Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 40365 

26 15 U.S.C. 78f(b)(5). 

27 15 U.S.C. 78s(b)(2). 

28 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

4 15 U.S.C. 78s(b)(1). 

5 17 CRF 240.19b–4. 

6Executions below $1.00 are assessed a fee of 

0.30% of TDV unless the Fee Code Combination 

results in a free execution. See Investors Exchange 

Fee Schedule, available on the Exchange public 

website. 

7Pursuant to Rule 11.190(g), the Protected 

Quotations of the New York Stock Exchange, 

Nasdaq Stock Market, NYSE Arca, Nasdaq BX, Cboe 

BZX Exchange, Cboe BYX Exchange, Cboe EDGX 

Exchange, and Cboe EDGA Exchange. 

8See, Rule 600(b)(42) under Regulation NMS. 

9See supra note 4 [sic]. 

values, or (d) the applicability of 

Exchange rules specified in this filing 

shall constitute continued listing 

requirements for listing the Shares on 

the Exchange. The issuer has 

represented to the Exchange that it will 

advise the Exchange of any failure by a 

Fund or Shares to comply with the 

continued listing requirements, and, 

pursuant to its obligations under 

Section 19(g)(1) of the Act, the Exchange 

will surveil for compliance with the 

continued listing requirements. If a 

Fund or Shares is not in compliance 

with the applicable listing requirements, 

then, with respect to such Fund or 

Shares, the Exchange will commence 

delisting procedures under BZX Rule 

14.12. 

This approval order is based on all of 

the Exchange’s representations and 

description of the Funds, including 

those set forth above and in Amendment 

No. 2 to the proposed rule change. 

Except as described herein, the 

Commission notes that the Shares must 

comply with all other applicable 

requirements of BZX Rule 14.11(c) to be 

listed and traded on the Exchange on an 

initial and continuing basis. The 

Commission further notes that the 

Shares of the Funds will not be listed 

and traded on the Exchange until any 

and all exemptive and/or no-action 

relief required under the 1940 Act has 

been obtained with respect to the Funds 

and the Shares and any conditions 

related thereto are satisfied. 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 2, is consistent with Section 6(b)(5) 

of the Act 26 and the rules and 

regulations thereunder applicable to a 

national securities exchange. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,27 that the 

proposed rule change (SR–CboeBZX– 

2017–005), as modified by Amendment 

No. 2, be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.28

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–17392 Filed 8–13–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83800; File No. SR–IEX– 

2018–16] 

Self-Regulatory Organizations: 

Investors Exchange LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Revise the 

Threshold for Imposition of the 

Crumbling Quote Remove Fee 

August 8, 2018. 

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 July 26, 

2018, the Investors Exchange LLC 

(‘‘IEX’’ or the ‘‘Exchange’’) 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 self-regulatory organization. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

Pursuant to the provisions of Section 

19(b)(1) under the Securities Exchange 

Act of 1934 (‘‘Act’’),4 and Rule 19b–4 

thereunder,5 IEX is filing with the 

Commission a proposed rule change to 

revise the threshold for imposition of 

the Crumbling Quote Remove Fee 

(‘‘CQRF’’) to more narrowly tailor it to 

trading activity that is indicative of a 

deliberate trading strategy that may 

adversely affect execution quality on the 

Exchange. The text of the proposed rule 

change is available at the Exchange’s 

website at www.iextrading.com, at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization 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 statement may be examined at 

the places specified in Item IV below. 

The self-regulatory organization 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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to amend its 

fee schedule, pursuant to IEX Rule 

15.110 (a) and (c), to revise the 

threshold for imposition of the CQRF to 

more narrowly tailor it to trading 

activity that is indicative of a deliberate 

trading strategy that may adversely 

affect execution quality on the 

Exchange. 

