83_FR_40522 83 FR 40365 - Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Revise the Threshold for Imposition of the Crumbling Quote Remove Fee

83 FR 40365 - Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Revise the Threshold for Imposition of the Crumbling Quote Remove Fee

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 157 (August 14, 2018)

Page Range40365-40371
FR Document2018-17396

Federal Register, Volume 83 Issue 157 (Tuesday, August 14, 2018)
[Federal Register Volume 83, Number 157 (Tuesday, August 14, 2018)]
[Notices]
[Pages 40365-40371]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-17396]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83800; File No. SR-IEX-2018-16]


Self-Regulatory Organizations: Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Revise 
the Threshold for Imposition of the Crumbling Quote Remove Fee

August 8, 2018.
    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 July 26, 2018, the Investors Exchange LLC (``IEX'' or 
the ``Exchange'') 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 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

    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''),\4\ and Rule 19b-4 thereunder,\5\ IEX is 
filing with the Commission a proposed rule change to revise the 
threshold for imposition of the Crumbling Quote Remove Fee (``CQRF'') 
to more narrowly tailor it to trading activity that is indicative of a 
deliberate trading strategy that may adversely affect execution quality 
on the Exchange. The text of the proposed rule change is available at 
the Exchange's website at www.iextrading.com, at the principal office 
of the Exchange, and at the Commission's Public Reference Room.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CRF 240.19b-4.
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II. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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 statement may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its fee schedule, pursuant to IEX 
Rule 15.110 (a) and (c), to revise the threshold for imposition of the 
CQRF to more narrowly tailor it to trading activity that is indicative 
of a deliberate trading strategy that may adversely affect execution 
quality on the Exchange.
    The Exchange charges the CQRF to orders that remove resting 
liquidity when the crumbling quote indicator (``CQI'') is on if such 
executions constitute at least 5% of the Member's volume executed on 
IEX and at least 1 million shares, on a monthly basis, measured on a 
per market participant identifier (``MPID'') basis (the ``CQRF 
Threshold''). Orders that exceed the 5% and 1 million share thresholds 
are assessed a fee of $0.0030 per each incremental share executed at or 
above $1.00 that exceeds the CQRF Threshold.\6\
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    \6\ Executions below $1.00 are assessed a fee of 0.30% of TDV 
unless the Fee Code Combination results in a free execution. See 
Investors Exchange Fee Schedule, available on the Exchange public 
website.
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    Pursuant to IEX Rule 11.190(g), in determining whether quote 
instability or a crumbling quote exists, the Exchange utilizes real 
time relative quoting activity of certain Protected Quotations \7\ and 
a proprietary mathematical calculation (the ``quote instability 
calculation'') to assess the probability of an imminent change to the 
current Protected National Best Bid \8\ to a lower price or the 
Protected National Best Offer \9\ to a higher price for a particular 
security (``quote instability factor''). When the quoting activity 
meets predefined criteria and the quote instability factor calculated 
is greater than the Exchange's defined quote instability threshold, the 
System treats the quote as unstable and the CQI is on. During all other 
times, the quote is considered stable, and the CQI is off. The System 
independently assesses the stability of the Protected NBB and Protected 
NBO for each security. When the System determines that a quote,

[[Page 40366]]

either the Protected NBB or the Protected NBO, is unstable, the 
determination remains in effect at that price level for two 
milliseconds, unless a new determination is made before the end of the 
two-millisecond period. A new determination may be made after at least 
200 microseconds has elapsed since a preceding determination, or a 
price change on either side of the Protected NBBO occurs, whichever is 
first. If a new determination is made, the original determination is no 
longer in effect. A new determination can be at either the Protected 
NBB or the Protected NBO and at the same or different price level as 
the original determination.
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    \7\ Pursuant to Rule 11.190(g), the Protected Quotations of the 
New York Stock Exchange, Nasdaq Stock Market, NYSE Arca, Nasdaq BX, 
Cboe BZX Exchange, Cboe BYX Exchange, Cboe EDGX Exchange, and Cboe 
EDGA Exchange.
    \8\ See, Rule 600(b)(42) under Regulation NMS.
    \9\ See supra note 4 [sic].
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    The Exchange adopted the CQRF beginning in January 2018 in order to 
incentivize the entry of resting liquidity on IEX, including displayed 
liquidity. Specifically, and as described more fully in the rule filing 
adopting the CQRF (``CQRF rule filing''),\10\ the Exchange identified 
that Members entering liquidity taking orders when the CQI was on 
appeared to be able to engage in a form of latency arbitrage by 
leveraging fast proprietary market data feeds and connectivity along 
with predictive strategies to chase short-term price momentum and 
successfully target resting orders at unstable prices. IEX believes 
that these types of trading strategies, with concentrated and 
aggressive tactics during moments of quote instability, are detrimental 
to the experience of other IEX participants, and create disparate 
burdens on resting orders, particularly those that are displayed and 
therefore ineligible to benefit from the CQI in the manner of 
Discretionary Peg orders \11\ and primary peg orders \12\ which do not 
exercise price discretion when the CQI is on.\13\ The CQRF is a 
narrowly tailored approach, designed to disincentivize certain 
liquidity removing orders that can degrade the quality of the market 
and thereby incentivize the entry of liquidity providing orders that 
can enhance the quality of the market. The CQRF is only charged on 
incremental executed shares above the CQRF Threshold, which is designed 
to limit the fee to trading activity that is indicative of a deliberate 
trading strategy that may adversely affect execution quality on IEX and 
to not charge the fee to executions taking liquidity when the CQI is on 
that are likely to be incidental and not part of such a strategy.
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    \10\ See Securities Exchange Act Release No. 81484 (August 25, 
2017), 82 FR 41446 (August 31, 2017) (SR-IEX-2017-27).
    \11\ See Rule 11.190(b)(10).
    \12\ See Rule 11.190(b)(8).
    \13\ By not permitting resting Discretionary Peg orders and 
primary peg orders to exercise price discretion during periods of 
quote instability, the Exchange is designed to protect such orders 
from unfavorable executions when its probabilistic model identifies 
that the market appears to be moving adversely to them. This 
limitation is designed to appropriately balance the protective 
benefits to Discretionary Peg and primary peg orders with the 
interest of avoiding potentially undue trading restrictions.
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    As described in the CQRF rule filing, there are significant 
differences in short term markouts \14\ for resting and taking orders 
between executions when the CQI is on and off, regardless of whether 
the NBB (NBO) moves lower (higher) within two milliseconds of the 
Exchange's determination of quote instability. Moreover, the breakdown 
of orders entered and shares removed when the CQI is on or off 
evidences that certain trading strategies appear to involve entering 
liquidity taking orders targeting resting orders at prices that are 
likely to move adversely from the perspective of the resting order.
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    \14\ The term markouts refers to changes in the midpoint of the 
NBBO measured from the perspective of either the liquidity providing 
resting order or liquidity removing taking order over a specified 
period of time following the time of execution.
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    The CQRF has been incrementally successful in achieving its stated 
goal of reducing the incidence of liquidity taking orders when the CQI 
is on. The volume removed when the CQI is on has declined from 8.1% in 
December 2017 to 7.3% in April 2018 (see Chart 1 below). Further, 5 of 
12 Members that surpassed the CQRF Threshold in December 2017 appear to 
have reduced such activity by at least 20% and one fell below the CQRF 
Threshold in April 2018.
[GRAPHIC] [TIFF OMITTED] TN14AU18.000


[[Page 40367]]


