[Federal Register Volume 85, Number 247 (Wednesday, December 23, 2020)]
[Notices]
[Pages 84065-84069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28318]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90713; File No. SR-CboeEDGX-2020-063]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend EDGX Rule 11.8(g), Which Describes the Handling of MidPoint 
Discretionary Orders Entered on the Exchange

December 17, 2020.
    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 December 15, 2020, 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 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section

[[Page 84066]]

19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposed rule change to amend EDGX Rule 11.8(g), which describes the 
handling of MidPoint Discretionary Orders entered on the Exchange.\5\ 
The text of the proposed rule change is provided in Exhibit 5.
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    \5\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), 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 purpose of the proposed rule change is to amend EDGX Rule 
11.8(g) to allow Users that enter MidPoint Discretionary Orders 
(``MDOs'') with a Quote Depletion Protection (``QDP'') instruction \6\ 
to also include an optional instruction to allow the MDO to remove 
liquidity. An MDO is a Limit Order that when resting on the EDGX Book 
is pegged to the NBB for an order to buy or the NBO for an order to 
sell, with or without an offset, with discretion to execute at prices 
to and including the midpoint of the NBBO.\7\ MDOs entered on the 
Exchange today are designed to only act as the provider of liquidity, 
including when resting on the EDGX Book and on entry.\8\ On June 4, 
2020, the Exchange received approval to introduce a new QDP instruction 
that Users can include on their MDOs to limit the order's ability to 
exercise discretion in certain circumstances where applicable market 
conditions indicate that it may be less desirable to execute within the 
order's discretionary range.\9\ QDP is designed to enable market 
participants to enter orders that may exercise discretion to trade at 
more aggressive prices up to the midpoint of the NBBO, while providing 
additional protection to those orders at times where the market for the 
security may be about to transition to a worse price from the 
perspective of the MDO. As proposed, Users that enter an MDO with a QDP 
instruction would be permitted to include an optional instruction to 
allow the MDO to remove liquidity, thereby facilitating the ability of 
such orders to aggressively seek an execution on entry and when posted 
to the EDGX Book.
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    \6\ QDP is an optional instruction that a User may include on an 
MDO to limit the order's ability to exercise discretion in certain 
circumstances. See EDGX Rule 11.9(g)(10).
    \7\ See EDGX Rule 11.8(g).
    \8\ Id.
    \9\ See Securities Exchange Act Release No. 89007 (June 4, 
2020), 85 FR 35454 (June 10, 2020) (SR-CboeEDGX-2020-010).
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    Currently, an MDO entered on the Exchange will only act as a 
liquidity provider once resting on the EDGX Book, and will only execute 
on entry in limited circumstances where the resting order includes a 
Super Aggressive or Non-Displayed Swap (``NDS'') instruction that 
allows for a liquidity swap with the incoming MDO.\10\ As a result, 
MDOs entered on the Exchange will only act as liquidity provider--i.e., 
either as the resting order, or by liquidity swapping with a resting 
order that is willing to assume the role of the liquidity remover in 
exchange for obtaining an execution.\11\ By contrast, MDOs entered on 
the Exchange's affiliate, Cboe EDGA Exchange, Inc. (``EDGA''), are 
allowed to remove liquidity.\12\ Although the Exchange believes that 
certain Users will continue to prefer to act solely as a liquidity 
provider, additional flexibility may be beneficial to market 
participants, particularly those that have begun entering MDOs with the 
recently-introduced QDP instruction. Indeed, the Exchange has received 
feedback from Users that utilize the QDP instruction on their MDOs 
indicating that they appreciate the protective features provided by 
QDP, but that it would also be valuable to improve fill rates by 
permitting such orders to remove liquidity. The Exchange is thus 
proposing to amend its rules such that Users would have the flexibility 
to allow such orders to remove liquidity. MDOs entered with both a QDP 
instruction and an instruction to allow the order to remove liquidity 
would be handled in the same manner as MDOs entered with a QDP 
instruction on EDGA today, thereby providing a consistent and familiar 
experience for market participants.
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    \10\ See EDGX Rule 11.8(g).
    \11\ The Exchange's Super Aggressive and NDS instructions allow 
orders entered with those instructions to trade as the remover of 
liquidity with orders that are designated to act solely as the 
liquidity provider. See EDGX Rules 11.6(n)(2),(7).
    \12\ See EDGA Rule 11.8(e).
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    In addition, since the Exchange believes that Users utilizing the 
MDO order type with a QDP instruction are more concerned with potential 
adverse selection risks, and would generally prefer to be able to 
secure an execution when possible at times that the QDP indicator does 
not predict a potential adverse price change, i.e., regardless of 
whether adding or removing liquidity, the Exchange proposes to make the 
ability to remove liquidity the default instruction for such orders. 
However, the Exchange would also retain the current functionality that 
allows MDOs to be entered that will only act as the provider of 
liquidity. This functionality would continue to apply to all MDOs 
entered without a QDP instruction, as well as to MDOs entered with a 
QDP instruction if the User affirmatively instructs the Exchange limit 
the order to providing liquidity.\13\ Thus, Users that prefer to only 
have their MDOs execute exclusively as the provider of liquidity would 
be able to continue to do so in the same manner that they do today. 
Introducing the ability for MDOs entered with a QDP instruction to 
remove liquidity, while retaining current functionality, would 
therefore provide additional flexibility to market participants without 
impacting order handling for Users that prefer the current 
functionality.
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    \13\ A User would be able to instruct the Exchange to limit the 
order to providing liquidity either on an order-by-order basis, or 
through the use of a port setting.
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    The Exchange also proposes also make certain conforming and non-
substantive changes to EDGX Rule 11.8(g). Specifically, to increase the 
readability of the MDO rule, the Exchange proposes to move all rule 
language associated with posting instructions to EDGX Rule 11.8(g)(5), 
labelled ``routing/posting.'' Currently,