The Exchange charges the CQRF to 

orders that remove resting liquidity 

when the crumbling quote indicator 

(‘‘CQI’’) is on if such executions 

constitute at least 5% of the Member’s 

volume executed on IEX and at least 1 

million shares, on a monthly basis, 

measured on a per market participant 

identifier (‘‘MPID’’) basis (the ‘‘CQRF 

Threshold’’). Orders that exceed the 5% 

and 1 million share thresholds are 

assessed a fee of $0.0030 per each 

incremental share executed at or above 

$1.00 that exceeds the CQRF 

Threshold.6

Pursuant to IEX Rule 11.190(g), in 

determining whether quote instability or 

a crumbling quote exists, the Exchange 

utilizes real time relative quoting 

activity of certain Protected Quotations 7

and a proprietary mathematical 

calculation (the ‘‘quote instability 

calculation’’) to assess the probability of 

an imminent change to the current 

Protected National Best Bid 8 to a lower 

price or the Protected National Best 

Offer 9 to a higher price for a particular 

security (‘‘quote instability factor’’). 

When the quoting activity meets 

predefined criteria and the quote 

instability factor calculated is greater 

than the Exchange’s defined quote 

instability threshold, the System treats 

the quote as unstable and the CQI is on. 

During all other times, the quote is 

considered stable, and the CQI is off. 

The System independently assesses the 

stability of the Protected NBB and 

Protected NBO for each security. When 

the System determines that a quote, 


amozie on DSK3GDR082PROD with NOTICES1
40366 Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 

10See Securities Exchange Act Release No. 81484 

(August 25, 2017), 82 FR 41446 (August 31, 2017) 

(SR–IEX–2017–27). 11See Rule 11.190(b)(10). 12See Rule 11.190(b)(8). 13By not permitting resting Discretionary Peg 

orders and primary peg orders to exercise price 

discretion during periods of quote instability, the 

Exchange is designed to protect such orders from 

unfavorable executions when its probabilistic 

model identifies that the market appears to be 

moving adversely to them. This limitation is 

designed to appropriately balance the protective 

benefits to Discretionary Peg and primary peg 

orders with the interest of avoiding potentially 

undue trading restrictions. 

14The term markouts refers to changes in the 

midpoint of the NBBO measured from the 

perspective of either the liquidity providing resting 

order or liquidity removing taking order over a 

specified period of time following the time of 

execution. 

either the Protected NBB or the 

Protected NBO, is unstable, the 

determination remains in effect at that 

price level for two milliseconds, unless 

a new determination is made before the 

end of the two-millisecond period. A 

new determination may be made after at 

least 200 microseconds has elapsed 

since a preceding determination, or a 

price change on either side of the 

Protected NBBO occurs, whichever is 

first. If a new determination is made, the 

original determination is no longer in 

effect. A new determination can be at 

either the Protected NBB or the 

Protected NBO and at the same or 

different price level as the original 

determination. 

The Exchange adopted the CQRF 

beginning in January 2018 in order to 

incentivize the entry of resting liquidity 

on IEX, including displayed liquidity. 

Specifically, and as described more 

fully in the rule filing adopting the 

CQRF (‘‘CQRF rule filing’’),10 the 

Exchange identified that Members 

entering liquidity taking orders when 

the CQI was on appeared to be able to 

engage in a form of latency arbitrage by 

leveraging fast proprietary market data 

feeds and connectivity along with 

predictive strategies to chase short-term 

price momentum and successfully target 

resting orders at unstable prices. IEX 

believes that these types of trading 

strategies, with concentrated and 

aggressive tactics during moments of 

quote instability, are detrimental to the 

experience of other IEX participants, 

and create disparate burdens on resting 

orders, particularly those that are 

displayed and therefore ineligible to 

benefit from the CQI in the manner of 

Discretionary Peg orders 11 and primary 

peg orders 12 which do not exercise 

price discretion when the CQI is on.13

The CQRF is a narrowly tailored 

approach, designed to disincentivize 

certain liquidity removing orders that 

can degrade the quality of the market 

and thereby incentivize the entry of 

liquidity providing orders that can 

enhance the quality of the market. The 

CQRF is only charged on incremental 

executed shares above the CQRF 

Threshold, which is designed to limit 

the fee to trading activity that is 

indicative of a deliberate trading 

strategy that may adversely affect 

execution quality on IEX and to not 

charge the fee to executions taking 

liquidity when the CQI is on that are 

likely to be incidental and not part of 

such a strategy. 

