Notice2021-19294
Self-Regulatory Organizations; MEMX LLC; Notice of Filing of a Proposed Rule Change To Establish a Retail Midpoint Liquidity Program
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 8, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 171 (Wednesday, September 8, 2021)</title>
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[Federal Register Volume 86, Number 171 (Wednesday, September 8, 2021)]
[Notices]
[Pages 50411-50420]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19294]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92844; File No. SR-MEMX-2021-10]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing of a
Proposed Rule Change To Establish a Retail Midpoint Liquidity Program
September 1, 2021.
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 August 18, 2021, MEMX LLC (``MEMX'' or the ``Exchange'') filed
with the Securities and Exchange Commission (the ``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 is filing with the Commission a proposed rule change
to establish a Retail Midpoint Liquidity Program. The text of the
proposed rule change is provided in Exhibit 5.
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
Purpose
Background
The Exchange proposes to adopt new Exchange Rule 11.22 to establish
a Retail Midpoint Liquidity Program (the ``RML Program''). As proposed,
the RML Program is designed to provide retail investors with meaningful
price improvement opportunities by executing at the midpoint of the
national best bid and offer (``NBBO'') such that Users \3\ will be
incentivized to direct additional orders designed to execute at the
midpoint of the NBBO (the ``Midpoint Price'') to the Exchange to
interact with orders that originate from retail investors that are also
designed to execute at the Midpoint Price.
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\3\ As defined in Exchange Rule 1.5(jj), a ``User'' is a member
of the Exchange (``Member'') or sponsored participant of a Member
who is authorized to obtain access to the System pursuant to
Exchange Rule 11.3. The term ``System'' refers to 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. See Exchange Rule 1.5(gg).
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As former Commission Chairman Jay Clayton noted in a 2018 speech,
forty-three million U.S. households hold a retirement or brokerage
account, with $3.6 trillion in balance sheet assets in 128 million
customer accounts serviced by more than 2,800 registered broker-
dealers.\4\ He also noted the importance of continued broad, long-term
retail participation in our capital markets, and that retail investors
count on the capital markets to fund major life events such as paying
for their children's higher education or funding their own
retirements.\5\
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\4\ See The Evolving Market for Retail Investment Services and
Forward-Looking Regulation--Adding Clarity and Investor Protection
while Ensuring Access and Choice, Chairman Jay Clayton, Commission
(May 2, 2018), available at <a href="https://www.sec.gov/news/speech/speech-clayton-2018-05-02">https://www.sec.gov/news/speech/speech-clayton-2018-05-02</a>.
\5\ Id.
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Against this backdrop, the RML Program is designed to provide
retail investors with access to a pool of midpoint liquidity on the
Exchange by introducing a new mechanism for retail-oriented liquidity
provision, thereby providing enhanced opportunities for meaningful
price improvement at the Midpoint Price for retail investors. The
Exchange believes that introducing the RML Program could provide retail
investors with a competitive alternative to existing exchange and over-
the-counter (``OTC'') retail programs, by
[[Page 50412]]
attracting counterparty liquidity to the Exchange from Users and their
clients seeking to interact with retail liquidity. The Exchange
understands that many professional market participants, such as market
makers, view interacting with orders of retail investors as more
desirable than interacting with orders of other professional market
participants. For example, as the Commission staff noted in a 2016
memorandum to the Equity Market Structure Advisory Committee (``EMSAC
Memorandum''), ``[m]arket makers are interested in retail customer
order flow because retail investors are, on balance, less informed than
other traders about short-term price movements . . . [and t]rading
against retail customer order flow enables market makers to avoid
adverse selection by informed professional traders and to more reliably
profit from market-making activity.'' \6\ Consistent with the EMSAC
Memorandum's conclusions, and based on informal discussions with market
participants and the knowledge and experience of its staff, the
Exchange believes that market makers and other sophisticated market
participants generally value interacting with retail orders because
they are smaller and not likely to be part of a larger parent order
that can move a stock price, causing a loss to the market maker. The
proposed rule change thus seeks to provide enhanced price improvement
opportunities for retail customers by incentivizing Users and their
clients to provide price-improving liquidity to interact with the
orders of retail investors. The RML Program would therefore be
consistent with the goals of the Commission to encourage markets that
are structured to benefit ordinary investors,\7\ while facilitating
order interaction to the benefit of all market participants.
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\6\ See January 26, 2016 Memorandum entitled ``Certain Issues
Affecting Customers in the Current Equity Market Structure'' from
the staff of the Commission's Division of Trading and Markets,
available at <a href="https://www.sec.gov/spotlight/equity-market-structure/issues-affecting-customers-emsac-012616.pdf">https://www.sec.gov/spotlight/equity-market-structure/issues-affecting-customers-emsac-012616.pdf</a>.
\7\ See, e.g., U.S. Securities and Exchange Commission,
Strategic Plan, Fiscal Years 2018-2022, available at <a href="https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf">https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf</a>
(``Commission Strategic Plan'').
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As proposed, through the RML Program, the Exchange would enable
Retail Member Organizations \8\ to submit a new type of Retail Order
designed to execute at the Midpoint Price (i.e., a Retail Midpoint
Order, described below) to the Exchange, and any User would be
permitted to provide price improvement to such order in the form of
another new order type that is designed to execute at the Midpoint
Price and that is only eligible to execute against a Retail Midpoint
Order (i.e., an RML Order, described below). The Exchange expects that
the introduction of Retail Midpoint Orders and RML Orders, through the
proposed RML Program, would result in a balanced mix of retail
brokerage firms and their wholesaling partners submitting Retail
Midpoint Orders to the Exchange to access the additional midpoint
liquidity provided by RML Orders that the Exchange anticipates
resulting from the RML Program.
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\8\ A ``Retail Member Organization'' or ``RMO'' is a Member (or
a division thereof) that has been approved by the Exchange under
Exchange Rule 11.21 to submit Retail Orders. A ``Retail Order''
means an agency or riskless principal order that meets the criteria
of FINRA Rule 5320.03 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. See
Exchange Rule 11.21(a).
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The Exchange notes that the proposed RML Program is comparable in
purpose and effect to the Investors Exchange LLC (``IEX'') Retail Price
Improvement Program (the ``IEX Retail Program''), which is also
designed to provide retail investors with meaningful price improvement
opportunities.\9\ Further, the Commission recently approved several
changes to the IEX Retail Program that make certain features of the IEX
Retail Program substantially similar to proposed features of the RML
Program.\10\ The Exchange will describe certain differences between the
proposed RML Program and the IEX Retail Program under the appropriate
headings below.
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\9\ See IEX Rule 11.232; see also Securities Exchange Act
Release No. 92398 (July 13, 2021), 86 FR 38166 (July 19, 2021) (SR-
IEX-2021-06) (order approving changes to the IEX Retail Program
including dissemination of a retail liquidity identifier and
limiting IEX Retail Liquidity Provider orders to midpoint peg
orders) (the ``IEX Retail Approval Order''). The Exchange notes that
the IEX Retail Program, as amended, supports executions of retail
orders described in IEX Rule 11.190(b)(15) (``IEX Retail Orders'')
at the Midpoint Price as well as prices that are different than the
Midpoint Price in certain limited circumstances. While the
Exchange's proposed new order types under the RML Program would only
be eligible to execute at the Midpoint Price, as further described
below, the Exchange notes that Retail Orders would still be eligible
to execute at prices that are different than the Midpoint Price
outside of the RML Program as they are today.
\10\ See IEX Retail Approval Order, supra note 9.