    Moreover, although material differences in key metrics related to 
orders entered when the CQI is on and off have persisted following 
implementation of the CQRF, the Exchange has identified some 
incremental improvement which appears to be generally attributable to 
the CQRF comparing data from June 2017 to April 2018. Most 
significantly, the percentage of marketable orders received when the 
CQI is on has declined from 30.4% to 18.2%, notwithstanding that the 
amount of time the CQI is on has increased from 1.24 seconds (0.005% of 
time during Regular Market Hours \15\) to 1.84 seconds (0.008% of time 
during Regular Market Hours). Thus, based on the foregoing analysis, 
IEX believes that the CQRF has been incrementally effective in reducing 
order flow that targets resting liquidity at prices that are about to 
become stale. With respect to incentivizing liquidity adding order 
flow, the Exchange notes that IEX's overall volume has increased since 
implementation of the CQRF, and volume traded when the CQI is off has 
increased as a proportion of overall volume.\16\ With the confluence of 
factors that influence order flow decisions, it is inherently difficult 
to attribute such increases to the CQRF, particularly in the short 
period of time it has been in effect. Nonetheless, IEX believes that 
the CQRF has achieved some of its intended objectives already.
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    \15\ See IEX Rule 1.160(gg).
    \16\ Comparing December 2017 to April 2018, IEX average daily 
volume increased from 148 million shares to 155 million shares and 
IEX volume when the CQI is off increased from 91.9% to 92.7%.
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    Beginning in May 2018, the Exchange incrementally optimized and 
enhanced the effectiveness of the quote instability calculation in 
determining whether a crumbling quote exists.\17\ As a result, the CQI 
is on more often. During May and June 2018, the CQI ``fired'' 28.6% 
more often per symbol per trading day (on average), compared to April 
2018. However, shares removed when the CQI is on increased only 19.6%. 
The Exchange believes that this subsequent increase in CQI activity is 
attributable to the increased coverage of the signal as a result of the 
upgrade in May 2018, not a reduction in the effectiveness of the CQRF.
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    \17\ See Securities Exchange Act Release No. 83048 (April 13, 
2018), 83 FR 17467 (April 19, 2018) (SR-IEX-2018-07).
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    However, notwithstanding the incremental effectiveness of the CQRF, 
IEX believes that it is possible for a Member to circumvent (in whole 
or in part) the CQRF Threshold by routing orders to IEX that are part 
of a deliberate trading strategy that targets resting liquidity during 
periods of quote instability through another Member (using such 
Members' MPID) not engaged in such a strategy at all or to the same 
extent. Such a routing approach would thus consolidate the executions 
that take liquidity when the CQI is on with executions of the other 
executing Member thereby reducing the executions that exceed the CQRF 
Threshold and the resultant fee for the entering Member. This is 
because the consolidated pool of executions would contain a significant 
number of orders executed on behalf of the executing Member and its 
other customers that did not take liquidity when the CQI is on. 
Therefore, fewer of the entering Member's executions that take 
liquidity when the CQI is on would be above the 5% threshold when 
measured on an MPID basis.
    In order to address the potential for ongoing and increased 
circumvention of the CQRF, IEX proposes to revise the threshold for 
imposition of the CQRF to more narrowly tailor it to trading activity 
that is indicative of a deliberate trading strategy that may adversely 
affect execution quality on the Exchange. As proposed, the CQRF 
Threshold would be revised in two respects. First, the 5% monthly CQRF 
Threshold would be measured and applied on a per logical port (also 
referred to as a ``session'') per MPID basis.\18\ Second, the 1 million 
share aspect of the CQRF Threshold would be eliminated. Therefore, on a 
monthly basis, the Exchange would determine whether the 5% threshold 
was reached within each session used by each Member's MPID. Incremental 
shares that removed liquidity while the CQI was on above the 5% 
threshold would be charged the CQRF.
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    \18\ Pursuant to the IEX Equities Port Request Form (available 
on IEX's website at https://iextrading.com/docs/IEX%20Connectivity%20Agreements%20and%20Forms.pdf), Members may 
request one or more connectivity ports to connect to IEX, through 
which the Member may send, or permit a Sponsored Participant of such 
Member, to send orders and order related messages to IEX.
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    IEX believes that Members generally use separate sessions within 
the same MPID to segment the order flow of particular customers and 
proprietary strategies. Thus, the Exchange believes that applying the 
CQRF Threshold on a per session per MPID basis, rather than solely per 
MPID, will result in a more fair application of the fee because it will 
more narrowly apply the fee to trading strategies that are indicative 
of a deliberate strategy that targets resting orders at prices that are 
likely to move adversely from the perspective of the resting order and 
that thus may adversely affect execution quality on IEX. In addition, 
the change is designed to reduce potential circumvention of the CQRF by 
Members that consolidate orders under one MPID that are part of such 
deliberate trading strategies with orders that are not.
    Eliminating the 1 million share aspect of the CQRF Threshold is 
designed to avoid potential circumvention whereby a Member could divide 
its orders that are part of such a deliberate trading strategy across 
multiple sessions in order to circumvent the CQRF by keeping each 
session below the 1 million share threshold. IEX does not charge for 
sessions, and thus Members can readily add additional sessions upon 
request.
    Based on an analysis of data from June 2018, the Exchange estimates 
that 35 Members would be subject to monthly increases in the CQRF, 
totaling approximately $94,000 and ranging from $0.10 to $36,351. 
Fourteen Members' increased fees would be more than $1,000 and two 
would be over $10,000. Twelve Members' fees would increase by less than 
$100.
    The Exchange will continue to provide the Fee Code Indicator of 
``Q'' on execution reports to Members removing liquidity at or within 
the NBBO when the CQI is on.
    IEX will implement the proposed fee change beginning on August 1, 
2018.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6(b) \19\ of the Act in general, and furthers the 
objectives of Sections 6(b)(4) \20\ of the Act, in particular, in that 
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. Additionally, IEX believes that the proposed revisions 
to the CQRF is consistent with the investor protection objectives of 
Section 6(b)(5) \21\ of the Act in particular in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to a free and open market and national market system, and in general to 
protect investors and the public interest.
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    \19\ 15 U.S.C. 78f.
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
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    The CQRF is designed to enhance the Exchange's market quality by 
encouraging Members and other market participants to add more liquidity 
to the Exchange order book, which benefits all investors by deepening 
the Exchange's liquidity pool. Specifically, the Exchange believes that 
trading strategies

[[Page 40368]]

that target resting liquidity during periods of quote instability seek 
to trade at prices that are about to become stale, and thus discourage 
other market participants from entering liquidity providing orders on 
the Exchange. The Exchange believes that the CQRF has been 
incrementally successful in achieving this goal. However, as described 
in the Purpose section, the Exchange has identified certain actual and 
potential ways in which the CQRF can be circumvented, which warrant 
revisions to the CQRF Threshold.
    The proposed change to the applicable threshold for imposition of 
the CQRF is a limited and narrowly drawn approach that is designed to 
increase the fairness of the fee, and also mitigate and reduce the 
potential for circumvention, as described in the Purpose section. 
Specifically, the Exchange believes that applying the CQRF Threshold on 
a per session per MPID basis, rather than solely on a per MPID basis, 
will result in a more fair and narrowly tailored application of the fee 
because it will better focus the fee on deliberate trading strategies 
that target resting orders at prices that are about to become stale, 
thus reducing the potential that incidental trading activity not part 
of such a strategy towards the end of a month after the MPID has 
crossed the threshold could be subject to the CQRF. In addition, the 
change is designed to reduce potential circumvention of the CQRF by 
Members that intentionally consolidate orders that are part of such a 
deliberate trading strategy with orders that are not, within a single 
MPID. The Exchange understands that Members typically use separate 
sessions for distinct trading strategies and customers, and that 
therefore deliberate trading strategies that target resting orders at 
prices that are about to become stale would generally not be on the 
same session as trading strategies that do not target resting orders in 
such a manner. Thus, assessing the threshold on a per session per MPID 
basis, rather than per MPID, is designed to be even more fair and 
narrowly tailored since the approach will focus the fee on transactions 
that are part of a deliberate strategy that targets resting orders at 
prices that are about to become stale, and reduce the potential that 
the fee will be applied to incidental transactions not part of such a 
strategy.
    As described in the Purpose section, elimination of the 1 million 
share threshold is designed to avoid potential circumvention whereby a 
Member could divide its orders that are part of deliberative trading 
strategies designed to target resting orders at prices that are about 
to become stale across multiple sessions in order to circumvent the 
CQRF by keeping each session below 1 million shares subject to the 
CQRF. In addition, the Exchange believes that the 5% threshold is 
sufficiently robust such that it is unlikely that a Member will 
accidentally breach the threshold and incur the CQRF. The CQI is on 
only 10.4 seconds per symbol per trading day on a volume weighted 
average basis, constituting 0.04% of the day per symbol. Consequently, 
the probability that a Member (or customer of a Member) not engaged in 
a deliberate strategy to target resting orders at prices about to 
become stale, would by chance trade when the CQI is on is about 1 in 
2,340. The Exchange believes that it is highly unlikely for a Member to 
encounter a 1 in 2,340 chance event more than 5% of the time, and thus 
the 5% threshold is sufficiently robust to limit application of the 
CQRF to intentional activity. As described above, IEX believes that the 
per session per MPID threshold will more narrowly apply the fee to 
deliberate trading strategies that target resting orders at prices that 
are about to become stale, and is thus an even fairer and more narrowly 
tailored application of the fee as a result thereof. Accordingly, the 
Exchange believes that the proposed changes will incrementally enhance 
the effectiveness of the CQRF to incentivize resting liquidity on the 
Exchange by more effectively disincentivizing order flow that targets 
resting liquidity at prices that are about to become stale.
    Other exchanges offer incentives in the form of rebates and/or 
reduced fees that are designed to encourage market participants to send 
increased levels of order flow to such exchanges. These typically take 
the form of lower fees and higher rebates for meeting specified volume 
tiers.\22\ These fee and rebate structures are typically justified by 
other exchanges on the basis that increased liquidity benefits all 
investors by deepening the exchange's liquidity pool, which provides 
price discovery and investor protection benefits.\23\ The Exchange also 
notes that other exchanges charge different fees (or provide rebates) 
to the buyer and seller to an execution, which are generally referred 
to as either maker-taker or taker-maker pricing schemes. Typically, the 
exchange offering such pricing is seeking to incentivize orders that 
provide or remove liquidity, based on which type of orders receive a 
rebate. While these pricing schemes discriminate against the Member 
party to the trade that is charged a fee (in favor of the Member party 
to the trade that is paid a rebate) the Commission has not found these 
fees to be unfairly discriminatory in violation of the Act.\24\
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    \22\ See, e.g., New York Stock Exchange Price List 2018, 
available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf. See also, Nasdaq Rule 7018.
    \23\ See, e.g., Securities Exchange Act Release No. 80034 
(February 14, 2017), 82 FR 11275 (February 21, 2017) (File No. SR-
BatsEDGX-2017-09).
    \24\ See note 15 [sic] supra.
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    Similarly, the proposed changes to the CQRF Threshold seek to 
promote increased liquidity and price discovery on the Exchange by 
providing a fee designed to incentivize liquidity providing orders that 
can improve the quality of the market. The Exchange believes that, to 
the extent the fee, as revised, is successful in further reducing 
targeted and aggressive liquidity removing orders, it would contribute 
to investors' confidence in the fairness of transactions and the market 
generally, thereby benefiting multiple classes of market participants 
and supporting the public interest and investor protection purposes of 
the Act.
    The Exchange believes that maker-taker and taker-maker pricing 
schemes in general create needless complexity in market structure in 
various ways and result in conflicts of interest between brokers and 
their customers. Accordingly, IEX has made a decision not to adopt 
rebate provisions in favor of a more transparent pricing structure that 
generally charges equal fees (or in some cases, no fee) for a 
particular trade to both the ``maker'' and ``taker'' of liquidity. 
Given this decision, IEX must use other means to incentivize orders to 
rest on its order book. IEX's execution quality is one important 
incentive, but this incentive can be undercut by trading strategies 
that target resting orders during periods of quote instability. 
Accordingly, IEX believes that the CQRF, as it is proposed to be 
amended, is one reasonable way to compete with other exchanges for 
order flow, consistent with its exchange model and without relying on 
rebates.
    The Exchange believes that the revised threshold for application of 
the CQRF is reasonable and equitable because it is designed to reduce 
potential circumvention of the CQRF and enhance both the fairness and 
narrowly tailored application of the fee. As amended, the CQRF would 
continue not to apply when executions taking liquidity while the CQI is 
on are likely to be incidental and not part of a deliberate trading 
strategy that targets resting liquidity during periods of quote 
instability. The Exchange does not believe that the proposed CQRF 
Threshold changes would result in an

