83_FR_41288 83 FR 41128 - Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Make Permanent Rule 11.24, Which Sets Forth the Exchange's Pilot Retail Price Improvement Program

83 FR 41128 - Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Make Permanent Rule 11.24, Which Sets Forth the Exchange's Pilot Retail Price Improvement Program

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 160 (August 17, 2018)

Page Range41128-41138
FR Document2018-17736

Federal Register, Volume 83 Issue 160 (Friday, August 17, 2018)
[Federal Register Volume 83, Number 160 (Friday, August 17, 2018)]
[Notices]
[Pages 41128-41138]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-17736]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83831; File No. SR-CboeBYX-2018-014]


Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Make Permanent Rule 11.24, Which 
Sets Forth the Exchange's Pilot Retail Price Improvement Program

August 13, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 30, 2018, Cboe BYX Exchange, Inc. (the ``Exchange'' or 
``BYX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to make permanent Rule 11.24, which 
sets forth the Exchange's pilot Retail Price Improvement Program.
    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to amend Rule 11.24 to 
make permanent the Retail Price Improvement Program (the ``Program''), 
which is currently offered on a pilot basis. The Exchange has operated 
the pilot for a six year period and believes that it has been 
successful in its stated goal of providing price improvement 
opportunities to retail investors. The analysis conducted by the 
Exchange shows that retail investors have been provided a total of $4.5 
million of price improvement during the 2.5 year period reviewed from 
January 2016 through June 2018. In addition, the Exchange's analysis 
shows that the Program has provided these benefits to retail investors 
without having an adverse impact on the broader market. The proposal 
provides an analysis of the economic benefits to retail investors and 
the marketplace flowing from operation of the Program, which the 
Exchange believes supports making the Program permanent.
Background
    In November 2012, the Commission approved the Program on a pilot 
basis.\3\ The Program is designed to attract retail order flow to the 
Exchange, and allow such order flow to receive potential price 
improvement. The Program is currently limited to trades occurring at 
prices equal to or greater than $1.00 per share.\4\ Under the Program, 
a class of market participant called a Retail Member Organization 
(``RMO'') is eligible to submit certain retail order flow (``Retail 
Orders'') to the Exchange. Users \5\ are permitted to provide potential 
price improvement for Retail Orders \6\ in the form of non-displayed 
interest that is better than the national best bid that is a Protected 
Quotation (``Protected NBB'') or the national best offer that is a 
Protected Quotation (``Protected NBO'', and together with the Protected 
NBB, the ``Protected NBBO'').\7\ The Program was approved by the 
Commission on a pilot basis running one-year from the date of 
implementation.\8\ The Commission approved the Program on November 27, 
2012.\9\ The Exchange implemented the Program on January 11, 2013, and 
has extended the pilot period five times.\10\

[[Page 41129]]

The pilot period for the Program is scheduled to expire on July 31, 
2018.\11\ The Exchange believes that the Program has been successful in 
its goal of providing price improvement to Retail Orders, and is 
therefore proposing to amend Rule 11.24 to make this pilot permanent so 
that retail investors can continue to reap the benefits of the 
Program.\12\
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    \3\ See Securities Exchange Act Release No. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) (``RPI Approval Order'') (SR-
BYX-2012-019).
    \4\ The Exchange will periodically notify the membership 
regarding the securities included in the Program through an 
information circular.
    \5\ A ``User'' is defined in Rule 1.5(cc) as any member or 
sponsored participant of the Exchange who is authorized to obtain 
access to the System.
    \6\ A ``Retail Order'' is defined in Rule 11.24(a)(2) as an 
agency order that originates from a natural person and is submitted 
to the Exchange by a RMO, provided that no change is made to the 
terms of the order with respect to price or side of market and the 
order does not originate from a trading algorithm or any 
computerized methodology. See Rule 11.24(a)(2).
    \7\ The term Protected Quotation is defined in BYX Rule 1.5(t) 
and has the same meaning as is set forth in Regulation NMS Rule 
600(b)(58). The terms Protected NBB and Protected NBO are defined in 
BYX Rule 1.5(s). The Protected NBB is the best-priced protected bid 
and the Protected NBO is the best-priced protected offer. Generally, 
the Protected NBB and Protected NBO and the national best bid 
(``NBB'') and national best offer (``NBO'', together with the NBB, 
the ``NBBO'') will be the same. However, a market center is not 
required to route to the NBB or NBO if that market center is subject 
to an exception under Regulation NMS Rule 611(b)(1) or if such NBB 
or NBO is otherwise not available for an automatic execution. In 
such case, the Protected NBB or Protected NBO would be the best-
priced protected bid or offer to which a market center must route 
interest pursuant to Regulation NMS Rule 611.
    \8\ See RPI Approval Order, supra note 3 at 71652.
    \9\ Id.
    \10\ See Securities Exchange Act Release Nos. 71249 (January 7, 
2014), 79 FR 2229 (January 13, 2014) (SR-BYX-2014-001); 74111 
(January 22, 2015), 80 FR 4598 (January 28, 2015) (SR-BYX-2015-05); 
76965 (January 22, 2016), 81 FR 4682 (January 27, 2016) (SR-BYX-
2016-01); 78180 (June 28, 2016), 81 FR 43306 (July 1, 2016) (SR-BYX-
2016-15); 81368 (August 10, 2017), 82 FR 38960 (August 16, 2017) 
(SR-BYX-2017-18).
    \11\ Concurrently with the filing of this proposed rule change, 
the Exchange is filing to extend the current pilot period until the 
earlier of approval of the filing to make this rule permanent (i.e., 
this proposed rule change) or December 31, 2018.
    \12\ The Program will continue to only apply to trades occurring 
at prices equal to or greater than $1.00 per share.
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    The SEC approved the Program on a pilot basis, in part, because it 
concluded, ``the Program is reasonably designed to benefit retail 
investors by providing price improvement to retail order flow.'' \13\ 
The Commission also found that ``while the Program would treat retail 
order flow differently from order flow submitted by other market 
participants, such segmentation would not be inconsistent with Section 
6(b)(5) of the Act, which requires that the rules of an exchange are 
not designed to permit unfair discrimination.'' \14\ As the SEC 
acknowledged, the retail order segmentation was designed to create 
greater retail order flow competition and thereby increase the amount 
of this flow to transparent and well-regulated exchanges. This would 
help to ensure that retail investors benefit from competitive price 
improvement that exchange-based liquidity providers provide. As 
discussed below, the Exchange believes that the Program data supports 
the conclusion that it provides valuable price [sic] to retail 
investors that they may not otherwise have received, and that it is 
therefore appropriate to make the Program permanent.
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    \13\ See RPI Approval Order, supra note 3 at 71655.
    \14\ Id.
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Definitions
    The Exchange adopted the following definitions under Rule 11.24(a):
    First, the term ``Retail Member Organization'' is defined as a 
Member (or a division thereof) that has been approved by the Exchange 
to submit Retail Orders.
    Second, the term ``Retail Order'' is defined as an agency order or 
riskless principal that meets the criteria of FINRA Rule 5320.03 \15\ 
that originates from a natural person and is submitted to the Exchange 
by a Retail Member Organization, provided that no change is made to the 
terms of the order with respect to price or side of market and the 
order does not originate from a trading algorithm or any other 
computerized methodology. A Retail Order is an Immediate or Cancel 
(``IOC'') Order and shall operate in accordance with Rule 11.24(f). A 
Retail Order may be an odd lot, round lot, or mixed lot.
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    \15\ FINRA Rule 5320.03 clarifies that an RMO may enter Retail 
Orders on a riskless principal basis, provided that (i) the entry of 
such riskless principal orders meet the requirements of FINRA Rule 
5320.03, including that the RMO maintains supervisory systems to 
reconstruct, in a time-[sic] sequenced manner, all Retail Orders 
that are entered on a riskless principal basis; and (ii) the RMO 
submits a report, contemporaneously with the execution of the 
facilitated order, that identifies the trade as riskless principal.
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    Finally, the term ``Retail Price Improvement Order'' or ``RPI 
Order'' consists of non-displayed interest on the Exchange that is 
priced better than the Protected NBB or Protected NBO by at least 
$0.001 and that is identified as such (``RPI interest'').\16\ The 
System \17\ will monitor whether RPI buy or sell interest, adjusted by 
any offset and subject to the ceiling or floor price, is eligible to 
interact with incoming Retail Orders. An RPI Order remains non-
displayed in its entirety (the buy or sell interest, the offset, and 
the ceiling or floor). An RPI Order may also be entered in a sub-penny 
increment with an explicit limit price. Any User is permitted, but not 
required, to submit RPI Orders. An RPI Order may be an odd lot, round 
lot or mixed lot.
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    \16\ Exchange systems prevent Retail Orders from interacting 
with RPI Orders if the RPI Order is not priced at least $0.001 
better than the Protected NBBO. The Exchange notes, however, that 
price improvement of $0.001 would be a minimum requirement and Users 
could enter RPI Orders that better the Protected NBBO by more than 
$0.001. Exchange systems will accept RPI Orders without a minimum 
price improvement value; however, such interest will execute at its 
floor or ceiling price only if such floor or ceiling price is better 
than the Protected NBBO by $0.001 or more.
    \17\ The ``System'' is defined in BYX Rule 1.5(aa) as ``the 
electronic communications and trading facility designated by the 
Board through which securities orders of Users are consolidated for 
ranking, execution and, when applicable, routing away.''
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    The price of an RPI Order is determined by a User's entry of the 
following into the Exchange: (1) RPI buy or sell interest; (2) an 
offset, if any; and (3) a ceiling or floor price. RPI Orders submitted 
with an offset are similar to other peg orders available to Users in 
that the order is tied or ``pegged'' to a certain price, and would have 
its price automatically set and adjusted upon changes in the Protected 
NBBO, both upon entry and any time thereafter. RPI buy or sell interest 
is typically entered to track the Protected NBBO, that is, RPI Orders 
are typically submitted with an offset. The offset is a predetermined 
amount by which the User is willing to improve the Protected NBBO, 
subject to a ceiling or floor price. The ceiling or floor price is the 
amount above or below which the User does not wish to trade. RPI Orders 
in their entirety (the buy or sell interest, the offset, and the 
ceiling or floor) will remain non-displayed. The Exchange also allows 
Users to enter RPI Orders that establish the exact limit price, which 
is similar to a non-displayed limit order currently accepted by the 
Exchange except the Exchange accepts sub-penny limit prices on RPI 
Orders in increments of $0.001. The Exchange monitors whether RPI buy 
or sell interest, adjusted by any offset and subject to the ceiling or 
floor price, is eligible to interact with incoming Retail Orders.
    Users and RMOs may enter odd lots, round lots or mixed lots as RPI 
Orders and as Retail Orders respectively. As discussed below, RPI 
Orders are ranked and allocated according to price and time of entry 
into the System consistent with Rule 11.12 and therefore without regard 
to whether the size entered is an odd lot, round lot or mixed lot 
amount. Similarly, Retail Orders interact with RPI Orders according to 
the Priority and Allocation rules of the Program and without regard to 
whether they are odd lots, round lots or mixed lots. Finally, Retail 
Orders are designated as Type 1 or Type 2 without regard to the size of 
the order.
    RPI Orders interact with Retail Orders as follows. Assume a User 
enters RPI sell interest with an offset of $0.001 and a floor of $10.10 
while the Protected NBO is $10.11. The RPI Order could interact with an 
incoming buy Retail Order at $10.109. If, however, the Protected NBO 
was $10.10, the RPI Order could not interact with the Retail Order 
because the price required to deliver the minimum $0.001 price 
improvement ($10.099) would violate the User's floor of $10.10. If a 
User otherwise enters an offset greater than the minimum required price 
improvement and the offset would produce a price that would violate the 
User's floor, the offset would be applied only to the extent that it 
respects the User's floor. By way of illustration, assume RPI buy 
interest is entered with an offset of $0.005 and a ceiling of $10.112 
while the Protected NBB is at $10.11. The RPI Order could interact with 
an incoming sell Retail Order at $10.112, because it would produce the 
required price improvement without violating the User's ceiling, but it 
could not interact above the $10.112 ceiling. Finally, if a User enters 
an RPI Order

[[Page 41130]]

without an offset (i.e., an explicitly priced limit order), the RPI 
Order will interact with Retail Orders at the level of the User's limit 
price as long as the minimum required price improvement is produced. 
Accordingly, if RPI sell interest is entered with a limit price of 
$10.098 and no offset while the Protected NBO is $10.11, the RPI Order 
could interact with the Retail Order at $10.098, producing $0.012 of 
price improvement. The System will not cancel RPI interest when it is 
not eligible to interact with incoming Retail Orders; such RPI interest 
will remain in the System and may become eligible again to interact 
with Retail Orders depending on the Protected NBBO.
RMO Qualifications and Application Process
    Under Rule 11.24(b), any Member may qualify as an RMO if it 
conducts a retail business or routes retail orders on behalf of another 
broker-dealer. For purposes of Rule 11.24(b), conducting a retail 
business shall include carrying retail customer accounts on a fully 
disclosed basis. Any Member that wishes to obtain RMO status is 
required to submit: (1) An application form; (2) supporting 
documentation sufficient to demonstrate the retail nature and 
characteristics of the applicant's order flow; and (3) an attestation, 
in a form prescribed by the Exchange, that substantially all orders 
submitted as Retail Orders will qualify as such under Rule 11.24.\18\ 
The Exchange shall notify the applicant of its decision in writing.
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    \18\ For example, a prospective RMO could be required to provide 
sample marketing literature, website screenshots, other publicly 
disclosed materials describing the retail nature of their order 
flow, and such other documentation and information as the Exchange 
may require to obtain reasonable assurance that the applicant's 
order flow would meet the requirements of the Retail Order 
definition.
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    An RMO is required to have written policies and procedures 
reasonably designed to assure that it will only designate orders as 
Retail Orders if all requirements of a Retail Order are met. Such 
written policies and procedures must require the Member to (i) exercise 
due diligence before entering a Retail Order to assure that entry as a 
Retail Order is in compliance with the requirements of this rule, and 
(ii) monitor whether orders entered as Retail Orders meet the 
applicable requirements. If the RMO represents Retail Orders from 
another broker-dealer customer, the RMO's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order. The RMO must (i) obtain an annual written 
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail Orders 
that entry of such orders as Retail Orders will be in compliance with 
the requirements of this rule, and (ii) monitor whether its broker-
dealer customers' Retail Order flow continues to meet the applicable 
requirements.\19\
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    \19\ The Exchange or another self-regulatory organization on 
behalf of the Exchange will review an RMO's compliance with these 
requirements through an exam-based review of the RMO's internal 
controls.
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    If the Exchange disapproves the application, the Exchange provides 
a written notice to the Member. The disapproved applicant could appeal 
the disapproval by the Exchange as provided in Rule 11.24(d), and/or 
reapply for RMO status 90 days after the disapproval notice is issued 
by the Exchange. An RMO also could voluntarily withdraw from such 
status at any time by giving written notice to the Exchange.
Failure of RMO To Abide by Retail Order Requirements
    Rule 11.24(c) addresses an RMO's failure to abide by Retail Order 
requirements. If an RMO designates orders submitted to the Exchange as 
Retail Orders and the Exchange determines, in its sole discretion, that 
those orders fail to meet any of the requirements of Retail Orders, the 
Exchange may disqualify a Member from its status as an RMO. When 
disqualification determinations are made, the Exchange provides a 
written disqualification notice to the Member. A disqualified RMO may 
appeal the disqualification as provided in Rule 11.24(d) and/or reapply 
for RMO status 90 days after the disqualification notice is issued by 
the Exchange.