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The Exchange will submit a separate proposal to amend its Fee
Schedule in connection with the proposed RML Program. Under that
proposal, the Exchange expects to provide free executions or charge a
fee to Users for executions of their RML Orders against Retail Midpoint
Orders, and in turn would provide a rebate or free executions to RMOs
for executions of their Retail Midpoint Orders against RML Orders.
Definitions
The Exchange proposes to adopt the following definitions under
paragraph (a) of proposed Exchange Rule 11.22 (Retail Midpoint
Liquidity Program). First, the term ``Retail Midpoint Order'' would be
defined as a Retail Order submitted by an RMO that is a Pegged Order
\11\ with a Midpoint Peg \12\ instruction (``Midpoint Peg Order'') and
that is only eligible to execute against RML Orders (a proposed new
order type described below), and other orders priced more aggressively
than the Midpoint Price, through the execution process described in
proposed Exchange Rule 11.22(c). As proposed, a Retail Midpoint Order
must have a time-in-force (``TIF'') instruction of IOC.\13\
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\11\ Pegged Orders are described in Exchange Rules 11.6(h) and
11.8(c) and generally defined as an order that is pegged to a
reference price and automatically re-prices in response to changes
in the NBBO.
\12\ A Midpoint Peg instruction is an instruction that may be
placed on a Pegged Order that instructs the Exchange to peg the
order to the midpoint of the NBBO. See Exchange Rule 11.6(h)(2).
\13\ ``IOC'' is an instruction the User may attach to an order
stating the order is to be executed in whole or in part as soon as
such order is received, and the portion not executed immediately on
the Exchange or another trading center is treated as cancelled and
is not posted to the MEMX Book. See Exchange Rule 11.6(o)(1). The
term ``MEMX Book'' refers to the System's electronic file of orders.
See Exchange Rule 1.5(q).
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Second, the term ``Retail Midpoint Liquidity Order'' or ``RML
Order'' would be defined as a Midpoint Peg Order that is only eligible
to execute against Retail Midpoint Orders through the execution process
described in proposed Exchange Rule 11.22(c). As proposed, an RML Order
must have a TIF instruction of Day,\14\ RHO,\15\ or GTT \16\ and may
not include a Minimum Execution Quantity \17\ instruction. Any User
would be permitted, but not required, to submit RML Orders.
Additionally, the Exchange proposes that a User may, but is not
required to, designate an RML Order to be identified as RML Order
interest (``RML Interest'') for purposes of the Retail Liquidity
[[Page 50413]]
Identifier pursuant to proposed Exchange Rule 11.22(b) (such RML
Interest is sometimes referred to herein as ``designated RML
Interest''), as further described below, by including a Displayed
instruction.\18\ A User would be able to designate RML Interest for
this purpose on an order-by-order basis or on a port-by-port basis. The
Exchange notes that, except with respect to a User's ability to elect
whether to designate an RML Order to be identified as such for purposes
of the Retail Liquidity Identifier, an RML Order is substantially
similar in effect to IEX's Retail Liquidity Provider Order (``IEX RLP
Order'') offered under the IEX Retail Program, in that an RML Order is
an order that is designed to execute at the Midpoint Price, is only
eligible to execute against retail order interest, and may be submitted
by any User.\19\
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\14\ See Exchange Rule 11.6(o)(2).
\15\ See Exchange Rule 11.6(o)(5).
\16\ See Exchange Rule 11.6(o)(4).
\17\ The Minimum Execution Quantity instruction is described in
Exchange Rule 11.6(f) and is generally defined as an instruction a
User may attach to an order with a Non-Displayed instruction or a
TIF of IOC instruction requiring the System to execute the order
only to the extent that a minimum quantity can be satisfied. A Non-
Displayed instruction is an instruction a User may attach to an
order stating that the order is not to be displayed by the System on
the MEMX Book. See Exchange Rule 11.6(c)(2).
\18\ A Displayed instruction is an instruction a User may attach
to an order stating that the order is to be displayed by the System
on the MEMX Book. See Exchange Rule 11.6(c)(1). Under Exchange Rule
11.8(c)(3), Pegged Orders, including Midpoint Peg Orders, are not
eligible to include a Displayed instruction; however, as proposed,
an RML Order would be eligible to include a Displayed instruction,
which would be for the sole purpose of indicating to the Exchange
that the User has designated the RML Order to be identified as RML
Interest for purposes of the Retail Liquidity Identifier pursuant to
proposed Exchange Rule 11.22(b), and inclusion of the Displayed
instruction would not indicate to the Exchange that the RML Order is
to be displayed by the System on the MEMX Book. The Exchange's
proposal to permit Users to include a Displayed instruction for an
RML Order for this purpose is purely to facilitate the
implementation of the Retail Liquidity Identifier by using an
existing but otherwise inapplicable instruction type (i.e., the
Displayed instruction), and the System will otherwise handle an RML
Order with a Displayed instruction as if no Displayed instruction
was included.
\19\ See IEX Rule 11.190(b)(14), which describes the IEX RLP
Order. See also IEX Retail Approval Order, supra note 9.
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As further described below, Retail Midpoint Orders and RML Orders
would only be eligible to execute at the Midpoint Price. Additionally,
as reflected in the proposed definitions of Retail Midpoint Order and
RML Order, such orders would only be eligible to execute against each
other with the exception that a Retail Midpoint Order would also be
eligible to execute against other orders in certain limited
circumstances (i.e., against displayed odd lot orders and/or non-
displayed orders priced more aggressively than the Midpoint Price
resting on the MEMX Book) pursuant to proposed Exchange Rule
11.22(c)(2), as further described below. The purpose of limiting Retail
Midpoint Orders and RML Orders to interacting with each other (subject
to the exception of Retail Midpoint Orders being eligible to execute
against other orders priced more aggressively than the Midpoint Price)
is that the proposed RML Program is designed to provide a mechanism
whereby liquidity-providing Users can provide price-improving liquidity
at the Midpoint Price specifically to retail investors, and liquidity-
removing RMOs submitting orders on behalf of retail investors can
interact with such price-improving liquidity at the Midpoint Price, in
a deterministic manner. The Exchange notes that this aspect of the
proposed RML Program is partially different than the IEX Retail
Program. Like an IEX RLP Order, which is only eligible to execute
against IEX Retail Orders, the Exchange's proposed RML Order would only
be eligible to execute against Retail Midpoint Orders. However, an IEX
Retail Order is generally eligible to execute against order types other
than an IEX RLP Order,\20\ whereas the Exchange's proposed Retail
Midpoint Order would be generally limited to executing against RML
Orders (subject to the exception of Retail Midpoint Orders being
eligible to execute against other orders priced more aggressively than
the Midpoint Price). While this aspect of the Exchange's proposal
differs from the IEX Retail Program, the Exchange notes that the
concept of an order type that is limited to interacting with a specific
contra-side order type has previously been approved by the Commission
both in the context of liquidity-providing orders for retail programs
\21\ and in other contexts.\22\ The Exchange believes the proposed
Retail Midpoint Order is analogous to such order types even though a
Retail Midpoint Order would be eligible to execute against non-RML
Orders where such orders are priced more aggressively than the Midpoint
Price because orders priced more aggressively than the Midpoint Price
comprise only a small amount of the Exchange's volume of orders, and
thus, the Exchange expects that Retail Midpoint Orders would mostly
interact with RML Orders. Moreover, the Exchange generally expects RMOs
to submit Retail Midpoint Orders when the Retail Liquidity Identifier
is disseminated, which indicates that there is available RML Interest
of at least one round lot on the MEMX Book, and generally does not
expect RMOs to submit Retail Midpoint Orders when the Retail Liquidity
Identifier is not disseminated or otherwise to specifically seek to
interact with other orders priced more aggressively than the Midpoint
Price, particularly as any such orders would be either non-displayed
(and therefore not known to the RMO) or less than a round lot in size,
and RMOs could still submit Retail Orders to interact with such
liquidity using an order type other than the Retail Midpoint Order as
they can today.