[[Page 40369]]

increase in such incidental orders being charged the CQRF. To the 
contrary, the Exchange believes the proposed CQRF Threshold changes 
would result in more orders that are part of such deliberative 
strategies being charged, and the per session per MPID charge would 
result in fewer incidental orders being charged. Consequently, the 
Exchange believes that the proposed fee structure is not unfairly 
discriminatory because it is narrowly tailored to charge a fee only on 
trading activity that is indicative of a trading strategy that may 
adversely affect execution quality on IEX and is reasonably related to 
the purpose of encouraging liquidity providing orders on IEX without 
the use of rebates.
    In particular, the Exchange believes that the data from April, May, 
and June 2018 supports the position that the proposed CQRF Threshold is 
narrowly tailored to charge the CQRF based on objective criteria 
indicating that execution of the orders in question reasonably appear 
to be part of a deliberate trading strategy that targets resting 
liquidity during periods of quote instability. A pro forma analysis of 
June 2018 data evidences that had the CQRF been calculated under the 
proposed threshold per session per MPID, the order entry profile of 
sessions that would have been subject to the fee is materially 
different than sessions that would not have been subject to the fee 
with respect to orders entered when the CQI was on. For the 286 
sessions above the CQRF Threshold, 19.0% of orders were received while 
the CQI was on (21.9% for the 135 sessions that would have been subject 
to more than $500 in fees), while for sessions below the proposed CQRF 
Threshold this number was only 4.7%. The Exchange believes that this 
difference evidences that sessions above the proposed CQRF Threshold 
were more likely to be engaging in a deliberate strategy to target 
resting orders at soon to be stale prices.\25\
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    \25\ Thirty-seven Members would have been charged the CQRF, with 
35 subject to increased fees. Those 37 Members traded through 565 
separate sessions, 286 of which would have been subject to the CQRF. 
For Members that would be subject to increased fees, the number of 
sessions that would be charged ranges from 1 to 42.
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    The Exchange also believes that it is appropriate, and consistent 
with the Act, to not charge the CQRF to Members for executed shares on 
sessions that do not exceed the CQRF Threshold during the month in 
question, as measured on a per session per MPID basis. This is designed 
to address limited inadvertent liquidity removal by such Members when 
the CQI is on since such order flow during such times appears to be 
incidental.
    The Exchange also believes that it is consistent with the Act and 
an equitable allocation of reasonable dues, fees and other charges 
among its Members and other persons using its facilities to measure 
whether the CQRF Threshold is reached on per session per MPID basis. As 
discussed above, the CQRF Threshold is designed to narrowly focus on 
executions that appear to be part of a deliberate trading strategy that 
targets resting liquidity during periods of quote instability. The 
Exchange believes that Members that utilize multiple sessions generally 
use different sessions for different trading strategies or customers. 
Therefore, the Exchange believes that measuring by session-MPID 
combination is a more precise manner of assessing whether a Member's 
trading strategy (or that of a customer) is part of a deliberate 
trading strategy that targets resting liquidity during periods of quote 
instability. Further, applying the CQRF Threshold on a per session per 
MPID basis is designed to address potential circumvention of the CQRF 
as described in the Purpose section.
    Accordingly, the Exchange submits that the proposed CQRF Threshold 
is narrowly tailored to address particular trading strategies (rather 
than particular classes of Members) that may operate to disincentivize 
the entry of resting orders by other market participants. Specifically, 
and as discussed above, to the extent the proposed CQRF is successful 
in further reducing such trading strategies on IEX, it may result in 
market quality improvements which could benefit multiple classes of 
market participants.
    The Exchange further believes that charging the CQRF only to the 
liquidity remover is equitable and not unfairly discriminatory because 
it is designed to incentivize order flow that enhances the quality of 
trading on the Exchange and disincentivize trading that does not. As 
discussed above, IEX believes that there are precedents for exchanges 
to charge different fees based upon meeting (or not meeting) particular 
criteria, as well as maker-taker and taker-maker pricing structures 
whereby the liquidity adder and remover to a trade are subject to 
differing fees and rebates, to incentivize certain types of trading 
activity. Fees and rebates based on maker-taker and taker-maker pricing 
as well as on volume-based tiers have been widely adopted by equities 
exchanges. And in some cases, maker-taker or taker-maker pricing has 
been combined with volume-based tiers that result in differential fees 
and rebates for different exchange members. These fee structures have 
been permitted by the Commission. For example, Cboe EDGA Exchange, Inc. 
(``EDGA'') previously offered a rebate contingent upon adding specified 
amounts of liquidity to EDGA.\26\ Notwithstanding that certain classes 
of exchange members (e.g., exchange routing brokers) do not typically 
add liquidity on competing exchanges, this fee structure was justified 
by EDGA on the basis that, generally, it encourages growth in liquidity 
on EDGA and applies equally to all members.\27\ Similarly, while the 
proposed IEX fee structure will result in the CQRF being imposed only 
on Members using specific trading strategies, it is also designed to 
attract liquidity to IEX and applies equally to all Members.
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    \26\ See Securities Exchange Act Release No. 80976 (June 20, 
2017), 82 FR 28920 (June 26, 2017) (SR-BatsEDGA-2017-18).
    \27\ See, e.g., Securities Exchange Act Release No. 69066 (March 
7, 2013), 78 FR 16023 (March 13, 2013) (SR-EDGA-2013-10).
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    The Exchange also notes that there is precedent to charge a 
different fee (or pay a different rebate) based on the execution price 
of an order. The Cboe BZX Exchange, Inc. (``BZX'') pays a rebate of 
$0.0015 to a non-displayed order that adds liquidity, while if such an 
order receives price improvement it does not receive a rebate or pay a 
fee.\28\
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    \28\ See Cboe BZX Exchange Fee Schedule, available at: http://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
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    Thus, maker-taker, taker-maker, and volume tier based fee 
structures (separately or in combination) have been adopted by other 
exchanges on the basis that they may discriminate in favor of certain 
types of members but not in an unfairly discriminatory manner in 
violation of the Act. As with such fee structures, the Exchange 
believes that the proposed fee change is equitable and not unfairly 
discriminatory because it is narrowly tailored to disincentive to all 
Members from deploying trading strategies designed to chase short-term 
price momentum during periods when the CQI is on and thus potentially 
adversely impact liquidity providing orders. IEX believes that, to the 
extent it is successful in this regard, the proposed fee structure may 
lead to increased liquidity providing orders on IEX which could benefit 
multiple classes of market participants through increased trading 
opportunities and execution quality.
    Further, the Exchange notes that the Nasdaq Stock Market 
(``Nasdaq'') charges excess order fees (ranging from $0.005 to $0.01 
per excess weighted order) on certain members that have a relatively 
high ratio of orders entered

[[Page 40370]]

away from the NBBO to orders executed in whole or in part, subject to a 
carve-outs for specified lower volume members and certain registered 
market makers.\29\ In its rule filing adopting the fee Nasdaq justified 
it as designed to achieve improvements in the quality of displayed 
liquidity to the benefit of all market participants.\30\ Nasdaq also 
asserted that the fee is reasonable because market participants may 
readily avoid the fee by making improvements in their order entry 
practices, noting that ``[i]deally, the fee will be applied to no one 
because market participants will adjust their behavior to avoid the 
fee.'' \31\
---------------------------------------------------------------------------

    \29\ See Nasdaq Rule 7018(a)(3)(m) [sic].
    \30\ See, Securities Exchange Act Release No. 66951 (May 9, 
2012), 77 FR 28647 (May 15, 2012) (File No. SR-NASDAQ-2012-055).
    \31\ Id.
---------------------------------------------------------------------------

    Similarly, the IEX CQRF, as revised, is designed to incentivize the 
entry of liquidity providing orders that can enhance the quality of the 
market and disincentivize certain liquidity removing orders that can 
degrade the quality of the market. Participants can manage their fees 
by making adjustments to their order entry practices, to decrease their 
entry of orders designed to target resting liquidity during periods of 
quote instability. And, as with the Nasdaq excess order fees, ideally, 
the fee will be applied to no one, because participants will adjust 
their trading activity to account for the pricing change. Thus, the 
Exchange believes that the fee of $0.0030 per share executed at or 
above $1.00 is reasonably related to the trading activity IEX is 
seeking to disincentivize.
    IEX also believes that it is appropriate, reasonable and consistent 
with the Act, to charge a fee of $0.0030 per share executed at or above 
$1.00 (or 0.3% of the total dollar value of the transaction for 
securities priced below $1.00) that exceed the CQRF Threshold described 
herein because it is within the transaction fee range charged by other 
exchanges \32\ and consistent with Rule 610(c) of Regulation NMS.\33\ 
Although the amount of the CQRF may not be adequate to fully 
disincentivize Members from deploying trading strategies designed to 
chase short-term price momentum during periods when the CQI is on, the 
Exchange is hopeful that it will further reduce such activity based on 
the economic disincentives that the CQRF will provide.
---------------------------------------------------------------------------

    \32\ See note 14 [sic] supra.
    \33\ 17 CFR 242.610(c)(1).
---------------------------------------------------------------------------

    Moreover, IEX believes that the CQRF will help 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, because the CQRF is designed 
to reduce the entry of liquidity removing orders that can degrade the 
quality of the market and incentivize liquidity providing orders that 
can improve the quality of the market, thereby promoting greater order 
interaction and inhibiting potentially abusive trading practices.
    Finally, and as discussed in the Burden on Competition section, the 
Exchange notes that it operates in a highly competitive market in which 
Members and market participants can readily direct order flow to 
competing venues if they deem fee levels to be excessive.

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

    IEX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
that the proposed rule change will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. To the contrary, the Exchange believes that the 
proposed pricing structure may increase competition and hopefully draw 
additional volume to the Exchange by enhancing the quality of 
executions across all participants when the CQI is on. As discussed in 
the Statutory Basis section, the proposed fee structure is a narrowly 
tailored approach, designed to enhance the Exchange's market quality by 
incentivizing trading activity that the Exchange believes enhances the 
quality of its market. The Exchange believes that the proposed 
revisions to the CQRF Threshold would contribute to, rather than 
burden, competition, as the CQRF is intended to incentivize Members and 
market participants to send increased liquidity providing order flow to 
the Exchange, which may increase IEX's liquidity and market quality, 
thereby enhancing the Exchange's ability to compete with other 
exchanges. Further, with the proposed revisions to the CQRF Threshold, 
the CQRF would continue to be in line with fees charged by other 
exchanges.
    The Exchange operates in a highly competitive market in which 
market participants can readily favor competing venues if fee schedules 
at other venues are viewed as more favorable. Consequently, the 
Exchange believes that the degree to which IEX fees could impose any 
burden on competition is extremely limited, and does not believe that 
such fees would burden competition of Members or competing venues in a 
manner that is not necessary or appropriate in furtherance of the 
purposes of the Act.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because, while 
the CQRF, as revised, would only be assessed in some circumstances, 
those circumstances are not based on the type of Member entering the 
liquidity removing order but on the percent of liquidity removing 
volume that the Member executes when the CQI is on. Further, the 
proposed revisions to the CQRF Threshold are intended to encourage 
market participants to bring increased volume to the Exchange, which 
benefits all market participants.\34\
---------------------------------------------------------------------------

    \34\ See e.g., IEX's white paper that utilized publicly 
available quote and trade data to compare market quality across U.S. 
stock exchanges, which empirically found, inter alia, that on 
average IEX has the lowest effective spread, and the greatest 
opportunity for price improvement amongst all exchanges. A 
Comparison of Execution Quality across U.S. Stock Exchanges, Elaine 
Wah, Stan Feldman, Francis Chung, Allison Bishop, and Daniel Aisen, 
Investors Exchange (2017). Effective spread is commonly defined by 
market structure academics and market participants as twice the 
absolute difference between the trade price and prevailing NBBO 
midpoint at the time of a trade, and is generally meant to measure 
the cost paid when an incoming order executes against a resting 
order, and unlike quoted spread captures other features of a market 
center, such as hidden and midpoint liquidity as well as market 
depth. Price improvement is in reference to the situation where an 
aggressive order is filled at a price strictly better than the 
inside quote (i.e., in the case of an aggressive buy (sell) order, 
receiving a fill at a price lower (higher) than the NBO (NBB)). See 
also, Hu, Edwin, Intentional Access Delays, Market Quality, and 
Price Discovery: Evidence from IEX Becoming an Exchange (February 7, 
2018). Available at SSRN: https://ssrn.com/abstract=3195001.
---------------------------------------------------------------------------

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

    Written comments were neither solicited nor received.

