Notice2025-10450
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 11.21 To Allow an RMO To Enter a Retail Order Onto the Exchange in a Principal Capacity
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 10, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 110 (Tuesday, June 10, 2025)</title>
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[Federal Register Volume 90, Number 110 (Tuesday, June 10, 2025)]
[Notices]
[Pages 24476-24481]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-10450]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103182; File No. SR-CboeEDGX-2025-035]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing of a Proposed Rule Change To Amend Rule 11.21 To Allow an RMO
To Enter a Retail Order Onto the Exchange in a Principal Capacity
June 4, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 21, 2025, 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, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to
(i) amend Rule 11.21(a)(2), to allow a Retail Member Organization to
enter a Retail Order onto the Exchange in a principal capacity,
provided the requirements of proposed Rule 11.21(g) are satisfied; (ii)
codify in proposed new Rule 11.21(g) additional requirements a Retail
Member Organization must comply with in order to enter Retail Orders as
principal; and (iii) amend Rule 11.21(b)(6) to require that Retail
Member Organizations have in place policies and procedures reasonably
designed to ensure compliance with proposed Rule 11.21(g)(1), as to
ensure that the Retail Member Organization can, upon request by the
Exchange, produce documentation evidencing compliance with the
requirements of Rule 11.21(g). 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 (i) amend Rule 11.21(a)(2) to allow a
Retail Member Organization (``RMO'') \3\ to enter a Retail Order \4\
onto the Exchange in a principal capacity, provided the requirements of
Rule 11.21(g) are satisfied; (ii) codify in proposed new Rule 11.21(g)
additional requirements a Retail Member Organization must comply with
in order to enter Retail Orders as principal; and(iii) amend Rule
11.21(b)(6) requiring that Retail Member Organizations have in place
policies and procedures reasonably designed to ensure compliance with
proposed Rule 11.21(g)(1), as well to ensure that the Retail Member
Organization can, upon request by the Exchange, produce documentation
evidencing compliance with the requirements of Rule 11.21(g).
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\3\ Retail Member Organization. A ``Retail Member Organization''
or ``RMO'' is a Member (or a division thereof) that has been
approved by the Exchange under Rule 11.21 to submit Retail Orders.
See Rule 11.21(a)(1).
\4\ A Retail Order is currently defined as ``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 Rule
11.21(a)(2).
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These proposed amendments are in response to feedback received by
the Exchange from certain RMOs that have stated that the ability to
enter orders in a principal capacity would better enable them to
provide their retail customers with better priced executions.
Currently, RMOs are only able to enter Retail Orders onto the Exchange
in either an agency or riskless principal capacity. Specifically, these
RMOs have explained that the ability to handle Retail Orders in a
principal capacity will enable them to provide their retail customers
with post-execution price improvement that is in addition to any price
improvement received on the Exchange. Because the price ultimately
allocated to the retail customer by the RMO would different (and
notably, would always better priced) from the price the principal order
received on the Exchange, such Retail Orders would not currently
qualify as riskless principal transactions.\5\ Accordingly, because
Exchange rules currently only permit the entry of Retail Orders in a
riskless principal or agency capacity, such post-execution price
improvement is not currently permitted.
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\5\ A ``riskless principal'' transaction is a transaction in
which a member, after having received an order to buy (sell) a
security, purchases (sells) the security as principal and satisfies
the original order by selling (buying) as principal at the same
(emphasis added) price (the offsetting ``riskless'' leg). See FINRA
Rule 5320.03--``Riskless Principal Exception'', available at:
<a href="https://www.finra.org/rules-guidance/rulebooks/finra-rules/5320">https://www.finra.org/rules-guidance/rulebooks/finra-rules/5320</a>.