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\20\ See IEX Rule 11.232(e)(3), which describes the priority and
order execution processes for IEX Retail Orders and provides that
such orders are eligible to execute against order types other than
an IEX RLP Order in certain circumstances, including against other
orders during a locked or crossed market, against displayed odd lot
orders priced at or better than the Midpoint Price, and against
other non-displayed interest at the Midpoint Price.
\21\ See, e.g., IEX Rule 11.190(b)(14), which states that an IEX
RLP Order is only eligible to execute against IEX Retail Orders;
Nasdaq PSX Rule 4702(b)(5)(A), which states that on Nasdaq PSX a
Retail Price Improving Order may only execute against a Retail
Order.
\22\ See, e.g., Securities Exchange Act Release No. 82825 (March
7, 2018), 83 FR 10937 (March 13, 2018) (SR-NASDAQ-2017-074) (Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified
by Amendment Nos. 1, 2, and 3, to Adopt the Midpoint Extended Life
Order) (the ``MELO Approval Order''). As set forth in the MELO
Approval Order, Nasdaq originally allowed executions of Midpoint
Extended Life Orders (``MELOs'') only against other eligible MELOs.
Pursuant to Rule 4702(b)(14)(A) Nasdaq today allows executions of
MELOs only against eligible MELOs and MELO+CB orders.
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As Retail Midpoint Orders and RML Orders are types of Pegged
Orders, and are designed to execute on the Exchange against each other,
such orders would not be eligible for routing.\23\
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\23\ See Exchange Rule 11.8(c)(5), which provides that Pegged
Orders are not eligible for routing.
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Retail Liquidity Identifier
Under the RML Program, the Exchange proposes to disseminate a
Retail Liquidity Identifier through the Exchange's proprietary market
data feeds, MEMOIR Depth \24\ and MEMOIR Top,\25\ and the appropriate
securities information processor (``SIP'') when designated RML Interest
aggregated to form at least one round lot for a particular security is
available in the System (``Retail Liquidity Identifier''), provided
that such designated RML Interest is resting at the Midpoint Price and
is priced at least $0.001 better than the national best bid (``NBB'')
or national best offer (``NBO'').
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\24\ See Exchange Rule 13.8(a).
\25\ See Exchange Rule 13.8(b).
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The purpose of the Retail Liquidity Identifier is to provide
relevant market information to RMOs that there is available RML
Interest on the Exchange, thereby incentivizing them to send Retail
Midpoint Orders to the Exchange seeking execution at the Midpoint
Price. The Retail Liquidity Identifier would reflect the symbol and the
side (buy and/or sell) of the designated RML Interest but would not
include the price or size. The Exchange does not believe that such
market information constitutes a ``quote'' within the meaning of
[[Page 50414]]
Regulation NMS because it does not include a specific price or size of
the interest; alternatively, if such information is deemed a quote, the
Exchange believes that an exemption from applicable rules would be
appropriate.\26\ While an explicit price would not be disseminated,
because RML Orders are only eligible to execute at the Midpoint Price,
dissemination of the Retail Liquidity Identifier would thus reflect the
availability of price improvement at the Midpoint Price.\27\
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\26\ The Exchange plans to submit a letter requesting no-action
or exemptive relief from obligations set forth in Rule 602 of
Regulation NMS.
\27\ The Exchange notes that this aspect of the proposed Retail
Liquidity Identifier is the same as the Retail Liquidity Identifier
disseminated by IEX under the IEX Retail Program that was recently
approved by the Commission. See IEX Rule 11.232(f); see also IEX
Retail Approval Order, supra note 9, at 38167.
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As noted above, the Exchange would only disseminate the Retail
Liquidity Identifier when designated RML Interest would provide at
least $0.001 of price improvement, which is consistent with the rules
of the other exchanges that disseminate Retail Liquidity Identifiers
\28\ as well as the SIP Plans' requirements.\29\ Because RML Orders are
proposed to be only Midpoint Peg Orders, they will always represent at
least $0.001 price improvement over the NBB or NBO, with two
exceptions: (1) In a locked or crossed market; and (2) a sub-dollar
quote when the security's spread is less than $0.002.\30\ Under
Exchange Rule 11.8(c)(6), a Pegged Order resting on the MEMX Book is
not eligible for execution when the market is locked or crossed; thus,
an RML Order would not be eligible for execution when the market is
locked or crossed and would rest on the MEMX Book and become eligible
for execution again when the market ceases to be locked or crossed.\31\
Because an RML Order would not be eligible for execution when the
market is locked or crossed, such order would not provide any price
improvement to an incoming Retail Midpoint Order (i.e., would not be
priced at least $0.001 better than the NBB or NBO) and therefore would
not comprise eligible RML Interest for purposes of the Retail Liquidity
Identifier. Similarly, when a particular security is priced less than
$1.00 per share, its MPV is $0.0001, so the Midpoint Price will not
always represent at least $0.001 in price improvement.\32\ Therefore,
the Exchange would only disseminate the Retail Liquidity Identifier for
sub-dollar securities if the spread in the security is greater than or
equal to $0.002, meaning the Midpoint Price represents at least $0.001
price improvement over the NBB or NBO. With respect to the requirement
that an RML Order must be resting at the Midpoint Price in order to be
included in the designated RML Interest to be disseminated pursuant to
the Retail Liquidity Identifier, the Exchange notes that an RML Order
could have a limit price that is less aggressive than the Midpoint
Price in which case it would not be eligible to trade with an incoming
Retail Midpoint Order and therefore should not be included for purposes
of Retail Liquidity Identifier dissemination since it would not reflect
interest available to trade with Retail Midpoint Orders. The Exchange
notes that not including: (1) RML Interest for a security when the
market for the security is locked or crossed; (2) RML Interest for a
sub-dollar security if the spread in the security is greater [sic] than
or equal [sic] to $0.002; and (3) RML Interest that is not resting at
the Midpoint Price (i.e., RML Interest that is constrained by a limit
price that is less aggressive than the Midpoint Price), for purposes of
Retail Liquidity Identifier dissemination is consistent with the Retail
Liquidity Identifier disseminated by IEX under the IEX Retail
Program.\33\
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\28\ See, e.g., IEX Rule 11.232(f), Cboe BYX Rule 11.24(e), and
NYSE Arca Equities Rule 7.44(j).
\29\ See January 26, 2021 CQS Participant Input Binary
Specification Version 2.6a, available at <a href="https://www.ctaplan.com/publicdocs/ctaplan/CQS_Pillar_Input_Specification.pdf">https://www.ctaplan.com/publicdocs/ctaplan/CQS_Pillar_Input_Specification.pdf</a> and May 2020
UTP Data Feed Services Specification Version 1.5, available at
<a href="https://www.utpplan.com/DOC/UtpBinaryOutputSpec.pdf">https://www.utpplan.com/DOC/UtpBinaryOutputSpec.pdf</a>.
\30\ The Minimum Price Variation (``MPV'') for bids, offers, or
orders in securities priced less than $1.00 per share is $0.0001.
See Exchange Rule 11.6(g).
\31\ See Exchange Rule 11.8(c)(6).
\32\ For example, if a security's NBB is $0.505 and NBO is
$0.506, the Midpoint Price would be $0.5055, which is $0.0005 more
than the NBB and less than the NBO, so it would not represent at
least $0.001 price improvement over the NBB or NBO, and therefore
would not comprise eligible RML Interest for purposes of the Retail
Liquidity Identifier.
