Notice2022-10152
Self-Regulatory Organizations; MEMX LLC; Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, To Establish a Retail Midpoint Liquidity Program
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Published
May 12, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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[Federal Register Volume 87, Number 92 (Thursday, May 12, 2022)]
[Notices]
[Pages 29193-29197]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10152]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94866; File No. SR-MEMX-2021-10]
Self-Regulatory Organizations; MEMX LLC; Order Disapproving a
Proposed Rule Change, as Modified by Amendment No. 1, To Establish a
Retail Midpoint Liquidity Program
May 6, 2022.
I. Introduction
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'' or
``Exchange 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 \5\ to determine whether to approve or
disapprove the proposed rule change.\6\ On January 27, 2022, the
Exchange filed Amendment No. 1 to the proposed rule change, which
supersedes the original filing in its entirety, and on February 14,
2022, the Commission published for comment Amendment No. 1 and
designated a longer period for Commission action on the proposed rule
change.\7\ The Commission received comments on the proposed rule
change,\8\ and the Exchange submitted a response to comments at the
time it filed Amendment No. 1.\9\
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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).
\4\ See Securities Exchange Act Release No. 93383 (October 19,
2021), 86 FR 58964 (October 25, 2021).
\5\ 15 U.S.C. 78s(b)(2)(B).
\6\ See Securities Exchange Act Release No. 93727 (December 7,
2021), 86 FR 70874 (December 13, 2021) (``Order Instituting
Proceedings'').
\7\ See Securities Exchange Act Release No. 94189 (February 8,
2022), 87 FR 8305 (February 14, 2022).
\8\ All comments received by the Commission on the proposed rule
change are available on the Commission's website 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>.
\9\ See Letter from Adrian Griffiths, Head of Market Structure,
MEMX, dated January 27, 2022 (``MEMX Letter'').
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This order disapproves the proposed rule change, as modified by
Amendment No. 1, because, as discussed below, the Exchange has not met
its burden under the Act and the Commission's Rules of Practice to
demonstrate that its proposal is consistent with the requirements of
the Act, including, in particular, the requirements in Section 6(b)(5)
of the Act that the rules of a national securities exchange be designed
to promote just and equitable principles of trade and to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers \10\ and
the objectives in Section 11A of the Exchange Act, including the
maintenance of fair and orderly markets.\11\
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\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78k-1(a)(1)(C).
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II. Description of the Proposal
The Exchange proposes to establish a Retail Midpoint Liquidity
Program to provide retail investors with price improvement
opportunities at or better than the midpoint of the national best bid
and offer (``Midpoint Price''). Specifically, the Exchange proposes to
allow Retail Member Organizations (``RMOs'') \12\ to submit a new type
of order on behalf of retail investors that is designed to execute at
the Midpoint Price or better (a ``Retail Midpoint Order'').\13\ Contra-
side liquidity would be provided by (i) a new non-displayed Midpoint
Peg order that would be restricted to interacting only with incoming
Retail Midpoint Orders through the proposed Program (``Retail Midpoint
Liquidity Order'' or ``RML Order'') \14\ as well as (ii) resting
liquidity on the Exchange's order book that would offer greater price
improvement than the Midpoint Price,\15\ and (iii) regular non-
restricted Midpoint Peg orders that users designate as also eligible to
interact with Retail Midpoint Orders (``Eligible Midpoint Peg
Orders'').\16\
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\12\ See MEMX Rule 11.21(a)(1).
\13\ A Retail Midpoint Order would have a Midpoint Peg
instruction (i.e., to re-price to the Midpoint Price in response to
changes in the national best bid and offer). As proposed, a Retail
Midpoint Order must have a time-in-force instruction of Immediate-
or-Cancel. See MEMX Rule 11.6(o)(1) (defining Immediate-or-Cancel).
See also MEMX Rules 11.6(h)(2) (defining Midpoint Peg) and 11.21(a)
(defining Retail Order).
\14\ See proposed MEMX Rule 11.22(a)(2).
\15\ See infra note 24.
\16\ The Exchange proposes to revise MEMX Rule 11.6(h)(2)'s
definition of Midpoint Peg to provide that a Midpoint Peg order
(other than a RML Order) would generally not be eligible to execute
against a Retail Midpoint Order, provided, however, that a user
submitting a Midpoint Peg order would be able to include an
instruction that such order is eligible to execute against a Retail
Midpoint Order through the execution process described in proposed
MEMX Rule 11.22(c).