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The Exchange notes that the ultimate determination as to whether an
RMO may choose to execute in this manner is not something to which the
Exchange has visibility. Indeed, such a decision will vary from RMO to
RMO. Generally speaking, RMOs may choose to execute in this manner to
satisfy certain execution quality and price improvement benchmarks RMOs
have applied to their underlying retail order(s), as well as to simply
provide additional price improvement as a service to their retail
customer(s) or retail broker customers. Because principal orders
entered in this manner are for the benefit of the underlying retail
customer(s)--i.e., to provide retail orders with better priced
executions--the Exchange believes that such transactions are consistent
with the definition of Retail Order, and the purposes of EDGX's Retail
Priority Program (discussed infra).
Current Definition of ``Retail Order''
Currently, Rule 11.21(a)(2) provides that a Retail Order is an
agency order, or a riskless principal order that meets the criteria of
FINRA Rule 5320.03.\6\ A Retail Order must originate from a natural
person and must be entered onto the Exchange by an RMO. The RMO is
[[Page 24477]]
not permitted to change the terms of the order with respect to the
price or side of the market, and a Retail Order may not originate from
a trading algorithm or any other computerized methodology. An RMO is a
Member (or a division thereof) that has been approved by the Exchange
under EDGX Rule 11.21 to submit Retail Orders. Pursuant to EDGX Rule
11.21(b), which describes the qualification and application process for
becoming a Retail Member Organization, any member may qualify as a
Retail Member Organization if it conducts a retail business or routes
retail orders on behalf of another broker-dealer.
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\6\ See FINRA Rule 5320.3, Riskless Principal Exception,
available at: <a href="https://www.finra.org/rules-guidance/rulebooks/finra-rules/5320">https://www.finra.org/rules-guidance/rulebooks/finra-rules/5320</a>.
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Proposed Definition of Retail Order
The Exchange believes that retail customers are a key part of the
trading ecosystem, and as such, has designed products and programs to
execute Retail Orders quickly, with high execution quality and at a
low-cost, with added pricing incentives. For instance, EDGX's Retail
Priority Program seeks to enhance execution quality for individual
customers who trade U.S. equities on EDGX. Retail Priority offers a
distinct allocation model, which differs from the traditional time-
based allocation model used by most U.S. equities market centers that
allocate trades to orders that arrive first in time at each price
point. Retail Priority focuses on improving execution quality and
trading outcomes for individual customers, and the firms facilitating
their orders, by reducing their time to execution. Under Retail
Priority, individual customers' displayed limit orders will post at the
front of the order queue for same-priced orders submitted on EDGX.
Additionally, EDGX offers retail-only pricing incentives for low cost
remove and premium rebates. EDGX also offers RMOs discounts on port
fees and market data, and retail tiers give growing retail firms
additional rebates.
EDGX offers RMOs the ability to participate in the Exchange's
Retail Priority program, which seeks to enhance execution quality for
individual customers who trade U.S. equities on EDGX. Specifically,
Retail Priority offers a distinct patent-pending allocation model,
which differs from the traditional time-based allocation model used by
most U.S. equities market centers that allocate trades to orders that
arrive first in time at each price point. The Retail Priority model
focuses on improving execution quality and trading outcomes for
individual customers, and the firms facilitating their orders, by
reducing their time to execution. Under the mechanism, the displayed
portion of an individual customers' Retail Priority Order \7\ will post
at the front of the order queue for same-priced orders submitted on
EDGX.
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\7\ A Retail Priority Order is a Retail Order, as defined in
Rule 11.21(a)(2), that is entered on behalf of a person that does
not place more than 390 equity orders per day on average during a
calendar month for its own beneficial account(s). See Exchange Rule
11.9, Interpretations and Policies .01.
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The Exchange now seeks to amend Rule 11.21(a)(2) to provide that an
RMO may also enter a Retail Order in a principal capacity, provided the
RMO satisfies the conditions codified in proposed Rule 11.21(g). As
noted above, some RMOs have expressed a desire to enter Retail Orders
onto the Exchange on behalf of their retail customers in a principal
capacity and subsequently provide such orders with post-execution price
improvement in addition to any price improvement received on the
Exchange. Because the RMO will allocate its Exchange execution to its
retail customer at a different (and better) price than it received on
the Exchange, such transaction can only be done in a principal
capacity.
