Notice2022-03022
Self-Regulatory Organizations; MEMX LLC; Notice of Filing of Amendment No. 1 to, and Designation of a Longer Period for Commission Action on Proceedings To Determine Whether To Approve or Disapprove, a Proposed Rule Change To Establish a Retail Midpoint Liquidity Program
Primary source
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Published
February 14, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 30 (Monday, February 14, 2022)</title>
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[Federal Register Volume 87, Number 30 (Monday, February 14, 2022)]
[Notices]
[Pages 8305-8314]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03022]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94189; File No. SR-MEMX-2021-10]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing of
Amendment No. 1 to, and Designation of a Longer Period for Commission
Action on Proceedings To Determine Whether To Approve or Disapprove, a
Proposed Rule Change To Establish a Retail Midpoint Liquidity Program
February 8, 2022.
On August 18, 2021, MEMX LLC (``MEMX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to establish a
Retail Midpoint Liquidity Program (``Program''). The proposed rule
change was published for comment in the Federal Register on September
8, 2021.\3\ On October 19, 2021, the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\4\ On December 7, 2021, the
Commission instituted proceedings under Section 19(b)(2)(B) of the Act
to determine whether to approve or disapprove the proposed rule
change.\5\ On January 27, 2022, the Exchange filed Amendment No. 1 to
the proposed rule change, which supersedes the original filing in its
entirety, and is described in Items I and II below, which Items have
been prepared by the Exchange.\6\ The Commission is
[[Page 8306]]
publishing this notice to solicit comments on the proposed rule change,
as modified by Amendment No. 1, from interested persons, and is
designating a longer period within which to approve or disapprove the
proposed rule change, as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 92844 (September 1,
2021), 86 FR 50411 (September 8, 2021). Comments on the proposed
rule change can be found at: <a href="https://www.sec.gov/comments/sr-memx-2021-10/srmemx202110.htm">https://www.sec.gov/comments/sr-memx-2021-10/srmemx202110.htm</a>.
\4\ See Securities Exchange Act Release No. 93383 (October 19,
2021), 86 FR 58964 (October 25, 2021).
\5\ See Securities Exchange Act Release No. 93727 (December 7,
2021), 86 FR 70874 (December 13, 2021).
\6\ In Amendment No. 1, the Exchange, among other things: (1)
Eliminated the ability for Users (defined below) to elect whether to
designate an RML Order to be identified as such for purposes of the
Retail Liquidity Identifier, (2) proposes to allow Retail Midpoint
Orders to trade with both displayed odd lot and non-displayed orders
priced better than the Midpoint Price (defined below) at those
orders' ranked prices rather than at the less aggressive Midpoint
Price, and (3) proposes to allow a Retail Midpoint Order to interact
with midpoint peg orders (i.e., non-RML Orders) that have elected to
be able to execute in the Retail Midpoint Liquidity Program, though
only after the Retail Midpoint Order has executed against any better
priced liquidity and any RML Orders. Cf. Investors Exchange Rule
11.232(e)(3)(A)(iii) (providing that Retail Liquidity Provider
orders (the equivalent to MEMX's proposed RML Orders) do not have a
priority advantage over other non-displayed orders priced to execute
at the midpoint of the national best bid and offer; they instead are
ranked in time priority with other midpoint interest).
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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. This Amendment No. 1
supersedes the original filing in its entirety. 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
1. Purpose
The Exchange is filing this Amendment No. 1 to SR-MEMX-2021-10 \7\
in order to address issues the Commission raised in the OIP and make
other related modifications.
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\7\ Securities Exchange Act Release No. 92844 (September 1,
2021), 86 FR 50411 (September 8, 2021) (the ``Initial Proposal'').
The Commission issued an Order Instituting Proceedings to Determine
Whether to Approve or Disapprove the Initial Proposal. See
Securities Exchange Act Release No. 93727 (December 7, 2021), 86 FR
70874 (December 13, 2021) (the ``OIP'').
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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 such that liquidity-providing Users \8\
will be incentivized to direct additional orders designed to execute at
the midpoint of the national best bid and offer (``NBBO'') (such price,
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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\8\ 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.\9\ 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.\10\
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\9\ 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>.
\10\ 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 in which 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,
thereby providing enhanced opportunities for meaningful price
improvement 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 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.'' \11\ 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 at
the Midpoint Price. The RML Program would therefore be consistent with
the goals of the Commission to encourage markets that are structured to
benefit ordinary investors,\12\ while facilitating order interaction to
the benefit of all market participants.