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MEMX would disseminate a Retail Liquidity Identifier through its
proprietary market data feeds, MEMOIR Depth \17\ and MEMOIR Top,\18\
and the appropriate securities information processor (``SIP'') when RML
Order interest aggregates to form at least one round lot for a
particular security, provided that such interest is resting at the
Midpoint Price \19\ and is priced at
[[Page 29194]]
least $0.001 better than the national best bid (``NBB'') or national
best offer (``NBO'').\20\ The Retail Liquidity Identifier would reflect
the symbol and the side (buy and/or sell) of the RML Order interest but
would not include the price or size of that interest.\21\
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\17\ See MEMX Rule 13.8(a).
\18\ See MEMX Rule 13.8(b).
\19\ The Exchange explains that a 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 would not be included for purposes of Retail
Liquidity Identifier dissemination since it would not reflect
interest available to trade with Retail Midpoint Orders. See
Amendment No. 1, supra note 7, at 8308.
\20\ The Exchange explains that because RML Orders are proposed
to be only Midpoint Peg orders, they would 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 security
when the security's spread is less than $0.002. See id. 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. See id.
\21\ The Exchange would remove the Retail Liquidity Identifier
when remaining RML Order interest no longer aggregates to form at
least one round lot, or in situations where there is no actionable
RML Order interest (such as when the market is locked or crossed).
See id. at 8308-09. A limited exception for some exchange retail
liquidity programs from the Quote Rule has been granted to allow
those exchanges to disseminate identifiers including symbol and
side, but not price or size, to attract retail interest and provide
them with price improvement over displayed prices. See, e.g.,
Securities Exchange Act Release No. 93217 (September 30, 2021)
(Order Granting Application of Investors Exchange LLC for a Limited
Exemption from Rule 602 of Regulation NMS for its Retail Price
Improvement Program).
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Priority and Order Execution
Proposed MEMX Rule 11.22(c) sets forth the execution priority rules
for the Program. First, an incoming Retail Midpoint Order would execute
against resting liquidity priced more aggressively than the Midpoint
Price. Specifically, proposed MEMX Rule 11.22(c)(2) provides that if
there is: (1) A Limit Order \22\ of Odd Lot \23\ size that is displayed
by the MEMX system (``Displayed Odd Lot Order'') and that is priced
more aggressively than the Midpoint Price and/or (2) an order that is
not displayed by the MEMX system (``Non-Displayed Order'') and that is
priced more aggressively than the Midpoint Price, resting on the MEMX
Book,\24\ an incoming Retail Midpoint Order would first execute against
any such orders pursuant to the Exchange's standard price/time priority
in accordance with MEMX Rules 11.9 and 11.10 before executing against
resting RML Orders.\25\
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\22\ See MEMX Rule 11.8(b).
\23\ See MEMX Rule 11.6(q)(2).
\24\ The Exchange states 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). See Amendment
No. 1, supra note 7, at 8309 n.41.
\25\ MEMX initially proposed that execution of a Retail Midpoint
Order against such Displayed Odd Lot Orders and Non-Displayed Orders
would have executed at the Midpoint Price irrespective of the prices
at which such orders were ranked. Thus, any additional price
improvement over the Midpoint Price would not have accrued to the
retail investor's Retail Midpoint Order, but rather would have
accrued to the Displayed Odd Lot Order or Non-Displayed Order. The
Exchange subsequently revised its proposal to accrue any price
improvement to the incoming Retail Midpoint Order. See also MEMX
Letter at 4.
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Second, after executing against resting liquidity priced more
aggressively than the Midpoint Price, proposed MEMX Rule 11.22(c)(3)
states that any unfilled portion of a Retail Midpoint Order would next
execute against RML Orders at the Midpoint Price in time priority.