Appeal of Disapproval or Disqualification

    Rule 11.24(d) provides appeal rights to Members. If a Member 
disputes the Exchange's decision to disapprove it as an RMO under Rule 
11.24(b) or disqualify it under Rule 11.24(c), such Member 
(``appellant'') may request, within five business days after notice of 
the decision is issued by the Exchange, that the Retail Price 
Improvement Program Panel (``RPI Panel'') review the decision to 
determine if it was correct.
    The RPI Panel consists of the Exchange's Chief Regulatory Officer 
(``CRO''), or a designee of the CRO, and two officers of the Exchange 
designated by the Chief Operating Officer (``COO''). The RPI Panel 
reviews the facts and render [sic] a decision within the time frame 
prescribed by the Exchange. The RPI Panel may overturn or modify an 
action taken by the Exchange and all determinations by the RPI Panel 
constitute final action by the Exchange on the matter at issue.

Retail Liquidity Identifier

    Under Rule 11.24(e), the Exchange disseminates an identifier when 
RPI interest priced at least $0.001 better than the Exchange's 
Protected Bid or Protected Offer for a particular security is available 
in the System (``Retail Liquidity Identifier''). The Retail Liquidity 
Identifier is disseminated through consolidated data streams (i.e., 
pursuant to the Consolidated Tape Association Plan/Consolidated 
Quotation Plan, or CTA/CQ, for Tape A and Tape B securities, and the 
Nasdaq UTP Plan for Tape C securities) as well as through proprietary 
Exchange data feeds.\20\ The Retail Liquidity Identifier reflects the 
symbol and the side (buy or sell) of the RPI interest, but does not 
include the price or size of the RPI interest. In particular, CQ and 
UTP quoting outputs include a field for codes related to the Retail 
Liquidity Identifier. The codes indicate RPI interest that is priced 
better than the Exchange's Protected Bid or Protected Offer by at least 
the minimum level of price improvement as required by the Program.
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    \20\ The Exchange notes that the Retail Liquidity Identifier for 
Tape A and Tape B securities are disseminated pursuant to the CTA/CQ 
Plan. The identifier is also available through the consolidated 
public market data stream for Tape C securities. The processor for 
the Nasdaq UTP quotation stream disseminates the Retail Liquidity 
Identifier and analogous identifiers from other market centers that 
operate programs similar to the RPI Program.
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Retail Order Designations

    Under Rule 11.24(f), an RMO can designate how a Retail Order would 
interact with available contra-side interest as follows:
    A Type 1-designated Retail Order will interact with available 
contra-side RPI Orders and other price improving contra-side interest 
but will not interact with other available contra-side interest in the 
System that is not offering price improvement or route to other 
markets. The portion of a Type 1-designated Retail Order that does not 
execute against contra-side RPI Orders or other price improving 
liquidity will be immediately and automatically cancelled.
    A Type 2-designated Retail Order will interact first with available 
contra-side RPI Orders and other price improving liquidity and then any 
remaining

[[Page 41131]]

portion of the Retail Order will be executed as an Immediate-or-Cancel 
(``IOC'') Order pursuant to Rule 11.9(b)(1). A Type 2-designated Retail 
Order can either be submitted as a BYX Only Order \21\ or as an order 
eligible for routing pursuant to Rule 11.13(a)(2).
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    \21\ A BYX Only Order is defined in BYX Rule 11.9(c)(4) and 
includes orders that are not eligible for routing to other trading 
centers.
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Priority and Order Allocation

    Under Rule 11.24(g), competing RPI Orders in the same security are 
ranked and allocated according to price then time of entry into the 
System. Executions occur in price/time priority in accordance with Rule 
11.12. Any remaining unexecuted RPI interest remains available to 
interact with other incoming Retail Orders if such interest is at an 
eligible price. Any remaining unexecuted portion of the Retail Order 
will cancel or execute in accordance with Rule 11.24(f). The following 
example illustrates this method:

 Protected NBBO for security ABC is $10.00-$10.05
 User 1 enters an RPI Order to buy ABC at $10.015 for 500
 User 2 then enters an RPI Order to buy ABC at $10.02 for 500
 User 3 then enters an RPI Order to buy ABC at $10.035 for 500

    An incoming Retail Order to sell ABC for 1,000 executes first 
against User 3's bid for 500 at $10.035, because it is the best priced 
bid, then against User 2's bid for 500 at $10.02, because it is the 
next best priced bid. User 1 is not filled because the entire size of 
the Retail Order to sell 1,000 is depleted. The Retail Order executes 
against RPI Orders in price/time priority.
    However, assume the same facts above, except that User 2's RPI 
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to 
sell 1,000 executes first against User 3's bid for 500 at $10.035, 
because it is the best priced bid, then against User 2's bid for 100 at 
$10.02, because it is the next best priced bid. User 1 then receives an 
execution for 400 of its bid for 500 at $10.015, at which point the 
entire size of the Retail Order to sell 1,000 is depleted.
    As a final example, assume the same facts as above, except that 
User 3's order was not an RPI Order to buy ABC at $10.035, but rather, 
a non-displayed order to buy ABC at $10.03. The result would be similar 
to the result immediately above, in that the incoming Retail Order to 
sell 1,000 executes first against User 3's bid for 500 at $10.03, 
because it is the best priced bid, then against User 2's bid for 100 at 
$10.02, because it is the next best priced bid. User 1 then receives an 
execution for 400 of its bid for 500 at $10.015, at which point the 
entire size of the Retail Order to sell 1,000 is depleted.
Eligible Securities
    All Regulation NMS securities traded on the Exchange are eligible 
for inclusion in the RPI Program. The Exchange limits the Program to 
trades occurring at prices equal to or greater than $1.00 per share. 
Toward that end, Exchange trade validation systems prevent the 
interaction of RPI buy or sell interest (adjusted by any offset) and 
Retail Orders at a price below $1.00 per share.\22\ For example, if 
there is RPI buy interest tracking the Protected NBB at $0.99 with an 
offset of $0.001 and a ceiling of $1.02, Exchange trade validation 
systems would prevent the execution of the RPI Order at $0.991 with a 
sell Retail Order with a limit of $0.99. However, if the Retail Order 
was Type 2 as defined the Program,\23\ it would be able to interact at 
$0.99 with liquidity outside the Program in the Exchange's order book. 
In addition to facilitating an orderly \24\ and operationally intuitive 
program, the Exchange believes that limiting the Program to trades 
equal to or greater than $1.00 per share enabled it better to focus its 
efforts to monitor price competition and to assess any indications that 
data disseminated under the Program is potentially disadvantaging 
retail orders. As part of that review, the Exchange produced data 
throughout the pilot, which included statistics about participation, 
the frequency and level of price improvement provided by the Program, 
and any effects on the broader market structure.
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    \22\ As discussed above, the price of an RPI is determined by a 
User's entry of buy or sell interest, an offset (if any) and a 
ceiling or floor price. RPI sell or buy interest typically tracks 
the Protected NBBO.
    \23\ Type 2 Retail Orders are treated as IOC orders that execute 
against displayed and non-displayed liquidity in the Exchange's 
order book where there is no available liquidity in the Program. 
Type 2 Retail Orders can either be designated as eligible for 
routing or as BYX Only Orders, and thus non-routable, as described 
above.
    \24\ Given the limitation, the Program would have no impact on 
the minimum pricing increment for orders priced less than $1.00 and 
therefore no effect on the potential of markets executing those 
orders to lock or cross. In addition, the non-displayed nature of 
the liquidity in the Program simply has no potential to disrupt 
displayed, protected quotes. In any event, the Program would do 
nothing to change the obligation of exchanges to avoid and reconcile 
locked and crossed markets under NMS Rule 610(d).
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Rationale for Making the Program Pilot Permanent
    The Exchange established the Program in an attempt to attract 
retail order flow to the Exchange by providing an opportunity for price 
improvement to such order flow. The Exchange believes that the Program 
promotes transparent competition for retail order flow by allowing 
Exchange members to submit RPI Orders to interact with Retail Orders. 
Such competition promotes efficiency by facilitating the price 
discovery process and generating additional investor interest in 
trading securities, thereby promoting capital formation and retail 
investment opportunities. The Program will continue to be limited to 
trades occurring at prices equal to or greater than $1.00 per share.
    In accordance with its filing establishing the pilot, the Exchange 
did ``produce data throughout the pilot, which will include statistics 
about participation, the frequency and level of price improvement 
provided by the Program, and any effects on the broader market 
structure.'' \25\ The Exchange has fulfilled this obligation through 
the reports and assessments it has submitted to the Commission since 
the implementation of the pilot Program. The Exchange believes that the 
data provided to the Commission to date, as well as the data being 
provided in this proposed rule change, support the continued operation 
of the Program on a permanent basis.
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    \25\ RPI Approval Order, 77 FR at 71655.
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    The SEC stated in the RPI Approval Order that the Program could 
promote competition for retail order flow among execution venues, and 
that this could benefit retail investors by creating additional well-
regulated and transparent price improvement opportunities for 
marketable retail order flow, most of which is currently executed in 
the Over-the-Counter (``OTC'') markets without ever reaching a public 
exchange.\26\ The Exchange believes that it has achieved its goal of 
attracting retail order flow to the Exchange. As the Exchange's 
analysis of the Program data below demonstrates, there has been 
consistent retail investor interest in the Program, which has provided 
tangible price improvement to those retail investors through a 
competitive pricing process over the course of the pilot. The data also 
demonstrates that the Program had an overall negligible impact on 
broader market quality outside of the Program. The Exchange has not 
received any

[[Page 41132]]

complaints or negative feedback concerning the Program.
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    \26\ Id.
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I. Overall Analysis of the Program

    Brokers route retail orders to a wide range of different trading 
systems. The Program offers a transparent and well-regulated option, 
providing meaningful competition and price improvement. As explained 
above, the purpose of the Program is to attract retail order flow to 
the Exchange by providing an opportunity for retail investors to 
receive price improvement. The Exchange believes that the Program has 
satisfied this goal, having provided a total of $4.5 million of price 
improvement, or approximately $153,000 per month, in the last 2.5 
years. Furthermore, while the amount of price improvement provided in 
the Program varies month to month, the amount of price improvement 
provided in recent months has generally increased relative to prior 
months due to additional participation in the Program by market 
participants with retail order flow. The Exchange believes that this 
supports permanent approval of the pilot as retail investors continue 
to reap the benefits afforded by the Program. The amount of monthly and 
cumulative price improvement provided in the Program is illustrated in 
Chart 1 below.
[GRAPHIC] [TIFF OMITTED] TN17AU18.019

    Furthermore, Retail Order volume executed in the Program accounted 
for between 0.86% and 2.32% of total BYX volume from January 2017 to 
June 2018, as shown in Chart 2 below, and between 0.05% and 0.11% of 
total consolidated volume, as shown in Chart 3 below. Despite its size 
relative to total volume executed on the Exchange or the broader 
market, the Program has continued to provide considerable price 
improvement each month to retail investors that participated in the 
Program. In addition, the Exchange believes that the relatively modest 
volume executed in the Program relative to total BYX volume and total 
consolidated volume limits the potential impact of the Program on 
broader market quality on the Exchange.\27\ The Exchange therefore 
believes that the Program has demonstrated the effectiveness of a 
transparent, on-exchange retail order price improvement functionality, 
notwithstanding that the majority of retail volume is still traded off-
exchange.
---------------------------------------------------------------------------

    \27\ The Exchange has also performed an analysis of the impact 
of the Program on other market quality indicators, which found that 
the Program did not have a significant impact on market quality in 
the broader market. See Section III below.

---------------------------------------------------------------------------

[[Page 41133]]

[GRAPHIC] [TIFF OMITTED] TN17AU18.020


[[Page 41134]]


[GRAPHIC] [TIFF OMITTED] TN17AU18.021

    Retail Orders are routed by sophisticated brokers using systems 
that seek the highest fill rates and amounts of price improvement. 
These brokers have many choices of execution venues for this order 
flow. When they choose to route to the Program, they have determined 
that it is the best opportunity for fill rate and price improvement at 
that time. As shown in Table 1 below, Retail Order average daily volume 
(``ADV'') executed in the Program averaged between 2 and 7 million 
shares from January 2016 to June 2018. Increased volatility in February 
2018 likely contributed to the increased Retail Order shares executed 
in the Program that month. Fill rates for the majority of the period 
studied ranged from 11%-19% with fill rates declining below 10% 
starting in December 2017, likely due to additional participation in 
the Program that resulted in a significant increase in the Retail Order 
volume entered on the Exchange. Retail Orders also continue to receive 
more than the minimum $0.001 price improvement required of a liquidity 
providing RPI Order, with the monthly average price improvement 
provided to Retail Orders ranging from $0.0011-$0.0014 per share, and 
the monthly effective/quoted spread ratio ranging from 0.77-0.90. The 
Exchange believes that this data supports permanent approval of the 
Program as this would allow retail investors to continue to execute 
their orders with price improvement in the Program.

