Notice2023-03487
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Order-to-Trade Ratio Fees
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Published
February 21, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 34 (Tuesday, February 21, 2023)</title>
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[Federal Register Volume 88, Number 34 (Tuesday, February 21, 2023)]
[Notices]
[Pages 10574-10577]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-03487]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96928; File No. SR-CboeEDGX-2023-009]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Adopt Order-to-Trade Ratio Fees
February 14, 2023.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on February 1, 2023, Cboe EDGX Exchange, Inc. (the
``Exchange'' or ``EDGX'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I and II below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'')
proposes to amend its Fee Schedule. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/options/regulation/rule_filings/edgx/">http://markets.cboe.com/us/options/regulation/rule_filings/edgx/</a>), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
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 proposes to amend its Fee Schedule to adopt Order-to-
Trade Ratio Fees, effective February 1, 2023.
The Exchange first notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive or incentives to be insufficient. More specifically, the
Exchange is only one of 16 options venues to which market participants
may direct their order flow. Based on publicly available information,
no single options exchange has more than 18% of the market share and
currently the Exchange represents only approximately 6% of the market
share.\4\ Thus, in such a low-concentrated and highly competitive
market, no single options exchange, including the Exchange, possesses
significant pricing power in the execution of option order flow. The
Exchange believes that the ever-shifting market share among the
exchanges from month to month demonstrates that market participants can
shift order flow or discontinue to reduce use of certain categories of
products, in response to fee changes. Accordingly, competitive forces
constrain the Exchange's transaction fees, and market participants can
readily trade on competing venues if they deem pricing levels at those
other venues to be more favorable.
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\4\ See Cboe Global Markets U.S. Options Market Monthly Volume
Summary (January 23, 2023), available at <a href="https://markets.cboe.com/us/options/market_statistics/">https://markets.cboe.com/us/options/market_statistics/</a>.
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The Exchange proposes to adopt Order-to-Trade Ratio Fees. The
proposed fees will be charged to market participants registered as
Market Makers on EDGX Options based on the number of orders (including
modification messages) entered compared to the number of orders traded
in a calendar month. The calculation of the ratio will not include
quotes or trades resulting from such quotes. A Market Maker's order
flow will be aggregated together with any affiliated Member sharing at
least 75% common ownership. The proposed fees are as follows:
[[Page 10575]]
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Tier Order-to-trade ratio Fee
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Tier 1..................... 0 to 999........................ $0
Tier 2..................... 1,000 to 1,999.................. 2,500
Tier 3..................... 2,000 to 4,999.................. 5,000
Tier 4..................... 5,000 to 9,999.................. 10,500
Tier 5..................... 10,000 to 14,999................ 35,000
Tier 6..................... 15,000 to 19,999................ 100,000
Tier 7..................... 20,000 and above................ 150,000
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The Exchange notes that market participants with incrementally
higher order-to-trade ratios have the potential residual effect of
exhausting system resources, bandwidth, and capacity. Higher order-to-
trade ratios may, in turn, create latency and impact other Members'
ability to receive timely executions. Recognizing Market Maker quoting
activity is an important source of liquidity on exchanges, and that
orders and executions often occur in large numbers, the purpose of this
proposal is to focus on activity that is truly disproportionate while
fairly allocating costs. The proposed fee structure has multiple
thresholds, and the proposed fees are incrementally greater at higher
order-to-trade ratios because the potential impact on exchange systems,
bandwidth and capacity becomes greater with increased order-to-trade
ratios. The proposal contemplates that a Market Maker would have to
exceed the high order to trade ratio of 999 before that Market Maker
would be charged a fee under the proposed tiers. The Exchange believes
that it is in the interests of all Members and market participants who
access the Exchange to not allow other market participants to exhaust
System resources, but to encourage efficient usage of network capacity.
The Exchange also believes this proposal will reduce the potential for
market participants to engage in excessive order and trade activity
that may require the Exchange to increase its storage capacity and will
encourage such activity to be submitted in good faith for legitimate
purposes.
The Exchange also represents that the proposed fees are not
intended to raise revenue; rather, as noted above, it is intended to
encourage efficient behavior so that market participants do not exhaust
System resources. The Exchange also notes that it intends to provide
Market Makers with daily reports, free of charge, which will detail
their order and trade activity in order for those firms to be fully
aware of all order and trade activity they (and their affiliates) are
sending to the Exchange. This will allow firms to monitor their
behavior and determine whether it is approaching any of the order-to-
trade thresholds that trigger the proposed fees.
The Exchange lastly notes that other exchanges have adopted similar
fee programs that assesses incrementally higher fees to Members that
have incrementally higher order-to-trade ratios for similar reasons.\5\
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\5\ See e.g., Securities Exchange Act Release No. 60102 (June
11, 2009), 74 FR 29251 (June 19, 2009) (SR-NYSEArca-2009-50).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\6\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \7\ requirements that the rules of an exchange be
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 regulating, clearing,
settling, processing information with respect to, and 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. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \8\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ Id.
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First, the Exchange notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive or incentives to be insufficient. The Exchange is only one of
16 options exchanges which market participants may direct their order
flow and/or participate on as a Market-Maker, and it represents a small
percentage of the overall market. Competing options exchanges similarly
assess fees based on a Member's order-to-trade ratio.\9\
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\9\ See e.g., NYSE Arca Options Fees and Charges, Ratio
Threshold Fee.