Third, proposed MEMX Rule 11.22(c)(4) states that after executing
against all liquidity that is priced more aggressively than the
Midpoint Price and all RML Orders, Retail Midpoint Orders would execute
against Eligible Midpoint Peg Orders at the Midpoint Price in time
priority.\26\
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\26\ MEMX initially proposed to execute Retail Midpoint Orders
only against RML Orders, to the exclusion of any other available
Midpoint Peg order. Two commenters objected to that treatment and
were critical of those aspects of the proposal that would have
limited the ability of retail orders to access all available
midpoint interest and the extent to which that could have harmed
retail investors. See Letter from Joseph Saluzzi and Sal Arnuk,
Themis Trading LLC, dated December 20, 2021, and Letter from Sean
Paylor, Acadian Asset Management LLC, dated January 10, 2022. MEMX
subsequently submitted Amendment No. 1 to its proposal to allow
Eligible Midpoint Peg Orders to participate in the Program. Another
commenter expressed concern about a lack of transparency in the
rebate and fee tiering structure behind the proposed Program. See
Letter from Reginald Neumann Maximillian Smythers, dated April 1,
2022. The Exchange has not yet filed an accompanying filing to
propose a fee schedule in connection with this proposal.
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III. Discussion and Commission Findings
Under Section 19(b)(2)(C) of the Act,\27\ the Commission shall
approve a proposed rule change of a self-regulatory organization
(``SRO'') if it finds that such proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
that are applicable to such organization.\28\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\29\ The Commission's Rules of Practice, under Rule 700(b)(3),
state that the ``burden to demonstrate that a proposed rule change is
consistent with the [Exchange] Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change'' and that a ``mere assertion that the proposed rule
change is consistent with those requirements . . . is not sufficient.''
\30\
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\27\ See 15 U.S.C. 78s(b)(2)(C).
\28\ See 15 U.S.C. 78s(b)(2)(C)(i).
\29\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700(b)(3).
\30\ See 17 CFR 201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\31\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Act and the applicable rules and
regulations.\32\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\33\
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\31\ See id.
\32\ See id.
\33\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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For the reasons discussed below, the Commission is disapproving the
proposed rule change, as modified by Amendment No. 1, because the
information before the Commission is insufficient to support a finding
that the proposed rule change, as modified by Amendment No. 1, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.
In summary, MEMX has an existing Midpoint Peg order type and is
proposing a new Midpoint Peg order type (i.e., RML Orders) as part of
the proposed Program. From the perspective of an incoming Retail
Midpoint Order, the current and proposed Midpoint-priced order types
are indistinguishable because, under the proposed Program, both would
result in a midpoint execution for the Retail Midpoint Order. From the
perspective of market participants posting each order type, however,
MEMX proposes to treat them differently by providing RML Orders with
execution priority over Eligible Midpoint Peg Orders. This proposed
disparate treatment raises concerns about whether the proposed Program
is consistent with the Act.
As part of its filing, MEMX bears the burden to provide a
sufficient legal analysis to demonstrate how its proposed rules are
consistent with the Act, which requires, among other
[[Page 29195]]
things, that MEMX's rules be designed to promote just and equitable
principles of trade and to protect investors and the public interest,
and not permit unfair discrimination between customers, issuers,
brokers, or dealers.\34\
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\34\ 15 U.S.C. 78f(b)(5).
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To demonstrate how providing RML Orders with execution priority
over Eligible Midpoint Peg Orders is consistent with the Act, MEMX
asserts the following: (1) Because RML Orders will contribute to the
Retail Liquidity Identifier, which is designed to attract retail orders
to the Exchange, RML Orders deserve the same priority advantage that
MEMX provides to displayed orders to reward displayed orders for
contributing to price discovery; (2) because the Retail Liquidity
Identifier would signal the presence of a buyer or seller at the
Midpoint Price, awarding higher priority to RML Orders would balance
the risks and incentives associated with entering RML Orders; and (3)
market participants that post Midpoint Peg orders can avoid losing
priority to RML Orders when trading with Retail Midpoint Orders by
switching to RML Orders.
The Commission is disapproving this proposed rule change, as
modified by Amendment No. 1, because, as discussed in detail below,
MEMX has not met its burden under the Act and the Commission's Rules of
Practice to demonstrate how its proposal to provide RML Orders with
execution priority over Eligible Midpoint Peg Orders is consistent with
the requirements of the Act, including, in particular, the requirements
in Section 6(b)(5) of the Act that a national securities exchange's
rules be designed to promote just and equitable principles of trade and
to protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers, and the objectives in Section 11A of the Exchange Act,
including the maintenance of fair and orderly markets.