Importantly, the Exchange intends for Retail Orders to be entered
on behalf of only bona fide retail customers. As such, the Exchange
proposes to introduce new Rule 11.21(g), Retail Orders Entered as
Principal, to codify requirements designed to ensure that Retail Orders
by RMOs in a principal capacity are in fact on behalf of retail
customers. Specifically, the Exchange seeks to codify that any Retail
Orders entered onto the Exchange in a principal capacity by an RMO on
behalf of its retail customer(s) must meet the following criteria: (i)
the RMO must currently have in hand, at the time of order entry onto
the Exchange, a Retail Order it seeks to execute on behalf of a retail
customer (ii) the Retail Order entered by an RMO as principal must
solely be for the purpose of providing post-execution price improvement
to the retail customer(s) in addition to any price improvement received
on the Exchange; (iii) the size of the principal order shall not be
greater than that of the underlying order(s) entered on behalf of the
retail customer(s); and (iv) the total number of shares executed in a
principal capacity must be fully allocated to the underlying retail
customer(s).
The Exchange also notes that its existing Regulatory and
Surveillance departments already possess the capability to review
Retail Orders to ensure that those entered in either a principal or
riskless principal transaction were indeed entered and executed by the
RMO on behalf of a retail customer.\8\ For instance, the Exchange's
Regulatory and Surveillance teams currently review Retail Orders
entered as principal to determine whether such orders were in fact
ultimately executed as riskless principal \9\ and fully allocated to
the RMO's end retail customer, at the same price, in accordance with
FINRA Rule 5320.03. While the proposed amendment would enable RMOs to
allocate a trade to their end retail customer at a different price,
this would not diminish the Exchange's Regulatory and Surveillance
teams from ability to effectively regulate RMOs' compliance with the
Exchange's Retail Order rules. Rather, the Regulatory and Surveillance
functions would instead need only monitor for Retail Orders that were
entered principally, but not ultimately executed as riskless principal,
and further inquire with the RMO that (i) the RMO had in hand, at the
time of order entry onto the Exchange, a Retail Order it sought to
execute on behalf of a retail customer (ii) the Retail Order entered by
an RMO as principal was solely be for the purpose of providing post-
execution price improvement to the retail customer(s) in addition to
any price improvement received on the Exchange; (iii) the size of the
principal order was not greater than that of the underlying order(s)
entered on behalf of the retail customer(s); and (iv) the total number
of shares executed in a principal capacity was fully allocated to the
underlying retail customer(s). In this regard, whether the order is
executed principally or as riskless principal, the Exchange will still
have the ability to effectively enforce its rules. Indeed, the
Exchange's Regulatory and Surveillance functions already monitor for
Retail Orders that are entered as riskless principal as well as
principal. Notably,
[[Page 24478]]
for the full year 2024, 25.5% of all Retail Orders entered across each
of Cboe's four equities exchanges, were entered as principal, compared
to only 6.4% entered as riskless principal. Therefore, as a practical
matter, the Exchange is accustomed to conducting surveillance of Retail
Orders entered as principal, and the proposed amendment should not pose
any additional issues.
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\8\ The Exchange permits RMOs to enter Retail Orders onto the
Exchange in an agency, principal, or riskless principal capacity.
See ``Capacity'' in ``Cboe US Equities BOE Specification'', pg. 62,
available at: <a href="https://cdn.cboe.com/resources/membership/Cboe_US_Equities_BOE_Specification.pdf">https://cdn.cboe.com/resources/membership/Cboe_US_Equities_BOE_Specification.pdf</a>; see also ``Order Capacity''
in ``Cboe US Equities FIX Specification,'' p. 21, available at:
<a href="https://cdn.cboe.com/resources/membership/Cboe_US_Equities_FIX_Specification.pdf">https://cdn.cboe.com/resources/membership/Cboe_US_Equities_FIX_Specification.pdf</a>.