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\11\ 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>.
\12\ 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 \13\ 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
[[Page 8307]]
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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\13\ 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.\14\ 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.\15\ 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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\14\ 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 more aggressive
than the Midpoint Price. The Exchange notes that this aspect of the
IEX Retail Program is similar to the proposed RML Program in that
executions of Retail Midpoint Orders would be supported at the
Midpoint Price as well as prices that are more aggressive than the
Midpoint Price, as further described below. The Exchange further
notes that Retail Orders would still be eligible to execute at any
prices (including prices that are less aggressive than the Midpoint
Price) outside of the RML Program as they are today.
\15\ See IEX Retail Approval Order, supra note 14.
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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 orders against Retail Midpoint
Orders at the Midpoint Price (i.e., RML Orders or Eligible Midpoint Peg
Orders, as defined below), and in turn would provide a rebate or free
executions to RMOs for executions of their Retail Midpoint Orders
against such 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
\16\ with a Midpoint Peg \17\ instruction (``Midpoint Peg Order'') and
that is only eligible to execute against RML Orders (a proposed new
order type described below), orders priced more aggressively than the
Midpoint Price, and Midpoint Peg Orders that are not RML Orders but are
designated as eligible to execute against Retail Midpoint Orders (i.e.,
Eligible Midpoint Peg Orders, which are further described below),
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.\18\
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\16\ 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.
\17\ 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).
\18\ ``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,\19\ RHO,\20\ or GTT \21\ and may
not include a Minimum Execution Quantity \22\ instruction. Any User
would be permitted, but not required, to submit RML Orders. RML Orders
would only execute at the Midpoint Price, as stated in proposed
Exchange Rule 11.22(c)(1). The Exchange notes that 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.\23\
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\19\ See Exchange Rule 11.6(o)(2).
\20\ See Exchange Rule 11.6(o)(5).
\21\ See Exchange Rule 11.6(o)(4).
\22\ 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).
\23\ See IEX Rule 11.190(b)(14), which describes the IEX RLP
Order. See also IEX Retail Approval Order, supra note 14.
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Third, the term ``Eligible Midpoint Peg Order'' would be defined as
a Midpoint Peg Order that is not an RML Order but includes an
instruction that such order is eligible to execute against Retail
Midpoint Orders through the execution process described in proposed
Exchange Rule 11.22(c). Thus, as proposed, a User submitting a Midpoint
Peg Order that is not an RML Order would have the ability, but is not
required, to include an instruction that such order is eligible to
execute against Retail Midpoint Orders (i.e., to designate such order
as an Eligible Midpoint Peg Order).\24\
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\24\ The Exchange is also proposing to amend Exchange Rule
11.6(h)(2), which describes Midpoint Peg Orders generally, to
reflect that a User may, but is not required to, include an
instruction that a Midpoint Peg Order that is not an RML Order is
eligible to execute against a Retail Midpoint Order.
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The RML Program is generally intended to facilitate the execution
of Retail Midpoint Orders against RML Orders at the Midpoint Price.
Nevertheless, the Exchange believes that it is appropriate to permit
Retail Midpoint Orders to also execute against non-RML Midpoint Peg
Orders resting on the MEMX Book that are designated as eligible to
execute against Retail Midpoint Orders (i.e., Eligible Midpoint Peg
Orders). While retail orders are typically smaller in size, and would
thus generally be fully executed through interactions with RML Orders
and/or orders priced more aggressively than the Midpoint Price,
allowing Retail Midpoint Orders to trade with Eligible Midpoint Orders
would increase the potential pool of liquidity that larger Retail
Midpoint Orders may interact with to the benefit of retail investors.
At the same time, although many market participants that post liquidity
at the Midpoint Price through Midpoint Peg Orders may be willing to
trade with retail order flow that is generally considered less
informed, the Exchange believes that it is important to allow Users to
choose whether they would like their Midpoint Peg Orders to execute
against Retail Midpoint Orders
[[Page 8308]]
in the RML Program where such orders may be subject to a different fee
structure.\25\ Similar to liquidity swap instructions available on
other U.S. equity exchanges,\26\ the Exchange would therefore allow
these Users to control their economics by choosing to opt in or out of
interacting with Retail Midpoint Orders entered into the RML Program.