1. Price-Time Priority
The rules of a national securities exchange specify the priority of
orders for execution in its matching engine. When exchange rules award
higher execution priority to one type of order over another, they must
do so in a manner that is consistent with the Act. One reason to
provide execution priority to one liquidity-providing order type over
another may be that the favored order is more aggressive and takes more
risk in a way that provides benefits to the market and liquidity
seekers. An exchange may seek to attract those types of orders because
they directly improve the exchange's market quality and increase
trading volume. Offering a priority advantage to the more aggressive
order is an incentive to attract those types of orders to the exchange
and may be justified as promoting just and equitable principles of
trade, avoiding unfair discrimination between broker-dealers and
between their customers, and contributing to the maintenance of fair
and orderly markets to the extent the priority advantage rewards those
liquidity providers for the risks they take and benefits they provide
to the market when they are the first to provide the most aggressive
widely-available best prices to the broadest population of liquidity
seekers.
MEMX Rule 11.9 establishes the priority of orders and describes how
MEMX uses ``price-time'' priority to rank orders for execution
priority. Under its price-time priority rule, MEMX affords priority to
the highest-priced order to buy (or lowest-priced order to sell) over
orders with less aggressive prices.\35\ For equally priced orders,
MEMX's rules specify that it will rank them in time priority (i.e.,
with the first order entered into the MEMX system having priority over
later-arriving orders) \36\ and it also generally awards priority to
displayed orders over non-displayed orders.\37\
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\35\ See MEMX Rule 11.9(a)(1).
\36\ See MEMX Rule 11.9(a)(2)(A) (``Where orders to buy (sell)
are entered into the System at the same price, the order clearly
established as the first entered into the System at such particular
price shall have precedence at that price, up to the number of
shares of stock specified in the order.'').
\37\ See, e.g., MEMX Rule 11.9(a)(2)(A)(i) and (ii).
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However, for its proposed Program, MEMX would deviate from its
price-time priority rule by always awarding priority to the RML Orders
(i.e., Midpoint Peg orders that can only trade against Retail Midpoint
Orders) over Eligible Midpoint Peg Orders (i.e., Midpoint Peg orders
that will trade with any counterparty, including Retail Midpoint
Orders), even though both orders are equally priced at the Midpoint
Price and would otherwise execute in time priority outside the proposed
Program.\38\ For the reasons further explained below, the Commission
finds that MEMX has not met its burden to support a finding that
providing RML Orders with execution priority over Eligible Midpoint Peg
Orders under the circumstances MEMX proposes is consistent with the
Act.
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\38\ See MEMX Rule 11.9(a)(2)(A)(iv). As proposed, if MEMX has a
90 share Eligible Midpoint Peg Order resting on its order book and
later receives a 90 share RML Order, it would execute an incoming 20
share Retail Midpoint Order against the later-arriving RML Order
even though the Eligible Midpoint Peg Order arrived first in time
(and even though the 90 share RML Order was not of sufficient size
to trigger the Retail Liquidity Identifier).
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a. Analogizing Non-Displayed Orders to Displayed Orders
MEMX analogizes RML Orders to fully displayed orders (e.g., a limit
order whose price and size is published by the Exchange) because they
would contribute to the Retail Liquidity Identifier. Specifically, MEMX
states that ``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.'' \39\ MEMX asserts that such treatment is
``consistent with general principles of order priority on the Exchange
. . . [where] orders that contribute to price discovery receive
priority ahead of non-displayed orders that do not contribute to market
transparency.'' \40\ ``As such,'' the Exchange continues, it ``does not
believe that the proposed order priority under the RML Program raises
any novel issues for the Commission to consider.'' \41\
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\39\ See Amendment No. 1, supra note 7, at 8309.
\40\ See id. at 8310.
\41\ See id.