[[Page 84067]]

this subparagraph only references the fact that MDOs are not eligible 
for routing to other national securities exchanges, and does not 
reference order handling related to posting instructions--i.e., whether 
and when an MDO is allowed to remove or add liquidity. As proposed, 
EDGX Rule 11.8(g)(5) would incorporate language currently included in 
the main section of the MDO rule that describes how such orders are 
handled consistent with an instruction to only act as the liquidity 
provider.
    First, the current rule provides that upon entry, an MDO will only 
execute against resting orders that include a Super Aggressive 
instruction priced at the MDO's pegged price if the MDO also contains a 
Displayed instruction and against orders with an NDS instruction priced 
at the MDO's pegged price or within its discretionary range. The 
Exchange proposes to move this discussion to EDGX Rule 11.8(g)(5) along 
with other language that addresses order handling related to routing 
and posting. Given the proposed ability for such orders to remove 
liquidity in certain circumstances, the Exchange has proposed to 
preface this language in the rule with language that explains that it 
only applies to MDOs that do not include instructions that permit the 
removal of liquidity. Thus, as proposed, EDGX Rule 11.8(g)(5) would 
provide that if the instructions included on an MDO do not permit the 
order to remove liquidity, the MDO will only execute on entry against 
resting orders that include a Super Aggressive instruction priced at 
the MDO's pegged price if the MDO also contains a Displayed 
instruction, and against orders with an NDS instruction priced at the 
MDO's pegged price or within its discretionary range. As discussed, 
this functionality is the same as currently applied to MDOs entered on 
the Exchange.
    Second, the current rule provides that should a resting contra-side 
order within the MDO's discretionary range not include an NDS 
instruction, the incoming MDO will be placed on the EDGX Book and its 
discretionary range shortened to equal the limit price of the contra-
side resting order. Similar to the above, the Exchange proposes to move 
this discussion to EDGX Rule 11.8(g)(5), and would make minor non-
substantive changes to the language to account for the ability of 
certain MDOs to remove liquidity under the proposal. Thus, as proposed, 
EDGX Rule 11.8(g)(5) would provide that if a resting contra-side order 
that does not include an NDS instruction is priced within the 
discretionary range of an incoming MDO that is not permitted to remove 
liquidity, the incoming MDO will be placed on the EDGX Book and its 
discretionary range will be shortened to equal the limit price of the 
resting contra-side order. This language relates specifically to 
incoming MDOs that do not remove liquidity and are therefore not able 
to trade on entry with certain orders that are unwilling to perform a 
liquidity swap. The proposed edits to the language would therefore make 
clear that this handling does not apply in circumstances where an MDO 
is entered with instructions that permit liquidity removal.
    Third, the current rule provides that where an incoming order with 
a Post Only instruction does not remove liquidity on entry pursuant to 
Rule 11.6(n)(4) against a resting MDO, the discretionary range of the 
resting MDO will be shortened to equal the limit price of the incoming 
contra-side order with a Post Only instruction. The Exchange also 
proposes to move this language to Rule 11.8(g)(5) as it relates to 
relates generally to posting instructions. However, since this handling 