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The Exchange believes adopting order-to-trade ratio fees is
reasonable as unfettered usage of System capacity and network resource
consumption can have a detrimental effect on all market participants
who access and use the Exchange. As discussed, high order-to-trade
ratios may adversely impact system resources, bandwidth, and capacity
which may, in turn, create latency and impact other Members' ability to
receive timely executions. The Exchange believes the proposed fees are
therefore reasonable as they are designed to focus on activity that is
truly disproportionate while fairly allocating costs.
The Exchange believes the proposed fees are also reasonable as
Market Makers that do not exceed the high order to trade ratio of 999
will not be charged any fee under the proposed tiers. Quoting activity
(and trades resulting from quotes) are also not included in the order-
to-trade ratio, thereby ensuring Market Makers quoting activity, which
acts as important source of liquidity, is not impeded by the proposal.
The Exchange believes it's reasonable, equitable and not unfairly
discriminatory to assess higher fees for greater higher order-to-trade
ratios because the potential impact on exchange systems, bandwidth and
capacity becomes greater with increased order-to-trade ratios. The
Exchange believes the proposed fee amounts are reasonable and
commensurate with the proposed thresholds as they are designed to
incentivize Market Makers to reduce excessive order and trade activity
that can be detrimental to all market participants and encourage such
activity to be made in good faith and for legitimate purposes. Indeed,
the Exchange believes that it is in the interests of all Members and
market participants who access the Exchange to not allow other market
participants to exhaust System resources, but to encourage efficient
usage of network capacity. The Exchange therefore also believes that
the proposed order-to-trade ratio fees appropriately reflect the
benefits to different firms of being able to send orders into the
Exchange's System and facilitates the Commission's goal of ensuring
that critical market infrastructure has ``levels of capacity,
integrity, resiliency, availability, and security adequate to maintain
their operational capability and promote the maintenance of fair and
orderly markets.'' \10\
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\10\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014) (File No. S7-01-13)
(Regulation SCI Adopting Release).
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The Exchange believes the proposed change is also equitable and not
unfairly discriminatory because it applies uniformly to all Market
Makers registered on EDGX Options. While the Exchange has no way of
predicting with certainty how the proposed changes will impact Member
activity, based on trading activity from the prior months,
[[Page 10576]]
the Exchange anticipates that, absent any changes to Member behavior,
the vast majority of Members will fall within proposed Tier 1 (and thus
not be subject to any new fees). With respect to Market Makers that
exceed this threshold, the Exchange anticipates, absent any change in
behavior, approximately two Members will fall within Tier 2, one Member
will fall within Tier 3, no Members will fall within Tiers 4 or 5 and
one Member will fall within Tier 6 and no Members will fall within Tier
7. As discussed above however, the Exchange believes it's equitable and
not unfairly discriminatory to assess incrementally higher fees for
Market Makers that have higher order-to-trade ratios because the
potential impact on exchange systems, bandwidth and capacity becomes
greater with increased order-to-trade ratios. In addition, the Exchange
believes that excluding quoting activity from the calculation of the
ratio for the proposed fees is not unfairly discriminatory because it
will ensure Market Makers are able to continue providing important
liquidity to the Exchange and meet their quoting obligations.
The Exchange lastly believes that its proposal is reasonable,
equitably allocated and not unfairly discriminatory because it is not
intended to raise revenue for the Exchange; rather, it is intended to
encourage efficient behavior so that market participants do not exhaust
System resources, while balancing the increase in order-to-trade ratio
has seen from some market participants.
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. In particular, the Exchange
believes the proposed rule change does not impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Particularly, the proposed fees
applies uniformly to all Market Makers registered on EDGX Options.
Further, any Market Maker who exceeds the order-to-trade ratio of 999
will be subject to a fee under the proposed tiers. The Exchange
believes that the proposed change neither favors nor penalizes one or
more categories of market participants in a manner that would impose an
undue burden on competition. Rather, the proposal seeks to benefit all
market participants by encouraging the efficient utilization of the
Exchange's network while taking into account the important liquidity
provided by Market Makers. As discussed above potential impact on
exchange systems, bandwidth and capacity becomes greater with increased
order-to-trade ratios. The Exchange also anticipates that the vast
majority of Market Makers on the Exchange will not be subject to any
fees under the proposed tiers. Accordingly, the Exchange believes that
the proposed Excessive Quoting Fee does not favor certain categories of
market participants in a manner that would impose a burden on
competition.
The Exchange also believes the proposed rule change does not impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As previously
discussed, the Exchange operates in a highly competitive market.
Members have numerous alternative venues they may participate on and
direct their order flow, including 15 other options exchanges.
Additionally, the Exchange represents a small percentage of the overall
market. Based on publicly available information, no single options
exchange has more than 18% of the market share. Therefore, no exchange
possesses significant pricing power in the execution of order flow.
Indeed, participants can readily choose to send their orders to other
exchanges if they deem fee levels at those other venues to be more
favorable. Moreover, the Commission has repeatedly expressed its
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. Specifically,
in Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and, also, recognized
that current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' The fact that
this market is competitive has also long been recognized by the courts.
In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit
stated as follows: ``[n]o one disputes that competition for order flow
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .''. Accordingly, the Exchange
does not believe its proposed fee change imposes any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \11\ of the Act and subparagraph (f)(2) of Rule
19b-4 \12\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \13\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\13\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6715120b024a04080a0a020913142714020449000811"><span class="__cf_email__" data-cfemail="ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab">[email protected]</span></a>. Please include
File Number SR-CboeEDGX-2023-009 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-CboeEDGX-2023-009. This
[[Page 10577]]
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-CboeEDGX-2023-009, and should be
submitted on or before March 14, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-03487 Filed 2-17-23; 8:45 am]
BILLING CODE 8011-01-P
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