\9\ As a general matter the exchange notes that riskless
principal transactions are typically entered into the marketplace as
principal orders, buying the security for itself and then, post-
execution, selling the security to its end-customer. If the broker-
dealer sells its customer the security at the same price for which
it purchased the security, this is typically called a riskless
principal transaction. This transaction is known as ``riskless''
because the broker-dealer purchases the security, knowing that it
will sell the security to its customer at the same price. See
generally SEC Office of Education and Advocacy, ``Investor Bulletin:
How to Read Confirmation Statements,'' available at: <a href="https://www.sec.gov/investor/alerts/ib_confirmations.pdf">https://www.sec.gov/investor/alerts/ib_confirmations.pdf</a>.
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Importantly, for the purpose of determining whether an order should
qualify as a Retail Order, the Exchange believes that principal orders
and riskless principal orders are essentially the same order type. In
addition to how it monitors and surveils Retails Orders (discussed
directly above), EDGX notes that there is no difference between a
Retail Order entered as a riskless principal order that meets the
requirements of FINRA Rule 5320.03, and a principal order. As noted
above, a riskless principal order is a transaction in which a Member,
after having received an order to buy (sell) a security, purchases
(sells) the security as principal and, contemporaneously, satisfies the
original order by selling (buying) as principal at the same price. A
riskless principal order involves two orders, the execution of one
being dependent upon the receipt of the execution of the other. As
such, there is no ``risk'' in the interdependent transactions when
completed. Notably, riskless principal orders are typically entered
onto exchanges in a principal capacity, and the riskless principal leg
of the transaction is reflected only via a corresponding non-media
trade report to a FINRA Facility.\10\ In this regard, the Exchange
believes that the results of a riskless principal transaction and a
principal transaction are the same: the customer will receive an
execution while the involved Member acts as an intermediary to effect
the transaction. However, instead of receiving the same Exchange
execution price, the retail customer will now receive better priced
execution because the RMO is now able to commit capital to that order,
as principal.
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\10\ FINRA Members can report riskless principal transactions by
submitting a single tape report to a FINRA Facility in the same
manner as an agency transaction, marked with a ``riskless
principal'' capacity indicator, excluding the mark-up or mark-down,
commission-equivalent or other fee. Alternatively, members can
report an OTC riskless principal transaction by submitting two (or
more, as necessary) reports: (1) a tape report to reflect the
initial leg of the transaction with a capacity of principal; and (2)
a non-tape (regulatory or clearing-only) report to reflect the
offsetting ``riskless'' leg of the transaction with a capacity of
riskless principal.
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A principal transaction on the Exchange that meets the requirements
of the proposed rule would occur as follows. Assume an RMO receives a
market order to sell 100 shares at $10.01 of security, ABC, from its
retail customer. The RMO then enters a Retail Order onto the Exchange
in a principal capacity, to sell at $10.01. As a Retail Order, the
order receives a price improved execution at $10.012. When that
execution occurs, rather than contemporaneously execute the order with
its retail customer at the same price ($10.012) exclusive of any markup
or markdown, commission equivalent, or other fee (i.e., consistent with
FINRA Rule 5320.03), the RMO may instead choose to provide that retail
customer's order with additional price improvement (i.e., a price
greater than $10.012). Here, the RMO is not permitted to execute this
transaction in a riskless principal capacity, because the RMO is not
providing its retail customer with the same execution price it received
on the Exchange. By permitting the RMO to use a principal order,
though, the RMO was able to provide its retail customer with price
improvement in addition to that already received on the Exchange.
