83 FR 62928 - Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Directed Market Makers and Primary Market Makers

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 234 (December 6, 2018)

[Federal Register Volume 83, Number 234 (Thursday, December 6, 2018)]
[Notices]
[Pages 62928-62930]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-26512]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84697; File No. SR-CboeEDGX-2018-057]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Directed Market Makers and Primary Market Makers

November 30, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 27, 2018, Cboe EDGX Exchange, Inc. (``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 proposes to amend its rules relating to Directed 
Market Makers and Primary Market Makers.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend its rules related to Directed Market 
Makers and Primary Market Makers. Particularly, the Exchange proposes 
to (1) rename ``Directed Market Makers'' and ``Primary Market Makers'', 
(2) clarify the applicable participation entitlements when a market 
participation is both a Directed Market Maker and Primary Market Maker, 
and (3) amend the definition of small size orders.
    The Exchange first proposes to update the names of ``Directed 
Market Makers'' and ``Primary Market Makers''. Specifically, the 
Exchange proposes to replace all references to ``Directed Market 
Makers'' to ``Preferred Market Makers'' (or ``PMMs'') and make a 
corresponding change to replace references to ``Directed Orders'' to 
``Preferred Orders.'' The Exchange also proposes to replace all 
references to ``Primary Market Makers'' to ``Designated Primary Market 
Makers'' (or ``DPMs''). The Exchange notes the proposed name changes 
conforms its terminology with respect to these types of Market Makers 
to the terminology used by its affiliated exchange, Cboe Options, for 
similar market participants.\3\ The Exchange notes that Directed Market 
Makers and Primary Market Makers will be referred to herein as ``PMMs'' 
and ``DPMs'', respectively.
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    \3\ See e.g., Cboe Exchange, Inc.'s (``Cboe Options'') Rules 
8.13 and 8.80.
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    Next, the Exchange proposes to provide in the rules which 
participation entitlement applies in the event an order is preferred to 
a DPM (i.e., the DPM is also the PMM) and both PMM and DPM 
participation entitlements are in effect. Although not explicitly 
specified in the rules, currently, if a DPM is also the PMM, the PMM 
entitlements apply. The Exchange proposes to expressly provide under 
Rule 21.18(h)(1) that, going forward, if the DPM is also a PMM with 
respect to an incoming order, that PMM/DPM will be treated as a DPM and 
the DPM participation entitlements under paragraph (g) of Rule 21.8 
will apply to that order. The Exchange believes that the proposed rule 
change is appropriate given a DPM's heightened quoting obligations.\4\ 
Put another way, the Exchange believes that a DPM that is preferred on 
an order should not be subject to a potentially lesser entitlement just 
because that DPM happened to also be preferred.\5\ Moreover, the 
Exchange believes that it is appropriate to provide the DPM 
entitlements when the DPM is also designated as a PMM as the 
obligations that the DPM has to the market are not diminished when it 
receives a Preferred Order.
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    \4\ See EDGX Options Rule 22.2.
    \5\ For example, if a DPM is preferred on a small size order 
(i.e., 5 or less contracts), that DPM should receive the small size 
order entitlement, which is a 100% allocation, notwithstanding the 
fact that DPM was also preferred on that order (i.e., it would 
otherwise receive 60% or 40% allocation under Rule 21.8(f)(1)). The 
Exchange notes that its affiliate exchange, Cboe Options, as well as 
other exchanges similarly apply the small order preference 
allocation where a DPM is also preferred on an order. See Cboe 
Options Regulatory Circular RG15-011. See also, Nasdaq ISE Rule 713, 
Supplementary Material to Rule 713 .03(c)(iii).
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    The Exchange lastly proposes to amend the definition of a small 
size order. More specifically, Rule 21.8(g)(2) provides that small size 
orders are allocated in full to the DPM if the DPM has a priority quote 
at the NBBO. The rule also provides that small size orders are defined 
as five (5) or fewer contracts. The Exchange proposes to provide that 
in order to qualify as a small size order, the incoming order must be a 
size of five or fewer contracts (i.e., the size of the original order 
determines whether the definition is met, not the number of contracts 
remaining after customer orders have been satisfied). The Exchange 
notes that a similar preference is given for small orders on Cboe 
Options as well as other exchanges and that such preference is based on 
the original size of the order.\6\
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    \6\ See Cboe Options Rule 6.45(a)(ii)(C). See also, NYSE Arca 
Rule 6.76A-O(a)(B).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to,