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MEMX's proposal does present a novel issue because MEMX seeks to
award execution priority to a new type of Midpoint Peg order (i.e., RML
Orders) over an existing type of Midpoint Peg order (i.e., Eligible
Midpoint Peg Orders). First, both Eligible Midpoint Peg Orders and RML
Orders would be classified as pegged orders under MEMX rules and MEMX's
rules specifically provide that pegged orders cannot be displayed.\42\
Second, RML Orders would not contribute to market transparency or price
discovery in the same way that displayed orders do because RML Orders
are pegged to the Midpoint Price that solely is derived from displayed
quotes and does not impact or contribute to those displayed quotes. The
information conveyed by the Retail Liquidity Identifier (i.e., the
existence of one round lot of RML Order interest at the Midpoint Price)
is different than the information on price and size that displayed
orders provide to inform price discovery. Displayed orders help
establish the best available
[[Page 29196]]
prices in the market, which broadly benefits investors, serves the
public interest, and facilitates fair and orderly markets by informing
not only trading decisions but also security and portfolio valuation,
prices of derivative securities like listed options, and the
calculation of market indices. MEMX's comparison of the broad benefits
that displayed orders contribute to the market to the narrow benefit
that the Retail Liquidity Identifier would provide to RMOs to justify
endowing RML Orders with the same exception to its price-time execution
priority rule that MEMX provides to displayed orders, without more,
does not sufficiently address how the proposal would promote just and
equitable principles of trade, be consistent with the maintenance of
fair and orderly markets, and not permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\42\ See MEMX Rule 11.8(c)(3). Because they are pegged to a
reference price (the Midpoint Price), RML Orders would be classified
as Pegged Orders under MEMX rules and MEMX's Pegged Order rule
specifically provides that ``Pegged Orders are not eligible to
include a Displayed instruction.'' Id.
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Third, Midpoint Peg orders are not eligible to be displayed for a
number of reasons, including, among others, prohibitions on the display
of quotes in subpenny increments,\43\ requirements to avoid locking the
market,\44\ and the impact that a displayed Midpoint Peg order would
have on the Midpoint Price. Thus, MEMX proposes to reward RML Orders
for doing something (i.e., contributing to the Retail Liquidity
Identifier) that Eligible Midpoint Peg Orders simply are not permitted
to do. Without more, MEMX has not sufficiently explained how providing
a priority advantage to one type of Midpoint Peg order (RML Orders)
over another (Eligible Midpoint Peg Orders), based on something that
Eligible Midpoint Peg Orders are not permitted to do, promotes just and
equitable principles of trade, is consistent with the maintenance of
fair and orderly markets, and does not permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\43\ See 17 CFR 242.612.
\44\ See 17 CFR 242.610(d).
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b. Balancing the Risks and Incentives Associated With Entering RML
Orders
MEMX also states 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.'' \45\ ``Thus,''
the Exchange states, ``the RML Program seeks to balance the risks and
incentives associated with entering RML Orders. . . .'' \46\
Consequently, MEMX proposes to reward RML Orders with execution
priority over Eligible Midpoint Peg Orders to the same extent that it
rewards displayed orders with priority over non-displayed orders.
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\45\ See Amendment No. 1, supra note 7, at 8313.
\46\ See id.
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In general, some market participants may be hesitant to display
regular limit orders on an exchange's order book because of the
potential for adverse selection when trading against counterparties
more associated with price movements and the inability to avoid
interacting with those counterparties. To encourage display of trading
interest on its order book in light of those risks, an exchange might
offer displayed orders enhanced execution priority over non-displayed
orders. Rewarding displayed orders with priority over non-displayed
orders compensates them for the risks they take in displaying prices
that are available for any liquidity taker and for the chance of
adverse selection when trading with certain counterparties.
However, market participants posting RML Orders would face little
risk (if any) from the Retail Liquidity Identifier because RML Orders
are uniquely counterparty-restricted whereas displayed orders are not
so restricted. In other words, RML Orders would experience
significantly different risk compared to displayed orders on MEMX's
order book because MEMX would restrict the counterparties with which an
RML Order could trade to only permit executions against retail orders
to the exclusion of all other types of orders and counterparties.
Market participants placing RML Orders would be specifically seeking to
interact exclusively with retail customers because they likely regard
retail customers to be attractive counterparties that submit smaller-
sized orders that typically are less predictive of very short-term
price movements.\47\
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\47\ See, e.g., Amendment No. 1, supra note 7, at 8306 (``[T]he
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.'').