\33\ See IEX Rule 11.232(f); see also IEX Retail Approval Order,
supra note 9, at 38167.
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The Exchange also proposes to remove the Retail Liquidity
Identifier previously disseminated through the MEMOIR Depth and MEMOIR
Top data products and through the appropriate SIP after executions
against Retail Midpoint Orders have depleted the available designated
RML Interest such that the remaining designated RML Interest does not
aggregate to form at least one round lot, or in situations where there
is no actionable RML Interest (such as when the market is locked or
crossed), in order to indicate to market participants that there is no
longer designated RML Interest of at least one round lot available. The
Exchange believes that removing the Retail Liquidity Identifier on the
market data feeds and SIP when there is not sufficient eligible RML
Interest available is consistent with the implementation of the other
exchanges that disseminate Retail Liquidity Identifiers.
As described above, the Exchange's proposed Retail Liquidity
Identifier is substantially similar to IEX's Retail Liquidity
Identifier. However, the Exchange notes one key distinction--the
Exchange would enable a User to elect whether to designate an RML Order
to be identified as such for purposes of the Retail Liquidity
Identifier. Similar to the proposed RML Program, under the IEX Retail
Program, eligible IEX RLP Order interest that is aggregated to form at
least one round lot is required to cause the dissemination of the
Retail Liquidity Identifier. Under the IEX Retail Program, a User is
not able to elect whether an IEX RLP Order is to be identified as such
for purposes of the Retail Liquidity Identifier, and thus, all IEX RLP
Order interest is included in determining whether there is a sufficient
amount of IEX RLP Order interest (i.e., one round lot) to cause the
dissemination of the Retail Liquidity Identifier. In contrast, under
the proposed RML Program, a User may, but is not required to, designate
an RML Order to be identified as such for purposes of the Retail
Liquidity Identifier. Therefore, a User would be able to elect whether
an RML Order that it submits will be included in determining whether
there is a sufficient amount of RML Interest (i.e., one round lot) to
cause the dissemination of the Retail Liquidity Identifier (i.e.,
whether it constitutes designated RML Interest).\34\
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\34\ As an example, assume the following facts: User 1 enters an
RML Order that is designated to be identified as such for purposes
of the Retail Liquidity Identifier to buy 50 shares of ABC; User 2
enters an RML Order that is not designated to be identified as such
for purposes of the Retail Liquidity Identifier to buy 100 shares of
ABC; and such orders are the only RML Orders resting on the MEMX
Book. In this event, the Exchange would not disseminate the Retail
Liquidity Identifier because there is not designated RML Interest to
buy ABC aggregated to form at least one round lot available in the
System, as only User 1's RML Order to buy 50 shares of ABC was
designated as such.
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As further described below, RML Orders that are designated to be
identified as such for purposes of the Retail Liquidity Identifier
would receive execution priority ahead of RML Orders that are not
designated to be identified as such. The Exchange believes that
providing Users with the optionality to designate their RML Orders to
be identified as such for purposes of the Retail Liquidity Identifier
is appropriate
[[Page 50415]]
because some Users submitting RML Orders may be concerned with
signaling to the market that there is interest to buy or sell at the
non-displayed Midpoint Price. In particular, while a User submitting a
smaller sized RML Order as part of a normal liquidity provision
strategy might prefer to have its interest identified through the
Retail Liquidity Identifier, it is possible that a larger sized RML
Order could be entered and that the User submitting such order may
prefer not to signal to the market that there is significant interest
in that security at the Midpoint Price. While the Retail Liquidity
Identifier would not identify the size associated with an RML Order, a
larger RML Order would likely result in the Retail Liquidity Identifier
persisting for a longer period of time despite multiple executions of
Retail Midpoint Orders against such order. The Exchange acknowledges
that since, as proposed, a User may elect not to designate an RML Order
to be identified as such for purposes of the Retail Liquidity
Identifier, RML Interest could be available without causing the
dissemination of the Retail Liquidity Identifier. The Exchange
nevertheless believes it is appropriate to limit dissemination of the
Retail Liquidity Identifier to those cases when at least one round lot
of designated RML Interest is available in order to maintain the
proposed optionality available to Users that wish to submit RML Orders
but do not want indications of their midpoint interest disseminated by
the Exchange. While different than the IEX Retail Program, the Exchange
notes that the ability for a User to elect whether to designate their
RML Interest to be identified as such for purposes of the Retail
Liquidity Identifier is similar in purpose and effect to the ability of
a User to elect whether to designate their orders as displayed or non-
displayed on an exchange's order book--functionality that is offered by
most U.S. equities exchanges, including the Exchange--as it is simply
intended to provide Users with the ability to decide which information
they publicize in the marketplace.
Priority and Order Execution
Retail Midpoint Orders and RML Orders would only execute at the
Midpoint Price, as stated in proposed Exchange Rule 11.22(c)(1) and
further described below. As discussed above, Retail Midpoint Orders and
RML Orders are primarily intended to interact with each other; however,
proposed Exchange Rule 11.22(c)(2) provides that if there is: (A) A
Limit Order \35\ of Odd Lot \36\ size that is displayed by the System
(``Displayed Odd Lot Order'') and that is priced more aggressively than
the Midpoint Price and/or (B) an order that is not displayed by the
System (``Non-Displayed Order'') and that is priced more aggressively
than the Midpoint Price, resting on the MEMX Book, then an incoming
Retail Midpoint Order would first execute against any such orders
pursuant to the Exchange's standard price/time priority in accordance
with Exchange Rule 11.9 and Exchange Rule 11.10 before executing
against RML Orders resting on the MEMX Book.\37\ Proposed Exchange Rule
11.22(c)(2) further provides that any such executions would be at the
Midpoint Price irrespective of the prices at which such Displayed Odd
Lot Orders and/or Non-Displayed Orders were ranked by the System on the
MEMX Book.
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\35\ See Exchange Rule 11.8(b).
\36\ See Exchange Rule 11.6(q)(2).
\37\ The Exchange notes that Displayed Odd Lot Orders and Non-
Displayed Orders are the only types of orders that could rest on the
MEMX Book at a price that is more aggressive than the Midpoint
Price, as any displayed buy (sell) order that is at least one round
lot in size would be eligible to form the NBB (NBO) as a Protected
Quotation. The term ``Protected Quotation'' refers to a quotation
that is a Protected Bid or Protected Offer. In turn, the term
``Protected Bid'' or ``Protected Offer'' refers to a bid or offer in
a stock that is (i) displayed by an automated trading center; (ii)
disseminated pursuant to an effective national market system plan;
and (iii) an automated quotation that is the best bid or best offer
of a national securities exchange or association. See Exchange Rule
1.5(z).
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The purpose of permitting a Retail Midpoint Order to first execute
against Displayed Odd Lot Orders and/or Non-Displayed Orders that are
priced more aggressively than the Midpoint Price is to ensure that the
priority of more aggressively priced orders over less aggressively
priced orders is maintained on the Exchange, consistent with Exchange
Rule 11.9. The Exchange notes that its proposed handling of a Retail
Midpoint Order in this regard is similar to Nasdaq's handling of a
MELO, which is an order type that is similarly designed to interact
with a specific contra-side order type at the Midpoint Price, in that
MELOs will respect better priced liquidity, as MELOs that ``would
otherwise be eligible to execute, will not execute if there is a more
aggressively priced Order resting on the Nasdaq Book.'' \38\ Thus,
because the Exchange's proposal introduces new order types that are
designed to interact with each other at the Midpoint Price but provides
for a mechanism to respect the priority of more aggressively priced
liquidity on the Exchange, similar to Nasdaq's handling of a MELO, the
Exchange believes that this aspect of the proposal does not raise any
novel issues for the Commission to consider.