Existing RMO Application Process/Requirements & Proposed Policies and
Procedures
The Exchange also notes that the proposed amendment does not
present any new or material risks that the Exchange has not already
mitigated through its RMO application process for orders entered onto
the Exchange as Retail Orders on behalf of retail customers. Currently,
Rule 11.21(b)(1)-(6) sets forth an objective process by which a Member
organization applies to become an RMO. First, to qualify as a Retail
Member Organization, a Member must conduct a retail routing business or
route retail orders on behalf of another broker-dealer.\11\ To become
an RMO, a Member is required to submit an application form,\12\
supporting documentation (e.g., marketing literature, website
screenshots, and other publicly disclosed materials) confirming that
the applicant's order flow would meet the requirements of the Retail
Order definition,\13\ and an attestation \14\ in a form prescribed by
the Exchange, that substantially all orders submitted as Retail Orders
will qualify as such under the Rule.\15\ After submission of these
materials, various Exchange functions, including legal and operations,
review the application to assess whether the applicant's order flow
complies with Exchange rules.\16\ Applicants are then notified, in
writing, of the Exchange's decision.\17\
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\11\ See Rule 11.21(b)(1).
\12\ See Rule 11.21(b)(2)(A).
\13\ See Rule 11.21(b)(2)(B).
\14\ See, ``Retail Member Organization--Broker-Dealer Customer
Agreement'', and ``Broker-Dealer Customer Annual Attestation'' of
``Cboe BYX Exchange, Inc., Retail Member Organization Application'',
available at: <a href="https://cdn.cboe.com/resources/membership/EDGX_Retail_Member_Organization_Application.pdf">https://cdn.cboe.com/resources/membership/EDGX_Retail_Member_Organization_Application.pdf</a>. Following approval
of this proposal, the Exchange will make conforming edits to the
attestation reflecting the changes to the definition of ``Retail
Order'', as well as the amendments made to the Interpretations and
Policies to Rule 11.21.
\15\ See Rule 11.21(b)(2)(C).
\16\ See Rule 11.21(b)(3).
\17\ Id.
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Furthermore, all RMOs must have in place policies and procedures
reasonably designed to ensure that it will only designate orders as
Retail Orders if all requirements of a Retail Order are met.\18\ These
policies and procedures must require the Member to (i) exercise due
diligence before entering a Retail Order to assure that entry as a
Retail Order is in compliance with the requirements of the Rule, and
(ii) monitor whether orders entered as Retail Orders meet the
applicable requirements.\19\ If an RMO does not itself conduct a retail
business but routes Retail Orders on behalf of another broker-dealer,
the RMO's supervisory procedures must be reasonably designed to assure
that the orders it receives from the other broker-dealer that are
designated as Retail Orders meets the definition of a Retail Order.\20\
In these cases, the RMO must (i) obtain an annual written
representation, in a form acceptable to the Exchange, from each other
broker-dealer that sends the RMO orders to be designated as Retail
Orders that the entry of such orders as Retail Orders will be in
compliance with the requirements of Rule 11.21; and (ii) monitor
whether Retail Order flow routed on behalf of other such broker-dealers
meets the applicable requirements.\21\ Importantly, the Exchange's
regulatory and surveillance functions provide appropriate oversight by
the Exchange by monitoring for continued compliance with the terms of
these provisions. If an RMO fails to abide by the Retail Order
requirements, the Exchange in its sole discretion may disqualify a
Member from its status as an RMO.\22\ The proposed amendment will not
eliminate or diminish the strength of the existing protections
currently codified in Rule 11.21.
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\18\ See Rule 11.21(b)(6).
\19\ Id.
\20\ Id.
\21\ Id.
\22\ See Rule 11.21(b)(d)(1).
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In addition, as noted further above, the Exchange has proposed
[[Page 24479]]
requirements pursuant to proposed Rule 11.21(g) designed to ensure that
Retail Orders entered in a principal capacity are in fact entered on
behalf of bona fide customers. In conjunction with these requirements,
the Exchange also proposes to amend Rule 11.21(b)(6), to codify the
requirements that RMOs choosing to enter Retail Orders in a principal
capacity must have in place policies and procedures reasonably designed
to ensure compliance with the requirements of 11.21(g), and to ensure
the RMO is able to, upon request, provide the Exchange with
documentation evidencing compliance with such requirements.