                                                       Table 1--Summary Statistics on the Program
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Effective/
                  Date                     Retail shares   Retail orders     Effective     Quoted spread   quoted spread       Price       Fill rate (%)
                                           executed ADV     placed ADV      spread BPS          BPS            ratio        improvement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-16..................................       4,666,052          20,560              19              22            0.89         $0.0011           16.09
Feb-16..................................       4,083,670          18,025              19              22            0.87          0.0011           16.10
Mar-16..................................       3,474,997          15,103              21              24            0.90          0.0011           17.50
Apr-16..................................       3,216,923          14,126              18              21            0.88          0.0011           19.23
May-16..................................       2,912,160          12,980              18              21            0.87          0.0011           19.73

[[Page 41135]]

 
Jun-16..................................       3,144,024          13,924              16              18            0.89          0.0011           19.65
Jul-16..................................       4,009,916          17,257              18              20            0.90          0.0011           19.97
Aug-16..................................       3,906,624          17,135              19              21            0.90          0.0011           17.66
Sep-16..................................       4,887,221          20,708              17              19            0.88          0.0011           17.28
Oct-16..................................       3,595,900          15,922              24              27            0.90          0.0012           17.19
Nov-16..................................       2,273,885           8,972              29              33            0.88          0.0013           12.71
Dec-16..................................       3,192,065          12,768              36              41            0.88          0.0013           14.82
Jan-17..................................       3,122,721          16,951              31              36            0.88          0.0013           16.09
Feb-17..................................       3,262,046          21,151              31              35            0.88          0.0013           14.71
Mar-17..................................       3,068,930          20,921              33              38            0.88          0.0014           13.85
Apr-17..................................       2,680,646          18,518              34              38            0.88          0.0013           13.97
May-17..................................       3,407,603          23,437              29              33            0.87          0.0013           16.88
Jun-17..................................       7,896,833          46,398              28              32            0.88          0.0013           17.07
Jul-17..................................       5,966,961          36,717              27              31            0.88          0.0012           16.43
Aug-17..................................       6,467,615          38,608              23              26            0.88          0.0013           16.24
Sep-17..................................       5,237,243          33,314              27              31            0.87          0.0013           15.76
Oct-17..................................       5,702,759          33,578              34              40            0.84          0.0012           16.77
Nov-17..................................       4,427,779          62,352              33              40            0.83          0.0012           11.61
Dec-17..................................       5,131,502         142,810              34              41            0.84          0.0012            8.30
Jan-18..................................       6,359,122         167,730              29              36            0.82          0.0013            7.98
Feb-18..................................       7,230,230         227,980              21              27            0.79          0.0012            8.29
Mar-18..................................       5,967,844         202,050              23              31            0.73          0.0011            7.69
Apr-18..................................       4,976,642         178,009              20              27            0.75          0.0011            7.90
May-18..................................       4,367,743         169,085              23              28            0.83          0.0011            7.02
Jun-18..................................       5,211,044         202,601              23              31            0.77          0.0011            7.19
--------------------------------------------------------------------------------------------------------------------------------------------------------

II. Analysis of Retail Orders by Order Size

    Tables 2, 3, and 4 show the distribution of Retail Orders entered 
and executed in the Program for the period from January 2017 to June 
2018. As shown in Table 2, a majority of all Retail Orders entered to 
participate in the Program from January 2016 to June 2018 were for a 
round lot or fewer shares. Specifically, Retail Orders of one round lot 
or fewer shares accounted for an average of approximately 56% of the 
total number of Retail Orders entered. More than 73% of Retail Orders 
entered were for 300 shares or less. Very large orders of more than 
7,500 shares accounted for only 1.9% of Retail Orders submitted to the 
Program but accounted for a significant portion (approximately 40%) of 
the shares entered, as shown in Table 3. In addition, despite lower 
fill rates, large orders account for a reasonable portion 
(approximately 9%) of the shares executed in the Program, as shown in 
Table 4. The Program also receives a significantly large number of odd 
lot and single lot sized shares, which could be representative of 
retail marketable orders from retail customers. By providing price 
improvement to these orders, retail customers would continue to benefit 
from the Program.

                                              Table 2--Distribution of Retail Orders Entered by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Date                  <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)      >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................        44.90        18.45         8.60        10.12         6.84         4.90         3.10          1.93         1.16
Feb-17............................        47.80        18.04         8.21         9.61         6.27         4.41         2.82          1.75         1.09
Mar-17............................        47.60        17.76         8.16         9.67         6.36         4.60         3.01          1.78         1.05
Apr-17............................        48.82        17.30         7.88         9.48         6.19         4.61         2.88          1.82         1.02
May-17............................        52.39        18.69         7.13         8.13         5.21         3.81         2.40          1.41         0.83
Jun-17............................        55.32        13.89         6.67         8.08         5.35         4.47         3.24          2.03         0.95
Jul-17............................        53.18        15.12         7.32         8.85         5.86         4.12         2.71          1.79         1.05
Aug-17............................        49.41        16.53         8.00         9.65         6.33         4.49         2.75          1.76         1.08
Sep-17............................        49.88        16.51         7.94         9.50         6.27         4.49         2.71          1.71         1.00
Oct-17............................        49.92        16.17         7.73         9.45         6.49         4.67         2.76          1.79         1.02
Nov-17............................        61.01        17.66         5.65         6.33         3.86         2.54         1.39          0.98         0.59
Dec-17............................        61.48        18.49         6.31         6.65         3.40         1.97         0.93          0.49         0.28
Jan-18............................        61.20        17.06         6.54         7.14         3.84         2.25         1.06          0.58         0.33
Feb-18............................        66.63        15.79         5.61         5.80         2.98         1.70         0.80          0.43         0.25
Mar-18............................        66.11        15.39         5.82         6.22         3.25         1.76         0.78          0.41         0.24
Apr-18............................        67.41        15.45         5.40         6.06         3.10         1.43         0.59          0.34         0.22
May-18............................        66.09        16.12         5.43         6.30         3.41         1.47         0.59          0.35         0.24
Jun-18............................        66.29        16.17         5.59         6.14         3.20         1.46         0.59          0.35         0.22
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                  Table 3--Distribution of Shares Entered by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Date                  <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)      >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................         2.15         3.45         3.27         7.03         9.15        12.48        14.61         17.00        30.87
Feb-17............................         2.36         3.64         3.40         7.30         9.16        12.29        14.52         16.80        30.53

[[Page 41136]]

 
Mar-17............................         2.25         3.55         3.36         7.32         9.21        12.68        15.38         16.92        29.33
Apr-17............................         2.36         3.54         3.32         7.32         9.17        13.00        14.92         17.45        28.91
May-17............................         3.44         4.59         3.60         7.51         9.25        12.92        15.02         16.32        27.35
Jun-17............................         1.89         2.89         2.92         6.64         8.44        13.27        17.56         20.05        26.34
Jul-17............................         1.98         3.18         3.22         7.24         9.17        12.23        14.73         18.29        29.96
Aug-17............................         1.92         3.36         3.39         7.59         9.57        12.76        14.33         17.21        29.87
Sep-17............................         2.15         3.49         3.43         7.55         9.70        13.15        14.55         17.27        28.70
Oct-17............................         1.97         3.34         3.30         7.41         9.91        13.48        14.54         17.90        28.16
Nov-17............................         6.28         5.19         3.86         7.92         9.53        12.10        12.18         16.22        26.72
Dec-17............................         9.96         7.34         5.96        11.51        11.24        12.70        11.15         11.31        18.83
Jan-18............................         8.56         6.29         5.64        11.27        11.49        13.17        11.61         12.18        19.79
Feb-18............................        11.33         7.16         6.01        11.31        11.12        12.42        10.99         11.30        18.37
Mar-18............................        11.06         6.96         6.10        12.00        11.88        12.69        10.62         10.82        17.88
Apr-18............................        12.30         7.46         5.95        12.51        12.19        11.17         8.89          9.73        19.80
May-18............................        12.14         7.50         5.74        12.40        12.76        11.08         8.53          9.67        20.17
Jun-18............................        12.39         7.77         6.12        12.60        12.60        11.42         8.76          9.89        18.45
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                 Table 4--Distribution of Shares Executed by Order Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Date                  <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)      >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................        11.39        14.06        10.40        18.41        15.88        12.34         8.41          5.26         3.86
Feb-17............................        13.96        15.27        10.48        17.77        14.54        11.44         7.82          5.15         3.60
Mar-17............................        14.14        14.99        10.15        17.53        14.74        11.80         8.15          5.02         3.48
Apr-17............................        14.69        14.83        10.01        17.80        14.84        11.55         7.85          5.00         3.42
May-17............................        17.86        18.10         9.98        16.46        13.17        10.48         6.94          4.23         2.78
Jun-17............................         9.74        11.25         8.91        16.71        14.58        14.86        12.03          7.97         3.95
Jul-17............................        10.37        12.33         9.91        18.84        16.17        12.75         8.96          6.56         4.11
Aug-17............................         9.39        12.34        10.01        18.97        16.70        13.36         8.77          6.15         4.31
Sep-17............................        10.60        12.93        10.22        18.87        16.28        13.00         8.56          5.74         3.79
Oct-17............................         9.40        12.40        10.16        19.36        17.12        13.45         8.58          5.86         3.66
Nov-17............................        12.42        13.48         9.27        16.56        15.84        13.24         7.98          6.63         4.56
Dec-17............................        14.98        15.80        10.29        16.77        14.92        11.67         6.98          5.04         3.55
Jan-18............................        14.27        14.96        10.28        17.53        15.27        11.90         7.12          5.16         3.50
Feb-18............................        16.74        15.75        10.78        17.05        14.27        11.08         6.48          4.57         3.30
Mar-18............................        17.27        15.97        10.58        16.87        13.81        10.51         6.66          4.63         3.70
Apr-18............................        17.12        15.58        10.24        16.30        13.60        10.04         6.71          5.37         5.03
May-18............................        18.24        16.29        10.18        15.89        12.80         9.80         6.25          5.25         5.31
Jun-18............................        18.93        17.28        10.59        16.16        12.96         9.64         5.66          4.95         3.84
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The Exchange also analyzed fill rates across the different order 
size buckets and found that while fill rates are higher for smaller 
orders as expected, large size orders are still able to access 
liquidity and therefore receive price improvement in the Program. 
Moreover, overall fill rates indicate that market participants that 
provide liquidity are responding with quote depth when the contra side 
order is looking for a fill. While fill rates decreased starting in 
November 2017, the Exchange believes that this is due to new Retail 
Order flow being routed to the Program, rather than a decrease in the 
available liquidity. Monthly volume executed in the Program, as shown 
in Table 1, has therefore remained constant or increased since November 
2017 despite the lower overall fill rates for those months. The 
Exchange therefore believes that the Program is an attractive option 
for market participants looking to fill Retail Orders with price 
improvement.

                                                                   Table 5--Fill Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            501-1,000   1,001-2,000  2,001-4,000  4,001-7,500  7,500-15,000
               Date                  <=100 (%)   101-300 (%)  301-500 (%)      (%)          (%)          (%)          (%)           (%)      >15,000 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jan-17............................        85.19        65.62        51.13        42.16        27.93        15.91         9.26          4.98         2.01
Feb-17............................        87.21        61.69        45.31        35.83        23.36        13.69         7.92          4.51         1.73
Mar-17............................        87.04        58.53        41.87        33.20        22.18        12.89         7.34          4.11         1.65
Apr-17............................        86.90        58.46        42.12        33.97        22.59        12.40         7.35          4.00         1.65
May-17............................        87.53        66.54        46.75        36.99        24.03        13.69         7.80          4.38         1.71
Jun-17............................        87.78        66.50        52.07        42.98        29.48        19.12        11.70          6.78         2.56
Jul-17............................        85.99        63.63        50.52        42.77        28.96        17.12         9.99          5.89         2.25
Aug-17............................        79.61        59.74        48.02        40.59        28.33        17.00         9.94          5.81         2.34
Sep-17............................        77.55        58.32        46.98        39.39        26.44        15.58         9.27          5.24         2.08
Oct-17............................        80.19        62.29        51.71        43.82        28.97        16.73         9.90          5.49         2.18
Nov-17............................        22.78        29.93        27.66        24.11        19.16        12.61         7.55          4.71         1.97
Dec-17............................        12.14        17.37        13.96        11.77        10.72         7.42         5.05          3.60         1.52
Jan-18............................        12.84        18.31        14.06        11.98        10.24         6.96         4.72          3.26         1.36
Feb-18............................        11.79        17.56        14.32        12.03        10.24         7.12         4.70          3.23         1.43
Mar-18............................        11.56        17.00        12.85        10.42         8.60         6.13         4.64          3.17         1.53
Apr-18............................        10.61        15.91        13.11         9.93         8.50         6.85         5.76          4.21         1.94
May-18............................        10.11        14.61        11.93         8.62         6.75         5.95         4.93          3.65         1.77
Jun-18............................        10.57        15.39        11.98         8.88         7.12         5.84         4.47          3.46         1.44
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 41137]]

III. Impact of the Program on Broader Market Quality

    As shown in Charts 2 and 3 above, Retail Order volume executed in 
the Program is a small percentage of both total volume executed on the 
Exchange and total consolidated volume. While the Program has better 
depth available for Retail Orders, it does not significantly affect the 
market volume of BYX. The average volume within the 95th percentile is 
between 1.3% and 1.7%. With the Program volume mostly below 2.5% of BYX 
volume, the Exchange does not believe that it is able to significantly 
impact BYX market quality. Nevertheless, to test the impact of the 
Program on broader market quality, the Exchange reviewed the 
correlation between metrics that are tied to overall market quality 
with relevant Program metrics over both 2017 and 2018. Based on this 
analysis, which is provided in Table 6 below, the Exchange does not 
believe that the Program has had any significant impact on broader 
market quality.
    Specifically, the Exchange's analysis shows that: (1) Inside size 
in the broader market is not correlated with either RPI effective 
spreads or the percentage of volume executed in the Program, which 
suggests that market participants are not moving volume from the 
regular market to the Program as effective spreads narrow or volume 
executed in the Program increases; (2) effective spreads in the broader 
market are not correlated with the percentage of volume executed in the 
Program, which suggests that spreads are not widening as a result of 
more Retail Order flow being executed in the Program, (3) midpoint 
volume executed is not correlated with effective spreads in the 
Program, which suggests that market participants are not moving 
midpoint liquidity from the regular market to instead receive price 
improvement in the Program, and (4) displayed volume executed is not 
correlated with quoted spreads in the Program, which suggest that 
market participants are not entering non-displayed retail price 
improving interest in the Program as an alternative to displaying 
interest on an order book. The Exchange therefore believes that the 
Program can continue on a permanent basis--and thereby provide 
increased price improvement opportunities to retail investors on a 
transparent well-regulated exchange--without degrading market quality 
outside of the Program.