does not depend on whether the MDO is only allowed to add liquidity, or 
can both add or remove liquidity, the Exchange is not proposing to edit 
this language when moving it to this subsection of the MDO rule.
    Finally, in addition to the proposed changes described above, the 
Exchange also proposes to amend EDGX Rule 11.8(g)(2) to allow MDOs to 
be entered for an odd lot size. Currently, EDGX Rule 11.8(g)(2) 
specifies that MDOs may be entered as a round lot or mixed lot only, 
and the Exchange does not permit Users odd lots to be entered using the 
MDO order type. By contrast, the Exchange's affiliate, EDGA, does not 
have a similar restriction, and MDOs entered on that exchange may 
therefore be entered for an odd lot size.\14\ The Exchange is proposing 
to similarly permit odd lot MDOs to be entered on the EDGX Book, which 
would allow market participants trading on the Exchange to similarly 
utilize MDOs for smaller order sizes.
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    \14\ See EDGA Rule 11.8(e)(2).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\16\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. Specifically, the Exchange believes that the proposed rule 
change is consistent with the protection of investors and the public 
interest as it would enable Users that enter MDOs with a QDP 
instruction to optionally remove liquidity, similar to the current 
handling on its affiliate, EDGA, which allows such orders to remove 
liquidity today. In addition, the proposed rule change would allow 
Users to enter MDOs for an odd lot quantity, which is similarly 
consistent with the operation of MDOs entered on EDGA.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    Although MDOs are currently designed to only act as the provider of 
liquidity, the Exchange believes that Users that enter MDOs with a QDP 
instruction may benefit from the ability to trade more aggressively as 
the remover of liquidity. The Exchange is therefore proposing to allow 
MDOs entered with a QDP instruction to remove liquidity, by default, 
while allowing Users to alternatively select to have such orders 
limited to providing liquidity. MDOs that are not entered with a QDP 
instruction, and MDOs entered with a QDP instruction where the User 
chooses to opt out of the ability to remove liquidity, would be handled 
in the same manner as they are today, thereby allowing Users to 
properly reflect their trading intent with their choice of instruction. 
As discussed, MDOs entered on the Exchange currently only act as the 
provider of liquidity, both on entry and upon posting to the EDGX Book. 
By contrast, the Exchange's affiliate, EDGA, allows such orders to both 
provide and remove liquidity. The Exchange believes that allowing MDOs 
entered with a QDP instruction to optionally act as liquidity remover, 
similar to the current handling on its affiliate, EDGA, would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.
    With the recent introduction of the QDP instruction, the Exchange 
has decided to revisit whether these orders should be allowed to remove 
liquidity, and has determined that such handling would be generally 
beneficial to market participants trading on the Exchange as it would 
increase the probability of such orders obtaining an execution. This 
change is consistent with customer feedback as some Users have 
indicated that they would prefer the ability to remove liquidity in 
order to boost fill rates for MDOs entered with a QDP instruction. At 
the same time, the Exchange understands that certain market 
participants may wish to continue to have these orders act solely