Finally, the Exchange believes it important to note that as Members
of the Exchange, RMOs must be registered brokers or dealers. As
registered brokers or dealers, RMOs are subject to a panoply of rules,
such as FINRA Rule 2010 (Standards of Commercial Honor and Principles
of Trade), EDGX Rule 2.2 (Obligation of Members and the Exchange), and
EDGX Rule 3.1 (Business Conduct of Members). These rules require,
amongst other things, that as brokers or dealers, Members are required
to conduct business with the highest standards of commercial honor, and
obligate Members to comply with all Exchange rules, by-laws, and
regulations.\23\ While the Exchange has an obligation to maintain fair
and orderly markets and carry out it its duties as a self-regulatory
organization, RMOs are also obligated to ensure that only orders that
comply with Exchange rules are routed to the Exchange and designated as
Retail Orders.
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\23\ While the RMO application process discussed above does rely
on information provided by the applicant, the Exchange believes that
ultimately it must be allowed to rely on representations made by
registered brokers or dealers that are obligated to conduct their
securities business consistent with the highest standards of
commercial honor, and in submitting their application, have attested
to the accuracy of the information provided to the Exchange.
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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.\24\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \25\ 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 customers and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \26\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ Id.
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In particular, the Exchange believes that the proposed rule change
is consistent with these principles because it would increase
competition among execution venues, encourage additional on-exchange
retail liquidity, and in turn, increase the opportunities for retail
customers to receive even greater levels of price improvement from RMOs
that trade principally and choose to commit additional capital to their
Retail Orders. The Exchange notes that a significant percentage of the
orders of individual customers are executed over the counter.\27\ By
providing RMOs with an additional order capacity in which they may
submit their retail orders to the Exchange, EDGX believes that more
retail flow may be directed to the Exchange and have the opportunity to
execute on a regulated, transparent market. Indeed, even the Commission
has noted that ``a very large percentage of marketable (immediately
executable) order flow of individual customers is `executed' or
`internalized' by broker-dealers in the [over-the-counter-markets].''
\28\ The Commission has also noted that a review of the order flow of
eight retail brokers revealed that nearly 100% of their customer market
orders were routed to over-the-counter market makers, often pursuant to
payment for order flow arrangements.\29\ By making clear to retail
broker-dealers that, subject to the conditions discussed herein, they
can enter and execute Retail Orders on the Exchange in a principal
capacity, such market participants may be encouraged to seek on-
Exchange price improvement opportunities. In turn, an increase in the
number of Retail Orders submitted onto the Exchange will encourage more
retail liquidity provision, thereby deepening EDGX's retail liquidity
pool, fostering enhanced price discovery, and offering Retail Orders
more price improvement opportunities as the number of liquidity
providers competing to trade with Retail Orders increases.
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\27\ Ninety-plus percent (90%) of retail marketable orders are
routed to wholesalers and executed off-exchange. See Chair Gensler's
remarks, ``Market Structure and the Retail Investors: Remarks Before
the Piper Sandler Global Exchange Conference'', (June 2, 2022),
available at: <a href="https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-global-exchange-conference-060822">https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-global-exchange-conference-060822</a>).
\28\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594, 3600 (January 21, 2010) (``Concept Release on
Equity Market Structure'').
\29\ Id.
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The Exchange also believes that the proposed amendment to add
principal orders to the definition of Retail Order, promotes just and
equitable principles of trade and is not unfairly discriminatory. All
RMOs are permitted to utilize the proposed principal order capacity and
doing so is not mandatory. While some RMOs may choose not to provide
additional price improvement to executions they receive on the
Exchange, such possibility does not make the proposed amendment
discriminatory. Indeed, to prevent all RMOs from trading in a principal
capacity to provide their retail customers with additional price
improvement, simply because some RMOs may choose not to do so, only
disadvantages the retail customer. Moreover, each RMO has its own
rationale and strategies in how to provide their retail orders with
best execution, and the proposed amendment to merely permit trading in
a principal capacity should not be germane to a consideration of
whether certain RMOs are better positioned to trade in this manner,
than others.