            Table 6--BYX Market Quality Correlation Analysis
------------------------------------------------------------------------
                                                       Date
                                         -------------------------------
                                               2017            2018
------------------------------------------------------------------------
Correlation of RPI Effective Spread to           -0.0145         -0.0096
 Average Inside Size across all Equities
 Exchanges \28\.........................
Correlation of RPI Volume as a Percent           -0.0217         -0.0056
 of Total Volume to Average Inside Size
 across all Equities Exchanges..........
Correlation of RPI Volume as a Percent            0.1175          0.0134
 of Total Volume to Average Effective
 Spread across all Venues...............
Correlation of RPI Effective Spread to           -0.1438         -0.1366
 Total Midpoint Volume across all Venues
Correlation of RPI Quoted Spread to              -0.1221         -0.0999
 Total Protected Lit Volume across all
 Equities Exchanges.....................
------------------------------------------------------------------------

IV. Conclusion

    Based on the Exchange's experience in operating the Program, and 
the data provided here and during the duration of the pilot, the 
Exchange believes that the Program has been a positive experiment in 
attracting retail order flow to a public exchange. The data provided by 
the Exchange describes a valuable service that delivers considerable 
price improvement in a transparent and well-regulated environment. The 
Program represents just a fraction of retail orders, most of which are 
executed off-exchange by a wide range of order handling services that 
have considerably more market share, and which operate pursuant to 
different rules and regulatory requirements. The order flow the Program 
attracted to the Exchange provided tangible price improvement to retail 
investors through a competitive and transparent pricing process 
unavailable in non-exchange venues. As such, despite relatively modest 
volumes, the Exchange believes that the Program satisfied the twin 
goals of attracting retail order flow to the Exchange and allowing such 
order flow to receive potential price improvement. Moreover, the 
Exchange believes that the data collected supports the conclusion that 
the Program did not have a negative impact on broader market quality. 
Although the results of the Program highlight the substantial 
advantages that broker-dealers retain when managing the benefits of 
retail order flow, the Exchange believes that the level of price 
improvement provided by the Program and the scant evidence that the 
Program negatively impacted the marketplace justifies making the 
Program permanent.
---------------------------------------------------------------------------

    \28\ Inside size is the average bid or ask size when the venue 
is at the NBB or NBO.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\29\ in general, and 
Section 6(b)(5) of the Act,\30\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that making the pilot permanent is consistent 
with these principles because the Program is reasonably designed to 
attract retail order flow to the exchange environment, while helping to 
ensure that retail investors benefit from the better price that 
liquidity providers are willing to give their orders. During the pilot 
period, the Exchange has provided data and analysis to the Commission. 
The Exchange believes that this data and analysis, as well as the 
further analysis provided in this filing, show that the Program has 
provided the intended benefits to the market, and retail investors in 
particular, and is therefore consistent with the Act.
    Additionally, the Exchange believes the proposed rule change is 
designed to facilitate transactions in securities and to remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system because making the Program permanent would 
allow the Exchange to continue to attract retail order flow to a public 
exchange and allow such order flow to receive potential price 
improvement. The data provided by the Exchange to the Commission staff 
demonstrates that the Program provided tangible price improvement to 
retail investors through a competitive pricing process

[[Page 41138]]

unavailable in non-exchange venues, and otherwise had an insignificant 
impact on the broader market. The Exchange believes that making the 
Program permanent would encourage the additional utilization of, and 
interaction with, the Exchange and provide retail customers with an 
additional venue for price discovery, liquidity, competitive quotes, 
and price improvement. For the same reasons, the Exchange believes that 
making the Program permanent would promote just and equitable 
principles of trade and remove impediments to and perfect the mechanism 
of a free and open market.
    Finally, the Exchange also believes that it is subject to 
significant competitive forces, as described below in the Exchange's 
statement regarding the burden on competition. For all of these 
reasons, the Exchange believes that the proposed rule change is 
consistent with the Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 
believes that making the Program permanent would continue to promote 
competition for retail order flow among execution venues and contribute 
to the public price discovery process. The Exchange believes that the 
data supplied to the Commission, and experience gained over the life of 
the pilot, have demonstrated that the Program creates price improvement 
opportunities for retail orders that are equal to what would be 
provided under OTC internalization arrangements, thereby benefiting 
retail investors and increasing competition between execution venues. 
The Exchange also believes that making the Program permanent will 
promote competition between execution venues operating their own retail 
liquidity programs. Such competition will lead to innovation within the 
market, thereby increasing the quality of the national market system. 
Finally, the Exchange notes that it operates in a highly competitive 
market in which market participants can easily direct their orders to 
competing venues, including off-exchange venues. In such an 
environment, the Exchange must continually review, and consider 
adjusting the services it offers and the requirements it imposes to 
remain competitive with other U.S. equity exchanges. For the reasons 
described above, the Exchange believes that the proposed rule change 
reflects this competitive environment.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 No. SR-CboeBYX-2018-014 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 No. SR-CboeBYX-2018-014. 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 such filing will also 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 No. SR-CboeBYX-2018-014 and should be submitted on 
or before September 7, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-17736 Filed 8-16-18; 8:45 am]
 BILLING CODE 8011-01-P



                                              41128                          Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices

                                              submission, all subsequent                              comments on the proposed rule change                  Background
                                              amendments, all written statements                      from interested persons.                                 In November 2012, the Commission
                                              with respect to the proposed rule                                                                             approved the Program on a pilot basis.3
                                              change that are filed with the                          I. Self-Regulatory Organization’s
                                                                                                      Statement of the Terms of Substance of                The Program is designed to attract retail
                                              Commission, and all written                                                                                   order flow to the Exchange, and allow
                                              communications relating to the                          the Proposed Rule Change
                                                                                                                                                            such order flow to receive potential
                                              proposed rule change between the                                                                              price improvement. The Program is
                                                                                                         The Exchange filed a proposal to
                                              Commission and any person, other than                                                                         currently limited to trades occurring at
                                                                                                      make permanent Rule 11.24, which sets
                                              those that may be withheld from the                                                                           prices equal to or greater than $1.00 per
                                              public in accordance with the                           forth the Exchange’s pilot Retail Price
                                                                                                      Improvement Program.                                  share.4 Under the Program, a class of
                                              provisions of 5 U.S.C. 552, will be                                                                           market participant called a Retail
                                              available for website viewing and                          The text of the proposed rule change               Member Organization (‘‘RMO’’) is
                                              printing in the Commission’s Public                     is available at the Exchange’s website at             eligible to submit certain retail order
                                              Reference Room, 100 F Street NE,                        www.markets.cboe.com, at the principal                flow (‘‘Retail Orders’’) to the Exchange.
                                              Washington, DC 20549, on official                       office of the Exchange, and at the                    Users 5 are permitted to provide
                                              business days between the hours of                      Commission’s Public Reference Room.                   potential price improvement for Retail
                                              10:00 a.m. and 3:00 p.m. Copies of the                                                                        Orders 6 in the form of non-displayed
                                              filing also will be available for                       II. Self-Regulatory Organization’s
                                                                                                      Statement of the Purpose of, and                      interest that is better than the national
                                              inspection and copying at the principal                                                                       best bid that is a Protected Quotation
                                              office of the Exchange. All comments                    Statutory Basis for, the Proposed Rule
                                                                                                                                                            (‘‘Protected NBB’’) or the national best
                                              received will be posted without change.                 Change
                                                                                                                                                            offer that is a Protected Quotation
                                              Persons submitting comments are                                                                               (‘‘Protected NBO’’, and together with the
                                              cautioned that we do not redact or edit                   In its filing with the Commission, the
                                                                                                      Exchange included statements                          Protected NBB, the ‘‘Protected NBBO’’).7
                                              personal identifying information from                                                                         The Program was approved by the
                                              comment submissions. You should                         concerning the purpose of and basis for
                                                                                                      the proposed rule change and discussed                Commission on a pilot basis running
                                              submit only information that you wish                                                                         one-year from the date of
                                              to make available publicly. All                         any comments it received on the
                                                                                                      proposed rule change. The text of these               implementation.8 The Commission
                                              submissions should refer to File
                                                                                                                                                            approved the Program on November 27,
                                              Number SR–PEARL–2018–15 and                             statements may be examined at the
                                                                                                                                                            2012.9 The Exchange implemented the
                                              should be submitted on or before                        places specified in Item IV below. The
                                                                                                                                                            Program on January 11, 2013, and has
                                              September 7, 2018.                                      Exchange has prepared summaries, set                  extended the pilot period five times.10
                                                For the Commission, by the Division of                forth in Sections A, B, and C below, of
                                              Trading and Markets, pursuant to delegated              the most significant parts of such                       3 See Securities Exchange Act Release No. 68303
                                              authority.19                                            statements.                                           (November 27, 2012), 77 FR 71652 (December 3,
                                              Robert W. Errett,                                                                                             2012) (‘‘RPI Approval Order’’) (SR–BYX–2012–019).
                                              Deputy Secretary.
                                                                                                      (A) Self-Regulatory Organization’s                       4 The Exchange will periodically notify the

                                                                                                      Statement of the Purpose of, and                      membership regarding the securities included in
                                              [FR Doc. 2018–17740 Filed 8–16–18; 8:45 am]                                                                   the Program through an information circular.
                                                                                                      Statutory Basis for, the Proposed Rule                   5 A ‘‘User’’ is defined in Rule 1.5(cc) as any
                                              BILLING CODE 8011–01–P
                                                                                                      Change                                                member or sponsored participant of the Exchange
                                                                                                                                                            who is authorized to obtain access to the System.
                                                                                                      1. Purpose                                               6 A ‘‘Retail Order’’ is defined in Rule 11.24(a)(2)
                                              SECURITIES AND EXCHANGE
                                                                                                                                                            as an agency order that originates from a natural
                                              COMMISSION                                                 The purpose of the proposed rule                   person and is submitted to the Exchange by a RMO,
                                              [Release No. 34–83831; File No. SR–                     change is to amend Rule 11.24 to make                 provided that no change is made to the terms of the
                                                                                                      permanent the Retail Price Improvement                order with respect to price or side of market and
                                              CboeBYX–2018–014]                                                                                             the order does not originate from a trading
                                                                                                      Program (the ‘‘Program’’), which is                   algorithm or any computerized methodology. See
                                              Self-Regulatory Organizations; Cboe                     currently offered on a pilot basis. The               Rule 11.24(a)(2).
                                              BYX Exchange, Inc.; Notice of Filing of                 Exchange has operated the pilot for a six                7 The term Protected Quotation is defined in BYX

                                              a Proposed Rule Change To Make                          year period and believes that it has been             Rule 1.5(t) and has the same meaning as is set forth
                                              Permanent Rule 11.24, Which Sets                                                                              in Regulation NMS Rule 600(b)(58). The terms
                                                                                                      successful in its stated goal of providing            Protected NBB and Protected NBO are defined in
                                              Forth the Exchange’s Pilot Retail Price                 price improvement opportunities to                    BYX Rule 1.5(s). The Protected NBB is the best-
                                              Improvement Program                                     retail investors. The analysis conducted              priced protected bid and the Protected NBO is the
                                                                                                                                                            best-priced protected offer. Generally, the Protected
                                              August 13, 2018.                                        by the Exchange shows that retail                     NBB and Protected NBO and the national best bid
                                                 Pursuant to Section 19(b)(1) of the                  investors have been provided a total of               (‘‘NBB’’) and national best offer (‘‘NBO’’, together
                                              Securities Exchange Act of 1934 (the                    $4.5 million of price improvement                     with the NBB, the ‘‘NBBO’’) will be the same.
                                                                                                      during the 2.5 year period reviewed                   However, a market center is not required to route
                                              ‘‘Act’’),1 and Rule 19b–4 thereunder,2                                                                        to the NBB or NBO if that market center is subject
                                              notice is hereby given that on July 30,                 from January 2016 through June 2018. In               to an exception under Regulation NMS Rule
                                              2018, Cboe BYX Exchange, Inc. (the                      addition, the Exchange’s analysis shows               611(b)(1) or if such NBB or NBO is otherwise not
                                              ‘‘Exchange’’ or ‘‘BYX’’) filed with the                 that the Program has provided these                   available for an automatic execution. In such case,
                                                                                                                                                            the Protected NBB or Protected NBO would be the
                                              Securities and Exchange Commission                      benefits to retail investors without                  best-priced protected bid or offer to which a market
                                              (‘‘Commission’’) the proposed rule                      having an adverse impact on the broader               center must route interest pursuant to Regulation
                                              change as described in Items I, II and III
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                                                                                                      market. The proposal provides an                      NMS Rule 611.
                                              below, which Items have been prepared                   analysis of the economic benefits to
                                                                                                                                                               8 See RPI Approval Order, supra note 3 at 71652.
                                                                                                                                                               9 Id.
                                              by the Exchange. The Commission is                      retail investors and the marketplace                     10 See Securities Exchange Act Release Nos.
                                              publishing this notice to solicit                       flowing from operation of the Program,                71249 (January 7, 2014), 79 FR 2229 (January 13,
                                                19 17
                                                                                                      which the Exchange believes supports                  2014) (SR–BYX–2014–001); 74111 (January 22,
                                                      CFR 200.30–3(a)(12).                                                                                  2015), 80 FR 4598 (January 28, 2015) (SR–BYX–
                                                1 15 U.S.C. 78s(b)(1).
                                                                                                      making the Program permanent.
                                                                                                                                                            2015–05); 76965 (January 22, 2016), 81 FR 4682
                                                2 17 CFR 240.19b–4.                                                                                         (January 27, 2016) (SR–BYX–2016–01); 78180 (June



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                                                                             Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices                                                41129