[[Page 84068]]

as a liquidity provider. The proposed rule change would therefore give 
Users the flexibility to determine whether an MDO entered with a QDP 
instruction should act solely as a liquidity provider, i.e., the 
current functionality, or whether such orders should instead be allowed 
to also remove liquidity. The Exchange believes that this change will 
benefit market participants by offering functionality similar to that 
currently offered by its affiliate, while providing additional 
flexibility with respect to how MDOs are handled by the Exchange.
    In addition, the Exchange believes that the proposed non-
substantive changes to its MDO rule are consistent with just and 
equitable principles of trade as these changes are designed to increase 
transparency around the operation of the Exchange. As proposed, the 
Exchange would move certain language included in the MDO rule to the 
subsection of the rule that addressees routing and posting. The 
proposed language to be included in that subsection is substantively 
the same as the language currently included in the main text of the MDO 
rule, with a handful of minor changes to reflect the fact that certain 
MDOs may be permitted to remove liquidity based on User instructions. 
The Exchange believes that consolidating all of this language in the 
subsection on routing and posting would increase the readability of the 
rule, and the proposed edits to the language included in that 
subsection are merely designed to highlight where the language is 
applicable specifically to MDOs entered with instructions that require 
that the order act as the provider of liquidity. These changes are 
being proposed to ensure that the language remains accurate in light of 
the changes to allow certain MDOs to remove liquidity. As such, the 
Exchange believes that those edits would increase transparency around 
the operation of the MDO order type in light of the other proposed 
changes addressed in this filing.
    Finally, the Exchange believes that allowing MDOs to be entered for 
an odd lot quantity would promote just and equitable principles of 
trade. As discussed, the Exchange's affiliate, EDGA, similarly allows 
such orders to be entered for an odd lot size, and the Exchange 
believes that market participants that trade on the EDGX Book should 
similarly be able to enter odd lot MDOs. While the Exchange initially 
restricted MDOs to either round lots or mixed lots, the Exchange now 
believes that this limitation unnecessarily limits the availability of 
the MDO order type for market participants that are interested in 
trading smaller sized orders. Expanding MDOs to odd lot orders would 
therefore increase the ability for market participants to trade using 
this order type, including potentially benefiting Users of the recently 
introduced QDP instruction.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed changes would 
allow MDOs entered with a QDP instruction on EDGX to remove liquidity, 
which would increase flexibility offered by such orders. Although these 
orders do not remove liquidity today, the Exchange's affiliate, EDGA, 
already permits such orders to do so. Thus, the proposed rule change 
would allow market participants that trade on EDGX to utilize similar 
functionality to those that trade on its affiliated exchange today. 
Further, the Exchange has proposed to introduce the ability to remove 
liquidity as the default instruction for such orders, while allowing 
Users that prefer the current functionality to continue to have their 
orders handled in the same manner as they are today--i.e., Users could 
chose to have these orders only add liquidity, as is the case with the 
current functionality. As a result, the Exchange does not believe that 
the proposed ability for these orders to remove liquidity would impose 
any significant burden on competition. Similarly, the Exchange notes 
that MDOs entered on the EDGA Book are permitted to be entered for an 
odd lot quantity. The Exchange believes that permitting odd lot MDOs on 
the EDGX Book would provide similar benefits to its Users by expanding 
the potential use of this order type, without imposing any significant 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and 
Rule 19b-4(f)(6) \18\ thereunder. At any time within 60 days of the 
filing of the 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 will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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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 (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#92e0e7fef7bff1fdfffff7fce6e1d2e1f7f1bcf5fde4"><span class="__cf_email__" data-cfemail="b1c3c4ddd49cd2dedcdcd4dfc5c2f1c2d4d29fd6dec7">[email protected]</span></a>. Please include 
File Number SR-CboeEDGX-2020-063 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-2020-063. 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 (http://www.sec.gov/rules/sro.shtml). 
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

[[Page 84069]]

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-2020-063 and should 
be submitted on or before January 13, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28318 Filed 12-22-20; 8:45 am]
BILLING CODE 8011-01-P


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