Moreover, proposed Rule 11.21(g) and the proposed amendment to Rule
11.21(b)(6) are designed to prevent fraudulent and manipulative acts
and practices, and to promote just and equitable principles of trade.
Specifically, the proposed requirements under Rule 11.21(g) are
designed to ensure that RMOs trade principally only on behalf of bona
fide retail customers, and not the RMOs own trading account.
Furthermore, the requirement that RMOs have in place policies and
procedures reasonably designed to ensure compliance with Rule
11.21(g)(1) will also help to ensure that RMOs are cognizant of their
regulatory obligations, thereby better ensuring their compliance with
Rule 11.21(g). Additionally, Rule 11.21(b)(6)'s requirement that RMOs
also have policies and procedures in place reasonably designed to
ensure that RMOs can, upon request, provide the Exchange with
documentation of their compliance with Rule 11.21(g) will help to
ensure the Exchange can properly surveil and regulate its RMOs.
Finally, the Exchange also believes that this proposal is not
designed to permit unfair discrimination between
[[Page 24480]]
customers, issuers, brokers, or dealers. While certain RMOs may elect
to trade principally and other RMOs may choose not to do so, the
Exchange is not privy to such decision making and the Exchange does not
dictate how RMOs may choose to enhance the execution quality of their
Retail Orders. Just as some RMOs choosing to enter their Retail Orders
onto the Exchange with more marketable or more conservative limit
prices is non-discriminatory, the mere fact that the Exchange now seeks
to permit an RMO to trade principally should not raise such concerns.
Moreover, any RMO that satisfies the requirements of Rule 11.21(g) may
enter Retail Orders onto the Exchange in a principal capacity,
regardless of their size or trading volume. Likewise, trading
principally is not a requirement to enter orders onto the Exchange as
principal, and RMOs are free to do so, or not, consistent with their
business models and order handling practices.
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 intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The Exchange
believes the proposed amendment will help to enhance the submission of
Retail Orders to the Exchange by providing RMOs with additional
flexibility in how they choose to execute their retail customers'
orders on the Exchange. In turn, greater overall order flow and trading
opportunities benefits all market participants on the Exchange. An
increase in RMO activity and liquidity providing orders will serve to
enhance the Exchange's available liquidity. Deeper liquidity pools
will, in turn, enhance price discovery, as well as price improvement
opportunities for retail customers as liquidity providers compete for
retail executions. Liquidity providers also benefit by being able to
interact with retail order flow that is often executed off-exchange,
and therefore generally inaccessible to those trading in the lit
markets.
While the proposed definition will help to ensure that only bona
fide retail customers receive the benefits afforded to Retail Orders,
the segmentation afforded Retail Orders is not a novel concept in the
securities market. The Commission has long recognized that U.S. capital
markets should be structured with the interests of retail customers in
mind \30\ and has recently proposed a series of rules designed, in
part, to attempt to bring order flow back to the exchanges from off-
exchange trading venues.\31\ In this regard, the proposed amendments
should not result in any new or novel issues to be considered by the
Commission or that have not already been contemplated by today's market
participants. For example, many exchanges, including the Exchange's
affiliate, Cboe BYX Exchange, Inc., offer retail price improvement
programs designed to attract retail order flow to regulated markets and
provide retail order flow with price improvement opportunities.\32\
Additionally, as noted in Amendment 1 of EDGX's Retail Priority
filing,\33\ customer priority has a long tradition in the options
market where orders entered on behalf of non-broker dealer public
customers have historically been afforded priority over orders
submitted by registered broker dealers. The aforementioned retail price
improvement programs and Retail Priority program each provide benefits
to Retail Orders not afforded to other customers by segmenting retail
order flow from traditional order flow. The Exchange's proposal does
not encourage additional segmentation, but rather seeks to enhance
existing benefits to retail customers by codifying that RMOs may
utilize a principal order type in order to provide additional post-
execution price improvement to Retail Orders.