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)(ii) \35\ of the Act.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the

[[Page 40371]]

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) \36\ of the Act to determine whether the proposed rule 
change should be approved or disapproved.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-IEX-2018-16 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-IEX-2018-16. 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-IEX-2018-16 and should be submitted on 
or before September 4, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
---------------------------------------------------------------------------

    \37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17396 Filed 8-13-18; 8:45 am]
BILLING CODE 8011-01-P



                                                                             Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices                                                40365

                                              values, or (d) the applicability of                     SECURITIES AND EXCHANGE                               Sections A, B, and C below, of the most
                                              Exchange rules specified in this filing                 COMMISSION                                            significant aspects of such statements.
                                              shall constitute continued listing                                                                            A. Self-Regulatory Organization’s
                                                                                                      [Release No. 34–83800; File No. SR–IEX–
                                              requirements for listing the Shares on                  2018–16]                                              Statement of the Purpose of, and the
                                              the Exchange. The issuer has                                                                                  Statutory Basis for, the Proposed Rule
                                              represented to the Exchange that it will                Self-Regulatory Organizations:                        Change
                                              advise the Exchange of any failure by a                 Investors Exchange LLC; Notice of
                                              Fund or Shares to comply with the                       Filing and Immediate Effectiveness of                 1. Purpose
                                              continued listing requirements, and,                    Proposed Rule Change To Revise the                       The Exchange proposes to amend its
                                              pursuant to its obligations under                       Threshold for Imposition of the                       fee schedule, pursuant to IEX Rule
                                              Section 19(g)(1) of the Act, the Exchange               Crumbling Quote Remove Fee                            15.110 (a) and (c), to revise the
                                              will surveil for compliance with the                                                                          threshold for imposition of the CQRF to
                                                                                                      August 8, 2018.
                                              continued listing requirements. If a                                                                          more narrowly tailor it to trading
                                                                                                         Pursuant to Section 19(b)(1) 1 of the              activity that is indicative of a deliberate
                                              Fund or Shares is not in compliance                     Securities Exchange Act of 1934 (the
                                              with the applicable listing requirements,                                                                     trading strategy that may adversely
                                                                                                      ‘‘Act’’) 2 and Rule 19b–4 thereunder,3                affect execution quality on the
                                              then, with respect to such Fund or                      notice is hereby given that, on July 26,
                                              Shares, the Exchange will commence                                                                            Exchange.
                                                                                                      2018, the Investors Exchange LLC                         The Exchange charges the CQRF to
                                              delisting procedures under BZX Rule                     (‘‘IEX’’ or the ‘‘Exchange’’) filed with the          orders that remove resting liquidity
                                              14.12.                                                  Securities and Exchange Commission                    when the crumbling quote indicator
                                                 This approval order is based on all of               (the ‘‘Commission’’) the proposed rule                (‘‘CQI’’) is on if such executions
                                              the Exchange’s representations and                      change as described in Items I, II and III            constitute at least 5% of the Member’s
                                              description of the Funds, including                     below, which Items have been prepared                 volume executed on IEX and at least 1
                                              those set forth above and in Amendment                  by the self-regulatory organization. The              million shares, on a monthly basis,
                                              No. 2 to the proposed rule change.                      Commission is publishing this notice to               measured on a per market participant
                                              Except as described herein, the                         solicit comments on the proposed rule                 identifier (‘‘MPID’’) basis (the ‘‘CQRF
                                              Commission notes that the Shares must                   change from interested persons.                       Threshold’’). Orders that exceed the 5%
                                              comply with all other applicable                        I. Self-Regulatory Organization’s                     and 1 million share thresholds are
                                              requirements of BZX Rule 14.11(c) to be                 Statement of the Terms of Substance of                assessed a fee of $0.0030 per each
                                              listed and traded on the Exchange on an                 the Proposed Rule Change                              incremental share executed at or above
                                              initial and continuing basis. The                                                                             $1.00 that exceeds the CQRF
                                                                                                         Pursuant to the provisions of Section              Threshold.6
                                              Commission further notes that the                       19(b)(1) under the Securities Exchange
                                              Shares of the Funds will not be listed                                                                           Pursuant to IEX Rule 11.190(g), in
                                                                                                      Act of 1934 (‘‘Act’’),4 and Rule 19b–4                determining whether quote instability or
                                              and traded on the Exchange until any                    thereunder,5 IEX is filing with the                   a crumbling quote exists, the Exchange
                                              and all exemptive and/or no-action                      Commission a proposed rule change to                  utilizes real time relative quoting
                                              relief required under the 1940 Act has                  revise the threshold for imposition of                activity of certain Protected Quotations 7
                                              been obtained with respect to the Funds                 the Crumbling Quote Remove Fee                        and a proprietary mathematical
                                              and the Shares and any conditions                       (‘‘CQRF’’) to more narrowly tailor it to              calculation (the ‘‘quote instability
                                              related thereto are satisfied.                          trading activity that is indicative of a              calculation’’) to assess the probability of
                                                 For the foregoing reasons, the                       deliberate trading strategy that may                  an imminent change to the current
                                              Commission finds that the proposed                      adversely affect execution quality on the             Protected National Best Bid 8 to a lower
                                              rule change, as modified by Amendment                   Exchange. The text of the proposed rule               price or the Protected National Best
                                              No. 2, is consistent with Section 6(b)(5)               change is available at the Exchange’s                 Offer 9 to a higher price for a particular
                                                                                                      website at www.iextrading.com, at the                 security (‘‘quote instability factor’’).
                                              of the Act 26 and the rules and
                                                                                                      principal office of the Exchange, and at              When the quoting activity meets
                                              regulations thereunder applicable to a
                                                                                                      the Commission’s Public Reference                     predefined criteria and the quote
                                              national securities exchange.
                                                                                                      Room.                                                 instability factor calculated is greater
                                              IV. Conclusion                                          II. Self-Regulatory Organization’s                    than the Exchange’s defined quote
                                                                                                      Statement of the Purpose of, and the                  instability threshold, the System treats
                                                It is therefore ordered, pursuant to
                                                                                                      Statutory Basis for, the Proposed Rule                the quote as unstable and the CQI is on.
                                              Section 19(b)(2) of the Act,27 that the
                                                                                                      Change                                                During all other times, the quote is
                                              proposed rule change (SR–CboeBZX–                                                                             considered stable, and the CQI is off.
                                              2017–005), as modified by Amendment                       In its filing with the Commission, the
                                                                                                                                                            The System independently assesses the
                                              No. 2, be, and it hereby is, approved.                  self-regulatory organization included
                                                                                                                                                            stability of the Protected NBB and
                                                                                                      statements concerning the purpose of
                                                For the Commission, by the Division of                                                                      Protected NBO for each security. When
                                                                                                      and basis for the proposed rule change
                                              Trading and Markets, pursuant to delegated                                                                    the System determines that a quote,
                                                                                                      and discussed any comments it received
                                              authority.28
                                                                                                      on the proposed rule change. The text                   6 Executions below $1.00 are assessed a fee of
                                              Eduardo A. Aleman,                                      of these statement may be examined at                 0.30% of TDV unless the Fee Code Combination
                                              Assistant Secretary.                                    the places specified in Item IV below.                results in a free execution. See Investors Exchange
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                                              [FR Doc. 2018–17392 Filed 8–13–18; 8:45 am]             The self-regulatory organization has                  Fee Schedule, available on the Exchange public
                                                                                                                                                            website.
                                              BILLING CODE 8011–01–P                                  prepared summaries, set forth in                        7 Pursuant to Rule 11.190(g), the Protected

                                                                                                                                                            Quotations of the New York Stock Exchange,
                                                                                                        1 15 U.S.C. 78s(b)(1).                              Nasdaq Stock Market, NYSE Arca, Nasdaq BX, Cboe
                                                                                                        2 15 U.S.C. 78a.                                    BZX Exchange, Cboe BYX Exchange, Cboe EDGX
                                                26 15 U.S.C. 78f(b)(5).                                 3 17 CFR 240.19b–4.                                 Exchange, and Cboe EDGA Exchange.
                                                27 15 U.S.C. 78s(b)(2).                                 4 15 U.S.C. 78s(b)(1).                                8 See, Rule 600(b)(42) under Regulation NMS.
                                                28 17 CFR 200.30–3(a)(12).                              5 17 CRF 240.19b–4.                                   9 See supra note 4 [sic].