                                              The pilot period for the Program is                      from a natural person and is submitted                     Orders are typically submitted with an
                                              scheduled to expire on July 31, 2018.11                  to the Exchange by a Retail Member                         offset. The offset is a predetermined
                                              The Exchange believes that the Program                   Organization, provided that no change                      amount by which the User is willing to
                                              has been successful in its goal of                       is made to the terms of the order with                     improve the Protected NBBO, subject to
                                              providing price improvement to Retail                    respect to price or side of market and                     a ceiling or floor price. The ceiling or
                                              Orders, and is therefore proposing to                    the order does not originate from a                        floor price is the amount above or below
                                              amend Rule 11.24 to make this pilot                      trading algorithm or any other                             which the User does not wish to trade.
                                              permanent so that retail investors can                   computerized methodology. A Retail                         RPI Orders in their entirety (the buy or
                                              continue to reap the benefits of the                     Order is an Immediate or Cancel                            sell interest, the offset, and the ceiling
                                              Program.12                                               (‘‘IOC’’) Order and shall operate in                       or floor) will remain non-displayed. The
                                                 The SEC approved the Program on a                     accordance with Rule 11.24(f). A Retail                    Exchange also allows Users to enter RPI
                                              pilot basis, in part, because it                         Order may be an odd lot, round lot, or                     Orders that establish the exact limit
                                              concluded, ‘‘the Program is reasonably                   mixed lot.                                                 price, which is similar to a non-
                                              designed to benefit retail investors by                     Finally, the term ‘‘Retail Price                        displayed limit order currently accepted
                                              providing price improvement to retail                    Improvement Order’’ or ‘‘RPI Order’’                       by the Exchange except the Exchange
                                              order flow.’’ 13 The Commission also                     consists of non-displayed interest on the                  accepts sub-penny limit prices on RPI
                                              found that ‘‘while the Program would                     Exchange that is priced better than the                    Orders in increments of $0.001. The
                                              treat retail order flow differently from                 Protected NBB or Protected NBO by at                       Exchange monitors whether RPI buy or
                                              order flow submitted by other market                     least $0.001 and that is identified as                     sell interest, adjusted by any offset and
                                              participants, such segmentation would                    such (‘‘RPI interest’’).16 The System 17                   subject to the ceiling or floor price, is
                                              not be inconsistent with Section 6(b)(5)                 will monitor whether RPI buy or sell                       eligible to interact with incoming Retail
                                              of the Act, which requires that the rules                interest, adjusted by any offset and                       Orders.
                                              of an exchange are not designed to                       subject to the ceiling or floor price, is                     Users and RMOs may enter odd lots,
                                              permit unfair discrimination.’’ 14 As the                eligible to interact with incoming Retail                  round lots or mixed lots as RPI Orders
                                              SEC acknowledged, the retail order                       Orders. An RPI Order remains non-                          and as Retail Orders respectively. As
                                              segmentation was designed to create                      displayed in its entirety (the buy or sell                 discussed below, RPI Orders are ranked
                                              greater retail order flow competition and                interest, the offset, and the ceiling or                   and allocated according to price and
                                              thereby increase the amount of this flow                 floor). An RPI Order may also be entered                   time of entry into the System consistent
                                              to transparent and well-regulated                        in a sub-penny increment with an                           with Rule 11.12 and therefore without
                                              exchanges. This would help to ensure                     explicit limit price. Any User is                          regard to whether the size entered is an
                                              that retail investors benefit from                       permitted, but not required, to submit                     odd lot, round lot or mixed lot amount.
                                              competitive price improvement that                       RPI Orders. An RPI Order may be an                         Similarly, Retail Orders interact with
                                              exchange-based liquidity providers                       odd lot, round lot or mixed lot.                           RPI Orders according to the Priority and
                                              provide. As discussed below, the                            The price of an RPI Order is                            Allocation rules of the Program and
                                              Exchange believes that the Program data                  determined by a User’s entry of the                        without regard to whether they are odd
                                                                                                       following into the Exchange: (1) RPI buy                   lots, round lots or mixed lots. Finally,
                                              supports the conclusion that it provides
                                                                                                       or sell interest; (2) an offset, if any; and               Retail Orders are designated as Type 1
                                              valuable price [sic] to retail investors
                                                                                                       (3) a ceiling or floor price. RPI Orders                   or Type 2 without regard to the size of
                                              that they may not otherwise have
                                                                                                       submitted with an offset are similar to                    the order.
                                              received, and that it is therefore
                                                                                                       other peg orders available to Users in                        RPI Orders interact with Retail Orders
                                              appropriate to make the Program
                                                                                                       that the order is tied or ‘‘pegged’’ to a                  as follows. Assume a User enters RPI
                                              permanent.
                                                                                                       certain price, and would have its price                    sell interest with an offset of $0.001 and
                                              Definitions                                              automatically set and adjusted upon                        a floor of $10.10 while the Protected
                                                The Exchange adopted the following                     changes in the Protected NBBO, both                        NBO is $10.11. The RPI Order could
                                              definitions under Rule 11.24(a):                         upon entry and any time thereafter. RPI                    interact with an incoming buy Retail
                                                First, the term ‘‘Retail Member                        buy or sell interest is typically entered                  Order at $10.109. If, however, the
                                              Organization’’ is defined as a Member                    to track the Protected NBBO, that is, RPI                  Protected NBO was $10.10, the RPI
                                              (or a division thereof) that has been                                                                               Order could not interact with the Retail
                                              approved by the Exchange to submit
                                                                                                       orders meet the requirements of FINRA Rule                 Order because the price required to
                                                                                                       5320.03, including that the RMO maintains                  deliver the minimum $0.001 price
                                              Retail Orders.                                           supervisory systems to reconstruct, in a time-[sic]
                                                Second, the term ‘‘Retail Order’’ is                   sequenced manner, all Retail Orders that are               improvement ($10.099) would violate
                                              defined as an agency order or riskless                   entered on a riskless principal basis; and (ii) the        the User’s floor of $10.10. If a User
                                                                                                       RMO submits a report, contemporaneously with the           otherwise enters an offset greater than
                                              principal that meets the criteria of                     execution of the facilitated order, that identifies the    the minimum required price
                                              FINRA Rule 5320.03 15 that originates                    trade as riskless principal.
                                                                                                          16 Exchange systems prevent Retail Orders from          improvement and the offset would
                                              28, 2016), 81 FR 43306 (July 1, 2016) (SR–BYX–           interacting with RPI Orders if the RPI Order is not        produce a price that would violate the
                                              2016–15); 81368 (August 10, 2017), 82 FR 38960           priced at least $0.001 better than the Protected           User’s floor, the offset would be applied
                                              (August 16, 2017) (SR–BYX–2017–18).                      NBBO. The Exchange notes, however, that price              only to the extent that it respects the
                                                                                                       improvement of $0.001 would be a minimum
                                                 11 Concurrently with the filing of this proposed
                                                                                                       requirement and Users could enter RPI Orders that          User’s floor. By way of illustration,
                                              rule change, the Exchange is filing to extend the                                                                   assume RPI buy interest is entered with
                                                                                                       better the Protected NBBO by more than $0.001.
                                              current pilot period until the earlier of approval of
                                              the filing to make this rule permanent (i.e., this
                                                                                                       Exchange systems will accept RPI Orders without            an offset of $0.005 and a ceiling of
                                                                                                       a minimum price improvement value; however,                $10.112 while the Protected NBB is at
                                              proposed rule change) or December 31, 2018.
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                                                                                                       such interest will execute at its floor or ceiling price
                                                 12 The Program will continue to only apply to
                                                                                                       only if such floor or ceiling price is better than the     $10.11. The RPI Order could interact
                                              trades occurring at prices equal to or greater than      Protected NBBO by $0.001 or more.                          with an incoming sell Retail Order at
                                              $1.00 per share.                                            17 The ‘‘System’’ is defined in BYX Rule 1.5(aa)        $10.112, because it would produce the
                                                 13 See RPI Approval Order, supra note 3 at 71655.
                                                                                                       as ‘‘the electronic communications and trading             required price improvement without
                                                 14 Id.
                                                                                                       facility designated by the Board through which
                                                 15 FINRA Rule 5320.03 clarifies that an RMO may       securities orders of Users are consolidated for
                                                                                                                                                                  violating the User’s ceiling, but it could
                                              enter Retail Orders on a riskless principal basis,       ranking, execution and, when applicable, routing           not interact above the $10.112 ceiling.
                                              provided that (i) the entry of such riskless principal   away.’’                                                    Finally, if a User enters an RPI Order


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                                              41130                          Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices

                                              without an offset (i.e., an explicitly                  definition of a Retail Order. The RMO                 The RPI Panel reviews the facts and
                                              priced limit order), the RPI Order will                 must (i) obtain an annual written                     render [sic] a decision within the time
                                              interact with Retail Orders at the level                representation, in a form acceptable to               frame prescribed by the Exchange. The
                                              of the User’s limit price as long as the                the Exchange, from each broker-dealer                 RPI Panel may overturn or modify an
                                              minimum required price improvement                      customer that sends it orders to be                   action taken by the Exchange and all
                                              is produced. Accordingly, if RPI sell                   designated as Retail Orders that entry of             determinations by the RPI Panel
                                              interest is entered with a limit price of               such orders as Retail Orders will be in               constitute final action by the Exchange
                                              $10.098 and no offset while the                         compliance with the requirements of                   on the matter at issue.
                                              Protected NBO is $10.11, the RPI Order                  this rule, and (ii) monitor whether its
                                                                                                                                                            Retail Liquidity Identifier
                                              could interact with the Retail Order at                 broker-dealer customers’ Retail Order
                                              $10.098, producing $0.012 of price                      flow continues to meet the applicable                    Under Rule 11.24(e), the Exchange
                                              improvement. The System will not                        requirements.19                                       disseminates an identifier when RPI
                                              cancel RPI interest when it is not                         If the Exchange disapproves the                    interest priced at least $0.001 better
                                              eligible to interact with incoming Retail               application, the Exchange provides a                  than the Exchange’s Protected Bid or
                                              Orders; such RPI interest will remain in                written notice to the Member. The                     Protected Offer for a particular security
                                              the System and may become eligible                      disapproved applicant could appeal the                is available in the System (‘‘Retail
                                              again to interact with Retail Orders                    disapproval by the Exchange as                        Liquidity Identifier’’). The Retail
                                              depending on the Protected NBBO.                        provided in Rule 11.24(d), and/or                     Liquidity Identifier is disseminated
                                                                                                      reapply for RMO status 90 days after the              through consolidated data streams (i.e.,
                                              RMO Qualifications and Application                      disapproval notice is issued by the                   pursuant to the Consolidated Tape
                                              Process                                                 Exchange. An RMO also could                           Association Plan/Consolidated
                                                 Under Rule 11.24(b), any Member                      voluntarily withdraw from such status                 Quotation Plan, or CTA/CQ, for Tape A
                                              may qualify as an RMO if it conducts a                  at any time by giving written notice to               and Tape B securities, and the Nasdaq
                                              retail business or routes retail orders on              the Exchange.                                         UTP Plan for Tape C securities) as well
                                              behalf of another broker-dealer. For                                                                          as through proprietary Exchange data
                                                                                                      Failure of RMO To Abide by Retail                     feeds.20 The Retail Liquidity Identifier
                                              purposes of Rule 11.24(b), conducting a                 Order Requirements
                                              retail business shall include carrying                                                                        reflects the symbol and the side (buy or
                                              retail customer accounts on a fully                        Rule 11.24(c) addresses an RMO’s                   sell) of the RPI interest, but does not
                                              disclosed basis. Any Member that                        failure to abide by Retail Order                      include the price or size of the RPI
                                              wishes to obtain RMO status is required                 requirements. If an RMO designates                    interest. In particular, CQ and UTP
                                              to submit: (1) An application form; (2)                 orders submitted to the Exchange as                   quoting outputs include a field for codes
                                              supporting documentation sufficient to                  Retail Orders and the Exchange                        related to the Retail Liquidity Identifier.
                                                                                                      determines, in its sole discretion, that              The codes indicate RPI interest that is
                                              demonstrate the retail nature and
                                                                                                      those orders fail to meet any of the                  priced better than the Exchange’s
                                              characteristics of the applicant’s order
                                                                                                      requirements of Retail Orders, the                    Protected Bid or Protected Offer by at
                                              flow; and (3) an attestation, in a form
                                                                                                      Exchange may disqualify a Member                      least the minimum level of price
                                              prescribed by the Exchange, that
                                                                                                      from its status as an RMO. When                       improvement as required by the
                                              substantially all orders submitted as
                                                                                                      disqualification determinations are                   Program.
                                              Retail Orders will qualify as such under
                                                                                                      made, the Exchange provides a written
                                              Rule 11.24.18 The Exchange shall notify                                                                       Retail Order Designations
                                                                                                      disqualification notice to the Member. A
                                              the applicant of its decision in writing.                                                                        Under Rule 11.24(f), an RMO can
                                                                                                      disqualified RMO may appeal the
                                                 An RMO is required to have written                   disqualification as provided in Rule                  designate how a Retail Order would
                                              policies and procedures reasonably                      11.24(d) and/or reapply for RMO status                interact with available contra-side
                                              designed to assure that it will only                    90 days after the disqualification notice             interest as follows:
                                              designate orders as Retail Orders if all                is issued by the Exchange.                               A Type 1-designated Retail Order will
                                              requirements of a Retail Order are met.                                                                       interact with available contra-side RPI
                                              Such written policies and procedures                    Appeal of Disapproval or                              Orders and other price improving
                                              must require the Member to (i) exercise                 Disqualification                                      contra-side interest but will not interact
                                              due diligence before entering a Retail                     Rule 11.24(d) provides appeal rights               with other available contra-side interest
                                              Order to assure that entry as a Retail                  to Members. If a Member disputes the                  in the System that is not offering price
                                              Order is in compliance with the                         Exchange’s decision to disapprove it as               improvement or route to other markets.
                                              requirements of this rule, and (ii)                     an RMO under Rule 11.24(b) or                         The portion of a Type 1-designated
                                              monitor whether orders entered as                       disqualify it under Rule 11.24(c), such               Retail Order that does not execute
                                              Retail Orders meet the applicable                       Member (‘‘appellant’’) may request,                   against contra-side RPI Orders or other
                                              requirements. If the RMO represents                     within five business days after notice of             price improving liquidity will be
                                              Retail Orders from another broker-dealer                the decision is issued by the Exchange,               immediately and automatically
                                              customer, the RMO’s supervisory                         that the Retail Price Improvement                     cancelled.
                                              procedures must be reasonably designed                  Program Panel (‘‘RPI Panel’’) review the                 A Type 2-designated Retail Order will
                                              to assure that the orders it receives from              decision to determine if it was correct.              interact first with available contra-side
                                              such broker-dealer customer that it                        The RPI Panel consists of the                      RPI Orders and other price improving
                                              designates as Retail Orders meet the                    Exchange’s Chief Regulatory Officer                   liquidity and then any remaining
                                                                                                      (‘‘CRO’’), or a designee of the CRO, and
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                                                 18 For example, a prospective RMO could be                                                                   20 The Exchange notes that the Retail Liquidity
                                                                                                      two officers of the Exchange designated
                                              required to provide sample marketing literature,                                                              Identifier for Tape A and Tape B securities are
                                              website screenshots, other publicly disclosed           by the Chief Operating Officer (‘‘COO’’).             disseminated pursuant to the CTA/CQ Plan. The
                                              materials describing the retail nature of their order                                                         identifier is also available through the consolidated
                                              flow, and such other documentation and                    19 The Exchange or another self-regulatory          public market data stream for Tape C securities. The
                                              information as the Exchange may require to obtain       organization on behalf of the Exchange will review    processor for the Nasdaq UTP quotation stream
                                              reasonable assurance that the applicant’s order flow    an RMO’s compliance with these requirements           disseminates the Retail Liquidity Identifier and
                                              would meet the requirements of the Retail Order         through an exam-based review of the RMO’s             analogous identifiers from other market centers that
                                              definition.                                             internal controls.                                    operate programs similar to the RPI Program.