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Despite this significant difference, MEMX proposes to confer the
same execution priority benefit to restricted RML Orders that it grants
to unrestricted displayed limit orders. However, MEMX's proposal is
designed to effectively eliminate the risk of adverse selection when
trading with non-retail counterparties more associated with price
movements and RML Orders would not be exposed to a level of execution
risk in the Program that is comparable to what displayed orders face on
MEMX's order book. The Retail Liquidity Identifier and counter-party
restriction would be a benefit to RMOs that permit an otherwise non-
displayed order to advertise its presence to the very counterparty with
which the poster seeks to trade (and is only permitted to trade with by
the terms of the RML Order). Compounding advantages does not appear to
balance the risks and incentives of entering RML Orders that MEMX said
it seeks to balance.
Accordingly, the Exchange's assertion that the Program ``seeks to
balance the risks and incentives'' is misplaced because the Retail
Liquidity Identifier should not generate additional risks to RMOs
commensurate with the risks experienced by market participants posting
regular displayed orders on MEMX's order book. Moreover, as stated
above, market participants placing RML Orders would instead benefit
from the Retail Liquidity Identifier because it is intended to attract
the desirable retail counterparties with whom they specifically seek to
trade and with whom, aside from the proposed Program, they may have
fewer opportunities to interact.
Consequently, MEMX is proposing to reward counterparty-restricted
RML Orders for contributing to a Retail Liquidity Identifier that
benefits them and MEMX has not sufficiently explained why those
compounded benefits are consistent with the Act. Further, MEMX has not
sufficiently explained why that different treatment proposed between
brokers, dealers, or customers when such brokers, dealers, or customers
post each different order type is not unfairly discriminatory. Without
more, MEMX has not carried its burden to sufficiently analyze how its
proposed disparate treatment in execution priority between two types of
Midpoint Peg orders promotes just and equitable principles of trade,
protects investors and the public interest, contributes to the
maintenance of fair and orderly markets, and is not designed to permit
unfair discrimination.
2. Choosing Between Two Types of Midpoint Pegs
MEMX states that its users are free to select which Midpoint Peg
order type they wish to submit if they want to interact with Retail
Midpoint Orders, and would do so knowing their advantages and
disadvantages, thus making its proposal to award RML Orders with
execution priority over Eligible Midpoint Peg Orders not unfairly
discriminatory.\48\ As discussed above, MEMX is proposing disparate
treatment between two Midpoint Peg
[[Page 29197]]
order types by proposing to reward RML Orders with execution priority
over Eligible Midpoint Peg Orders when interacting with Retail Midpoint
Orders. MEMX cannot resolve potential unfair discrimination in favor of
RML Orders over Eligible Midpoint Peg Orders by relying on the fact
that users can instead use RML Orders; doing so does not convert unfair
discrimination into fair discrimination. When MEMX chooses to offer two
Midpoint Peg order types but treats them differently, each order type
must independently be consistent with the Act and any discriminatory
treatment must also be consistent with the Act. The consistency of one
order type with the requirements of the Act is independent of, and
cannot be contingent on, the existence of a substitute.
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\48\ See Amendment No. 1, supra note 7, at 8313.
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3. MEMX Has Failed To Meet Its Burden
When assessing this proposed rule change, as modified by Amendment
No. 1, the Commission must consider its consistency with the Act and
the applicable rules and regulations issued thereunder. As stated
above, under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
self-regulatory organization that proposed the rule change.'' \49\ For
the foregoing reasons, the Exchange has not met its burden to
demonstrate that it would be consistent with the Act for the Exchange
to provide a priority advantage to one type of midpoint peg (RML
Orders) over another type of midpoint peg (Eligible Midpoint Peg
Orders). As a result, the Commission does not have sufficient
information to find that the Exchange's proposal would promote just and
equitable principles of trade and protect investors and the public
interest, not permit unfair discrimination between customers, issuers,
brokers, or dealers, and promote the maintenance of fair and orderly
markets. Accordingly, the Commission must disapprove the proposal
because the Exchange has not met its burden to demonstrate that the
proposal is consistent with the Act, including Section 6(b)(5) and
Section 11A of the Act.\50\
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\49\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\50\ In disapproving this proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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IV. Conclusion
For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Act, that the proposed rule change,
as modified by Amendment No. 1, is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to a
national securities exchange, and in particular, with Section 6(b)(5)
of the Act.\51\
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\51\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\52\ that the proposed rule change (SR-MEMX-2021-10), as modified
by Amendment No. 1, is disapproved.
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\52\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10152 Filed 5-11-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on May 12, 2022.
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