The Exchange notes that regardless of whether the User chooses to opt
in (i.e., designate a non-RML Midpoint Peg Order as an Eligible
Midpoint Peg Order), such order would remain available on the MEMX Book
where it is accessible to all market participants outside of the RML
Program, including market participants submitting orders on behalf of
retail investors, as it is today.\27\ The Exchange notes that enabling
a User to choose whether its Midpoint Peg Orders may interact with
Retail Midpoint Orders is different than the IEX Retail Program in
which all such orders are eligible to interact against incoming Retail
Orders; however, the Exchange believes that providing such optionality
is appropriate for the reasons described above.
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\25\ As noted above, the Exchange will submit a separate
proposal to amend its Fee Schedule in connection with the
implementation of the RML Program. Under that proposal, the Exchange
expects to provide free executions or charge a fee to Users for
executions of their liquidity-providing Eligible Midpoint Peg Orders
against incoming Retail Midpoint Orders, whereas liquidity-providing
Midpoint Peg Orders ordinarily receive a rebate under the Exchange's
pricing.
\26\ See, e.g., Cboe BZX Exchange, Inc. (``Cboe BZX'') Rule
11.3(c)(12) (Non-Displayed Swap Order). A Non-Displayed Swap
(``NDS'') Order entered on Cboe BZX elects to remove liquidity
against an incoming Post Only Order that would otherwise not trade
on entry. In such situations the NDS Order is treated as liquidity
remover and would pay associated fees.
\27\ For example, a Retail Order could be entered onto the MEMX
Book outside of the RML Program where it would be eligible to trade
with other liquidity-providing orders, including Midpoint Peg Orders
that have not opted into trading with Retail Midpoint 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
through the RML Program, such orders would not be eligible for
routing.\28\
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\28\ 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 \29\ and MEMOIR Top,\30\ and the appropriate
securities information processor (``SIP'') when RML Order interest
(``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 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''). 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 RML Interest but would not include the price or size.\31\ 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. The Exchange notes that the
Exchange's proposed Retail Liquidity Identifier is substantively
identical to the Retail Liquidity Identifier disseminated by IEX under
the IEX Retail Program.\32\
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\29\ See Exchange Rule 13.8(a).
\30\ See Exchange Rule 13.8(b).
\31\ The Exchange plans to submit a letter requesting exemptive
relief from obligations set forth in Rule 602 of Regulation NMS.
\32\ See IEX Rule 11.232(f); see also IEX Retail Approval Order,
supra note 14, at 38167.
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As noted above, the Exchange would only disseminate the Retail
Liquidity Identifier when 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 \33\ as well as
the SIP Plans' requirements.\34\ 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.\35\ 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.\36\
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.\37\ 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 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.\38\
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\33\ See, e.g., IEX Rule 11.232(f), Cboe BYX Rule 11.24(e), and
NYSE Arca Equities Rule 7.44(j).
\34\ 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>.
\35\ 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).
\36\ See Exchange Rule 11.8(c)(6).
\37\ 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.
\38\ See IEX Rule 11.232(f); see also IEX Retail Approval Order,
supra note 14, at 38167.
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The Exchange also proposes to remove the Retail Liquidity
Identifier previously disseminated through the
[[Page 8309]]
MEMOIR Depth and MEMOIR Top data products and through the appropriate
SIP after executions against and/or cancellations of Retail Midpoint
Orders have depleted the available RML Interest such that the remaining
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 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.
The Exchange anticipates that Retail Midpoint Orders would mostly
interact with RML Orders due to the Retail Liquidity Identifier. In
this regard, 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. In turn, the Exchange 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 or Eligible Midpoint Peg Orders, 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.
Priority and Order Execution
The proposed priority and order execution under the RML Program
when a Retail Midpoint Order is received by the Exchange is as follows:
<bullet> First, a Retail Midpoint Order would execute against
orders resting on the MEMX Book that are priced more aggressively than
the Midpoint Price. More specifically, proposed Exchange Rule
11.22(c)(2) provides that if there is: (A) A Limit Order \39\ of Odd
Lot \40\ 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.\41\ Retail Midpoint Orders would be
executed against such Displayed Odd Lot Orders and/or Non-Displayed
Orders at the prices that such resting orders are ranked on the MEMX
Book.
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\39\ See Exchange Rule 11.8(b).
\40\ See Exchange Rule 11.6(q)(2).
