[Federal Register Volume 88, Number 34 (Tuesday, February 21, 2023)]
[Notices]
[Pages 10574-10577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03487]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96928; File No. SR-CboeEDGX-2023-009]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Adopt Order-to-Trade Ratio Fees

February 14, 2023.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on February 1, 2023, 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 and II below, which Items have been prepared by the self-
regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 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. 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 amend its Fee Schedule to adopt Order-to-
Trade Ratio Fees, effective February 1, 2023.
    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 18% of the market share and 
currently the Exchange represents only approximately 6% of the market 
share.\4\ Thus, in such a low-concentrated and highly competitive 
market, no single options exchange, including the 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 to reduce 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.
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    \4\ See Cboe Global Markets U.S. Options Market Monthly Volume 
Summary (January 23, 2023), available at https://markets.cboe.com/us/options/market_statistics/.
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    The Exchange proposes to adopt Order-to-Trade Ratio Fees. The 
proposed fees will be charged to market participants registered as 
Market Makers on EDGX Options based on the number of orders (including 
modification messages) entered compared to the number of orders traded 
in a calendar month. The calculation of the ratio will not include 
quotes or trades resulting from such quotes. A Market Maker's order 
flow will be aggregated together with any affiliated Member sharing at 
least 75% common ownership. The proposed fees are as follows:

[[Page 10575]]



------------------------------------------------------------------------
            Tier                   Order-to-trade ratio           Fee
------------------------------------------------------------------------
Tier 1.....................  0 to 999........................         $0
Tier 2.....................  1,000 to 1,999..................      2,500
Tier 3.....................  2,000 to 4,999..................      5,000
Tier 4.....................  5,000 to 9,999..................     10,500
Tier 5.....................  10,000 to 14,999................     35,000
Tier 6.....................  15,000 to 19,999................    100,000
Tier 7.....................  20,000 and above................    150,000
------------------------------------------------------------------------

    The Exchange notes that market participants with incrementally 
higher order-to-trade ratios have the potential residual effect of 
exhausting system resources, bandwidth, and capacity. Higher order-to-
trade ratios may, in turn, create latency and impact other Members' 
ability to receive timely executions. Recognizing Market Maker quoting 
activity is an important source of liquidity on exchanges, and that 
orders and executions often occur in large numbers, the purpose of this 
proposal is to focus on activity that is truly disproportionate while 
fairly allocating costs. The proposed fee structure has multiple 
thresholds, and the proposed fees are incrementally greater at higher 
order-to-trade ratios because the potential impact on exchange systems, 
bandwidth and capacity becomes greater with increased order-to-trade 
ratios. The proposal contemplates that a Market Maker would have to 
exceed the high order to trade ratio of 999 before that Market Maker 
would be charged a fee under the proposed tiers. The Exchange believes 
that it is in the interests of all Members and market participants who 
access the Exchange to not allow other market participants to exhaust 
System resources, but to encourage efficient usage of network capacity. 
The Exchange also believes this proposal will reduce the potential for 
market participants to engage in excessive order and trade activity 
that may require the Exchange to increase its storage capacity and will 
encourage such activity to be submitted in good faith for legitimate 
purposes.
    The Exchange also represents that the proposed fees are not 
intended to raise revenue; rather, as noted above, it is intended to 
encourage efficient behavior so that market participants do not exhaust 
System resources. The Exchange also notes that it intends to provide 
Market Makers with daily reports, free of charge, which will detail 
their order and trade activity in order for those firms to be fully 
aware of all order and trade activity they (and their affiliates) are 
sending to the Exchange. This will allow firms to monitor their 
behavior and determine whether it is approaching any of the order-to-
trade thresholds that trigger the proposed fees.
    The Exchange lastly notes that other exchanges have adopted similar 
fee programs that assesses incrementally higher fees to Members that 
have incrementally higher order-to-trade ratios for similar reasons.\5\
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    \5\ See e.g., Securities Exchange Act Release No. 60102 (June 
11, 2009), 74 FR 29251 (June 19, 2009) (SR-NYSEArca-2009-50).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\6\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \7\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ Id.
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    First, the Exchange 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. The Exchange is only one of 
16 options exchanges which market participants may direct their order 
flow and/or participate on as a Market-Maker, and it represents a small 
percentage of the overall market. Competing options exchanges similarly 
assess fees based on a Member's order-to-trade ratio.\9\
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    \9\ See e.g., NYSE Arca Options Fees and Charges, Ratio 
Threshold Fee.
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    The Exchange believes adopting order-to-trade ratio fees is 
reasonable as unfettered usage of System capacity and network resource 
consumption can have a detrimental effect on all market participants 
who access and use the Exchange. As discussed, high order-to-trade 
ratios may adversely impact system resources, bandwidth, and capacity 
which may, in turn, create latency and impact other Members' ability to 
receive timely executions. The Exchange believes the proposed fees are 
therefore reasonable as they are designed to focus on activity that is 
truly disproportionate while fairly allocating costs.
    The Exchange believes the proposed fees are also reasonable as 
Market Makers that do not exceed the high order to trade ratio of 999 
will not be charged any fee under the proposed tiers. Quoting activity 
(and trades resulting from quotes) are also not included in the order-
to-trade ratio, thereby ensuring Market Makers quoting activity, which 
acts as important source of liquidity, is not impeded by the proposal. 
The Exchange believes it's reasonable, equitable and not unfairly 
discriminatory to assess higher fees for greater higher order-to-trade 
ratios because the potential impact on exchange systems, bandwidth and 
capacity becomes greater with increased order-to-trade ratios. The 
Exchange believes the proposed fee amounts are reasonable and 
commensurate with the proposed thresholds as they are designed to 
incentivize Market Makers to reduce excessive order and trade activity 
that can be detrimental to all market participants and encourage such 
activity to be made in good faith and for legitimate purposes. Indeed, 
the Exchange believes that it is in the interests of all Members and 
market participants who access the Exchange to not allow other market 
participants to exhaust System resources, but to encourage efficient 
usage of network capacity. The Exchange therefore also believes that 
the proposed order-to-trade ratio fees appropriately reflect the 
benefits to different firms of being able to send orders into the 
Exchange's System and facilitates the Commission's goal of ensuring 
that critical market infrastructure has ``levels of capacity, 
integrity, resiliency, availability, and security adequate to maintain 
their operational capability and promote the maintenance of fair and 
orderly markets.'' \10\
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    \10\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (File No. S7-01-13) 
(Regulation SCI Adopting Release).
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    The Exchange believes the proposed change is also equitable and not 
unfairly discriminatory because it applies uniformly to all Market 
Makers registered on EDGX Options. While the Exchange has no way of 
predicting with certainty how the proposed changes will impact Member 
activity, based on trading activity from the prior months,