[[Page 62929]]

and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. Additionally, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \9\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    First, the Exchange believes its proposal to rename Directed Market 
Makers and Primary Market Makers standardizes the naming conventions 
used for similar market participants (i.e., Market Makers) across 
affiliated exchanges (i.e., Cboe Options and EDGX), thereby making the 
rules easier to read and reducing potential confusion. Similarly, the 
Exchange believes explicitly stating in the rules which participation 
entitlements a Market Maker will receive when it's both a DPM and PMM 
with respect to a particular order alleviates confusion and provides 
clarity in the rules. Providing clarity and reducing confusion in the 
rules removes impediments to and perfects the mechanism of a free and 
open market and a national market system, and, in general, protects 
investors and the public interest.
    The Exchange also believes the proposal to apply the DPM 
participation entitlements to an order that is preferred to a DPM is 
appropriate given DPMs' heightened quoting obligations.\10\ The regular 
allocation entitlements for DPMs, including the small size order 
entitlement, are designed to balance the obligations that the DPM has 
to the market with corresponding benefits. The Exchange believes that 
it is appropriate to provide DPM entitlements when the DPM is also a 
PMM as the obligations that the DPM has to the market are not 
diminished when it receives a Preferred Order. The proposed rule change 
also applies equally to similarly situated market participants. 
Moreover, the proposed change is consistent with other Exchanges' 
rules, including the Exchange's affiliate, Cboe Options.\11\
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    \10\ See EDGX Options Rule 22.2.
    \11\ See Cboe Options Regulatory Circular RG15-011. See also, 
Nasdaq ISE Rule 713, Supplementary Material to Rule 713 .03(c)(iii).
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    The Exchange lastly believes the proposal to use the size of the 
original order to determine whether an order meets the small size order 
definition for purposes of the small size order entitlement is 
reasonable as it better achieves the purpose of the participation 
entitlement, which is to provide a benefit to DPMs when an order 
involves a small number of contracts in exchange for their heightened 
quoting obligations. The Exchange does not believe the DPM should 
receive that same benefit where the order involves a small number of 
contracts only as a result of prior executions. For example, without 
the proposed rule change, a DPM may receive full allocation on an order 
that was originally 1,000 contracts because 995 contracts were first 
executed by Customers. The Exchange no longer wishes to allow such 
orders to qualify for the small size order entitlement. The Exchange 
notes the proposed rule change applies to all DPMs uniformly. As noted 
above, the proposed change also conforms to how small orders are 
determined on its affiliated exchange, Cboe Options and other Exchanges 
(i.e., determined by the size of the original order).\12\
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    \12\ See Cboe Options Rule 6.45(a)(ii)(C). See also, NYSE Arca 
Rule 6.76A-O(a)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Particularly, the Exchange 
notes that the proposed changes apply equally to similarly situated 
market participants. Moreover, the proposed changes provide greater 
clarity in the rules and greater harmonization between the Exchange and 
its affiliated exchange, Cboe Options. Moreover, the proposed changes 
only apply to EDGX. To the extent that the proposed changes may make 
the Exchange a more attractive trading venue for market participants on 
other exchanges, such market participants may elect to become Exchange 
market participants.

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

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

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and the text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \16\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Exchange notes that 
the proposed changes relating to (i) which participation entitlement 
applies when a DPM is also a PMM and (ii) determining whether an order 
qualifies for a small order size entitlement based on original order 
size will be available for implementation starting November 29, 2018. 
The Exchange states that the waiver of the operative delay would allow 
the proposed changes to be implemented as soon as it's available. The 
Exchange further states that the implementation of conforming and 
clarifying changes would also immediately reduce confusion and provide 
further harmonization across affiliated exchanges. The Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Accordingly, the 
Commission hereby waives the operative delay and designates the 
proposed rule change as operative upon filing.\17\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings

[[Page 62930]]

to determine whether the proposed rule should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2018-057 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeEDGX-2018-057. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeEDGX-2018-057 and should be 
submitted on or before December 27, 2018.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26512 Filed 12-4-18; 8:45 am]
 BILLING CODE 8011-01-P