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                                              40366                        Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices

                                              either the Protected NBB or the                         predictive strategies to chase short-term             likely to be incidental and not part of
                                              Protected NBO, is unstable, the                         price momentum and successfully target                such a strategy.
                                              determination remains in effect at that                 resting orders at unstable prices. IEX                   As described in the CQRF rule filing,
                                              price level for two milliseconds, unless                believes that these types of trading                  there are significant differences in short
                                              a new determination is made before the                  strategies, with concentrated and                     term markouts 14 for resting and taking
                                              end of the two-millisecond period. A                    aggressive tactics during moments of                  orders between executions when the
                                              new determination may be made after at                  quote instability, are detrimental to the             CQI is on and off, regardless of whether
                                              least 200 microseconds has elapsed                      experience of other IEX participants,                 the NBB (NBO) moves lower (higher)
                                              since a preceding determination, or a                   and create disparate burdens on resting               within two milliseconds of the
                                              price change on either side of the                      orders, particularly those that are                   Exchange’s determination of quote
                                              Protected NBBO occurs, whichever is                     displayed and therefore ineligible to                 instability. Moreover, the breakdown of
                                              first. If a new determination is made, the              benefit from the CQI in the manner of                 orders entered and shares removed
                                              original determination is no longer in                  Discretionary Peg orders 11 and primary               when the CQI is on or off evidences that
                                              effect. A new determination can be at                   peg orders 12 which do not exercise                   certain trading strategies appear to
                                              either the Protected NBB or the                         price discretion when the CQI is on.13                involve entering liquidity taking orders
                                              Protected NBO and at the same or                        The CQRF is a narrowly tailored                       targeting resting orders at prices that are
                                              different price level as the original                   approach, designed to disincentivize                  likely to move adversely from the
                                              determination.                                          certain liquidity removing orders that                perspective of the resting order.
                                                 The Exchange adopted the CQRF                        can degrade the quality of the market                    The CQRF has been incrementally
                                              beginning in January 2018 in order to                   and thereby incentivize the entry of                  successful in achieving its stated goal of
                                              incentivize the entry of resting liquidity              liquidity providing orders that can                   reducing the incidence of liquidity
                                              on IEX, including displayed liquidity.                  enhance the quality of the market. The                taking orders when the CQI is on. The
                                              Specifically, and as described more                     CQRF is only charged on incremental                   volume removed when the CQI is on has
                                              fully in the rule filing adopting the                   executed shares above the CQRF                        declined from 8.1% in December 2017
                                              CQRF (‘‘CQRF rule filing’’),10 the                      Threshold, which is designed to limit                 to 7.3% in April 2018 (see Chart 1
                                              Exchange identified that Members                        the fee to trading activity that is                   below). Further, 5 of 12 Members that
                                              entering liquidity taking orders when                   indicative of a deliberate trading                    surpassed the CQRF Threshold in
                                              the CQI was on appeared to be able to                   strategy that may adversely affect                    December 2017 appear to have reduced
                                              engage in a form of latency arbitrage by                execution quality on IEX and to not                   such activity by at least 20% and one
                                              leveraging fast proprietary market data                 charge the fee to executions taking                   fell below the CQRF Threshold in April
                                              feeds and connectivity along with                       liquidity when the CQI is on that are                 2018.
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                                                10 See Securities Exchange Act Release No. 81484      Exchange is designed to protect such orders from        14 The term markouts refers to changes in the

                                              (August 25, 2017), 82 FR 41446 (August 31, 2017)        unfavorable executions when its probabilistic         midpoint of the NBBO measured from the
                                              (SR–IEX–2017–27).                                       model identifies that the market appears to be        perspective of either the liquidity providing resting
                                                11 See Rule 11.190(b)(10).                            moving adversely to them. This limitation is          order or liquidity removing taking order over a
                                                12 See Rule 11.190(b)(8).                             designed to appropriately balance the protective      specified period of time following the time of
                                                13 By not permitting resting Discretionary Peg        benefits to Discretionary Peg and primary peg         execution.
                                              orders and primary peg orders to exercise price         orders with the interest of avoiding potentially
                                                                                                                                                                                                                    EN14AU18.000</GPH>




                                              discretion during periods of quote instability, the     undue trading restrictions.



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                                                                           Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices                                             40367

                                                 Moreover, although material                          liquidity during periods of quote                     adversely affect execution quality on
                                              differences in key metrics related to                   instability through another Member                    IEX. In addition, the change is designed
                                              orders entered when the CQI is on and                   (using such Members’ MPID) not                        to reduce potential circumvention of the
                                              off have persisted following                            engaged in such a strategy at all or to the           CQRF by Members that consolidate
                                              implementation of the CQRF, the                         same extent. Such a routing approach                  orders under one MPID that are part of
                                              Exchange has identified some                            would thus consolidate the executions                 such deliberate trading strategies with
                                              incremental improvement which                           that take liquidity when the CQI is on                orders that are not.
                                              appears to be generally attributable to                 with executions of the other executing                   Eliminating the 1 million share aspect
                                              the CQRF comparing data from June                       Member thereby reducing the                           of the CQRF Threshold is designed to
                                              2017 to April 2018. Most significantly,                 executions that exceed the CQRF                       avoid potential circumvention whereby
                                              the percentage of marketable orders                     Threshold and the resultant fee for the               a Member could divide its orders that
                                              received when the CQI is on has                         entering Member. This is because the                  are part of such a deliberate trading
                                              declined from 30.4% to 18.2%,                           consolidated pool of executions would                 strategy across multiple sessions in
                                              notwithstanding that the amount of time                 contain a significant number of orders                order to circumvent the CQRF by
                                              the CQI is on has increased from 1.24                   executed on behalf of the executing                   keeping each session below the 1
                                              seconds (0.005% of time during Regular                  Member and its other customers that did               million share threshold. IEX does not
                                              Market Hours 15) to 1.84 seconds                        not take liquidity when the CQI is on.                charge for sessions, and thus Members
                                              (0.008% of time during Regular Market                   Therefore, fewer of the entering                      can readily add additional sessions
                                              Hours). Thus, based on the foregoing                    Member’s executions that take liquidity               upon request.
                                              analysis, IEX believes that the CQRF has                when the CQI is on would be above the                    Based on an analysis of data from
                                              been incrementally effective in reducing                5% threshold when measured on an                      June 2018, the Exchange estimates that
                                              order flow that targets resting liquidity               MPID basis.                                           35 Members would be subject to
                                              at prices that are about to become stale.                  In order to address the potential for              monthly increases in the CQRF, totaling
                                              With respect to incentivizing liquidity                 ongoing and increased circumvention of                approximately $94,000 and ranging
                                              adding order flow, the Exchange notes                   the CQRF, IEX proposes to revise the                  from $0.10 to $36,351. Fourteen
                                              that IEX’s overall volume has increased                 threshold for imposition of the CQRF to               Members’ increased fees would be more
                                              since implementation of the CQRF, and                   more narrowly tailor it to trading                    than $1,000 and two would be over
                                              volume traded when the CQI is off has                   activity that is indicative of a deliberate           $10,000. Twelve Members’ fees would
                                              increased as a proportion of overall                    trading strategy that may adversely                   increase by less than $100.
                                              volume.16 With the confluence of factors                affect execution quality on the                          The Exchange will continue to
                                              that influence order flow decisions, it is              Exchange. As proposed, the CQRF                       provide the Fee Code Indicator of ‘‘Q’’
                                              inherently difficult to attribute such                  Threshold would be revised in two                     on execution reports to Members
                                              increases to the CQRF, particularly in                  respects. First, the 5% monthly CQRF                  removing liquidity at or within the
                                              the short period of time it has been in                 Threshold would be measured and                       NBBO when the CQI is on.
                                              effect. Nonetheless, IEX believes that the              applied on a per logical port (also                      IEX will implement the proposed fee
                                              CQRF has achieved some of its intended                  referred to as a ‘‘session’’) per MPID                change beginning on August 1, 2018.
                                              objectives already.                                     basis.18 Second, the 1 million share
                                                 Beginning in May 2018, the Exchange                                                                        2. Statutory Basis
                                                                                                      aspect of the CQRF Threshold would be
                                              incrementally optimized and enhanced                    eliminated. Therefore, on a monthly                      IEX believes that the proposed rule
                                              the effectiveness of the quote instability              basis, the Exchange would determine                   change is consistent with the provisions
                                              calculation in determining whether a                    whether the 5% threshold was reached                  of Section 6(b) 19 of the Act in general,
                                              crumbling quote exists.17 As a result,                  within each session used by each                      and furthers the objectives of Sections
                                              the CQI is on more often. During May                    Member’s MPID. Incremental shares that                6(b)(4) 20 of the Act, in particular, in that
                                              and June 2018, the CQI ‘‘fired’’ 28.6%                  removed liquidity while the CQI was on                it is designed to provide for the
                                              more often per symbol per trading day                   above the 5% threshold would be                       equitable allocation of reasonable dues,
                                              (on average), compared to April 2018.                   charged the CQRF.                                     fees and other charges among its
                                              However, shares removed when the CQI                       IEX believes that Members generally                Members and other persons using its
                                              is on increased only 19.6%. The                         use separate sessions within the same                 facilities. Additionally, IEX believes that
                                              Exchange believes that this subsequent                  MPID to segment the order flow of                     the proposed revisions to the CQRF is
                                              increase in CQI activity is attributable to             particular customers and proprietary                  consistent with the investor protection
                                              the increased coverage of the signal as                 strategies. Thus, the Exchange believes               objectives of Section 6(b)(5) 21 of the Act
                                              a result of the upgrade in May 2018, not                that applying the CQRF Threshold on a                 in particular in that it is designed to
                                              a reduction in the effectiveness of the                 per session per MPID basis, rather than               promote just and equitable principles of
                                              CQRF.                                                   solely per MPID, will result in a more                trade, to remove impediments to a free
                                                 However, notwithstanding the                         fair application of the fee because it will           and open market and national market
                                              incremental effectiveness of the CQRF,                  more narrowly apply the fee to trading                system, and in general to protect
                                              IEX believes that it is possible for a                  strategies that are indicative of a                   investors and the public interest.
                                              Member to circumvent (in whole or in                    deliberate strategy that targets resting                 The CQRF is designed to enhance the
                                              part) the CQRF Threshold by routing                     orders at prices that are likely to move              Exchange’s market quality by
                                              orders to IEX that are part of a deliberate             adversely from the perspective of the                 encouraging Members and other market
                                              trading strategy that targets resting                   resting order and that thus may                       participants to add more liquidity to the
                                                                                                                                                            Exchange order book, which benefits all
amozie on DSK3GDR082PROD with NOTICES1




                                                15 See IEX Rule 1.160(gg).                              18 Pursuant to the IEX Equities Port Request Form   investors by deepening the Exchange’s
                                                16 Comparing   December 2017 to April 2018, IEX       (available on IEX’s website at https://               liquidity pool. Specifically, the
                                              average daily volume increased from 148 million         iextrading.com/docs/IEX%20Connectivity%20
                                              shares to 155 million shares and IEX volume when
                                                                                                                                                            Exchange believes that trading strategies
                                                                                                      Agreements%20and%20Forms.pdf), Members may
                                              the CQI is off increased from 91.9% to 92.7%.           request one or more connectivity ports to connect
                                                17 See Securities Exchange Act Release No. 83048                                                              19 15 U.S.C. 78f.
                                                                                                      to IEX, through which the Member may send, or
                                                                                                                                                              20 15 U.S.C. 78f(b)(4).
                                              (April 13, 2018), 83 FR 17467 (April 19, 2018) (SR–     permit a Sponsored Participant of such Member, to
                                              IEX–2018–07).                                           send orders and order related messages to IEX.          21 15 U.S.C. 78f(b)(5).