\41\ 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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<bullet> Next, after executing against orders priced more
aggressively than the Midpoint Price pursuant to proposed Exchange Rule
11.22(c)(2), a Retail Midpoint Order would then execute against RML
Orders resting on the MEMX Book at the Midpoint Price in time priority
pursuant to proposed Exchange Rule 11.22(c)(3).
<bullet> Finally, after executing against orders priced more
aggressively than the Midpoint Price pursuant to proposed Exchange Rule
11.22(c)(2) and RML Orders pursuant to proposed Exchange Rule
11.22(c)(3), a Retail Midpoint Order would then execute against
Eligible Midpoint Peg Orders at the Midpoint Price in time priority
pursuant to proposed Exchange Rule 11.22(c)(4).\42\
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\42\ Any remaining portion of a Retail Midpoint Order that is
not executed pursuant to the execution process described in proposed
Exchange Rule 11.22(c) would be cancelled back to the entering RMO
since a Retail Midpoint Order may only be entered with a TIF of IOC
and is not eligible for routing. See Exchange Rule 11.6(o)(1).
---------------------------------------------------------------------------
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 believes that this aspect of the RML Program is
appropriate because it would enable an RMO entering a Retail Midpoint
Order to capture better prices available on the MEMX Book while seeking
out midpoint liquidity through the RML Program. Passing along this
additional available price improvement to retail investors is
consistent with the RML Program's overall objective to provide
meaningful price improvement opportunities to retail investors and the
Commission's goal to encourage markets that are structured to benefit
ordinary investors.
At the Midpoint Price, the Exchange believes it is appropriate to
execute RML Orders, which contribute to the dissemination of the Retail
Liquidity Identifier, ahead of Eligible Midpoint Peg Orders, which do
not contribute to the dissemination of the Retail Liquidity Identifier
and are not displayed on the MEMX Book. As previously discussed, the
Retail Liquidity Identifier is likely to be the principal factor in
attracting RMOs to send Retail Midpoint Orders as it signals to the
market that there is available midpoint liquidity on the Exchange and
thus increases the likelihood of execution for such orders on the
Exchange.
Although certain market participants may not ordinarily post
liquidity at the Midpoint Price on exchanges due to adverse selection
risks, the Exchange believes that they may be willing to do so if they
can limit their interactions to Retail Orders (i.e., through the use of
RML Orders), which are generally considered to be less informed, as
described above. However, entering RML Orders involves some additional
risk for those market participants as the Retail Liquidity Identifier
will signal that there is a buyer or seller that is willing to trade
with retail investors at the Midpoint Price. The proposed RML Program
therefore appropriately balances the risks and incentives associated
with entering RML Orders such that market participants that wish to
interact with Retail Midpoint Order flow would be free to determine
whether to submit RML Orders that contribute to the dissemination of
the Retail Liquidity Identifier and have execution priority when
trading with incoming Retail Midpoint Orders, or instead enter Eligible
Midpoint Peg Orders that remain non-displayed but cede execution
priority to those RML Orders. Thus, similar to the priority afforded to
orders that are displayed on the MEMX Book, which receive priority over
non-displayed orders because they contribute to price discovery and
attract liquidity to the Exchange, the Exchange believes that RML
Orders, which contribute to the dissemination of the Retail Liquidity
Identifier that signals to RMOs that there is available midpoint
liquidity on the Exchange, should receive priority over Eligible
Midpoint Peg Orders for the same reasons.
The Exchange notes that this aspect of the proposed RML Program is
partially different than the IEX Retail Program in that the IEX Retail
Program does not provide priority to an IEX RLP Order
[[Page 8310]]
over other orders at the Midpoint Price, whereas the Exchange has
proposed providing RML Orders with priority over Eligible Midpoint Peg
Orders. However, the Exchange submits that the proposed order priority
under the RML Program, as described above, is consistent with general
principles of order priority on the Exchange and other U.S. equity
exchanges, where orders at superior prices receive first priority and,
at any particular price, orders that contribute to price discovery
receive priority ahead of non-displayed orders that do not contribute
to market transparency. As such, the Exchange does not believe that the
proposed order priority under the RML Program raises any novel issues
for the Commission to consider.
The following example, which the Exchange proposes to codify in
proposed Exchange Rule 11.22(c)(5) as slightly modified to conform with
the Rule's context, illustrates 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 to buy ABC for 500 shares. The
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 RML Interest of at least one round lot to
buy ABC.