As described in the CQRF rule filing, 

there are significant differences in short 

term markouts 14 for resting and taking 

orders between executions when the 

CQI is on and off, regardless of whether 

the NBB (NBO) moves lower (higher) 

within two milliseconds of the 

Exchange’s determination of quote 

instability. Moreover, the breakdown of 

orders entered and shares removed 

when the CQI is on or off evidences that 

certain trading strategies appear to 

involve entering liquidity taking orders 

targeting resting orders at prices that are 

likely to move adversely from the 

perspective of the resting order. 

The CQRF has been incrementally 

successful in achieving its stated goal of 

reducing the incidence of liquidity 

taking orders when the CQI is on. The 

volume removed when the CQI is on has 

declined from 8.1% in December 2017 

to 7.3% in April 2018 (see Chart 1 

below). Further, 5 of 12 Members that 

surpassed the CQRF Threshold in 

December 2017 appear to have reduced 

such activity by at least 20% and one 

fell below the CQRF Threshold in April 

2018. 


amozie on DSK3GDR082PROD with NOTICES1EN14AU18.000</GPH>
Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 40367 

15See IEX Rule 1.160(gg). 

16Comparing December 2017 to April 2018, IEX 

average daily volume increased from 148 million 

shares to 155 million shares and IEX volume when 

the CQI is off increased from 91.9% to 92.7%. 

17See Securities Exchange Act Release No. 83048 

(April 13, 2018), 83 FR 17467 (April 19, 2018) (SR– 

IEX–2018–07). 

18Pursuant to the IEX Equities Port Request Form 

(available on IEX’s website at https://

iextrading.com/docs/IEX%20Connectivity%20

Agreements%20and%20Forms.pdf), Members may 

request one or more connectivity ports to connect 

to IEX, through which the Member may send, or 

permit a Sponsored Participant of such Member, to 

send orders and order related messages to IEX. 

19 15 U.S.C. 78f. 

20 15 U.S.C. 78f(b)(4). 

21 15 U.S.C. 78f(b)(5). 

Moreover, although material 

differences in key metrics related to 

orders entered when the CQI is on and 

off have persisted following 

implementation of the CQRF, the 

Exchange has identified some 

incremental improvement which 

appears to be generally attributable to 

the CQRF comparing data from June 

2017 to April 2018. Most significantly, 

the percentage of marketable orders 

received when the CQI is on has 

declined from 30.4% to 18.2%, 

notwithstanding that the amount of time 

the CQI is on has increased from 1.24 

seconds (0.005% of time during Regular 

Market Hours 15) to 1.84 seconds 

(0.008% of time during Regular Market 

Hours). Thus, based on the foregoing 

analysis, IEX believes that the CQRF has 

been incrementally effective in reducing 

order flow that targets resting liquidity 

at prices that are about to become stale. 

With respect to incentivizing liquidity 

adding order flow, the Exchange notes 

that IEX’s overall volume has increased 

since implementation of the CQRF, and 

volume traded when the CQI is off has 

increased as a proportion of overall 

volume.16 With the confluence of factors 

that influence order flow decisions, it is 

inherently difficult to attribute such 

increases to the CQRF, particularly in 

the short period of time it has been in 

effect. Nonetheless, IEX believes that the 

CQRF has achieved some of its intended 

objectives already. 

Beginning in May 2018, the Exchange 

incrementally optimized and enhanced 

the effectiveness of the quote instability 

calculation in determining whether a 

crumbling quote exists.17 As a result, 

the CQI is on more often. During May 

and June 2018, the CQI ‘‘fired’’ 28.6% 

more often per symbol per trading day 

(on average), compared to April 2018. 

However, shares removed when the CQI 

is on increased only 19.6%. The 

Exchange believes that this subsequent 

increase in CQI activity is attributable to 

the increased coverage of the signal as 

a result of the upgrade in May 2018, not 

a reduction in the effectiveness of the 

CQRF. 

