Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange proposes to amend its fees and rebates applicable to Members
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements.
The Exchange proposes to introduce new flags ZA and ZR for Members that utilize Retail Orders. Flag ZA is proposed to be yielded for those Members that use Retail Orders that add liquidity to EDGX and is proposed to be assigned a rebate of $0.0032 per share. Flag ZR is proposed to be yielded for those Members that use Retail Orders that remove liquidity from EDGX and is proposed to be assigned a charge of $0.0030 per share. Footnote 4, in turn, is proposed to be amended to define a "Retail Order" as an agency order that originates from a natural person and is submitted to the Exchange by a Member, provided that no change is made to the terms of the order (e.g., price or side of market), and the order does not originate from a trading algorithm or any other computerized methodology. The Exchange proposes to append Footnote 4 to its default, non-tiered rebate of $0.0023 per share at the top of its fee schedule to signify a rate change if the conditions in Footnote 4 are met.
The Exchange notes that Members will only be able to designate their orders as "Retail Orders" that add/remove liquidity using the FIX order entry protocol (FIX) but not the HP-API order entry protocol (HP-API). The Exchange also notes that Members using HP-API only who would like to take advantage of the new "Retail Order" flags can subscribe to FIX logical ports with the first five logical ports being provided free of charge while $500.00/month is charged for each additional logical port.
The Exchange also proposes to specify in Footnote 4 that to the extent Members qualify for a rebate higher than $0.0032 per share through other volume tiers, such as the Mega Tier ($0.0035 per share) or Market Depth Tier ($0.0033 per share), Members will earn the higher rebate on Flag ZA instead of its assigned rate. In addition, to the extent Members qualify for a removal rate lower than $0.0030 per share through any other tier, such as the Mega Tier ($0.0029 per share) or Step-up Take Tier ($0.0028 per share), then Members will earn [sic] the lower removal rate on Flag ZR instead of its assigned rate.
A Member would be required to attest, in a form and/or manner prescribed by the Exchange, that they have implemented policies and procedures that are reasonably designed to ensure that every order designated by the Member as a "Retail Order" complies with the Exchange's definition of a Retail Order, as described above. The proposed use of Flags ZA and ZR to identify Retail Orders would be optional for Members. Accordingly, a Member that does not opt to identify qualified orders as Retail Orders would choose not to make an attestation to the Exchange and thereby, not receive the rates associated with Flags ZA or ZR.
Additionally, a Member would be 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 specified by the Exchange, and (ii) monitor whether orders entered as Retail Orders meet the applicable requirements. If the Member represents Retail Orders from another broker-dealer customer, the Member'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 Member 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 specified by the Exchange, and (ii) monitor whether its broker-dealer customer's Retail Order flow continues to meet the applicable requirements.
The Exchange further proposes that it may disqualify a Member from qualifying for Flags ZA and ZR if the Exchange determines, in its sole discretion, that a Member has failed to abide by the requirements proposed herein, including, for example, if a Member designates orders submitted to the Exchange as Retail Orders but those orders fail to meet any of the requirements of Retail Orders. Tiered or non-tiered default rates would apply based on the Member's qualifying levels for a Member that is disqualified from qualifying for Flags ZA and ZR.
The Exchange also proposes to amend the text of the first paragraph of Footnote 1 to include Flag ZR as part of the list of "removal flags," where Flag ZR removes liquidity from the EDGX Book
The Exchange also proposes to amend the text of Footnote 2 to include Flag ZR as part of the "remove liquidity" flags
The Exchange proposes to amend the text of Footnote 13, sections (i) and (ii), to include Flags ZA and ZR as qualifying "added flags" and "removal flags," respectively, for the Investor Tier.
The Exchange proposes to implement these amendments to its fee schedule on December 1, 2012.
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,
The Exchange believes that the proposed rule change is reasonable, equitable and not unfairly discriminatory because it would encourage Members to send additional Retail Orders that add liquidity to the Exchange for execution in order to qualify for an incrementally higher credit for such executions that add liquidity on the Exchange.
The Exchange notes that a significant percentage of the orders of individual investors are executed over-the-counter.
The Exchange also notes that the Commission recently approved a similar proposal by the New York Stock Exchange, Inc. ("NYSE") and NYSE MKT LLC ("NYSE MKT").
The Exchange believes that a differential pricing structure for Retail Orders is not unfairly discriminatory. As stated in the NYSE RLP Approval Order, the "Commission has previously recognized that the markets generally distinguish between individual retail investors, whose orders are considered desirable by liquidity providers because such retail investors are presumed on average to be less informed about short-term price movements, and professional traders, whose orders are presumed on average to be more informed."
The Exchange understands that Section 6(b)(5) of the Act
The Exchange also believes that the proposed rates for Retail Orders (Flags
Moreover, the proposed use of Retail Orders, which are available for all Members that utilize FIX, is equitable and not unfairly discriminatory because FIX is available for all Members on an equal and non-discriminatory basis, as all Members can sign up for new logical ports using FIX or HP-API at a cost of $500/month (the first five DIRECT logical ports being provided free). The Exchange also notes that all Members that it expects will send Retail Orders currently maintain logical ports that utilize FIX. The Exchange also notes that the Members that only utilize HP-API are generally those that are more concerned with latency as they trade for their own accounts where their order flow typically would not qualify as retail order flow. Finally, all order entry protocols on the Exchange do not necessarily support all Exchange functions and are designed differently in order to support the Member base most likely to utilize them.
The Exchange believes its amendments to footnotes 1, 2, and 13 support the Exchange's efforts to achieve consistent application and specificity among the flags on the fee schedule and provide transparency for its Members. First, in SR-EDGX-2012-39, the Exchange discounted certain "removal flags" if a Member satisfied the criteria for the Mega Tier rebate in Footnote 1.
Secondly, in SR-EDGX-2012-46,
Finally, in SR-EDGX-2012-12, the Exchange included "added" and "removal flags" in its calculation of the "add liquidity" to "removed liquidity" ratio to qualify for the Investor Tier.
The Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues. In such an environment, the Exchange must continually review, and consider adjusting, its fees and credits to remain competitive with other exchanges. For the reasons described above, the Exchange believes that the proposed rule change reflects this competitive environment.
This proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from Members or other interested parties.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) 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 paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.