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                                              40368                        Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices

                                              that target resting liquidity during                    about to become stale across multiple                 provide or remove liquidity, based on
                                              periods of quote instability seek to trade              sessions in order to circumvent the                   which type of orders receive a rebate.
                                              at prices that are about to become stale,               CQRF by keeping each session below 1                  While these pricing schemes
                                              and thus discourage other market                        million shares subject to the CQRF. In                discriminate against the Member party
                                              participants from entering liquidity                    addition, the Exchange believes that the              to the trade that is charged a fee (in
                                              providing orders on the Exchange. The                   5% threshold is sufficiently robust such              favor of the Member party to the trade
                                              Exchange believes that the CQRF has                     that it is unlikely that a Member will                that is paid a rebate) the Commission
                                              been incrementally successful in                        accidentally breach the threshold and                 has not found these fees to be unfairly
                                              achieving this goal. However, as                        incur the CQRF. The CQI is on only 10.4               discriminatory in violation of the Act.24
                                              described in the Purpose section, the                   seconds per symbol per trading day on                    Similarly, the proposed changes to the
                                              Exchange has identified certain actual                  a volume weighted average basis,                      CQRF Threshold seek to promote
                                              and potential ways in which the CQRF                    constituting 0.04% of the day per                     increased liquidity and price discovery
                                              can be circumvented, which warrant                      symbol. Consequently, the probability                 on the Exchange by providing a fee
                                              revisions to the CQRF Threshold.                        that a Member (or customer of a                       designed to incentivize liquidity
                                                 The proposed change to the                           Member) not engaged in a deliberate                   providing orders that can improve the
                                              applicable threshold for imposition of                  strategy to target resting orders at prices           quality of the market. The Exchange
                                              the CQRF is a limited and narrowly                      about to become stale, would by chance                believes that, to the extent the fee, as
                                              drawn approach that is designed to                      trade when the CQI is on is about 1 in                revised, is successful in further reducing
                                              increase the fairness of the fee, and also              2,340. The Exchange believes that it is               targeted and aggressive liquidity
                                              mitigate and reduce the potential for                   highly unlikely for a Member to                       removing orders, it would contribute to
                                              circumvention, as described in the                      encounter a 1 in 2,340 chance event                   investors’ confidence in the fairness of
                                              Purpose section. Specifically, the                      more than 5% of the time, and thus the                transactions and the market generally,
                                              Exchange believes that applying the                     5% threshold is sufficiently robust to                thereby benefiting multiple classes of
                                              CQRF Threshold on a per session per                     limit application of the CQRF to                      market participants and supporting the
                                              MPID basis, rather than solely on a per                 intentional activity. As described above,             public interest and investor protection
                                              MPID basis, will result in a more fair                  IEX believes that the per session per                 purposes of the Act.
                                              and narrowly tailored application of the                MPID threshold will more narrowly                        The Exchange believes that maker-
                                              fee because it will better focus the fee                apply the fee to deliberate trading                   taker and taker-maker pricing schemes
                                              on deliberate trading strategies that                   strategies that target resting orders at              in general create needless complexity in
                                              target resting orders at prices that are                prices that are about to become stale,                market structure in various ways and
                                              about to become stale, thus reducing the                and is thus an even fairer and more                   result in conflicts of interest between
                                              potential that incidental trading activity              narrowly tailored application of the fee              brokers and their customers.
                                              not part of such a strategy towards the                 as a result thereof. Accordingly, the                 Accordingly, IEX has made a decision
                                              end of a month after the MPID has                       Exchange believes that the proposed                   not to adopt rebate provisions in favor
                                              crossed the threshold could be subject                  changes will incrementally enhance the                of a more transparent pricing structure
                                              to the CQRF. In addition, the change is                 effectiveness of the CQRF to incentivize              that generally charges equal fees (or in
                                              designed to reduce potential                            resting liquidity on the Exchange by                  some cases, no fee) for a particular trade
                                              circumvention of the CQRF by Members                    more effectively disincentivizing order               to both the ‘‘maker’’ and ‘‘taker’’ of
                                              that intentionally consolidate orders                   flow that targets resting liquidity at                liquidity. Given this decision, IEX must
                                              that are part of such a deliberate trading              prices that are about to become stale.                use other means to incentivize orders to
                                              strategy with orders that are not, within                  Other exchanges offer incentives in                rest on its order book. IEX’s execution
                                              a single MPID. The Exchange                             the form of rebates and/or reduced fees               quality is one important incentive, but
                                              understands that Members typically use                  that are designed to encourage market                 this incentive can be undercut by
                                              separate sessions for distinct trading                  participants to send increased levels of              trading strategies that target resting
                                              strategies and customers, and that                      order flow to such exchanges. These                   orders during periods of quote
                                              therefore deliberate trading strategies                 typically take the form of lower fees and             instability. Accordingly, IEX believes
                                              that target resting orders at prices that               higher rebates for meeting specified                  that the CQRF, as it is proposed to be
                                              are about to become stale would                         volume tiers.22 These fee and rebate                  amended, is one reasonable way to
                                              generally not be on the same session as                 structures are typically justified by other           compete with other exchanges for order
                                              trading strategies that do not target                   exchanges on the basis that increased                 flow, consistent with its exchange
                                              resting orders in such a manner. Thus,                  liquidity benefits all investors by                   model and without relying on rebates.
                                              assessing the threshold on a per session                deepening the exchange’s liquidity pool,                 The Exchange believes that the
                                              per MPID basis, rather than per MPID,                   which provides price discovery and                    revised threshold for application of the
                                              is designed to be even more fair and                    investor protection benefits.23 The                   CQRF is reasonable and equitable
                                              narrowly tailored since the approach                    Exchange also notes that other                        because it is designed to reduce
                                              will focus the fee on transactions that                 exchanges charge different fees (or                   potential circumvention of the CQRF
                                              are part of a deliberate strategy that                  provide rebates) to the buyer and seller              and enhance both the fairness and
                                              targets resting orders at prices that are               to an execution, which are generally                  narrowly tailored application of the fee.
                                              about to become stale, and reduce the                   referred to as either maker-taker or                  As amended, the CQRF would continue
                                              potential that the fee will be applied to               taker-maker pricing schemes. Typically,               not to apply when executions taking
                                              incidental transactions not part of such                the exchange offering such pricing is                 liquidity while the CQI is on are likely
                                              a strategy.                                             seeking to incentivize orders that                    to be incidental and not part of a
amozie on DSK3GDR082PROD with NOTICES1




                                                 As described in the Purpose section,                                                                       deliberate trading strategy that targets
                                              elimination of the 1 million share                        22 See, e.g., New York Stock Exchange Price List    resting liquidity during periods of quote
                                              threshold is designed to avoid potential                2018, available at https://www.nyse.com/              instability. The Exchange does not
                                              circumvention whereby a Member could                    publicdocs/nyse/markets/nyse/NYSE_Price_
                                                                                                      List.pdf. See also, Nasdaq Rule 7018.
                                                                                                                                                            believe that the proposed CQRF
                                              divide its orders that are part of                        23 See, e.g., Securities Exchange Act Release No.   Threshold changes would result in an
                                              deliberative trading strategies designed                80034 (February 14, 2017), 82 FR 11275 (February
                                              to target resting orders at prices that are             21, 2017) (File No. SR–BatsEDGX–2017–09).               24 See   note 15 [sic] supra.



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                                                                           Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices                                                     40369