[[Page 10576]]

the Exchange anticipates that, absent any changes to Member behavior, 
the vast majority of Members will fall within proposed Tier 1 (and thus 
not be subject to any new fees). With respect to Market Makers that 
exceed this threshold, the Exchange anticipates, absent any change in 
behavior, approximately two Members will fall within Tier 2, one Member 
will fall within Tier 3, no Members will fall within Tiers 4 or 5 and 
one Member will fall within Tier 6 and no Members will fall within Tier 
7. As discussed above however, the Exchange believes it's equitable and 
not unfairly discriminatory to assess incrementally higher fees for 
Market Makers that have higher order-to-trade ratios because the 
potential impact on exchange systems, bandwidth and capacity becomes 
greater with increased order-to-trade ratios. In addition, the Exchange 
believes that excluding quoting activity from the calculation of the 
ratio for the proposed fees is not unfairly discriminatory because it 
will ensure Market Makers are able to continue providing important 
liquidity to the Exchange and meet their quoting obligations.
    The Exchange lastly believes that its proposal is reasonable, 
equitably allocated and not unfairly discriminatory because it is not 
intended to raise revenue for the Exchange; rather, it is intended to 
encourage efficient behavior so that market participants do not exhaust 
System resources, while balancing the increase in order-to-trade ratio 
has seen from some market participants.

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. In particular, the Exchange 
believes 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. Particularly, the proposed fees 
applies uniformly to all Market Makers registered on EDGX Options. 
Further, any Market Maker who exceeds the order-to-trade ratio of 999 
will be subject to a fee under the proposed tiers. The Exchange 
believes that the proposed change neither favors nor penalizes one or 
more categories of market participants in a manner that would impose an 
undue burden on competition. Rather, the proposal seeks to benefit all 
market participants by encouraging the efficient utilization of the 
Exchange's network while taking into account the important liquidity 
provided by Market Makers. As discussed above potential impact on 
exchange systems, bandwidth and capacity becomes greater with increased 
order-to-trade ratios. The Exchange also anticipates that the vast 
majority of Market Makers on the Exchange will not be subject to any 
fees under the proposed tiers. Accordingly, the Exchange believes that 
the proposed Excessive Quoting Fee does not favor certain categories of 
market participants in a manner that would impose a burden on 
competition.
    The Exchange also 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 18% of the market share. 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 if they deem fee levels at those other venues to be more 
favorable. 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.

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 is effective upon filing pursuant to 
Section 19(b)(3)(A) \11\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \12\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such 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 shall institute proceedings under 
Section 19(b)(2)(B) \13\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
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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 [email protected]. Please include 
File Number SR-CboeEDGX-2023-009 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-2023-009. This

[[Page 10577]]

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-CboeEDGX-2023-009, and should be 
submitted on or before March 14, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03487 Filed 2-17-23; 8:45 am]
BILLING CODE 8011-01-P


