Daily Rules, Proposed Rules, and Notices of the Federal Government
The CHX proposes to amend its Schedule of Fees and Assessments (the "Fee Schedule"), effective November 2, 2012, relating to its order cancellation fee for Participants entering and subsequently cancelling order under certain circumstances. The text of this proposed rule change is available on the Exchange's Web site at
In its filing with the Commission, the CHX included statements concerning the purpose of and basis for the proposed rule changes and discussed any comments it received regarding the proposal. The text of these statements may be examined at the places specified in Item IV below. The CHX has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements.
Beginning in January 2010, the Exchange published Fee Schedule imposed a charge for order cancellations in issues priced $1.00 per share or more
However, soon after the imposition of the original order cancellation fee, the Exchange had observed that the number of unexecuted and displayed orders had actually increased for certain Participants. It was apparent to the Exchange that in order to avoid application of the cancellation fee, certain Participants were submitting Quotable orders to the CHX's Matching System, but for an extremely short duration, rendering such activity negligible. In addition to avoiding order cancellation fees, this quotation activity actually exacerbated the operational costs which the Exchange sought to avoid by creating the order cancellation fee in the first place. The Exchange had observed that those firms entering the limited durational orders described above conducted much of their business on our trading facilities in Exchange Traded Funds ("ETFs"), Exchange Traded Notes ("ETNs") or Exchange Traded Vehicles ("ETVs"), collectively referred to as Exchange Traded Products ("ETPs").
Nevertheless, after the modified order cancellation fee went into effect, the Exchange observed that certain Participants had found a number of methods for avoiding the application of the modified order cancellation fee. For example, certain Participants submitted Quotable orders to the CHX's Matching System in
The current order cancellation fee utilizes a formula, calculated on a daily basis, which divides the Participant's total cancelled volume in a given issue ("cvissue") by the Participant's total executed volume in that issue ("exvissue"). In those instances where a Participant's daily activity in a given issue exceeds a cancellation ratio of 30, the Exchange imposes an order cancellation fee of $.30 on each cancellation in that issue for that day and bills such fees on a monthly basis. By only crediting Participants with Quotable orders of the same issue as Wide orders, the Exchange sought to eliminate the practice of quoting in thinly-traded stocks to reduce cancellation fee liability. Furthermore, by imposing the cancellation fee on a daily basis, the Exchange sought to eliminate end-of-the-month fee avoidance trading activity.
After the current order cancellation fee went into effect, there has been a noticeable reduction in the aforementioned "gaming" of the order cancellation fee formula. However, the Exchange submits that this fee mechanism can be further perfected to promote display liquidity (
The Exchange now proposes to readopt the original order cancellation fee, with amendments to provide for the
In determining whether the proposed order cancellation fee would be imposed, the Exchange proposes to utilize a formula that subtracts from the total daily number of Wide or "W" orders in a given security, the product of Near or "N" orders
In contrast to the original W order, an order may now be considered Wide if any one of the following three conditions are met.
Moreover, the proposed W order introduces two new parameters. First, the "Threshold Away Amount" is a security-type specific value that establishes a bright-line value for determining when an order price is either away or near the NBBO. Although the value of this parameter may eventually vary by security-type, the Exchange proposes to set the Threshold Away Amount at $0.03 for all six security types.
In contrast to the original "Quotable" or "Q" order, the proposed N order is defined as (1) an order in a security priced at $1.00 per share or more submitted by the Participant in the Regular Trading Session, (2) where the difference between the order price and the NBB or NBO is less than its corresponding Threshold Away Amount and (3) where the order is not voluntarily cancelled by the Participant prior to either its corresponding Minimum Duration or prior to a partial execution of the order, whichever is earlier.
Moreover, the proposed N order will be modified by a "Near order multiplier" or "N
The following examples illustrate how an order may be classified as either Wide or Near. For all Examples, assume submission of a buy order for 1,000 shares of a Tape A non-derivative security:
For Example A, assume that the price of the order is $0.04 inferior to the NBB and it is voluntarily cancelled by the Participant twelve (12) milliseconds after submission to the Matching System. Since the difference between the order price and NBB ("price difference") is greater than the Threshold Away Amount for a Tape A non-derivative security ($0.03), this is a Wide order, notwithstanding all other factors.