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\38\ SR-NASDAQ-2017-074, Amendment No. 2, at page 20, available
at <a href="https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074-2659324-161401.pdf">https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074-2659324-161401.pdf</a>. See also Nasdaq Rule 4702(b)(14)(A). While the
Exchange's proposed handling of Retail Midpoint Orders when there is
a resting order priced more aggressively than the Midpoint Price
similarly respects the more aggressively priced resting order, it
differs from Nasdaq's handling of MELOs in this event, in that MELOs
will not execute and will be held for execution until such resting
order is no longer on the Nasdaq book or the Midpoint Price matches
the price of such resting order, and the Exchange proposes to
execute a Retail Midpoint Order against such resting order at the
Midpoint Price. Thus, both implementations are designed to maintain
the priority of more aggressively priced orders.
---------------------------------------------------------------------------
The Exchange believes that it is appropriate to execute any such
Displayed Odd Lot Orders and/or Non-Displayed Orders against a Retail
Midpoint Order at the Midpoint Price instead of the prices at which
such orders were ranked because RMOs that submit Retail Midpoint Orders
to the Exchange are, by selecting an order type that is specifically
limited to executing at the Midpoint Price, expecting to receive an
execution at the Midpoint Price and not at any other price(s). Thus,
the Exchange is proposing to address the needs of RMOs that focus their
Retail Order trading on receiving executions at the Midpoint Price
through the adoption of the Retail Midpoint Order, and the Exchange
notes that use of this order type is completely voluntary and that RMOs
may continue to submit their Retail Orders to the Exchange to execute
against orders at prices different than the Midpoint Price, outside of
the RML Program, as they can today. Moreover, based on informal
discussions with market participants, the Exchange believes that there
are benefits associated with executing Retail Orders submitted to the
Exchange at one price level rather than multiple prices, such as
simplified record-keeping for retail investors and execution reporting
by RMOs. The Exchange also believes the Users submitting the contra-
side Displayed Odd Lot Orders and/or Non-Displayed Orders would prefer
an execution against an incoming Retail Midpoint Order at the Midpoint
Price, as this would provide price improvement to such orders, which
were originally priced more aggressively than the Midpoint Price.
After first executing against any resting Displayed Odd Lot Orders
and/or Non-Displayed Orders priced more aggressively than the Midpoint
Price, as described above, a Retail Midpoint Order would then execute
against RML Orders resting on the MEMX Book in accordance with proposed
Exchange Rule 11.22(c)(3). Specifically, Retail
[[Page 50416]]
Midpoint Orders would execute against RML Orders resting on the MEMX
Book at the Midpoint Price in relative time priority in accordance with
Exchange Rule 11.10 as follows: (1) First against RML Orders that are
designated to be identified as RML Interest pursuant to proposed
Exchange Rule 11.22(b); and (2) then against RML Orders that are not
designated to be identified as RML Interest pursuant to proposed
Exchange Rule 11.22(b). Thus, RML Orders that are designated to be
identified as such for purposes of the Retail Liquidity Identifier, as
described above, would be executed ahead of previously-received RML
Orders that are not designated to be identified as such.\39\ The
execution of multiple RML Orders that are designated to be identified
as such would be determined vis-[agrave]-vis each other based on time
priority. Similarly, the execution of multiple RML Orders that are not
designated to be identified as such would be determined vis-[agrave]-
vis each other based on time priority.
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\39\ The Exchange notes that this aspect of the proposed RML
Program is different than the IEX Retail Program since the IEX
Retail Program does not offer the ability to elect whether to
designate an IEX RLP Order to be identified as such for purposes of
IEX's Retail Liquidity Identifier, as described above.
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The Exchange believes it is appropriate to provide priority to RML
Orders that are designated to be identified as such for purposes of the
Retail Liquidity Identifier over orders that are not so designated
because the Retail Liquidity Identifier is likely to be an important
factor in attracting RMOs to send Retail Midpoint Orders, and thus
increases the likelihood of execution for resting RML Orders. Thus,
similar to the priority afforded to orders that are displayed on the
MEMX Book, which receive priority because they contribute to price
discovery and attract liquidity to the Exchange, the Exchange believes
that designated RML Orders resulting in the dissemination of the Retail
Liquidity Identifier should receive priority over those that do not.
The following examples, which the Exchange proposes to codify in
proposed Exchange Rule 11.22(c)(3)(B) as slightly modified to conform
with the Rule's context, illustrate how the Exchange would handle
orders under the proposed RML Program:
Assume the following facts:
<bullet> The NBBO for security ABC is $10.00-$10.10.
<bullet> User 1 enters an RML Order that is not designated to be
identified as RML Interest to buy ABC for 500 shares. The RML Order is
posted to the MEMX Book as an RML Order to buy ABC at $10.05.
<bullet> User 2 then enters an RML Order that is designated to be
identified as RML Interest to buy ABC for 500 shares. The RML Order is
posted to the MEMX Book as an RML Order to buy ABC at $10.05. The
Exchange publishes through the MEMOIR Depth and MEMOIR Top data
products and through the appropriate SIP a Retail Liquidity Identifier
indicating the presence of designated RML Interest of at least one
round lot to buy ABC.
<bullet> User 3 then enters a Pegged Order with a Midpoint Peg
instruction to buy ABC for 500 shares. The Pegged Order is posted to
the MEMX Book as a Pegged Order to buy ABC at $10.05.
<bullet> User 4 then enters a Limit Order with a Non-Displayed
instruction to buy ABC at $10.07 for 100 shares, which is posted to the
MEMX Book.
<bullet> There are no other orders resting on the MEMX Book.
Example 1: Retail Member Organization enters a Retail Midpoint
Order to sell 1,200 shares of ABC. The Retail Midpoint Order will
execute in the following order:
<bullet> First, against the full size of User 4's buy order for 100
shares at $10.05 (because it is priced more aggressively than the
Midpoint Price, and thus, it is eligible to execute against a Retail
Midpoint Order, it has priority over the RML Orders resting on the MEMX
Book, and it executes at the Midpoint Price pursuant to proposed
Exchange Rule 11.22(c)(2));
<bullet> second, against the full size of User 2's buy order for
500 shares at $10.05 (because it has priority over User 1's RML Order
that is not designated to be identified as RML Interest pursuant to
proposed Exchange Rule 11.22(c)(3)(A)(i) and (ii)); and
<bullet> third, against the full size of User 1's buy order for 500
shares at $10.05.
The Retail Midpoint Order does not execute against User 3's buy order
because User 3's buy order is not an RML Order. The Retail Midpoint
Order is filled for 1,100 shares and the balance of 100 shares is
cancelled back to the Retail Member Organization. The Exchange removes
the Retail Liquidity Identifier previously disseminated through the
MEMOIR Depth and MEMOIR Top data products and through the appropriate
SIP as there is no longer designated RML Interest of at least one round
lot to buy ABC.
Example 2: Assume the same facts above, except that User 3 enters a
Limit Order with a Displayed instruction to buy 50 shares of ABC at
$10.06, which is posted to the MEMX Book. The incoming Retail Midpoint
Order to sell 1,200 shares of ABC will execute in the following order:
<bullet> First, against the full size of User 4's buy order for 100
shares at $10.05 (because it is priced more aggressively than User 3's
buy order and is priced more aggressively than the Midpoint Price, and
thus, it is eligible to execute against a Retail Midpoint Order, it has
priority over the RML Orders resting on the MEMX Book, and it executes
at the Midpoint Price pursuant to proposed Exchange Rule 11.22(c)(2));
<bullet> second, against the full size of User 3's buy order for 50
shares at $10.05 (because it is priced more aggressively than the
Midpoint Price, and thus, it is eligible to execute against a Retail
Midpoint Order, it has priority over the RML Orders resting on the MEMX
Book, and it executes at the Midpoint Price pursuant to proposed
Exchange Rule 11.22(c)(2));
<bullet> third, against the full size of User 2's buy order for 500
shares at $10.05 (because it has priority over User 1's RML Order that
is not designated to be identified as RML Interest pursuant to proposed
Exchange Rule 11.22(c)(3)(A)(i) and (ii)); and
<bullet> fourth, against the full size of User 1's buy order for
500 shares at $10.05.