<bullet> User 2 then enters a Pegged Order with a Midpoint Peg
instruction to buy ABC for 500 shares that includes an instruction that
such order is eligible to execute against Retail Midpoint Orders (i.e.,
an Eligible Midpoint Peg Order). The order is posted to the MEMX Book
as an Eligible Midpoint Peg Order to buy ABC at $10.05.
<bullet> User 3 then enters a Limit Order with a Displayed
instruction \43\ to buy 50 shares of ABC at $10.06, which is posted to
the MEMX Book.
---------------------------------------------------------------------------
\43\ 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).
---------------------------------------------------------------------------
<bullet> User 4 then enters a Pegged Order with a Midpoint Peg
instruction to buy ABC for 500 shares that is not an RML Order and does
not include an instruction that such order is eligible to execute
against Retail Midpoint Orders (i.e., a Midpoint Peg Order that is not
an Eligible Midpoint Peg Order). The order is posted to the MEMX Book
as a Pegged Order to buy ABC at $10.05.
<bullet> User 5 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: 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 5's buy Limit Order
for 100 shares at $10.07 (because it is priced more aggressively than
the Midpoint Price, and thus, it is eligible to execute against a
Retail Midpoint Order and it is also the most aggressively priced
order);
<bullet> second, against the full size of User 3's buy Limit Order
for 50 shares at $10.06 (because it is priced more aggressively than
the Midpoint Price, and thus, it is eligible to execute against a
Retail Midpoint Order and it is the next most aggressively priced
order);
<bullet> third, against the full size of User 1's buy RML Order for
500 shares at $10.05; and
<bullet> fourth, against the full size of User 2's buy Pegged Order
for 500 shares at $10.05 (because it is an Eligible Midpoint Peg
Order).
The Retail Midpoint Order does not execute against User 4's buy
Pegged Order because User 4's buy Pegged Order is not an RML Order or
an Eligible Midpoint Peg Order. 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
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 \44\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \45\ 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
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.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78f(b).
\45\ 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, 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 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 or substantively
identical to proposed features of the RML Program.\46\ 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.
---------------------------------------------------------------------------
\46\ See IEX Retail Approval Order, supra note 14.
---------------------------------------------------------------------------
Section 6(b)(5) of the Act prohibits an exchange from establishing
rules that treat market participants in an unfairly discriminatory
manner. 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. In addition to the
[[Page 8311]]
Exchange's existing rules relating to Retail Orders,\47\ there is ample
precedent for differentiation of retail order flow in the existing
approved programs of other national securities exchanges,\48\ 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 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.\49\
---------------------------------------------------------------------------
\47\ See Exchange Rule 11.21.
\48\ See infra note 51.
\49\ 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.\50\ 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.
---------------------------------------------------------------------------
\50\ See Commission Strategic Plan, supra note 12.
---------------------------------------------------------------------------
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.\51\ 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 (or better if there is resting liquidity priced
more aggressively than 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.
---------------------------------------------------------------------------
\51\ 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 \52\ and will receive
price improvement at the Midpoint Price when executing against resting
RML Orders and Eligible Midpoint Peg 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.
---------------------------------------------------------------------------
\52\ 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 to provide a mechanism whereby liquidity-
providing Users can provide price-improving liquidity at the Midpoint
Price specifically to retail investors (i.e., through the use of RML
Orders), and liquidity-removing RMOs submitting orders on behalf of
retail investors can interact with such price-improving liquidity. This
structure 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 liquidity-providing 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 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 in the context of liquidity-providing orders for retail
programs.\53\
---------------------------------------------------------------------------
\53\ See supra note 23 and accompanying text (describing the IEX
RLP Order).
---------------------------------------------------------------------------
The Exchange notes that use of the RML Order and Retail Midpoint
Order types is completely voluntary and reiterates that Users
(including RMOs) may continue to submit their orders (including Retail
Orders) to the Exchange to execute against the various other order
types offered by the Exchange, at prices different than the Midpoint
Price, outside of the RML Program as they can today.
The Exchange also believes that it is consistent with the Act to
enable a User submitting a non-RML Midpoint Peg Order to include an
instruction that such order is eligible to execute against Retail
Midpoint Orders through the execution process described in proposed
Exchange Rule 11.22(c) (i.e., to designate such order as an Eligible
Midpoint Peg Order) so that incoming Retail Midpoint Orders submitted
on behalf of retail investors have a larger potential pool of midpoint
liquidity to interact with, and thus, a greater chance of being filled.
