trading Platform To 
Introduce a Flat Charge for the Execution of MDOs That Are Entered With 
the QDP Instruction

July 10, 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 July 1, 2020, Cboe EDGA Exchange, Inc. (the ``Exchange'' or 
``EDGA'') 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 EDGA Exchange, Inc. (``EDGA'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to amend the fee schedule applicable to its 
equities trading platform to introduce a flat charge for the execution 
of MDOs that are entered with the QDP instruction. 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/equities/regulation/rule_filings/edga/), 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
    On June 4, 2020, the Commission approved the Exchange's proposed 
introduction of a new order instruction, Quote Depletion Protection 
(``QDP''), that is available for Midpoint Discretionary Orders 
(``MDOs'').\3\ QDP, which was launched by the Exchange on June 10, 
2020, is designed to provide enhanced protections to MDOs by tracking 
significant executions on the EDGA Book, and facilitating the ability 
of Users to avoid potentially unfavorable executions by preventing MDOs 
entered with the optional QDP instruction from exercising discretion to 
trade at more aggressive prices when QDP has been triggered. The 
Exchange now proposes to introduce a flat charge for the execution of 
MDOs that are entered with the QDP instruction.
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    \3\ See Securities Exchange Act Release No. 89016 (June 4, 
2020), 85 FR 35488 (June 10, 2020) (SR-CboeEDGA-2020-005).
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    EDGA operates pursuant to an inverted pricing model where orders 
that add liquidity are generally charged a fee, and orders that remove 
liquidity are generally provided a rebate. Unlike MDOs entered on the 
Exchange's affiliate, Cboe EDGX, Exchange, Inc. (``EDGX''), MDOs 
entered on the Exchange pursuant to EDGA Rule 11.8(e) are allowed to 
execute both on entry and also after resting on the EDGA Book. MDOs 
that are executed on the Exchange may therefore be subject to a fee, 
rebate, or in some instances free executions, depending on whether the 
order is executed as the adder or remover of liquidity, and whether or 
not the order is executed within its discretionary range. Specifically, 
an MDO that adds liquidity is currently charged a fee of $0.00300 per 
share for securities priced at or above $1.00.\4\ This fee applies to 
MDOs that are executed either within the order's discretionary range or 
at its displayed or non-displayed ranked price.\5\ Conversely, for MDOs 
that remove liquidity in securities priced at or above $1.00, the 
Exchange's pricing depends on whether the order is executed within its 
discretionary range or at its displayed or non-displayed ranked price. 
Specifically, the Exchange currently provides a rebate of $0.00240 per 
share for MDOs that remove liquidity at the order's displayed or non-
displayed ranked price,\6\ but instead offers free executions for MDOs 
that remove liquidity within the order's discretionary range, in each 
case for securities priced at or above $1.00.\7\ For all MDOs executed 
in securities priced below $1.00, the Exchange provides free 
executions, regardless of whether the order is executed as the adder or 
remover of liquidity, or whether or not

[[Page 43270]]