The Retail Midpoint Order is filled for 1,150 shares and the
balance of 50 shares is cancelled back to the Retail Member
Organization. The Exchange removes the Retail Liquidity Identifier
previously disseminated through the MEMOIR Depth and MEMOIR Top data
products and through the appropriate SIP as there is no longer
designated RML Interest of at least one round lot to buy ABC.
Implementation
The Exchange proposes that all securities traded on the Exchange
would be eligible for inclusion in the RML Program. If the Commission
approves this proposed rule change, the Exchange will implement it
within 90 days of approval and will provide notice to Members and
market participants of the implementation timeline.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \40\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \41\ in particular, in that it
is 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 facilitating
transactions in securities, to remove impediments to and perfect the
[[Page 50417]]
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest. Specifically,
the Exchange believes that the proposed rule change is consistent with
these principles because it is designed to increase competition among
execution venues and offer the potential for meaningful price
improvement to orders of retail investors, including through
encouraging market participants to provide additional liquidity to
execute against the orders of retail investors at the Midpoint Price.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f(b).
\41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As discussed in the Purpose section, the Exchange's proposed RML
Program is a simple, transparent approach designed to provide retail
investors with meaningful price improvement opportunities by executing
at the Midpoint Price (through RMOs' use of the proposed new Retail
Midpoint Order) by incentivizing Users who wish to interact with such
retail liquidity to send additional non-displayed resting interest also
designed to execute at the Midpoint Price (through such Users' use of
the proposed new RML Order).
As described above, the proposed RML Program is comparable in
purpose and effect to the IEX Retail Program, and the Commission
recently approved several changes to the IEX Retail Program that make
certain of its features substantially similar to proposed features of
the RML Program.\42\ Accordingly, the Exchange's proposal generally
encourages competition between exchange venues. In this connection, the
Exchange believes that the proposed distinctions between the Exchange's
proposal and the approved IEX Retail Program will both enhance
competition amongst market participants and encourage competition
amongst exchange venues.
---------------------------------------------------------------------------
\42\ See IEX Retail Approval Order, supra note 9.
---------------------------------------------------------------------------
Section 6(b)(5) of the Act prohibits an exchange from establishing
rules that treat market participants in an unfairly discriminatory
manner. However, Section 6(b)(5) of the Act does not prohibit exchange
members or other broker-dealers from discriminating, so long as their
activities are otherwise consistent with the federal securities laws.
Nor does Section 6(b)(5) of the Act require exchanges to preclude
discrimination by broker-dealers, and the Exchange understands that
broker-dealers commonly differentiate between customers based on the
nature and profitability of their business.
While the RML Program would differentiate among its Users, in that
Retail Midpoint Orders may only be submitted by an RMO, as is the case
with other Retail Orders on the Exchange today, the Exchange believes
that such differentiation is not unfairly discriminatory but rather is
designed to promote a competitive process for retail executions while
providing retail investors with the potential to receive meaningful
price improvement at the Midpoint Price. In addition to the Exchange's
existing rules relating to Retail Orders,\43\ there is ample precedent
for differentiation of retail order flow in the existing approved
programs of other national securities exchanges,\44\ including the IEX
Retail Program, as described in the Purpose section. As the Commission
has recognized, retail order segmentation was designed to create
additional competition for retail order flow, leading to additional
retail order flow to the exchange environment and ensuring that retail
investors benefit from the better price that liquidity providers are
willing to give their orders.\45\
---------------------------------------------------------------------------
\43\ See Exchange Rule 11.21.
\44\ See infra note 47.
\45\ See Securities Exchange Act Release No. 85160 (February 15,
2019), 84 FR 5754 (February 22, 2019) (SR-NYSE-2018-28) (order
approving NYSE's Retail Liquidity Program on a permanent basis).
---------------------------------------------------------------------------
The Commission consistently highlights the need to ensure that the
U.S. capital markets are structured with the interests of retail
investors in mind, and highlighted its focus on the ``long-term
interests of Main Street investors'' as its number one strategic goal
for fiscal years 2018 to 2022 in the Commission Strategic Plan.\46\ The
Exchange believes its proposed RML Program would serve the retail
investing public by providing them with the opportunity for meaningful
price improvement on eligible trades.
---------------------------------------------------------------------------
\46\ See Commission Strategic Plan, supra note 7.
---------------------------------------------------------------------------
The Exchange notes that several other national securities
exchanges, including IEX as described herein, have for several years
operated retail liquidity programs that include market segmentation
whereby retail orders are permitted to interact with specified price-
improving liquidity or receive execution priority.\47\ The Exchange
understands that these programs were designed to promote competition
for retail order flow among execution venues, most of which continues
to be executed in the OTC markets rather than on exchanges. Similarly,
the Exchange's proposed RML Program is designed to provide an
additional competitive alternative for retail orders to receive price
improvement. The Exchange believes that it is appropriate to provide
incentives to bring more retail order flow to a public exchange. As
described in the Purpose section, these incentives include the
opportunity for Retail Orders to receive meaningful price improvement
at the Midpoint Price (through RMOs' use of the proposed Retail
Midpoint Order) by providing all Users with the opportunity to provide
price-improving liquidity to such orders (through Users' use of the
proposed RML Order).
---------------------------------------------------------------------------
\47\ See IEX Rule 11.232. See also NYSE Rule 107C, NYSE Arca
Equities Rule 7.44, Cboe EDGX Rule 11.9(a)(2)(A) and (B), Cboe BYX
Rule 11.24, and Nasdaq BX Rule 4780.
---------------------------------------------------------------------------
Definitions
The Exchange believes that it is consistent with the Act for a
Retail Midpoint Order to be a Retail Order that is a Midpoint Peg Order
with a TIF instruction of IOC, as this is designed to ensure that such
orders are entered on behalf of retail investors \48\ and will receive
price improvement at the Midpoint Price when executing against resting
RML Orders. Similarly, the Exchange believes that it is consistent with
the Act for an RML Order to be a Midpoint Peg Order with a TIF
instruction of Day, RHO, or GTT, as this is designed to ensure that
such orders are able to post to the MEMX Book and will provide price
improvement at the Midpoint Price to retail investors when executing
against incoming Retail Midpoint Orders. The Exchange also believes
that it is appropriate and consistent with the Act for Retail Midpoint
Orders and RML Orders to not be eligible for routing because, as noted
above, such orders are designed to execute on the Exchange against each
other and, as Pegged Orders, are not eligible for routing under the
Exchange's current rules relating to Pegged Orders.
---------------------------------------------------------------------------
\48\ An RMO must exercise due diligence and monitor orders that
it enters as Retail Orders to ensure that such orders originate from
natural persons (i.e., retail investors). See Exchange Rule
11.21(b)(6).