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\30\ See 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>.
\31\ See Securities Exchange Act Release No. 96495 (December 14,
2022), 88 FR 128 (January 3, 2023) (``Order Competition Rule'');
Securities Exchange Act Release No. 96494 (December 14, 2022), 87 FR
80266 (December 29, 2022) (``Tick Size Proposal''); Securities
Exchange Act Release No. 96496 (December 14, 2022), 88 FR 5440
(January 27, 2023) (``Regulation Best Execution''); Securities
Exchange Act Release No. 96493 (December 14, 2022), 88 FR 3786
(January 20, 2023) (``Disclosure of Order Execution Information'').
\32\ See, e.g., Cboe BYX Exchange Rule 11.24 (Retail Price
Improvement Program); NYSE National, Inc. Rule 7.44 (Retail
Liquidity Program); Investors Exchange Inc. Rule 11.232 (Retail
Price Improvement Program).
\33\ See Securities Exchange Act Release No. 86280 (July 2,
2019), 84 FR 32808 (July 9, 2019) (``Notice of Amendment No. 1'').
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Additionally, the Exchange does not believe its proposal unfairly
discriminates between Retail Orders--i.e., between Retail Orders that
are executed principally, and Retail Orders executed in an agency or
riskless principal capacity. While Retail Orders entered in a principal
capacity must satisfy additional requirements compared to Retail Orders
entered as agent or riskless principal, these requirements are designed
to ensure that the benefits of the Exchange's Retail Order program
accrue only to bona retail brokers and their retail customers.
Moreover, treating Retail Orders entered principally in the same manner
as Retail Orders entered as agent or riskless principal equally does
not unfairly discriminate between Retail Orders. The choice to enter a
Retail Order principally or as agent or riskless principal, does not
provide a Retail Order with any additional on-Exchange benefits--i.e.,
whether entered as principal, riskless principal, or agent, the Retail
Order will be handled in the same manner. The additional price
improvement received by principal Retail Orders is fully accrued off-
Exchange, when the RMO chooses to provide additional price improvement
to their retail customers post-execution on the Exchange.
The Exchange further believes that the proposed rule change will
increase intermarket competition by enabling the Exchange to better
compete with other exchanges and off-exchange trading venues for retail
order flow. The Commission has spoken about ``increasing competition
and enhancing the direct exposure of individual customer orders to a
broader spectrum of market participants'' \34\ and the Exchange
believes its proposed amendment to the definition of Retail Order will
help to encourage RMOs to submit additional retail order flow to the
Exchange. In turn, retail customers will have additional opportunities
to receive executions on a transparent, regulated, national securities
exchange in addition to the currently available off-exchange trading
venues, and could also create additional incentives for regulated
exchanges to develop additional liquidity programs designed at
providing additional benefits to retail customers, thus promoting
additional intermarket competition.
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\34\ See Order Competition Rule at 178.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its
[[Page 24481]]
reasons for so finding or (ii) as to which the Exchange consents, the
Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#afdddac3ca82ccc0c2c2cac1dbdcefdccacc81c8c0d9"><span class="__cf_email__" data-cfemail="c4b6b1a8a1e9a7aba9a9a1aab0b784b7a1a7eaa3abb2">[email protected]</span></a>. Please include
file number SR-CboeEDGX-2025-035 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-2025-035. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeEDGX-2025-035 and should
be submitted on or before July 1, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Stephanie Fouse,
Assistant Secretary.
[FR Doc. 2025-10450 Filed 6-9-25; 8:45 am]
BILLING CODE 8011-01-P
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