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                                                                             Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices                                                       41131

                                              portion of the Retail Order will be                     because it is the next best priced bid.                  Rationale for Making the Program Pilot
                                              executed as an Immediate-or-Cancel                      User 1 then receives an execution for                    Permanent
                                              (‘‘IOC’’) Order pursuant to Rule                        400 of its bid for 500 at $10.015, at                       The Exchange established the
                                              11.9(b)(1). A Type 2-designated Retail                  which point the entire size of the Retail                Program in an attempt to attract retail
                                              Order can either be submitted as a BYX                  Order to sell 1,000 is depleted.                         order flow to the Exchange by providing
                                              Only Order 21 or as an order eligible for                                                                        an opportunity for price improvement to
                                              routing pursuant to Rule 11.13(a)(2).                   Eligible Securities
                                                                                                                                                               such order flow. The Exchange believes
                                              Priority and Order Allocation                              All Regulation NMS securities traded                  that the Program promotes transparent
                                                 Under Rule 11.24(g), competing RPI                   on the Exchange are eligible for                         competition for retail order flow by
                                              Orders in the same security are ranked                  inclusion in the RPI Program. The                        allowing Exchange members to submit
                                              and allocated according to price then                   Exchange limits the Program to trades                    RPI Orders to interact with Retail
                                              time of entry into the System.                          occurring at prices equal to or greater                  Orders. Such competition promotes
                                              Executions occur in price/time priority                 than $1.00 per share. Toward that end,                   efficiency by facilitating the price
                                              in accordance with Rule 11.12. Any                      Exchange trade validation systems                        discovery process and generating
                                              remaining unexecuted RPI interest                       prevent the interaction of RPI buy or sell               additional investor interest in trading
                                              remains available to interact with other                interest (adjusted by any offset) and                    securities, thereby promoting capital
                                              incoming Retail Orders if such interest                 Retail Orders at a price below $1.00 per                 formation and retail investment
                                              is at an eligible price. Any remaining                  share.22 For example, if there is RPI buy                opportunities. The Program will
                                              unexecuted portion of the Retail Order                                                                           continue to be limited to trades
                                                                                                      interest tracking the Protected NBB at
                                              will cancel or execute in accordance                                                                             occurring at prices equal to or greater
                                                                                                      $0.99 with an offset of $0.001 and a
                                              with Rule 11.24(f). The following                                                                                than $1.00 per share.
                                                                                                      ceiling of $1.02, Exchange trade                            In accordance with its filing
                                              example illustrates this method:                        validation systems would prevent the                     establishing the pilot, the Exchange did
                                              • Protected NBBO for security ABC is                    execution of the RPI Order at $0.991                     ‘‘produce data throughout the pilot,
                                                 $10.00–$10.05                                        with a sell Retail Order with a limit of
                                              • User 1 enters an RPI Order to buy                                                                              which will include statistics about
                                                                                                      $0.99. However, if the Retail Order was                  participation, the frequency and level of
                                                 ABC at $10.015 for 500                               Type 2 as defined the Program,23 it
                                              • User 2 then enters an RPI Order to                                                                             price improvement provided by the
                                                                                                      would be able to interact at $0.99 with                  Program, and any effects on the broader
                                                 buy ABC at $10.02 for 500
                                              • User 3 then enters an RPI Order to                    liquidity outside the Program in the                     market structure.’’ 25 The Exchange has
                                                 buy ABC at $10.035 for 500                           Exchange’s order book. In addition to                    fulfilled this obligation through the
                                                                                                      facilitating an orderly 24 and                           reports and assessments it has
                                                 An incoming Retail Order to sell ABC
                                              for 1,000 executes first against User 3’s               operationally intuitive program, the                     submitted to the Commission since the
                                              bid for 500 at $10.035, because it is the               Exchange believes that limiting the                      implementation of the pilot Program.
                                              best priced bid, then against User 2’s bid              Program to trades equal to or greater                    The Exchange believes that the data
                                              for 500 at $10.02, because it is the next               than $1.00 per share enabled it better to                provided to the Commission to date, as
                                              best priced bid. User 1 is not filled                   focus its efforts to monitor price                       well as the data being provided in this
                                              because the entire size of the Retail                   competition and to assess any                            proposed rule change, support the
                                              Order to sell 1,000 is depleted. The                    indications that data disseminated                       continued operation of the Program on
                                              Retail Order executes against RPI Orders                under the Program is potentially                         a permanent basis.
                                              in price/time priority.                                 disadvantaging retail orders. As part of                    The SEC stated in the RPI Approval
                                                 However, assume the same facts                       that review, the Exchange produced                       Order that the Program could promote
                                              above, except that User 2’s RPI Order to                data throughout the pilot, which                         competition for retail order flow among
                                              buy ABC at $10.02 is for 100. The                       included statistics about participation,                 execution venues, and that this could
                                              incoming Retail Order to sell 1,000                                                                              benefit retail investors by creating
                                                                                                      the frequency and level of price
                                              executes first against User 3’s bid for                                                                          additional well-regulated and
                                                                                                      improvement provided by the Program,
                                              500 at $10.035, because it is the best                                                                           transparent price improvement
                                                                                                      and any effects on the broader market
                                              priced bid, then against User 2’s bid for                                                                        opportunities for marketable retail order
                                                                                                      structure.                                               flow, most of which is currently
                                              100 at $10.02, because it is the next best
                                              priced bid. User 1 then receives an                                                                              executed in the Over-the-Counter
                                                                                                         22 As discussed above, the price of an RPI is
                                              execution for 400 of its bid for 500 at                                                                          (‘‘OTC’’) markets without ever reaching
                                                                                                      determined by a User’s entry of buy or sell interest,
                                              $10.015, at which point the entire size                 an offset (if any) and a ceiling or floor price. RPI     a public exchange.26 The Exchange
                                              of the Retail Order to sell 1,000 is                    sell or buy interest typically tracks the Protected      believes that it has achieved its goal of
                                              depleted.                                               NBBO.                                                    attracting retail order flow to the
                                                 As a final example, assume the same
                                                                                                         23 Type 2 Retail Orders are treated as IOC orders
                                                                                                                                                               Exchange. As the Exchange’s analysis of
                                                                                                      that execute against displayed and non-displayed         the Program data below demonstrates,
                                              facts as above, except that User 3’s order              liquidity in the Exchange’s order book where there
                                              was not an RPI Order to buy ABC at                      is no available liquidity in the Program. Type 2         there has been consistent retail investor
                                              $10.035, but rather, a non-displayed                    Retail Orders can either be designated as eligible for   interest in the Program, which has
                                              order to buy ABC at $10.03. The result                  routing or as BYX Only Orders, and thus non-             provided tangible price improvement to
                                                                                                      routable, as described above.                            those retail investors through a
                                              would be similar to the result                             24 Given the limitation, the Program would have
                                              immediately above, in that the incoming                                                                          competitive pricing process over the
                                                                                                      no impact on the minimum pricing increment for
                                                                                                                                                               course of the pilot. The data also
amozie on DSK3GDR082PROD with NOTICES1




                                              Retail Order to sell 1,000 executes first               orders priced less than $1.00 and therefore no effect
                                              against User 3’s bid for 500 at $10.03,                 on the potential of markets executing those orders       demonstrates that the Program had an
                                              because it is the best priced bid, then                 to lock or cross. In addition, the non-displayed         overall negligible impact on broader
                                                                                                      nature of the liquidity in the Program simply has        market quality outside of the Program.
                                              against User 2’s bid for 100 at $10.02,                 no potential to disrupt displayed, protected quotes.
                                                                                                      In any event, the Program would do nothing to
                                                                                                                                                               The Exchange has not received any
                                                21 A BYX Only Order is defined in BYX Rule            change the obligation of exchanges to avoid and
                                                                                                                                                                25 RPI   Approval Order, 77 FR at 71655.
                                              11.9(c)(4) and includes orders that are not eligible    reconcile locked and crossed markets under NMS
                                              for routing to other trading centers.                   Rule 610(d).                                              26 Id.




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                                              41132                         Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices

                                              complaints or negative feedback                         opportunity for retail investors to                   increased relative to prior months due
                                              concerning the Program.                                 receive price improvement. The                        to additional participation in the
                                                                                                      Exchange believes that the Program has                Program by market participants with
                                              I. Overall Analysis of the Program
                                                                                                      satisfied this goal, having provided a                retail order flow. The Exchange believes
                                                Brokers route retail orders to a wide                 total of $4.5 million of price                        that this supports permanent approval
                                              range of different trading systems. The                 improvement, or approximately                         of the pilot as retail investors continue
                                              Program offers a transparent and well-                  $153,000 per month, in the last 2.5                   to reap the benefits afforded by the
                                              regulated option, providing meaningful                  years. Furthermore, while the amount of               Program. The amount of monthly and
                                              competition and price improvement. As                   price improvement provided in the                     cumulative price improvement provided
                                              explained above, the purpose of the                     Program varies month to month, the                    in the Program is illustrated in Chart 1
                                              Program is to attract retail order flow to              amount of price improvement provided
                                                                                                                                                            below.
                                              the Exchange by providing an                            in recent months has generally




                                                Furthermore, Retail Order volume                      investors that participated in the                    Exchange therefore believes that the
                                              executed in the Program accounted for                   Program. In addition, the Exchange                    Program has demonstrated the
                                              between 0.86% and 2.32% of total BYX                    believes that the relatively modest                   effectiveness of a transparent, on-
                                              volume from January 2017 to June 2018,                  volume executed in the Program relative               exchange retail order price
                                              as shown in Chart 2 below, and between                  to total BYX volume and total                         improvement functionality,
                                              0.05% and 0.11% of total consolidated                   consolidated volume limits the potential              notwithstanding that the majority of
                                              volume, as shown in Chart 3 below.                      impact of the Program on broader                      retail volume is still traded off-
                                              Despite its size relative to total volume               market quality on the Exchange.27 The                 exchange.
                                              executed on the Exchange or the broader
                                                                                                        27 The Exchange has also performed an analysis
                                              market, the Program has continued to
                                                                                                      of the impact of the Program on other market          did not have a significant impact on market quality
                                              provide considerable price                              quality indicators, which found that the Program      in the broader market. See Section III below.
                                              improvement each month to retail
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                                                                                                                                                                                                                  EN17AU18.019</GPH>




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                                              41134                               Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices




                                                Retail Orders are routed by                                million shares from January 2016 to                   receive more than the minimum $0.001
                                              sophisticated brokers using systems that                     June 2018. Increased volatility in                    price improvement required of a
                                              seek the highest fill rates and amounts                      February 2018 likely contributed to the               liquidity providing RPI Order, with the
                                              of price improvement. These brokers                          increased Retail Order shares executed                monthly average price improvement
                                              have many choices of execution venues                        in the Program that month. Fill rates for             provided to Retail Orders ranging from
                                              for this order flow. When they choose to                     the majority of the period studied                    $0.0011–$0.0014 per share, and the
                                              route to the Program, they have                              ranged from 11%–19% with fill rates                   monthly effective/quoted spread ratio
                                              determined that it is the best                               declining below 10% starting in                       ranging from 0.77–0.90. The Exchange
                                              opportunity for fill rate and price                          December 2017, likely due to additional               believes that this data supports
                                              improvement at that time. As shown in                        participation in the Program that                     permanent approval of the Program as
                                              Table 1 below, Retail Order average                          resulted in a significant increase in the             this would allow retail investors to
                                              daily volume (‘‘ADV’’) executed in the                       Retail Order volume entered on the                    continue to execute their orders with
                                              Program averaged between 2 and 7                             Exchange. Retail Orders also continue to              price improvement in the Program.