However, notwithstanding the 

incremental effectiveness of the CQRF, 

IEX believes that it is possible for a 

Member to circumvent (in whole or in 

part) the CQRF Threshold by routing 

orders to IEX that are part of a deliberate 

trading strategy that targets resting 

liquidity during periods of quote 

instability through another Member 

(using such Members’ MPID) not 

engaged in such a strategy at all or to the 

same extent. Such a routing approach 

would thus consolidate the executions 

that take liquidity when the CQI is on 

with executions of the other executing 

Member thereby reducing the 

executions that exceed the CQRF 

Threshold and the resultant fee for the 

entering Member. This is because the 

consolidated pool of executions would 

contain a significant number of orders 

executed on behalf of the executing 

Member and its other customers that did 

not take liquidity when the CQI is on. 

Therefore, fewer of the entering 

Member’s executions that take liquidity 

when the CQI is on would be above the 

5% threshold when measured on an 

MPID basis. 

In order to address the potential for 

ongoing and increased circumvention of 

the CQRF, IEX proposes to revise the 

threshold for imposition of the CQRF to 

more narrowly tailor it to trading 

activity that is indicative of a deliberate 

trading strategy that may adversely 

affect execution quality on the 

Exchange. As proposed, the CQRF 

Threshold would be revised in two 

respects. First, the 5% monthly CQRF 

Threshold would be measured and 

applied on a per logical port (also 

referred to as a ‘‘session’’) per MPID 

basis.18 Second, the 1 million share 

aspect of the CQRF Threshold would be 

eliminated. Therefore, on a monthly 

basis, the Exchange would determine 

whether the 5% threshold was reached 

within each session used by each 

Member’s MPID. Incremental shares that 

removed liquidity while the CQI was on 

above the 5% threshold would be 

charged the CQRF. 

IEX believes that Members generally 

use separate sessions within the same 

MPID to segment the order flow of 

particular customers and proprietary 

strategies. Thus, the Exchange believes 

that applying the CQRF Threshold on a 

per session per MPID basis, rather than 

solely per MPID, will result in a more 

fair application of the fee because it will 

more narrowly apply the fee to trading 

strategies that are indicative of a 

deliberate strategy that targets resting 

orders at prices that are likely to move 

adversely from the perspective of the 

resting order and that thus may 

adversely affect execution quality on 

IEX. In addition, the change is designed 

to reduce potential circumvention of the 

CQRF by Members that consolidate 

orders under one MPID that are part of 

such deliberate trading strategies with 

orders that are not. 

Eliminating the 1 million share aspect 

of the CQRF Threshold is designed to 

avoid potential circumvention whereby 

a Member could divide its orders that 

are part of such a deliberate trading 

strategy across multiple sessions in 

order to circumvent the CQRF by 

keeping each session below the 1 

million share threshold. IEX does not 

charge for sessions, and thus Members 

can readily add additional sessions 

upon request. 

Based on an analysis of data from 

June 2018, the Exchange estimates that 

35 Members would be subject to 

monthly increases in the CQRF, totaling 

approximately $94,000 and ranging 

from $0.10 to $36,351. Fourteen 

Members’ increased fees would be more 

than $1,000 and two would be over 

$10,000. Twelve Members’ fees would 

increase by less than $100. 

The Exchange will continue to 

provide the Fee Code Indicator of ‘‘Q’’ 

on execution reports to Members 

removing liquidity at or within the 

NBBO when the CQI is on. 

IEX will implement the proposed fee 

change beginning on August 1, 2018. 

2. Statutory Basis 

IEX believes that the proposed rule 

change is consistent with the provisions 

of Section 6(b) 19 of the Act in general, 

and furthers the objectives of Sections 

6(b)(4) 20 of the Act, in particular, in that 

it is designed to provide for the 

equitable allocation of reasonable dues, 

fees and other charges among its 

Members and other persons using its 

facilities. Additionally, IEX believes that 

the proposed revisions to the CQRF is 

consistent with the investor protection 

objectives of Section 6(b)(5) 21 of the Act 

in particular in that it is designed to 

promote just and equitable principles of 

trade, to remove impediments to a free 

and open market and national market 

system, and in general to protect 

investors and the public interest. 