---------------------------------------------------------------------------
The Exchange further believes that it is consistent with the Act to
structure its RML Program such that Retail Midpoint Orders and RML
Orders are only eligible to execute against each other (subject to the
exception of Retail Midpoint Orders being eligible to execute against
other orders priced more aggressively than the Midpoint Price in order
to maintain price priority on the Exchange, as described above) to
provide a mechanism whereby liquidity-providing Users can provide
price-improving liquidity at the Midpoint Price specifically to retail
investors, and liquidity-removing RMOs submitting orders on behalf of
retail investors can interact with such price-improving liquidity at
the Midpoint Price in a deterministic manner. This structure
[[Page 50418]]
would thus facilitate the interaction of such liquidity-providing Users
with the orders of retail investors, which the Exchange believes is
desirable for certain Users, as described above, while avoiding the
possibility of such Users unintentionally interacting with another type
of market participant. Accordingly, the Exchange believes that it is
consistent with the Act for RML Orders to only execute against Retail
Midpoint Orders (subject to the exception of Retail Midpoint Orders
being eligible to execute against other orders priced more aggressively
than the Midpoint Price) so as to incentivize the entry of RML Orders
and thereby provide meaningful price improvement to retail investors.
Further, as noted above, the concept of an order type that is only
eligible to interact with a specific contra-side order type has
previously been approved by the Commission both in the context of
liquidity-providing orders for retail programs and in other
contexts.\49\ The Exchange reiterates that RMOs may continue to submit
their Retail Orders to the Exchange to execute against the various
other order types offered by the Exchange, at prices different than the
Midpoint Price, as they can today.
---------------------------------------------------------------------------
\49\ See supra notes 21-22 and accompanying text.
---------------------------------------------------------------------------
For the foregoing reasons, the Exchange believes that the proposed
definitions of Retail Midpoint Order and RML Order, and the proposed
structure of the RML Program whereby such orders are only eligible to
execute against each other (subject to the exception of Retail Midpoint
Orders being eligible to execute against other orders priced more
aggressively than the Midpoint Price) and at the Midpoint Price, are
designed to promote just and equitable principles of trade, foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
further the investor protection and public interest objectives of
Section 6(b) of the Act, by establishing a simple, transparent
structure that is designed to facilitate the provision of meaningful
price improvement (i.e., at the Midpoint Price) for orders of retail
investors in a deterministic manner.
Retail Liquidity Identifier
The Exchange believes that it is consistent with the Act to
disseminate a Retail Liquidity Identifier in connection with its RML
Program, as described in the Purpose section. The purpose of the Retail
Liquidity Identifier is to provide relevant market information to RMOs
that there is available RML Interest on the Exchange. The dissemination
is thus designed to augment the total mix of information available to
RMOs that may benefit the Retail Orders they represent by encouraging
RMOs to send such retail liquidity as Retail Midpoint Orders designed
to receive price improvement by executing at the Midpoint Price against
available RML Interest.
As noted above, the proposed Retail Liquidity Identifier is
substantially similar to the Retail Liquidity Identifier disseminated
by IEX, which was recently approved by the Commission, except that the
Exchange would enable a User to elect whether to designate an RML Order
to be identified as such for purposes of the Retail Liquidity
Identifier. The Exchange believes that providing Users with the
optionality to designate an RML Order to be identified as such for
purposes of the Retail Liquidity Identifier is appropriate and
consistent with the Act because, as described above, some Users
submitting RML Orders, such as those with a larger sized RML Order, may
be concerned about potential information leakage when the Retail
Liquidity Identifier persists for extended periods of time despite
multiple executions of Retail Midpoint Orders against such order. The
Exchange thus believes that offering this optionality would enable such
Users to manage their RML Orders more effectively and would therefore
foster cooperation and coordination with persons engaged in
facilitating transactions in securities and remove impediments to and
perfect the mechanism of a free and open market and a national market
system. Further, as noted above, the ability for a User to elect
whether to designate their RML Interest to be identified as such for
purposes of the Retail Liquidity Identifier is similar in purpose and
effect to the ability of a User to elect whether to designate their
orders as displayed or non-displayed on an exchange's order book--
functionality that is offered by most U.S. equities exchanges,
including the Exchange--as it is simply intended to provide Users with
the ability to decide which information they publicize in the
marketplace, and thus, the Exchange does not believe this aspect of the
proposal raises any novel issues for the Commission to consider.
The Exchange also believes that removing the Retail Liquidity
Identifier previously disseminated through the MEMOIR Depth and MEMOIR
Top data products and through the appropriate SIP after executions
against Retail Midpoint Orders have depleted the available designated
RML Interest such that the remaining designated RML Interest does not
aggregate to form at least one round lot is consistent with the Act, as
it would increase transparency in the market by indicating to RMOs that
there is no longer designated RML Interest of at least one round lot
available, which the Exchange believes would reduce the amount of
Retail Midpoint Orders sent to the Exchange that are cancelled back to
the User when there is no actionable RML Interest to execute against.
In this regard, the Exchange believes that its proposed implementation
of the Retail Liquidity Identifier would foster cooperation and
coordination with persons engaged in facilitating transactions in
securities and remove impediments to and perfect the mechanism of a
free and open market and a national market system. As noted above, the
Exchange also believes this implementation is consistent with the
implementation of the other exchanges that disseminate Retail Liquidity
Identifiers.
Priority and Order Execution
The Exchange further believes that its priority and order execution
approach for the RML Program is consistent with the Act. As discussed
above, the RML Program is designed to incentivize RMOs to submit Retail
Midpoint Orders to the Exchange to receive meaningful price improvement
while simultaneously incentivizing Users and their clients to enter
additional non-displayed interest in the form of RML Orders that will
only trade with, and offer meaningful price improvement to, Retail
Midpoint Orders. Thus, the proposed RML Program is designed to
facilitate the provision of meaningful price improvement (i.e., at the
Midpoint Price) for orders of retail investors.
The Exchange believes that it is appropriate and consistent with
the Act to structure its RML Program such that Retail Midpoint Orders
and RML Orders are only eligible to execute against each other at the
Midpoint Price, so that Retail Midpoint Orders, which are entered on
behalf of retail investors, receive price improvement that is
meaningful by definition, as they are guaranteed, if executed, to
execute at the Midpoint Price. The Exchange believes that introducing a
program that provides and encourages additional liquidity and price
improvement to Retail Orders, in the form of Retail Midpoint Orders
designed to execute at the Midpoint Price, is appropriate because
retail investors are typically less sophisticated than professional
market participants and therefore would
[[Page 50419]]
not have the type of technology to enable them to compete with such
market participants. Therefore, the Exchange believes that it is
consistent with the public interest and the protection of investors to
provide retail investors with these enhanced execution opportunities.
Additionally, as discussed above, the Exchange believes that the
opportunity to obtain meaningful price improvement at the Midpoint
Price should operate as a powerful incentive for RMOs to send Retail
Orders to the Exchange in the form of Retail Midpoint Orders, thereby
contributing to the Exchange's midpoint liquidity to the benefit of all
Users. While the Exchange typically has resting non-displayed liquidity
priced to execute at the Midpoint Price, a key aspect of the proposed
RML Program is to further incentivize Users and their clients to enter
additional non-displayed interest that will trade with Retail Orders
and offer meaningful price improvement at the Midpoint Price (i.e., in
the form of RML Orders) in a deterministic manner.
In addition, the proposal to execute Retail Midpoint Orders against
RML Orders only at the Midpoint Price is also designed to facilitate
RMOs' compliance with their best execution obligations when acting as
agent on behalf of a Retail Order.\50\ Specifically, as noted in FINRA
Regulatory Notice 15-46 (Guidance on Best Execution Obligations in
Equity, Options and Fixed Income Markets), when conducting its review
of execution quality in any security, a firm should consider, among
other things, whether it could obtain mid-point price improvement on
one venue versus less price improvement on another venue.\51\ Further,
limiting the execution of Retail Midpoint Orders against RML Orders to
the Midpoint Price is designed to be a simple approach that does not
introduce unnecessary complexity to the order entry and execution
process on the Exchange, as both orders are proposed to be a type of
Midpoint Peg Order. The Exchange notes that under the initial
implementation of the IEX Retail Program, approved by the Commission in
2019, IEX Retail Orders and IEX RLP Orders were only eligible to trade
at the Midpoint Price.\52\ Accordingly, the Exchange does not believe
this aspect of the proposal raises any novel issues that have not been
considered by the Commission.