the order is executed within its discretionary range.\8\
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    \4\ See EDGA Fee Schedule, Fee Codes DA and DM.
    \5\ Id.
    \6\ See EDGA Fee Schedule, Fee Code DR.
    \7\ See EDGA Fee Schedule, Fee Code DT.
    \8\ See EDGA Fee Schedule, Fee Codes DA, DM, DR, and DT.
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    The Exchange now proposes to instead introduce a small flat fee for 
the execution of an MDO that is entered with a QDP instruction. As 
proposed, MDOs entered with a QDP instruction would be subject to a fee 
of $0.00040 per share for securities priced at or above $1.00, or 0.30% 
of the dollar value of the trade for securities priced below $1.00.\9\ 
This charge would apply to the execution of MDOs that are entered with 
a QDP instruction, regardless of whether a QDP Active Period has been 
enabled in the security. MDOs entered without the optional QDP 
instruction would continue to be subject to current pricing. The 
Exchange's affiliate, Cboe EDGX Exchange, Inc. (``EDGX'') is 
simultaneously proposing a similar flat fee pricing model for MDOs 
entered with a QDP instruction that are executed on that exchange.\10\
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    \9\ To effect this change, the Exchange would introduce a new 
fee code ``DQ'' to its fee schedule that applies to MDOs entered 
with a QDP instruction.
    \10\ See SR-CboeEDGX-2020-032 (pending publication).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\11\ in general, and 
furthers the objectives 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 members and other persons using its 
facilities. Specifically, the Exchange believes that the proposed rule 
change is consistent with the requirements of the Act as it is designed 
to compensate the Exchange for the development of new and innovative 
market features, i.e., QDP, while continuing to provide a pricing model 
that the Exchange believes is competitive with pricing models offered 
by other national securities exchanges and off-exchange venues that 
offer similar protective features to their customers. 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. The proposed rule change 
reflects a competitive pricing structure designed both to compensate 
the Exchange for the introduction of innovative features and allow it 
to continue to compete aggressively with other market centers.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
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    As discussed, the proposed rule change would introduce pricing that 
is specific to MDOs entered with the recently-introduced QDP 
instruction. Although such MDOs would be subject to a small flat fee 
instead of a fee, rebate, or free execution under the current pricing 
model, the Exchange believes that the proposed pricing is reasonable 
given the enhanced benefits provided to Users that choose to utilize 
the protective features provided by the QDP instruction. QDP, which was 
introduced on the Exchange in June, is designed to facilitate the 
ability for market participants, including buy-side and other 
investors, to avoid potentially unfavorable executions in an MDO's 
discretionary range by preventing the exercise of discretion for two 
milliseconds following the execution of the EDGA best bid or offer on 
the same side of the market as the MDO below one round lot. While 
market participants that use this instruction would be subject to a 
small flat charge, including when the order adds or removes liquidity, 
the Exchange believes that the value of the protection provided by this 
feature outweighs the small fee that would be charged by the Exchange. 
Further, the proposed pricing may actually be beneficial to market 
participants that primarily add liquidity with MDOs as the proposed 
flat fee would be lower than the fee charged under the current MDO 
pricing model. In this respect, the Exchange notes that although MDOs 
entered on the EDGA Book may remove liquidity, both MDOs and the 
associated QDP instruction are designed primarily to facilitate 
liquidity provision by buy-side and other investors that are seeking 
protection from potential adverse selection risks. As a result, the 
Exchange believes that the benefits of more attractive pricing for 
adding liquidity may outweigh, in many respects, the costs of paying a 
fee when removing liquidity.
    The Nasdaq Stock Market LLC (``Nasdaq'') similarly charges special 
fees for the use of orders that are designed to offer certain 
protections to market participants. Specifically, Nasdaq charges a fee 
of $0.0004 per share to members that trade using its Midpoint Extended 
Life Order (``M-ELO'') in securities priced at or above $1.\13\ The 
Exchange believes that the proposed fees would be competitive with the 
fees that Nasdaq charges for M-ELO executions, as well as the fees 
charged by other national securities exchanges and off-exchange venues 
that provide various protective features.\14\ QDP is offered on a 
voluntary basis, and therefore market participants that would prefer to 
operate under the current pricing structure can continue to enter MDOs 
without the QDP instruction. The Exchange believes, however, that 
market participants may find value in the use of the QDP instruction, 
and--similar to firms that trade using Nasdaq M-ELO, IEX Discretionary 
Peg, or other similar trading mechanisms--would be willing to pay a 
small flat fee to benefit from the protections that this instruction is 
designed to provide to investors.
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    \13\ See Nasdaq Rules, Equity 7, Pricing Schedule, Section 
118(a)(1),(2),(3). Nasdaq does not charge a fee for M-ELO executions 
in securities priced below $1. See Nasdaq Rules, Equity 7, Pricing 
Schedule, Section 118(b).
    \14\ For example, Investors Exchange LLC (``IEX''), charges a 
fee of $0.0009 or $0.0003 per share for adding or removing non-
displayed or displayed liquidity, respectively. See IEX Fee 
Schedule, Fee Codes I and L. Although IEX does not have special 
pricing for its Discretionary Peg Orders, which are similar in 
certain respects to an MDO entered with a QDP instruction, firms 
that trade such orders on IEX would be subject to the general 
transaction fees described above.
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    The Exchange also believes that the proposed fee change is 
equitable and not unfairly discriminatory because it would apply 
equally to all MDOs entered with a QDP instruction. As discussed, QDP 
is an optional order instruction that a market participant can choose 
to include on an MDO entered on the Exchange in order to benefit from 
enhanced protections at times when recent executions on the EDGA Book 
suggest that the market may be about to move against the resting MDO. 
Both the MDO order type and the associated QDP instruction are 
available to all Users on an equal and non-discriminatory basis, and 
any User that chooses to use the QDP instruction would be subject to 
the same fee. As proposed, any MDO entered with a QDP instruction would 
be charged a small flat fee, regardless of how the order is ultimately 
executed. That is, an MDO entered with a QDP instruction would always 
be subject to a small transaction fee, whether or not the order acts as 
the adder or remover of liquidity, whether or not the MDO is executed 
within its discretionary range or at its displayed or non-displayed 
ranked price, and irrespective of whether or not the MDO is executed 
during a QDP Active Period where executions within the order's 
discretionary range are prevented.
    Although MDOs that include the new QDP instruction would be subject 
to a simplified pricing model compared to MDOs that do not include this 
instruction, the Exchange does not believe that this is inequitable or 
unfairly discriminatory within the meaning of the Act. All similarly