Additionally, the Exchange believes that allowing Users to choose
whether they would like their non-RML Midpoint Peg Orders to execute
against Retail Midpoint Orders in the RML Program where such orders may
be subject to a different fee structure, as described above, would
foster cooperation and coordination with persons engaged in
facilitating transactions in securities and would remove impediments to
and perfect the mechanism of a free and open market and a national
market system, as such optionality would enable these Users to more
effectively control their economics in a manner that is consistent with
order instructions available on other U.S. equity exchanges today.\54\
The Exchange reiterates that regardless of whether the User chooses to
designate a non-RML Midpoint Peg Order as an Eligible Midpoint Peg
Order, such order would remain available on the MEMX Book where it is
accessible to all market participants outside of the RML Program as it
is today.
---------------------------------------------------------------------------
\54\ See supra note 26 and accompanying text.
---------------------------------------------------------------------------
For the foregoing reasons, the Exchange believes that the proposed
definitions of Retail Midpoint Order, RML Order, and Eligible Midpoint
Peg Order, as well as the proposed structure of the RML Program, which
is designed
[[Page 8312]]
to facilitate executions of Retail Midpoint Orders and RML Orders
against each other at the Midpoint Price (and also permits Retail
Midpoint Orders to execute against other orders priced more
aggressively than the Midpoint Price and against Eligible Midpoint Peg
Orders 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 for orders of retail
investors.
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 substantively identical to the Retail Liquidity
Identifier disseminated by IEX, which was recently approved by the
Commission, and is consistent with the SIP Plans' requirements. As
such, the Exchange believes that adopting this same implementation for
its Retail Liquidity Identifier is consistent with the Act, as it would
foster cooperation and coordination with persons engaged in
facilitating transactions in securities and would remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and does not raise 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 RML Interest
such that the remaining 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 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 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 against
an RML Order, to execute at the Midpoint Price (or better if there is
more aggressively priced liquidity resting on the MEMX Book that it
executes against first). 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 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 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 activity to the benefit of all Users. While the
Exchange currently permits Users to post 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 that do not
typically post orders at the Midpoint Price on the Exchange to enter
additional non-displayed interest that will trade with incoming Retail
Orders and offer meaningful price improvement at the Midpoint Price.
In addition, the proposal to execute Retail Midpoint Orders against
RML Orders 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.\55\ 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.\56\ For these
reasons, the Exchange believes that this aspect of the proposal 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.
---------------------------------------------------------------------------
\55\ 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).
\56\ 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>.
---------------------------------------------------------------------------
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 doing
[[Page 8313]]
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 and general
principles of order execution on other U.S. equity exchanges, as
described above, 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.
The Exchange further believes that it is appropriate and consistent
with the Act to execute a Retail Midpoint Order against resting
Displayed Odd Lot Orders and/or Non-Displayed Orders priced more
aggressively than the Midpoint Price at the prices at which such orders
are ranked on the MEMX Book as doing so would maintain price priority
on the Exchange, as described above, in a manner that would enable an
RMO entering a Retail Midpoint Order to capture better prices available
on the MEMX Book while seeking out midpoint liquidity through the RML
Program, and then pass along this additional price improvement to
retail investors. In this regard, the Exchange believes that providing
retail investors with these enhanced execution opportunities is
consistent with the public interest and the protection of investors as
well as the Commission's goal to encourage markets that are structured
to benefit ordinary investors. In addition, the proposal to execute
Retail Midpoint Orders against Displayed Odd Lot Orders and/or Non-
Displayed Orders priced more aggressively than the Midpoint Price at
the prices at which such orders are ranked on the MEMX Book would also
facilitate RMOs' compliance with their best execution obligations when
acting as agent on behalf of a Retail Order for the same reasons
described above with respect to execution against RML Orders at the
Midpoint Price, thereby fostering cooperation and coordination with
persons engaged in facilitating transactions in securities and removing
impediments to and perfecting the mechanism of a free and open market
and a national market system.