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\50\ All Users that handle customer orders as agent are required
to be FINRA members, and therefore are subject to FINRA guidance.
See 17 CFR 240.15b9-1(a).
\51\ See FINRA Regulatory Notice 15-46, endnote 25, available at
<a href="https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf">https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf</a>.
\52\ See Securities Exchange Act Release No. 86619 (August 9,
2019), 84 FR 41769 (August 15, 2019) (SR-IEX-2019-05) (order
granting approval of a proposed rule change to establish the IEX
Retail Program). The Exchange notes that IEX subsequently amended
the IEX Retail Program to permit executions at prices other than the
Midpoint Price in certain limited circumstances--i.e., against
displayed odd lots priced at or more aggressively than the Midpoint
Price--although the Exchange is instead proposing to execute Retail
Midpoint Orders against Displayed Odd Lot Orders priced more
aggressively than the Midpoint Price at the Midpoint Price in this
circumstance, as described above. See Securities Exchange Act
Release No. 91324 (March 15, 2021), 86 FR 15015 (March 19, 2021)
(SR-IEX-2021-03) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change to Allow Retail Orders to Trade with Certain
Aggressively Priced Displayed Odd Lot Orders).
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The Exchange further believes that it is appropriate and consistent
with the Act to execute Retail Midpoint Orders against Displayed Odd
Lot Orders and/or Non-Displayed Orders priced more aggressively than
the Midpoint Price at the Midpoint Price, rather than at the prices at
which such orders are ranked on the MEMX Book, as doing so would ensure
that the priority of more aggressively priced orders is maintained on
the Exchange, as described above, in a manner that provides the
expected execution price to RMOs that submit Retail Midpoint Orders and
provides price improvement to Users that submit more aggressively
priced orders. As noted above, by selecting an order type that is
specifically limited to executing at the Midpoint Price, an RMO would
expect to receive an execution of their Retail Midpoint Order at the
Midpoint Price and not at any other price(s), and thus, the Exchange is
proposing to address the needs of RMOs that focus their Retail Order
trading on receiving executions at the Midpoint Price in a
deterministic manner through the adoption of the Retail Midpoint Order.
Additionally, as noted above, use of this order type is completely
voluntary, and RMOs may continue to submit their Retail Orders to the
Exchange to execute against orders at prices different than the
Midpoint Price, outside of the RML Program, as they can today.
Moreover, the Exchange believes that there are benefits associated with
executing Retail Orders submitted to the Exchange at one price level
rather than multiple prices, such as simplified record-keeping for
retail investors and execution reporting by RMOs. The Exchange believes
such benefits, in addition to the simplicity and transparency of the
RML Program achieved by permitting executions of the proposed new order
types only at the Midpoint Price, outweigh the potential additional
price improvement that Retail Midpoint Orders could receive if they
were permitted to execute against Displayed Odd Lot Orders and/or Non-
Displayed Orders priced more aggressively than the Midpoint Price at
the prices at which such orders were ranked, in a manner consistent
with the objectives of Section 6(b)(5) of the Act \53\ described above.
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\53\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that first executing a Retail Midpoint Order
against any resting Displayed Odd Lot Orders and/or Non-Displayed
Orders priced more aggressively than the Midpoint Price ahead of RML
Orders is consistent with the Act because, notwithstanding the RML
Program's goal of matching Retail Midpoint Orders against RML Orders at
the Midpoint Price in a deterministic manner, doing so ensures that the
priority of more aggressively priced orders is maintained on the
Exchange, as described above. Maintaining price priority in this
regard, consistent with its current rules, reflects the Exchange's
overall goal of incentivizing Users to submit aggressively priced
orders to the Exchange, which contribute to the overall market quality
and attract liquidity on the Exchange, thereby promoting just and
equitable principles of trade and removing impediments to and
perfecting the mechanism of a free and open market and a national
market system. Furthermore, as the proposed RML Program provides for a
mechanism to respect the priority of more aggressively priced liquidity
on the Exchange prior to executing Retail Midpoint Orders against RML
Orders at the Midpoint Price, similar to Nasdaq's handling of MELOs, as
described above, the Exchange believes that this aspect of the proposal
does not raise any novel issues for the Commission to consider.
The Exchange believes that providing execution priority to RML
Orders that are designated to be identified as such for purposes of the
Retail Liquidity Identifier ahead of RML Orders that are not so
designated is consistent with the Act, as the Exchange believes that
designated RML Orders would attract additional liquidity to the
Exchange. Specifically, as noted above, the Exchange believes that
dissemination of the Retail Liquidity Identifier is likely to be an
important factor in attracting incoming Retail Midpoint Orders, and
thus increases the likelihood of execution for resting RML Orders.
Therefore, the Exchange believes that it removes impediments to and
perfects the mechanism of a free and open market and national market
system to provide execution priority to designated
[[Page 50420]]
RML Orders, which cause the dissemination of the Retail Liquidity
Identifier, over those that do not. Additionally, the Exchange believes
that providing execution priority to designated RML Orders is not
unfairly discriminatory since any User can designate their RML Orders
to be identified as such for purposes of the Retail Liquidity
Identifier, and the Exchange believes that Users would only choose not
to designate RML Orders to be identified as such when another purpose,
such as the potential for information leakage, outweighs the importance
of execution priority for such orders.
In sum, the Exchange submits that the proposed RML Program is a
simple, transparent approach designed to provide an opportunity for
retail customers' orders to receive meaningful price improvement in a
manner generally consistent with the approved retail programs of other
exchanges. Thus, the Exchange believes that the proposed RML Program is
consistent with the Act in that it is designed to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in 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.
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. To the contrary, the
Exchange believes that the proposed RML Program would enhance
competition and execution quality for retail investors and would
enhance competition for Users and their clients seeking to interact
with retail liquidity.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition since competing venues
have and can continue to adopt similar retail programs, subject to the
SEC rule change process. The Exchange operates in a highly competitive
market in which market participants can easily direct their orders to
competing venues, including off-exchange venues.
The Exchange also does not believe that the proposed rule change
will impose any burden on intramarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act. As described
above, a Retail Midpoint Order may only be submitted by firms approved
to send Retail Orders on the Exchange (i.e., RMOs), which is comparable
to an IEX Retail Order offered under the IEX Retail Program and retail
programs on other exchanges where specific rules have been approved
allowing only certain participants to send Retail Orders.\54\ All Users
would be eligible to enter an RML Order, and all Users would be
eligible to execute against an incoming Retail Midpoint Order in price
priority in accordance with the Exchange's existing rules. Moreover,
the proposed rule change would provide potential benefits to all Users
to the extent it is successful in attracting additional midpoint
liquidity.
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\54\ See supra note 47.
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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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#2a585f464f07494547474f445e596a594f49044d455c"><span class="__cf_email__" data-cfemail="e290978e87cf818d8f8f878c9691a2918781cc858d94">[email protected]</span></a>. Please include
File Number SR-MEMX-2021-10 on the subject line.
Paper Comments
<bullet> 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-MEMX-2021-10. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-MEMX-2021-10 and should be submitted on
or before September 29, 2021.
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\55\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19294 Filed 9-7-21; 8:45 am]
BILLING CODE 8011-01-P
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