The CQRF is designed to enhance the 

Exchange’s market quality by 

encouraging Members and other market 

participants to add more liquidity to the 

Exchange order book, which benefits all 

investors by deepening the Exchange’s 

liquidity pool. Specifically, the 

Exchange believes that trading strategies 


amozie on DSK3GDR082PROD with NOTICES1
40368 Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 

22See, e.g., New York Stock Exchange Price List 

2018, available at https://www.nyse.com/ 

publicdocs/nyse/markets/nyse/NYSE_Price_

List.pdf. See also, Nasdaq Rule 7018. 

23See, e.g., Securities Exchange Act Release No. 

80034 (February 14, 2017), 82 FR 11275 (February 

21, 2017) (File No. SR–BatsEDGX–2017–09). 24See note 15 [sic] supra. 

that target resting liquidity during 

periods of quote instability seek to trade 

at prices that are about to become stale, 

and thus discourage other market 

participants from entering liquidity 

providing orders on the Exchange. The 

Exchange believes that the CQRF has 

been incrementally successful in 

achieving this goal. However, as 

described in the Purpose section, the 

Exchange has identified certain actual 

and potential ways in which the CQRF 

can be circumvented, which warrant 

revisions to the CQRF Threshold. 

The proposed change to the 

applicable threshold for imposition of 

the CQRF is a limited and narrowly 

drawn approach that is designed to 

increase the fairness of the fee, and also 

mitigate and reduce the potential for 

circumvention, as described in the 

Purpose section. Specifically, the 

Exchange believes that applying the 

CQRF Threshold on a per session per 

MPID basis, rather than solely on a per 

MPID basis, will result in a more fair 

and narrowly tailored application of the 

fee because it will better focus the fee 

on deliberate trading strategies that 

target resting orders at prices that are 

about to become stale, thus reducing the 

potential that incidental trading activity 

not part of such a strategy towards the 

end of a month after the MPID has 

crossed the threshold could be subject 

to the CQRF. In addition, the change is 

designed to reduce potential 

circumvention of the CQRF by Members 

that intentionally consolidate orders 

that are part of such a deliberate trading 

strategy with orders that are not, within 

a single MPID. The Exchange 

understands that Members typically use 

separate sessions for distinct trading 

strategies and customers, and that 

therefore deliberate trading strategies 

that target resting orders at prices that 

are about to become stale would 

generally not be on the same session as 

trading strategies that do not target 

resting orders in such a manner. Thus, 

assessing the threshold on a per session 

per MPID basis, rather than per MPID, 

is designed to be even more fair and 

narrowly tailored since the approach 

will focus the fee on transactions that 

are part of a deliberate strategy that 

targets resting orders at prices that are 

about to become stale, and reduce the 

potential that the fee will be applied to 

incidental transactions not part of such 

a strategy. 

As described in the Purpose section, 

elimination of the 1 million share 

threshold is designed to avoid potential 

circumvention whereby a Member could 

divide its orders that are part of 

deliberative trading strategies designed 

to target resting orders at prices that are 

about to become stale across multiple 

sessions in order to circumvent the 

CQRF by keeping each session below 1 

million shares subject to the CQRF. In 

addition, the Exchange believes that the 

5% threshold is sufficiently robust such 

that it is unlikely that a Member will 

accidentally breach the threshold and 

incur the CQRF. The CQI is on only 10.4 

seconds per symbol per trading day on 

a volume weighted average basis, 

constituting 0.04% of the day per 

symbol. Consequently, the probability 

that a Member (or customer of a 

Member) not engaged in a deliberate 

strategy to target resting orders at prices 

about to become stale, would by chance 

trade when the CQI is on is about 1 in 

2,340. The Exchange believes that it is 

highly unlikely for a Member to 

encounter a 1 in 2,340 chance event 

more than 5% of the time, and thus the 

5% threshold is sufficiently robust to 

limit application of the CQRF to 

intentional activity. As described above, 

IEX believes that the per session per 

MPID threshold will more narrowly 

apply the fee to deliberate trading 

strategies that target resting orders at 

prices that are about to become stale, 

and is thus an even fairer and more 

narrowly tailored application of the fee 

as a result thereof. Accordingly, the 

Exchange believes that the proposed 

changes will incrementally enhance the 

effectiveness of the CQRF to incentivize 

resting liquidity on the Exchange by 

more effectively disincentivizing order 

flow that targets resting liquidity at 

prices that are about to become stale. 