                                              increase in such incidental orders being                 flow during such times appears to be                  have been permitted by the
                                              charged the CQRF. To the contrary, the                   incidental.                                           Commission. For example, Cboe EDGA
                                              Exchange believes the proposed CQRF                         The Exchange also believes that it is              Exchange, Inc. (‘‘EDGA’’) previously
                                              Threshold changes would result in more                   consistent with the Act and an equitable              offered a rebate contingent upon adding
                                              orders that are part of such deliberative                allocation of reasonable dues, fees and               specified amounts of liquidity to
                                              strategies being charged, and the per                    other charges among its Members and                   EDGA.26 Notwithstanding that certain
                                              session per MPID charge would result in                  other persons using its facilities to                 classes of exchange members (e.g.,
                                              fewer incidental orders being charged.                   measure whether the CQRF Threshold is                 exchange routing brokers) do not
                                              Consequently, the Exchange believes                      reached on per session per MPID basis.                typically add liquidity on competing
                                              that the proposed fee structure is not                   As discussed above, the CQRF                          exchanges, this fee structure was
                                              unfairly discriminatory because it is                    Threshold is designed to narrowly focus               justified by EDGA on the basis that,
                                              narrowly tailored to charge a fee only on                on executions that appear to be part of               generally, it encourages growth in
                                              trading activity that is indicative of a                 a deliberate trading strategy that targets            liquidity on EDGA and applies equally
                                              trading strategy that may adversely                      resting liquidity during periods of quote             to all members.27 Similarly, while the
                                              affect execution quality on IEX and is                   instability. The Exchange believes that               proposed IEX fee structure will result in
                                              reasonably related to the purpose of                     Members that utilize multiple sessions                the CQRF being imposed only on
                                              encouraging liquidity providing orders                   generally use different sessions for                  Members using specific trading
                                              on IEX without the use of rebates.                       different trading strategies or customers.            strategies, it is also designed to attract
                                                 In particular, the Exchange believes                  Therefore, the Exchange believes that                 liquidity to IEX and applies equally to
                                              that the data from April, May, and June                  measuring by session-MPID                             all Members.
                                              2018 supports the position that the                      combination is a more precise manner                     The Exchange also notes that there is
                                              proposed CQRF Threshold is narrowly                      of assessing whether a Member’s trading               precedent to charge a different fee (or
                                              tailored to charge the CQRF based on                     strategy (or that of a customer) is part of           pay a different rebate) based on the
                                              objective criteria indicating that                       a deliberate trading strategy that targets            execution price of an order. The Cboe
                                                                                                       resting liquidity during periods of quote             BZX Exchange, Inc. (‘‘BZX’’) pays a
                                              execution of the orders in question
                                                                                                       instability. Further, applying the CQRF               rebate of $0.0015 to a non-displayed
                                              reasonably appear to be part of a
                                                                                                       Threshold on a per session per MPID                   order that adds liquidity, while if such
                                              deliberate trading strategy that targets
                                                                                                       basis is designed to address potential                an order receives price improvement it
                                              resting liquidity during periods of quote
                                                                                                       circumvention of the CQRF as described                does not receive a rebate or pay a fee.28
                                              instability. A pro forma analysis of June
                                                                                                       in the Purpose section.                                  Thus, maker-taker, taker-maker, and
                                              2018 data evidences that had the CQRF                       Accordingly, the Exchange submits
                                              been calculated under the proposed                                                                             volume tier based fee structures
                                                                                                       that the proposed CQRF Threshold is                   (separately or in combination) have
                                              threshold per session per MPID, the                      narrowly tailored to address particular
                                              order entry profile of sessions that                                                                           been adopted by other exchanges on the
                                                                                                       trading strategies (rather than particular            basis that they may discriminate in
                                              would have been subject to the fee is                    classes of Members) that may operate to
                                              materially different than sessions that                                                                        favor of certain types of members but
                                                                                                       disincentivize the entry of resting orders            not in an unfairly discriminatory
                                              would not have been subject to the fee                   by other market participants.
                                              with respect to orders entered when the                                                                        manner in violation of the Act. As with
                                                                                                       Specifically, and as discussed above, to              such fee structures, the Exchange
                                              CQI was on. For the 286 sessions above                   the extent the proposed CQRF is
                                              the CQRF Threshold, 19.0% of orders                                                                            believes that the proposed fee change is
                                                                                                       successful in further reducing such                   equitable and not unfairly
                                              were received while the CQI was on                       trading strategies on IEX, it may result
                                              (21.9% for the 135 sessions that would                                                                         discriminatory because it is narrowly
                                                                                                       in market quality improvements which                  tailored to disincentive to all Members
                                              have been subject to more than $500 in                   could benefit multiple classes of market
                                              fees), while for sessions below the                                                                            from deploying trading strategies
                                                                                                       participants.                                         designed to chase short-term price
                                              proposed CQRF Threshold this number                         The Exchange further believes that
                                              was only 4.7%. The Exchange believes                                                                           momentum during periods when the
                                                                                                       charging the CQRF only to the liquidity               CQI is on and thus potentially adversely
                                              that this difference evidences that                      remover is equitable and not unfairly
                                              sessions above the proposed CQRF                                                                               impact liquidity providing orders. IEX
                                                                                                       discriminatory because it is designed to              believes that, to the extent it is
                                              Threshold were more likely to be                         incentivize order flow that enhances the
                                              engaging in a deliberate strategy to                                                                           successful in this regard, the proposed
                                                                                                       quality of trading on the Exchange and                fee structure may lead to increased
                                              target resting orders at soon to be stale                disincentivize trading that does not. As
                                              prices.25                                                                                                      liquidity providing orders on IEX which
                                                                                                       discussed above, IEX believes that there              could benefit multiple classes of market
                                                 The Exchange also believes that it is                 are precedents for exchanges to charge
                                                                                                                                                             participants through increased trading
                                              appropriate, and consistent with the                     different fees based upon meeting (or
                                                                                                                                                             opportunities and execution quality.
                                              Act, to not charge the CQRF to Members                   not meeting) particular criteria, as well                Further, the Exchange notes that the
                                              for executed shares on sessions that do                  as maker-taker and taker-maker pricing                Nasdaq Stock Market (‘‘Nasdaq’’)
                                              not exceed the CQRF Threshold during                     structures whereby the liquidity adder                charges excess order fees (ranging from
                                              the month in question, as measured on                    and remover to a trade are subject to                 $0.005 to $0.01 per excess weighted
                                              a per session per MPID basis. This is                    differing fees and rebates, to incentivize            order) on certain members that have a
                                              designed to address limited inadvertent                  certain types of trading activity. Fees               relatively high ratio of orders entered
                                              liquidity removal by such Members                        and rebates based on maker-taker and
                                              when the CQI is on since such order                      taker-maker pricing as well as on
amozie on DSK3GDR082PROD with NOTICES1




                                                                                                                                                                26 See Securities Exchange Act Release No. 80976
                                                                                                       volume-based tiers have been widely                   (June 20, 2017), 82 FR 28920 (June 26, 2017) (SR–
                                                25 Thirty-seven Members would have been                adopted by equities exchanges. And in                 BatsEDGA–2017–18).
                                              charged the CQRF, with 35 subject to increased           some cases, maker-taker or taker-maker                   27 See, e.g., Securities Exchange Act Release No.

                                              fees. Those 37 Members traded through 565                pricing has been combined with                        69066 (March 7, 2013), 78 FR 16023 (March 13,
                                              separate sessions, 286 of which would have been                                                                2013) (SR–EDGA–2013–10).
                                              subject to the CQRF. For Members that would be
                                                                                                       volume-based tiers that result in                        28 See Cboe BZX Exchange Fee Schedule,

                                              subject to increased fees, the number of sessions        differential fees and rebates for different           available at: http://markets.cboe.com/us/equities/
                                              that would be charged ranges from 1 to 42.               exchange members. These fee structures                membership/fee_schedule/bzx/.



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                                              40370                        Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices

                                              away from the NBBO to orders executed                   coordination with persons engaged in                  are viewed as more favorable.
                                              in whole or in part, subject to a carve-                regulating, clearing, settling, processing            Consequently, the Exchange believes
                                              outs for specified lower volume                         information with respect to, and                      that the degree to which IEX fees could
                                              members and certain registered market                   facilitating transactions in securities, to           impose any burden on competition is
                                              makers.29 In its rule filing adopting the               remove impediments to and perfect the                 extremely limited, and does not believe
                                              fee Nasdaq justified it as designed to                  mechanism of a free and open market                   that such fees would burden
                                              achieve improvements in the quality of                  and a national market system, and, in                 competition of Members or competing
                                              displayed liquidity to the benefit of all               general, to protect investors and the                 venues in a manner that is not necessary
                                              market participants.30 Nasdaq also                      public interest, because the CQRF is                  or appropriate in furtherance of the
                                              asserted that the fee is reasonable                     designed to reduce the entry of liquidity             purposes of the Act.
                                              because market participants may readily                 removing orders that can degrade the                    The Exchange does not believe that
                                              avoid the fee by making improvements                    quality of the market and incentivize                 the proposed rule change will impose
                                              in their order entry practices, noting                  liquidity providing orders that can                   any burden on intramarket competition
                                              that ‘‘[i]deally, the fee will be applied to            improve the quality of the market,                    that is not necessary or appropriate in
                                              no one because market participants will                 thereby promoting greater order                       furtherance of the purposes of the Act
                                              adjust their behavior to avoid the fee.’’ 31            interaction and inhibiting potentially                because, while the CQRF, as revised,
                                                 Similarly, the IEX CQRF, as revised,                 abusive trading practices.                            would only be assessed in some
                                              is designed to incentivize the entry of                    Finally, and as discussed in the                   circumstances, those circumstances are
                                              liquidity providing orders that can                     Burden on Competition section, the                    not based on the type of Member
                                              enhance the quality of the market and                   Exchange notes that it operates in a                  entering the liquidity removing order
                                              disincentivize certain liquidity                        highly competitive market in which                    but on the percent of liquidity removing
                                              removing orders that can degrade the                    Members and market participants can                   volume that the Member executes when
                                              quality of the market. Participants can                 readily direct order flow to competing                the CQI is on. Further, the proposed
                                              manage their fees by making                             venues if they deem fee levels to be                  revisions to the CQRF Threshold are
                                              adjustments to their order entry                        excessive.                                            intended to encourage market
                                              practices, to decrease their entry of                                                                         participants to bring increased volume
                                                                                                      B. Self-Regulatory Organization’s
                                              orders designed to target resting                                                                             to the Exchange, which benefits all
                                                                                                      Statement on Burden on Competition
                                              liquidity during periods of quote                                                                             market participants.34
                                              instability. And, as with the Nasdaq                       IEX does not believe that the
                                              excess order fees, ideally, the fee will be             proposed rule change will result in any               C. Self-Regulatory Organization’s
                                              applied to no one, because participants                 burden on competition that is not                     Statement on Comments on the
                                              will adjust their trading activity to                   necessary or appropriate in furtherance               Proposed Rule Change Received From
                                              account for the pricing change. Thus,                   of the purposes of the Act. The                       Members, Participants, or Others
                                              the Exchange believes that the fee of                   Exchange does not believe that the
                                                                                                                                                              Written comments were neither
                                              $0.0030 per share executed at or above                  proposed rule change will impose any
                                                                                                                                                            solicited nor received.
                                              $1.00 is reasonably related to the trading              burden on intermarket competition that
                                              activity IEX is seeking to disincentivize.              is not necessary or appropriate in                    III. Date of Effectiveness of the
                                                 IEX also believes that it is                         furtherance of the purposes of the Act.               Proposed Rule Change and Timing for
                                              appropriate, reasonable and consistent                  To the contrary, the Exchange believes                Commission Action
                                              with the Act, to charge a fee of $0.0030                that the proposed pricing structure may                  The foregoing rule change has become
                                              per share executed at or above $1.00 (or                increase competition and hopefully                    effective pursuant to Section
                                              0.3% of the total dollar value of the                   draw additional volume to the Exchange
                                                                                                                                                            19(b)(3)(A)(ii) 35 of the Act.
                                              transaction for securities priced below                 by enhancing the quality of executions
                                                                                                                                                               At any time within 60 days of the
                                              $1.00) that exceed the CQRF Threshold                   across all participants when the CQI is
                                                                                                                                                            filing of the proposed rule change, the
                                              described herein because it is within the               on. As discussed in the Statutory Basis
                                              transaction fee range charged by other                  section, the proposed fee structure is a                34 See e.g., IEX’s white paper that utilized
                                              exchanges 32 and consistent with Rule                   narrowly tailored approach, designed to               publicly available quote and trade data to compare
                                              610(c) of Regulation NMS.33 Although                    enhance the Exchange’s market quality                 market quality across U.S. stock exchanges, which
                                              the amount of the CQRF may not be                       by incentivizing trading activity that the            empirically found, inter alia, that on average IEX
                                                                                                                                                            has the lowest effective spread, and the greatest
                                              adequate to fully disincentivize                        Exchange believes enhances the quality                opportunity for price improvement amongst all
                                              Members from deploying trading                          of its market. The Exchange believes                  exchanges. A Comparison of Execution Quality
                                              strategies designed to chase short-term                 that the proposed revisions to the CQRF               across U.S. Stock Exchanges, Elaine Wah, Stan
                                              price momentum during periods when                      Threshold would contribute to, rather                 Feldman, Francis Chung, Allison Bishop, and
                                                                                                                                                            Daniel Aisen, Investors Exchange (2017). Effective
                                              the CQI is on, the Exchange is hopeful                  than burden, competition, as the CQRF                 spread is commonly defined by market structure
                                              that it will further reduce such activity               is intended to incentivize Members and                academics and market participants as twice the
                                              based on the economic disincentives                     market participants to send increased                 absolute difference between the trade price and
                                              that the CQRF will provide.                             liquidity providing order flow to the                 prevailing NBBO midpoint at the time of a trade,
                                                 Moreover, IEX believes that the CQRF                                                                       and is generally meant to measure the cost paid
                                                                                                      Exchange, which may increase IEX’s                    when an incoming order executes against a resting
                                              will help to prevent fraudulent and                     liquidity and market quality, thereby                 order, and unlike quoted spread captures other
                                              manipulative acts and practices, to                     enhancing the Exchange’s ability to                   features of a market center, such as hidden and
                                              promote just and equitable principles of                compete with other exchanges. Further,                midpoint liquidity as well as market depth. Price
                                              trade, to foster cooperation and                                                                              improvement is in reference to the situation where
                                                                                                      with the proposed revisions to the
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                                                                                                                                                            an aggressive order is filled at a price strictly better
                                                                                                      CQRF Threshold, the CQRF would                        than the inside quote (i.e., in the case of an
                                                29 See Nasdaq Rule 7018(a)(3)(m) [sic].               continue to be in line with fees charged              aggressive buy (sell) order, receiving a fill at a price
                                                30 See,Securities Exchange Act Release No. 66951      by other exchanges.                                   lower (higher) than the NBO (NBB)). See also, Hu,
                                              (May 9, 2012), 77 FR 28647 (May 15, 2012) (File No.                                                           Edwin, Intentional Access Delays, Market Quality,
                                              SR–NASDAQ–2012–055).
                                                                                                         The Exchange operates in a highly
                                                                                                                                                            and Price Discovery: Evidence from IEX Becoming
                                                31 Id.                                                competitive market in which market                    an Exchange (February 7, 2018). Available at SSRN:
                                                32 See note 14 [sic] supra.                           participants can readily favor competing              https://ssrn.com/abstract=3195001.
                                                33 17 CFR 242.610(c)(1).                              venues if fee schedules at other venues                 35 15 U.S.C. 78s(b)(3)(A)(ii).