The Exchange believes that executing Retail Midpoint Orders against
RML Orders, which contribute to the dissemination of the Retail
Liquidity Identifier, ahead of Eligible Midpoint Peg Orders, which do
not contribute to the dissemination of the Retail Liquidity Identifier,
is consistent with the Act, because, as noted above, the Exchange
believes that dissemination of the Retail Liquidity Identifier is
likely to be the principal factor in attracting RMOs to send Retail
Midpoint Orders, as it signals to the market that there is available
midpoint liquidity on the Exchange and thus increases the likelihood of
execution for such orders. As noted above, while certain market
participants may not ordinarily post liquidity at the Midpoint Price on
exchanges due to adverse selection risks, the Exchange believes that
they may be willing to do so if they can limit their interactions to
Retail Orders (i.e., through the use of RML Orders). However, the
Exchange recognizes that entering RML Orders involves some additional
risk for those market participants as the Retail Liquidity Identifier
will signal that there is a buyer or seller that is willing to trade
with retail investors at the Midpoint Price. Thus, the RML Program
seeks to balance the risks and incentives associated with entering RML
Orders, which contribute to the dissemination of the Retail Liquidity
Identifier but only interact with Retail Midpoint Orders, and Eligible
Midpoint Peg Orders, which do not contribute to the dissemination of
the Retail Liquidity Identifier but can interact with various market
participants, through the relative execution priority of such orders.
Further, as described above, the proposed execution priority of RML
Orders over Eligible Midpoint Peg Orders is similar to the priority
afforded to orders that are displayed on the MEMX Book, which receive
priority over non-displayed orders because they contribute to price
discovery and attract additional liquidity to the Exchange. 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 RML Orders over Eligible Midpoint Orders
to incentivize the submission of RML Orders, which contribute to market
transparency and attract the submission of Retail Midpoint Orders.
Additionally, the Exchange believes that providing such execution
priority to RML Orders is not unfairly discriminatory since Users that
wish to interact with Retail Midpoint Order flow would be free to
determine whether to submit RML Orders that contribute to the
dissemination of the Retail Liquidity Identifier and have execution
priority when trading with incoming Retail Midpoint Orders, or instead
enter Eligible Midpoint Peg Orders that remain non-displayed but cede
execution priority to those RML Orders.
For the reasons set forth above, the Exchange believes that the
proposed order priority under the RML Program is consistent with
general principles of order priority on the Exchange and other U.S.
equity exchanges, where orders at superior prices receive first
priority and, at any particular price, orders that contribute to price
discovery receive priority ahead of non-displayed orders that do not
contribute to market transparency. As such, the Exchange believes that
the proposed order priority under the RML Program is consistent with
the Act and does not raise any novel issues for the Commission to
consider.
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 as well as general principles of order priority on the
Exchange and other U.S. equity 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
[[Page 8314]]
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.\57\ All Users would be eligible to
enter an RML Order or an Eligible Midpoint Peg Order that would be
eligible to execute against an incoming Retail Midpoint Order.
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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\57\ See supra note 51.
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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. Notice of Designation of a Longer Period for Commission Action on
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change, as Modified by Amendment No. 1
Section 19(b)(2) of the Act \58\ provides that, after initiating
proceedings, the Commission shall issue an order approving or
disapproving the proposed rule change not later than 180 days after the
date of publication of notice of filing of the proposed rule change.
The Commission may extend the period for issuing an order approving or
disapproving the proposed rule change, however, by not more than 60
days if the Commission determines that a longer period is appropriate
and publishes the reasons for such determination. The Initial Proposal
was published for comment in the Federal Register on September 8,
2021.\59\ The 180th day after publication of the Initial Proposal is
March 7, 2022. The Commission is extending the time period for
approving or disapproving the proposed rule change for an additional 60
days.
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\58\ 15 U.S.C. 78s(b)(2).
\59\ See supra note 3.
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The Commission finds that it is appropriate to designate a longer
period within which to issue an order approving or disapproving the
proposed rule change so that it has sufficient time to consider the
proposed rule change, as modified by Amendment No. 1, and the comments
that have been submitted in connection therewith, including the
comments received after the Commission instituted proceedings.
Accordingly, the Commission, pursuant to Section 19(b)(2) of the
Act,\60\ designates May 6, 2022, as the date by which the Commission
shall either approve or disapprove the proposed rule change, as
modified by Amendment No. 1 (File Number SR-MEMX-2021-10).
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\60\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether the proposed rule change, as modified by
Amendment No. 1, 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#f98b8c959cd49a9694949c978d8ab98a9c9ad79e968f"><span class="__cf_email__" data-cfemail="e496918881c9878b8989818a9097a4978187ca838b92">[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 March 7, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
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\61\ 17 CFR 200.30-3(a)(12) and (57).
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03022 Filed 2-11-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on February 14, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.