For Example B, assume that the price of the order is $0.04 inferior to the NBB and it is fully executed after twelve (12) milliseconds. Since the price difference is greater than the corresponding Threshold Away Amount, this is a Wide order, notwithstanding all other factors.
For Example C, assume that the price of the order is $0.04 inferior to the NBB, there is a partial execution of 500 shares after five (5) milliseconds and the remainder of the order is voluntarily cancelled after twelve (12) milliseconds. Since the price difference is greater than the corresponding Threshold Away Amount, it is a Wide order, notwithstanding all other factors.
For Example D, assume that the price of the order is $0.01 inferior to the NBB, there is a partial execution of 500 shares after five (5) milliseconds, the remainder is voluntarily cancelled after twelve (12) milliseconds and the order is marked "Do Not Display." Since the order is marked "Do Not Display," it is a Wide order, notwithstanding all other factors.
For Example E, assume that the order price is equal to the NBB and the order is fully executed after twelve (12) milliseconds. Since the price difference is less than the corresponding Threshold Away Amount and the order was fully executed, this is a Near order.
For Example F, assume that the order price is equal to the NBB, there is a partial execution of 500 shares after five (5) milliseconds and the balance of the order is voluntarily cancelled after eight (8) milliseconds. Since the price difference is less than the corresponding Threshold Away Amount and the order was cancelled only after a partial execution of 500 shares, this is a Near order, notwithstanding the order having been voluntarily cancelled prior to the expiration of the corresponding Minimum Duration.
For Example G, assume that the order price is $0.01 inferior to the NBB and it is voluntarily cancelled after 20 milliseconds without any executions. Since the price difference is less than the corresponding Threshold Away Amount and the order was only cancelled after the expiration of the corresponding Minimum Duration, it is a Near order.
Moreover, the operation of the proposed order cancellation fee formula can be illustrated by the use of some more examples. For Example 1, assume that on a given day, a Participant firm submits to the Matching System 200,000 buy orders for a Tape A non-derivative security. Of this amount, 180,000 orders are priced $0.04 inferior to the NBB and are voluntarily cancelled after twelve (12) milliseconds, thus making these orders Wide. The remaining 20,000 orders are priced $0.02 inferior to the NBB and are voluntarily cancelled after twelve (12) milliseconds, thus making these orders Near. Out of 200,000 submitted orders, 1,000 orders are executed in whole or in part.
Example 1 also illustrates the power of the N
For Example 2, we assume the same facts as above, with the exception that the Participant firm submits a total of 400,000 buy orders for a Tape A non-derivative security on a given day and that 380,000 of those orders are Wide orders. Also assume that 200,000 such W and N orders are cancelled. Pursuant to the proposed formula, the difference between W (380,000) and the product of N and the corresponding N multiplier of two (40,000) is 340,000. Dividing that figure by the number of orders which were executed (E or 1,000) gives us an order cancellation ratio of 340. Since the corresponding order cancellation ratio of a Tape A non-derivative security is 150, a cancellation fee of $2,000, which is the product of 200,000 cancellations and $0.01 per order cancelled, would be assessed on this day, to this Participant, with respect to this specific security.
The purpose of this order cancellation fee is to incent Participants to submit orders which, when quoted, are at or close to the NBBO or, at the very least, compensate the Exchange for the processing and electronic storage costs associated with orders which rarely execute. Under the proposed formula, the likelihood that the cancellation fee would be imposed increases with the number of Wide orders submitted by the Participant. The formula is designed to isolate a pattern of behavior in which a Participant submits orders well outside the NBBO and frequently cancels and reenters such orders to continuously stay outside the NBBO.
The Exchange believes that the proposed order cancellation fee benefits the national market system by promoting the display of Near orders, which will result in increased displayed liquidity and reduced order cancellations. This will, in turn, relieve the Exchange's systems capacity and will result in decreased order and market data storage costs. Since Wide orders are infrequently executed, such orders are more expensive, on a relative basis, for the Exchange to receive and process.
The Exchange proposes to implement the cancellation charge effective November 2, 2012. The formula by which the cancellation fee is derived shall be calculated and made available to Participants daily, but billed after the end of the month.
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act
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.
No written comments were solicited or received.
The proposed rule change is to take effect pursuant to Section 19(b)(3)(A)(ii) of the Act
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
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:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
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 Web site (