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                                                                               Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices                                                   40371

                                              Commission summarily may                                   Persons submitting comments are                       www.markets.cboe.com, at the principal
                                              temporarily suspend such rule change if                    cautioned that we do not redact or edit               office of the Exchange, and at the
                                              it appears to the Commission that such                     personal identifying information from                 Commission’s Public Reference Room.
                                              action is necessary or appropriate in the                  comment submissions. You should
                                                                                                                                                               II. Self-Regulatory Organization’s
                                              public interest, for the protection of                     submit only information that you wish
                                                                                                                                                               Statement of the Purpose of, and
                                              investors, or otherwise in furtherance of                  to make available publicly. All
                                                                                                                                                               Statutory Basis for, the Proposed Rule
                                              the purposes of the Act. If the                            submissions should refer to File
                                              Commission takes such action, the                                                                                Change
                                                                                                         Number SR–IEX–2018–16 and should
                                              Commission shall institute proceedings                     be submitted on or before September 4,                   In its filing with the Commission, the
                                              under Section 19(b)(2)(B) 36 of the Act to                 2018.                                                 Exchange included statements
                                              determine whether the proposed rule                                                                              concerning the purpose of and basis for
                                                                                                           For the Commission, by the Division of
                                              change should be approved or                               Trading and Markets, pursuant to delegated            the proposed rule change and discussed
                                              disapproved.                                               authority.37                                          any comments it received on the
                                                                                                         Eduardo A. Aleman,                                    proposed rule change. The text of these
                                              IV. Solicitation of Comments                                                                                     statements may be examined at the
                                                                                                         Assistant Secretary.
                                                Interested persons are invited to                                                                              places specified in Item IV below. The
                                                                                                         [FR Doc. 2018–17396 Filed 8–13–18; 8:45 am]
                                              submit written data, views and                                                                                   Exchange has prepared summaries, set
                                              arguments concerning the foregoing,                        BILLING CODE 8011–01–P
                                                                                                                                                               forth in Sections A, B, and C below, of
                                              including whether the proposed rule                                                                              the most significant parts of such
                                              change is consistent with the Act.                                                                               statements.
                                              Comments may be submitted by any of                        SECURITIES AND EXCHANGE
                                              the following methods:                                     COMMISSION                                            (A) Self-Regulatory Organization’s
                                                                                                         [Release No. 34–83798; File No. SR–                   Statement of the Purpose of, and
                                              Electronic Comments                                        CboeBYX–2018–013]                                     Statutory Basis for, the Proposed Rule
                                                • Use the Commission’s internet                                                                                Change
                                              comment form (http://www.sec.gov/                          Self-Regulatory Organizations; Cboe
                                                                                                                                                               1. Purpose
                                              rules/sro.shtml); or                                       BYX Exchange, Inc.; Notice of Filing
                                                • Send an email to rule-comments@                        and Immediate Effectiveness of a                         The Exchange offers four distinct
                                              sec.gov. Please include File Number SR–                    Proposed Rule Change To Amend                         trading sessions where the Exchange
                                              IEX–2018–16 on the subject line.                           Exchange Rule 1.5 Definitions and                     accepts orders for potential execution:
                                                                                                         Exchange Rule 14.1 Unlisted Trading                   (1) The ‘‘Early Trading Session,’’ which
                                              Paper Comments                                                                                                   begins at 7:00 a.m. Eastern Time (‘‘ET’’)
                                                                                                         Privileges
                                                 • Send paper comments in triplicate                                                                           and continues until 8:00 a.m. ET,5 (2)
                                              to Secretary, Securities and Exchange                      August 8, 2018.                                       the ‘‘Pre-Opening Session,’’ which
                                              Commission, 100 F Street NE,                                  Pursuant to Section 19(b)(1) of the                begins at 8:00 a.m. ET and continues
                                              Washington, DC 20549–1090.                                 Securities Exchange Act of 1934 (the                  until 9:30 a.m. ET,6 (3) ‘‘Regular Trading
                                              All submissions should refer to File                       ‘‘Act’’),1 and Rule 19b–4 thereunder,2                Hours,’’ which begin at 9:30 a.m. ET and
                                              Number SR–IEX–2018–16. This file                           notice is hereby given that on July 25,               continue until 4:00 p.m. ET,7 and (4) the
                                              number should be included on the                           2018, Cboe BYX Exchange, Inc. (the                    ‘‘After Hours Trading Session,’’ which
                                              subject line if email is used. To help the                 ‘‘Exchange’’ or ‘‘BYX’’) filed with the               begins at 4:00 p.m. ET and continues
                                              Commission process and review your                         Securities and Exchange Commission                    until 5:00 p.m. ET.8 Users 9 may
                                              comments more efficiently, please use                      (‘‘Commission’’) the proposed rule                    designate when their orders are eligible
                                              only one method. The Commission will                       change as described in Items I and II                 for execution by selecting their desired
                                              post all comments on the Commission’s                      below, which Items have been prepared                 Time-in-Force instruction.10
                                              internet website (http://www.sec.gov/                      by the Exchange. The Exchange has                        The purpose of the proposed rule
                                              rules/sro.shtml). Copies of the                            designated this proposal as a ‘‘non-                  change is to amend Rule 1.5(c), which
                                              submission, all subsequent                                 controversial’’ proposed rule change                  defines the After Hours Trading Session,
                                              amendments, all written statements                         pursuant to Section 19(b)(3)(A) of the                to allow trading until 8:00 p.m. ET,
                                              with respect to the proposed rule                          Act 3 and Rule 19b–4(f)(6)(iii)                       consistent with the hours currently
                                              change that are filed with the                             thereunder,4 which renders it effective               available on the Exchange’s affiliates
                                              Commission, and all written                                upon filing with the Commission. The                  Cboe EDGX Exchange, Inc. (‘‘EDGX’’)
                                              communications relating to the                             Commission is publishing this notice to               and Cboe EDGA Exchange, Inc.
                                              proposed rule change between the                           solicit comments on the proposed rule                 (‘‘EDGA’’).11 The After Hours Trading
                                              Commission and any person, other than                      change from interested persons.
                                                                                                                                                                 5 ‘‘Early Trading Session’’ means the time
                                              those that may be withheld from the                        I. Self-Regulatory Organization’s                     between 7:00 a.m. and 8:00 a.m. ET. See Rule
                                              public in accordance with the                              Statement of the Terms of Substance of                1.5(ee).
                                              provisions of 5 U.S.C. 552, will be                        the Proposed Rule Change                                6 ‘‘Pre-Opening Session’’ means the time between

                                              available for website viewing and                                                                                8:00 a.m. and 9:30 a.m. ET. See Rule 1.5(r).
                                                                                                            The Exchange filed a proposal to
                                              printing in the Commission’s Public                                                                                7 ‘‘Regular Trading Hours’’ means the time
                                                                                                         amend Rule 1.5(c), which defines the                  between 9:30 a.m. and 4:00 p.m. ET. See Rule
                                              Reference Room, 100 F Street NE,
                                                                                                         After Hours Trading Session, to allow                 1.5(w).
                                              Washington, DC 20549 on official
                                                                                                         trading until 8:00 p.m. ET.                             8 ‘‘After Hours Trading Session’’ means the time
                                              business days between the hours of
amozie on DSK3GDR082PROD with NOTICES1




                                                                                                            The text of the proposed rule change               between 4:00 p.m. and 5:00 p.m. ET. See Rule
                                              10:00 a.m. and 3:00 p.m. Copies of the                     is available at the Exchange’s website at             1.5(c).
                                              filing also will be available for                                                                                  9 ‘‘User’’ means any Member or Sponsored

                                              inspection and copying at the principal                                                                          Participant who is authorized to obtain access to the
                                                                                                           37 17 CFR 200.30–3(a)(12).                          System pursuant to Rule 11.3. See Rule 1.5(cc).
                                              office of the Exchange. All comments                         1 15 U.S.C. 78s(b)(1).                                10 See Rule 11.9(b).
                                              received will be posted without change.                      2 17 CFR 240.19b–4.                                   11 See EDGX and EDGA Rule 1.5(r), which both
                                                                                                           3 15 U.S.C. 78s(b)(3)(A).
                                                                                                                                                               define ‘‘Post-Closing Session’’ as the time between
                                                36 15   U.S.C. 78s(b)(2)(B).                               4 17 CFR 240.19b–4(f)(6)(iii).                      4:00 p.m. and 8:00 p.m. ET.



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Document Created: 2018-08-14 02:18:35
Document Modified: 2018-08-14 02:18:35
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation83 FR 40365 

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