[[Page 43271]]

situated market participants would be subject to consistent and non-
discriminatory pricing based on the instructions that they include on 
their MDOs, with Users that include the optional QDP instruction paying 
a small fee that the Exchange believes is modest in relation to the 
value provided by the QDP instruction in avoiding potentially 
unfavorable executions. The proposed pricing is designed to be 
attractive to Users that enter MDOs with a QDP instruction, 
notwithstanding the fact that market participants would be subject to a 
fee in all circumstances. Further, the Exchange believes that the 
ability to charge a flat fee for the execution of such orders would 
appropriately compensate the Exchange for the development of this 
feature, while allowing the Exchange to offer pricing that is 
competitive with other national securities exchanges and off-exchange 
venues that may offer competing features. To the extent that any 
particular User believes that the benefits of the QDP instruction are 
outweighed by the proposed pricing, such Users would be free to enter 
MDOs without the QDP instruction, in which case their orders would be 
subject to the same pricing offered today.

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

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Rather, the Exchange 
believes that the proposed changes to its fees would promote continued 
competition between the Exchange, other national securities exchanges, 
and off-exchange venues that must continuously compete to offer both 
competitive pricing and services to members and investors. As proposed, 
the Exchange would charge a small flat fee for the use of its recently-
introduced QDP instruction. Charging fees for the use of this 
instruction would both compensate for the development and introduction 
of new and innovative features, and provide continued incentives for 
the Exchange to compete on both cost and the quality of its products 
and services.
Intramarket Competition
    The Exchange believes the proposed rule change would not impose any 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed fees would 
apply to all members equally in that all members would be subject to 
the same flat fee for the execution of orders that include a QDP 
instruction. The Exchange and other national securities exchanges 
(e.g., Nasdaq) offer pricing that is based on the characteristics of 
the order that is executed on the Exchange. Although MDOs entered with 
the QDP instruction would be subject to the pricing described in this 
proposed rule change, the Exchange does not believe that pricing would 
impose any significant burden on intramarket competition as this fee 
would be applied in the same manner to the execution of any MDO entered 
with this instruction. Both MDO and the associated QDP instruction 
discussed in this filing are available to all Users on an equal and 
non-discriminatory basis. As a result, any User can decide to use (or 
not use) the QDP instruction based on the benefits provided by that 
instruction in potentially avoiding unfavorable executions, and the 
associated charge that the Exchange proposes to introduce for its use. 
As discussed, any firm that chooses to use the QDP instruction would be 
charged the same flat fee for the execution of orders that are entered 
with this instruction.
Intermarket Competition
    The Exchange also believes the proposed fees would not impose any 
burden on intermarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. As discussed, the Exchange 
operates in a highly competitive market where members can direct their 
orders to a number of different market centers. These include 12 live 
U.S. equities exchanges, as well as a large number of off-exchange 
venues that trade NMS stocks. In addition, the Exchange represents a 
small percentage of the overall market. Based on publicly available 
information, no single equities exchange has more than 20% of U.S. 
equities market share.\15\ Therefore, no exchange possesses significant 
pricing power in the execution of order flow. Indeed, market 
participants can readily choose to send their orders to other exchange 
and off-exchange venues if they deem fee levels at those other venues 
to be more favorable, or if they believe that the products and services 
that they offer are better serve their trading needs. Since competitors 
are free to modify their own pricing in response, and as market 
participants may readily adjust their order routing practices, the 
Exchange believes that the degree to which pricing changes in this 
market may impose any burden on competition is extremely limited.
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    \15\ See Cboe Global Markets U.S. Equities Market Volume Summary 
(May 28, 2020), available at http://markets.cboe.com/us/equities/market_share/.
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Conclusion
    In sum, if the changes proposed herein are unattractive to market 
participants, it is likely that the Exchange will lose market share to 
competing exchanges and off-exchange venues as a result. Accordingly, 
the Exchange does not believe that the proposed changes would impair 
the ability of members or competing order execution venues to maintain 
their competitive standing in the financial markets. Indeed, 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.'' \16\
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    \16\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
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    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'. . . .''.\17\ Accordingly, the Exchange does not believe the 
proposed fees impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \17\ See NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

[[Page 43272]]

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 \18\ and paragraph (f) of Rule 19b-4 \19\ 
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.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f).
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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-CboeEDGA-2020-019 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-CboeEDGA-2020-019. 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 to make available publicly. All submissions 
should refer to File Number SR-CboeEDGA-2020-019, and should be 
submitted on or before August 6, 2020.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15304 Filed 7-15-20; 8:45 am]
BILLING CODE 8011-01-P