                                                                                                     TABLE 1—SUMMARY STATISTICS ON THE PROGRAM
                                                                                                                                                                 Effective/
                                                                                   Retail shares      Retail orders       Effective             Quoted                                Price       Fill rate
amozie on DSK3GDR082PROD with NOTICES1




                                                           Date                                                                                                   quoted
                                                                                  executed ADV        placed ADV         spread BPS           spread BPS                           improvement      (%)
                                                                                                                                                                spread ratio

                                              Jan-16 ..........................        4,666,052             20,560                     19                22              0.89          $0.0011         16.09
                                              Feb-16 ..........................        4,083,670             18,025                     19                22              0.87           0.0011         16.10
                                              Mar-16 ..........................        3,474,997             15,103                     21                24              0.90           0.0011         17.50
                                              Apr-16 ..........................        3,216,923             14,126                     18                21              0.88           0.0011         19.23
                                                                                                                                                                                                                EN17AU18.021</GPH>




                                              May-16 .........................         2,912,160             12,980                     18                21              0.87           0.0011         19.73



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                                                                                               Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices                                                      41135

                                                                                                    TABLE 1—SUMMARY STATISTICS ON THE PROGRAM—Continued
                                                                                                                                                                              Effective/
                                                                                            Retail shares       Retail orders        Effective               Quoted                                 Price                Fill rate
                                                              Date                                                                                                             quoted
                                                                                           executed ADV         placed ADV          spread BPS             spread BPS                            improvement               (%)
                                                                                                                                                                             spread ratio

                                              Jun-16 ..........................                   3,144,024            13,924                      16                18                 0.89             0.0011                19.65
                                              Jul-16 ...........................                  4,009,916            17,257                      18                20                 0.90             0.0011                19.97
                                              Aug-16 ..........................                   3,906,624            17,135                      19                21                 0.90             0.0011                17.66
                                              Sep-16 ..........................                   4,887,221            20,708                      17                19                 0.88             0.0011                17.28
                                              Oct-16 ..........................                   3,595,900            15,922                      24                27                 0.90             0.0012                17.19
                                              Nov-16 ..........................                   2,273,885             8,972                      29                33                 0.88             0.0013                12.71
                                              Dec-16 ..........................                   3,192,065            12,768                      36                41                 0.88             0.0013                14.82
                                              Jan-17 ..........................                   3,122,721            16,951                      31                36                 0.88             0.0013                16.09
                                              Feb-17 ..........................                   3,262,046            21,151                      31                35                 0.88             0.0013                14.71
                                              Mar-17 ..........................                   3,068,930            20,921                      33                38                 0.88             0.0014                13.85
                                              Apr-17 ..........................                   2,680,646            18,518                      34                38                 0.88             0.0013                13.97
                                              May-17 .........................                    3,407,603            23,437                      29                33                 0.87             0.0013                16.88
                                              Jun-17 ..........................                   7,896,833            46,398                      28                32                 0.88             0.0013                17.07
                                              Jul-17 ...........................                  5,966,961            36,717                      27                31                 0.88             0.0012                16.43
                                              Aug-17 ..........................                   6,467,615            38,608                      23                26                 0.88             0.0013                16.24
                                              Sep-17 ..........................                   5,237,243            33,314                      27                31                 0.87             0.0013                15.76
                                              Oct-17 ..........................                   5,702,759            33,578                      34                40                 0.84             0.0012                16.77
                                              Nov-17 ..........................                   4,427,779            62,352                      33                40                 0.83             0.0012                11.61
                                              Dec-17 ..........................                   5,131,502           142,810                      34                41                 0.84             0.0012                 8.30
                                              Jan-18 ..........................                   6,359,122           167,730                      29                36                 0.82             0.0013                 7.98
                                              Feb-18 ..........................                   7,230,230           227,980                      21                27                 0.79             0.0012                 8.29
                                              Mar-18 ..........................                   5,967,844           202,050                      23                31                 0.73             0.0011                 7.69
                                              Apr-18 ..........................                   4,976,642           178,009                      20                27                 0.75             0.0011                 7.90
                                              May-18 .........................                    4,367,743           169,085                      23                28                 0.83             0.0011                 7.02
                                              Jun-18 ..........................                   5,211,044           202,601                      23                31                 0.77             0.0011                 7.19



                                              II. Analysis of Retail Orders by Order                                 lot or fewer shares accounted for an                     orders account for a reasonable portion
                                              Size                                                                   average of approximately 56% of the                      (approximately 9%) of the shares
                                                                                                                     total number of Retail Orders entered.                   executed in the Program, as shown in
                                                 Tables 2, 3, and 4 show the                                         More than 73% of Retail Orders entered                   Table 4. The Program also receives a
                                              distribution of Retail Orders entered and                              were for 300 shares or less. Very large                  significantly large number of odd lot
                                              executed in the Program for the period                                 orders of more than 7,500 shares                         and single lot sized shares, which could
                                              from January 2017 to June 2018. As                                     accounted for only 1.9% of Retail                        be representative of retail marketable
                                              shown in Table 2, a majority of all Retail                             Orders submitted to the Program but                      orders from retail customers. By
                                              Orders entered to participate in the                                   accounted for a significant portion                      providing price improvement to these
                                              Program from January 2016 to June 2018                                 (approximately 40%) of the shares                        orders, retail customers would continue
                                              were for a round lot or fewer shares.                                  entered, as shown in Table 3. In
                                                                                                                                                                              to benefit from the Program.
                                              Specifically, Retail Orders of one round                               addition, despite lower fill rates, large
                                                                                                 TABLE 2—DISTRIBUTION OF RETAIL ORDERS ENTERED BY ORDER SIZE
                                                                 Date                              ≤100         101–300       301–500       501–1,000       1,001–2,000   2,001–4,000    4,001–7,500     7,500–15,000      >15,000
                                                                                                    (%)           (%)           (%)            (%)              (%)           (%)            (%)              (%)            (%)

                                              Jan-17 .....................................           44.90          18.45           8.60           10.12           6.84          4.90             3.10            1.93           1.16
                                              Feb-17 .....................................           47.80          18.04           8.21            9.61           6.27          4.41             2.82            1.75           1.09
                                              Mar-17 .....................................           47.60          17.76           8.16            9.67           6.36          4.60             3.01            1.78           1.05
                                              Apr-17 ......................................          48.82          17.30           7.88            9.48           6.19          4.61             2.88            1.82           1.02
                                              May-17 ....................................            52.39          18.69           7.13            8.13           5.21          3.81             2.40            1.41           0.83
                                              Jun-17 .....................................           55.32          13.89           6.67            8.08           5.35          4.47             3.24            2.03           0.95
                                              Jul-17 .......................................         53.18          15.12           7.32            8.85           5.86          4.12             2.71            1.79           1.05
                                              Aug-17 .....................................           49.41          16.53           8.00            9.65           6.33          4.49             2.75            1.76           1.08
                                              Sep-17 .....................................           49.88          16.51           7.94            9.50           6.27          4.49             2.71            1.71           1.00
                                              Oct-17 ......................................          49.92          16.17           7.73            9.45           6.49          4.67             2.76            1.79           1.02
                                              Nov-17 .....................................           61.01          17.66           5.65            6.33           3.86          2.54             1.39            0.98           0.59
                                              Dec-17 .....................................           61.48          18.49           6.31            6.65           3.40          1.97             0.93            0.49           0.28
                                              Jan-18 .....................................           61.20          17.06           6.54            7.14           3.84          2.25             1.06            0.58           0.33
                                              Feb-18 .....................................           66.63          15.79           5.61            5.80           2.98          1.70             0.80            0.43           0.25
                                              Mar-18 .....................................           66.11          15.39           5.82            6.22           3.25          1.76             0.78            0.41           0.24
                                              Apr-18 ......................................          67.41          15.45           5.40            6.06           3.10          1.43             0.59            0.34           0.22
                                              May-18 ....................................            66.09          16.12           5.43            6.30           3.41          1.47             0.59            0.35           0.24
                                              Jun-18 .....................................           66.29          16.17           5.59            6.14           3.20          1.46             0.59            0.35           0.22
amozie on DSK3GDR082PROD with NOTICES1




                                                                                                     TABLE 3—DISTRIBUTION OF SHARES ENTERED BY ORDER SIZE
                                                                                                   ≤100         101–300       301–500       501–1,000       1,001–2,000   2,001–4,000    4,001–7,500     7,500–15,000      >15,000
                                                                 Date                               (%)           (%)           (%)            (%)              (%)           (%)            (%)              (%)            (%)

                                              Jan-17 .....................................            2.15           3.45           3.27            7.03           9.15         12.48            14.61          17.00           30.87
                                              Feb-17 .....................................            2.36           3.64           3.40            7.30           9.16         12.29            14.52          16.80           30.53



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                                              41136                                            Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices

                                                                                               TABLE 3—DISTRIBUTION OF SHARES ENTERED BY ORDER SIZE—Continued
                                                                                                   ≤100         101–300       301–500       501–1,000      1,001–2,000   2,001–4,000    4,001–7,500     7,500–15,000   >15,000
                                                                 Date                               (%)           (%)           (%)            (%)             (%)           (%)            (%)              (%)         (%)

                                              Mar-17 .....................................            2.25           3.55           3.36            7.32          9.21         12.68            15.38          16.92       29.33
                                              Apr-17 ......................................           2.36           3.54           3.32            7.32          9.17         13.00            14.92          17.45       28.91
                                              May-17 ....................................             3.44           4.59           3.60            7.51          9.25         12.92            15.02          16.32       27.35
                                              Jun-17 .....................................            1.89           2.89           2.92            6.64          8.44         13.27            17.56          20.05       26.34
                                              Jul-17 .......................................          1.98           3.18           3.22            7.24          9.17         12.23            14.73          18.29       29.96
                                              Aug-17 .....................................            1.92           3.36           3.39            7.59          9.57         12.76            14.33          17.21       29.87
                                              Sep-17 .....................................            2.15           3.49           3.43            7.55          9.70         13.15            14.55          17.27       28.70
                                              Oct-17 ......................................           1.97           3.34           3.30            7.41          9.91         13.48            14.54          17.90       28.16
                                              Nov-17 .....................................            6.28           5.19           3.86            7.92          9.53         12.10            12.18          16.22       26.72
                                              Dec-17 .....................................            9.96           7.34           5.96           11.51         11.24         12.70            11.15          11.31       18.83
                                              Jan-18 .....................................            8.56           6.29           5.64           11.27         11.49         13.17            11.61          12.18       19.79
                                              Feb-18 .....................................           11.33           7.16           6.01           11.31         11.12         12.42            10.99          11.30       18.37
                                              Mar-18 .....................................           11.06           6.96           6.10           12.00         11.88         12.69            10.62          10.82       17.88
                                              Apr-18 ......................................          12.30           7.46           5.95           12.51         12.19         11.17             8.89           9.73       19.80
                                              May-18 ....................................            12.14           7.50           5.74           12.40         12.76         11.08             8.53           9.67       20.17
                                              Jun-18 .....................................           12.39           7.77           6.12           12.60         12.60         11.42             8.76           9.89       18.45


                                                                                                    TABLE 4—DISTRIBUTION OF SHARES EXECUTED BY ORDER SIZE
                                                                                                   ≤100         101–300       301–500       501–1,000      1,001–2,000   2,001–4,000    4,001–7,500     7,500–15,000   >15,000
                                                                 Date                               (%)           (%)           (%)            (%)             (%)           (%)            (%)              (%)         (%)

                                              Jan-17 .....................................           11.39          14.06          10.40           18.41         15.88         12.34             8.41           5.26        3.86
                                              Feb-17 .....................................           13.96          15.27          10.48           17.77         14.54         11.44             7.82           5.15        3.60
                                              Mar-17 .....................................           14.14          14.99          10.15           17.53         14.74         11.80             8.15           5.02        3.48
                                              Apr-17 ......................................          14.69          14.83          10.01           17.80         14.84         11.55             7.85           5.00        3.42
                                              May-17 ....................................            17.86          18.10           9.98           16.46         13.17         10.48             6.94           4.23        2.78
                                              Jun-17 .....................................            9.74          11.25           8.91           16.71         14.58         14.86            12.03           7.97        3.95
                                              Jul-17 .......................................         10.37          12.33           9.91           18.84         16.17         12.75             8.96           6.56        4.11
                                              Aug-17 .....................................            9.39          12.34          10.01           18.97         16.70         13.36             8.77           6.15        4.31
                                              Sep-17 .....................................           10.60          12.93          10.22           18.87         16.28         13.00             8.56           5.74        3.79
                                              Oct-17 ......................................           9.40          12.40          10.16           19.36         17.12         13.45             8.58           5.86        3.66
                                              Nov-17 .....................................           12.42          13.48           9.27           16.56         15.84         13.24             7.98           6.63        4.56
                                              Dec-17 .....................................           14.98          15.80          10.29           16.77         14.92         11.67             6.98           5.04        3.55
                                              Jan-18 .....................................           14.27          14.96          10.28           17.53         15.27         11.90             7.12           5.16        3.50
                                              Feb-18 .....................................           16.74          15.75          10.78           17.05         14.27         11.08             6.48           4.57        3.30
                                              Mar-18 .....................................           17.27          15.97          10.58           16.87         13.81         10.51             6.66           4.63        3.70
                                              Apr-18 ......................................          17.12          15.58          10.24           16.30         13.60         10.04             6.71           5.37        5.03
                                              May-18 ....................................            18.24          16.29          10.18           15.89         12.80          9.80             6.25           5.25        5.31
                                              Jun-18 .....................................           18.93          17.28          10.59           16.16         12.96          9.64             5.66           4.95        3.84



                                                The Exchange also analyzed fill rates                                responding with quote depth when the                    therefore remained constant or
                                              across the different order size buckets                                contra side order is looking for a fill.                increased since November 2017 despite
                                              and found that while fill rates are higher                             While fill rates decreased starting in                  the lower overall fill rates for those
                                              for smaller orders as expected, large size                             November 2017, the Exchange believes                    months. The Exchange therefore
                                              orders are still able to access liquidity                              that this is due to new Retail Order flow               believes that the Program is an attractive
                                              and therefore receive price                                            being routed to the Program, rather than                option for market participants looking to
                                              improvement in the Program. Moreover,                                  a decrease in the available liquidity.                  fill Retail Orders with price
                                              overall fill rates indicate that market                                Monthly volume executed in the                          improvement.
                                              participants that provide liquidity are                                Program, as shown in Table 1, has
                                                                                                                                 TABLE 5—FILL RATES
                                                                                                   ≤100         101–300       301–500       501–1,000      1,001–2,000   2,001–4,000    4,001–7,500     7,500–15,000   >15,000
                                                                 Date                               (%)           (%)           (%)            (%)             (%)           (%)            (%)              (%)         (%)

                                              Jan-17 .....................................           85.19          65.62          51.13           42.16         27.93         15.91             9.26           4.98        2.01
                                              Feb-17 .....................................           87.21          61.69          45.31           35.83         23.36         13.69             7.92           4.51        1.73
                                              Mar-17 .....................................           87.04          58.53          41.87           33.20         22.18         12.89             7.34           4.11        1.65
                                              Apr-17 ......................................          86.90          58.46          42.12           33.97         22.59         12.40             7.35           4.00        1.65
                                              May-17 ....................................            87.53          66.54          46.75           36.99         24.03         13.69             7.80           4.38        1.71
                                              Jun-17 .....................................           87.78          66.50          52.07           42.98         29.48         19.12            11.70           6.78        2.56
                                              Jul-17 .......................................         85.99          63.63          50.52           42.77         28.96         17.12             9.99           5.89        2.25
                                              Aug-17 .....................................           79.61          59.74          48.02           40.59         28.33         17.00             9.94           5.81        2.34
                                              Sep-17 .....................................           77.55          58.32          46.98           39.39         26.44         15.58             9.27           5.24        2.08
                                              Oct-17 ......................................          80.19          62.29          51.71           43.82         28.97         16.73             9.90           5.49        2.18
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                                              Nov-17 .....................................           22.78          29.93          27.66           24.11         19.16         12.61             7.55           4.71        1.97
                                              Dec-17 .....................................           12.14          17.37          13.96           11.77         10.72          7.42             5.05           3.60        1.52
                                              Jan-18 .....................................           12.84          18.31          14.06           11.98         10.24          6.96             4.72           3.26        1.36
                                              Feb-18 .....................................           11.79          17.56          14.32           12.03         10.24          7.12             4.70           3.23        1.43
                                              Mar-18 .....................................           11.56          17.00          12.85           10.42          8.60          6.13             4.64           3.17        1.53
                                              Apr-18 ......................................          10.61          15.91          13.11            9.93          8.50          6.85             5.76           4.21        1.94
                                              May-18 ....................................            10.11          14.61          11.93            8.62          6.75          5.95             4.93           3.65        1.77
                                              Jun-18 .....................................           10.57          15.39          11.98            8.88          7.12          5.84             4.47           3.46        1.44




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                                                                                 Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices                                              41137

                                              III. Impact of the Program on Broader                        Program metrics over both 2017 and                        in the Program, (3) midpoint volume
                                              Market Quality                                               2018. Based on this analysis, which is                    executed is not correlated with effective
                                                 As shown in Charts 2 and 3 above,                         provided in Table 6 below, the                            spreads in the Program, which suggests
                                              Retail Order volume executed in the                          Exchange does not believe that the                        that market participants are not moving
                                              Program is a small percentage of both                        Program has had any significant impact                    midpoint liquidity from the regular
                                              total volume executed on the Exchange                        on broader market quality.                                market to instead receive price
                                              and total consolidated volume. While                            Specifically, the Exchange’s analysis                  improvement in the Program, and (4)
                                              the Program has better depth available                       shows that: (1) Inside size in the broader                displayed volume executed is not
                                              for Retail Orders, it does not                               market is not correlated with either RPI                  correlated with quoted spreads in the
                                              significantly affect the market volume of                    effective spreads or the percentage of                    Program, which suggest that market
                                              BYX. The average volume within the                           volume executed in the Program, which                     participants are not entering non-
                                              95th percentile is between 1.3% and                          suggests that market participants are not                 displayed retail price improving interest
                                              1.7%. With the Program volume mostly                         moving volume from the regular market                     in the Program as an alternative to
                                              below 2.5% of BYX volume, the                                to the Program as effective spreads                       displaying interest on an order book.
                                              Exchange does not believe that it is able                    narrow or volume executed in the                          The Exchange therefore believes that the
                                              to significantly impact BYX market                           Program increases; (2) effective spreads                  Program can continue on a permanent
                                              quality. Nevertheless, to test the impact                    in the broader market are not correlated                  basis—and thereby provide increased
                                              of the Program on broader market                             with the percentage of volume executed                    price improvement opportunities to
                                              quality, the Exchange reviewed the                           in the Program, which suggests that                       retail investors on a transparent well-
                                              correlation between metrics that are tied                    spreads are not widening as a result of                   regulated exchange—without degrading
                                              to overall market quality with relevant                      more Retail Order flow being executed                     market quality outside of the Program.

                                                                                             TABLE 6—BYX MARKET QUALITY CORRELATION ANALYSIS
                                                                                                                                                                                              Date

                                                                                                                                                                                       2017          2018

                                              Correlation   of   RPI   Effective Spread to Average Inside Size across all Equities Exchanges 28 .............................          ¥0.0145        ¥0.0096
                                              Correlation   of   RPI   Volume as a Percent of Total Volume to Average Inside Size across all Equities Exchanges                        ¥0.0217        ¥0.0056
                                              Correlation   of   RPI   Volume as a Percent of Total Volume to Average Effective Spread across all Venues .........                      0.1175         0.0134
                                              Correlation   of   RPI   Effective Spread to Total Midpoint Volume across all Venues .................................................   ¥0.1438        ¥0.1366
                                              Correlation   of   RPI   Quoted Spread to Total Protected Lit Volume across all Equities Exchanges ........................              ¥0.1221        ¥0.0999



                                              IV. Conclusion                                               Moreover, the Exchange believes that                        The Exchange believes that making
                                                 Based on the Exchange’s experience                        the data collected supports the                           the pilot permanent is consistent with
                                              in operating the Program, and the data                       conclusion that the Program did not                       these principles because the Program is
                                              provided here and during the duration                        have a negative impact on broader                         reasonably designed to attract retail
                                              of the pilot, the Exchange believes that                     market quality. Although the results of                   order flow to the exchange environment,
                                              the Program has been a positive                              the Program highlight the substantial                     while helping to ensure that retail
                                              experiment in attracting retail order                        advantages that broker-dealers retain                     investors benefit from the better price
                                              flow to a public exchange. The data                          when managing the benefits of retail                      that liquidity providers are willing to
                                              provided by the Exchange describes a                         order flow, the Exchange believes that                    give their orders. During the pilot
                                              valuable service that delivers                               the level of price improvement provided                   period, the Exchange has provided data
                                              considerable price improvement in a                          by the Program and the scant evidence                     and analysis to the Commission. The
                                              transparent and well-regulated                               that the Program negatively impacted                      Exchange believes that this data and
                                              environment. The Program represents                          the marketplace justifies making the                      analysis, as well as the further analysis
                                              just a fraction of retail orders, most of                    Program permanent.                                        provided in this filing, show that the
                                              which are executed off-exchange by a                                                                                   Program has provided the intended
                                              wide range of order handling services                        2. Statutory Basis                                        benefits to the market, and retail
                                              that have considerably more market                                                                                     investors in particular, and is therefore
                                                                                                             The Exchange believes the proposed                      consistent with the Act.
                                              share, and which operate pursuant to                         rule change is consistent with the
                                              different rules and regulatory                                                                                           Additionally, the Exchange believes
                                                                                                           requirements of Section 6(b) of the                       the proposed rule change is designed to
                                              requirements. The order flow the                             Act,29 in general, and Section 6(b)(5) of
                                              Program attracted to the Exchange                                                                                      facilitate transactions in securities and
                                                                                                           the Act,30 in particular, in that it is                   to remove impediments to, and perfect
                                              provided tangible price improvement to
                                                                                                           designed to remove impediments to and                     the mechanisms of, a free and open
                                              retail investors through a competitive
                                                                                                           perfect the mechanism of a free and                       market and a national market system
                                              and transparent pricing process
                                              unavailable in non-exchange venues. As                       open market and a national market                         because making the Program permanent
                                              such, despite relatively modest                              system, to promote just and equitable                     would allow the Exchange to continue
                                              volumes, the Exchange believes that the                      principles of trade, and, in general, to                  to attract retail order flow to a public
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                                              Program satisfied the twin goals of                          protect investors and the public interest                 exchange and allow such order flow to
                                              attracting retail order flow to the                          and not to permit unfair discrimination                   receive potential price improvement.
                                              Exchange and allowing such order flow                        between customers, issuers, brokers, or                   The data provided by the Exchange to
                                              to receive potential price improvement.                      dealers.                                                  the Commission staff demonstrates that
                                                                                                                                                                     the Program provided tangible price
                                                28 Inside size is the average bid or ask size when           29 15   U.S.C. 78f(b).                                  improvement to retail investors through
                                              the venue is at the NBB or NBO.                                30 15   U.S.C. 78f(b)(5).                               a competitive pricing process


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                                              41138                         Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Notices

                                              unavailable in non-exchange venues,                     proposed rule change reflects this                    public in accordance with the
                                              and otherwise had an insignificant                      competitive environment.                              provisions of 5 U.S.C. 552, will be
                                              impact on the broader market. The                                                                             available for website viewing and
                                                                                                      (C) Self-Regulatory Organization’s
                                              Exchange believes that making the                                                                             printing in the Commission’s Public
                                                                                                      Statement on Comments on the
                                              Program permanent would encourage                                                                             Reference Room, 100 F Street NE,
                                                                                                      Proposed Rule Change Received From
                                              the additional utilization of, and                                                                            Washington, DC 20549, on official
                                                                                                      Members, Participants or Others
                                              interaction with, the Exchange and                                                                            business days between the hours of
                                              provide retail customers with an                          The Exchange has neither solicited                  10:00 a.m. and 3:00 p.m. Copies of such
                                              additional venue for price discovery,                   nor received written comments on the                  filing will also be available for
                                              liquidity, competitive quotes, and price                proposed rule change.                                 inspection and copying at the principal
                                              improvement. For the same reasons, the                  III. Date of Effectiveness of the                     office of the Exchange. All comments
                                              Exchange believes that making the                       Proposed Rule Change and Timing for                   received will be posted without change.
                                              Program permanent would promote just                    Commission Action                                     Persons submitting comments are
                                              and equitable principles of trade and                                                                         cautioned that we do not redact or edit
                                              remove impediments to and perfect the                      Within 45 days of the date of                      personal identifying information from
                                              mechanism of a free and open market.                    publication of this notice in the Federal             comment submissions. You should
                                                                                                      Register or within such longer period (i)             submit only information that you wish
                                                 Finally, the Exchange also believes
                                                                                                      as the Commission may designate up to                 to make available publicly. All
                                              that it is subject to significant
                                                                                                      90 days of such date if it finds such                 submissions should refer to File No. SR-
                                              competitive forces, as described below
                                                                                                      longer period to be appropriate and                   CboeBYX–2018–014 and should be
                                              in the Exchange’s statement regarding
                                                                                                      publishes its reasons for so finding or               submitted on or before September 7,
                                              the burden on competition. For all of
                                                                                                      (ii) as to which the Exchange consents,               2018.
                                              these reasons, the Exchange believes
                                                                                                      the Commission will: (a) By order
                                              that the proposed rule change is                                                                                For the Commission, by the Division of
                                                                                                      approve or disapprove such proposed
                                              consistent with the Act.                                                                                      Trading and Markets, pursuant to delegated
                                                                                                      rule change, or (b) institute proceedings
                                                                                                                                                            authority.31
                                              (B) Self-Regulatory Organization’s                      to determine whether the proposed rule
                                                                                                                                                            Robert W. Errett,
                                              Statement on Burden on Competition                      change should be disapproved.
                                                                                                                                                            Deputy Secretary.
                                                 The Exchange does not believe that                   IV. Solicitation of Comments                          [FR Doc. 2018–17736 Filed 8–16–18; 8:45 am]
                                              the proposed rule change will result in                   Interested persons are invited to                   BILLING CODE 8011–01–P
                                              any burden on competition that is not                   submit written data, views and
                                              necessary or appropriate in furtherance                 arguments concerning the foregoing,
                                              of the purposes of the Act. The                         including whether the proposal is                     SMALL BUSINESS ADMINISTRATION
                                              Exchange believes that making the                       consistent with the Act. Comments may
                                              Program permanent would continue to                     be submitted by any of the following                  [Disaster Declaration #15567 and #15568;
                                              promote competition for retail order                    methods:                                              HAWAII Disaster Number HI–00049]
                                              flow among execution venues and
                                              contribute to the public price discovery                Electronic Comments                                   Presidential Declaration Amendment of
                                              process. The Exchange believes that the                   • Use the Commission’s internet                     a Major Disaster for the State of Hawaii
                                              data supplied to the Commission, and                    comment form (http://www.sec.gov/                     AGENCY: U.S. Small Business
                                              experience gained over the life of the                  rules/sro.shtml); or                                  Administration.
                                              pilot, have demonstrated that the                         • Send an email to rule-comments@
                                                                                                                                                            ACTION: Amendment 1.
                                              Program creates price improvement                       sec.gov. Please include File No. SR–
                                              opportunities for retail orders that are                CboeBYX–2018–014 on the subject line.                 SUMMARY:   This is an amendment of the
                                              equal to what would be provided under                                                                         Presidential declaration of a major
                                                                                                      Paper Comments
                                              OTC internalization arrangements,                                                                             disaster for the State of Hawaii (FEMA–
                                              thereby benefiting retail investors and                   • Send paper comments in triplicate                 4366–DR), dated 06/14/2018.
                                              increasing competition between                          to Secretary, Securities and Exchange                   Incident: Kilauea Volcanic Eruption
                                              execution venues. The Exchange also                     Commission, 100 F Street NE,                          and Earthquakes.
                                              believes that making the Program                        Washington, DC 20549–1090.                              Incident Period: 05/03/2018 and
                                              permanent will promote competition                      All submissions should refer to File No.              continuing.
                                              between execution venues operating                      SR–CboeBYX–2018–014. This file
                                              their own retail liquidity programs.                    number should be included on the                      DATES: Issued on 06/14/2018.
                                              Such competition will lead to                           subject line if email is used. To help the              Physical Loan Application Deadline
                                              innovation within the market, thereby                   Commission process and review your                    Date: 09/12/2018.
                                              increasing the quality of the national                  comments more efficiently, please use                   Economic Injury (EIDL) Loan
                                              market system. Finally, the Exchange                    only one method. The Commission will                  Application Deadline Date: 03/14/2019.
                                              notes that it operates in a highly                      post all comments on the Commission’s                 ADDRESSES: Submit completed loan
                                              competitive market in which market                      internet website (http://www.sec.gov/                 applications to: U.S. Small Business
                                              participants can easily direct their                    rules/sro.shtml). Copies of the                       Administration, Processing and
                                              orders to competing venues, including                   submission, all subsequent                            Disbursement Center, 14925 Kingsport
                                              off-exchange venues. In such an                         amendments, all written statements                    Road, Fort Worth, TX 76155.
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                                              environment, the Exchange must                          with respect to the proposed rule                     FOR FURTHER INFORMATION CONTACT: A
                                              continually review, and consider                        change that are filed with the                        Escobar, Office of Disaster Assistance,
                                              adjusting the services it offers and the                Commission, and all written                           U.S. Small Business Administration,
                                              requirements it imposes to remain                       communications relating to the                        409 3rd Street SW, Suite 6050,
                                              competitive with other U.S. equity                      proposed rule change between the                      Washington, DC 20416, (202) 205–6734.
                                              exchanges. For the reasons described                    Commission and any person, other than
                                              above, the Exchange believes that the                   those that may be withheld from the                     31 17   CFR 200.30–3(a)(12).



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Document Created: 2018-08-17 03:25:56
Document Modified: 2018-08-17 03:25:56
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 41128 

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