Other exchanges offer incentives in 

the form of rebates and/or reduced fees 

that are designed to encourage market 

participants to send increased levels of 

order flow to such exchanges. These 

typically take the form of lower fees and 

higher rebates for meeting specified 

volume tiers.22 These fee and rebate 

structures are typically justified by other 

exchanges on the basis that increased 

liquidity benefits all investors by 

deepening the exchange’s liquidity pool, 

which provides price discovery and 

investor protection benefits.23 The 

Exchange also notes that other 

exchanges charge different fees (or 

provide rebates) to the buyer and seller 

to an execution, which are generally 

referred to as either maker-taker or 

taker-maker pricing schemes. Typically, 

the exchange offering such pricing is 

seeking to incentivize orders that 

provide or remove liquidity, based on 

which type of orders receive a rebate. 

While these pricing schemes 

discriminate against the Member party 

to the trade that is charged a fee (in 

favor of the Member party to the trade 

that is paid a rebate) the Commission 

has not found these fees to be unfairly 

discriminatory in violation of the Act.24

Similarly, the proposed changes to the 

CQRF Threshold seek to promote 

increased liquidity and price discovery 

on the Exchange by providing a fee 

designed to incentivize liquidity 

providing orders that can improve the 

quality of the market. The Exchange 

believes that, to the extent the fee, as 

revised, is successful in further reducing 

targeted and aggressive liquidity 

removing orders, it would contribute to 

investors’ confidence in the fairness of 

transactions and the market generally, 

thereby benefiting multiple classes of 

market participants and supporting the 

public interest and investor protection 

purposes of the Act. 

The Exchange believes that makertaker and taker-maker pricing schemes 

in general create needless complexity in 

market structure in various ways and 

result in conflicts of interest between 

brokers and their customers. 

Accordingly, IEX has made a decision 

not to adopt rebate provisions in favor 

of a more transparent pricing structure 

that generally charges equal fees (or in 

some cases, no fee) for a particular trade 

to both the ‘‘maker’’ and ‘‘taker’’ of 

liquidity. Given this decision, IEX must 

use other means to incentivize orders to 

rest on its order book. IEX’s execution 

quality is one important incentive, but 

this incentive can be undercut by 

trading strategies that target resting 

orders during periods of quote 

instability. Accordingly, IEX believes 

that the CQRF, as it is proposed to be 

amended, is one reasonable way to 

compete with other exchanges for order 

flow, consistent with its exchange 

model and without relying on rebates. 

The Exchange believes that the 

revised threshold for application of the 

CQRF is reasonable and equitable 

because it is designed to reduce 

potential circumvention of the CQRF 

and enhance both the fairness and 

narrowly tailored application of the fee. 

As amended, the CQRF would continue 

not to apply when executions taking 

liquidity while the CQI is on are likely 

to be incidental and not part of a 

deliberate trading strategy that targets 

resting liquidity during periods of quote 

instability. The Exchange does not 

believe that the proposed CQRF 

Threshold changes would result in an 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 40369 

25Thirty-seven Members would have been 

charged the CQRF, with 35 subject to increased 

fees. Those 37 Members traded through 565 

separate sessions, 286 of which would have been 

subject to the CQRF. For Members that would be 

subject to increased fees, the number of sessions 

that would be charged ranges from 1 to 42. 

26See Securities Exchange Act Release No. 80976 

(June 20, 2017), 82 FR 28920 (June 26, 2017) (SR– 

BatsEDGA–2017–18). 

27See, e.g., Securities Exchange Act Release No. 

69066 (March 7, 2013), 78 FR 16023 (March 13, 

2013) (SR–EDGA–2013–10). 

28See Cboe BZX Exchange Fee Schedule, 

available at: http://markets.cboe.com/us/equities/ 

membership/fee_schedule/bzx/. 

increase in such incidental orders being 

charged the CQRF. To the contrary, the 

Exchange believes the proposed CQRF 

Threshold changes would result in more 

orders that are part of such deliberative 

strategies being charged, and the per 

session per MPID charge would result in 

fewer incidental orders being charged. 

Consequently, the Exchange believes 

that the proposed fee structure is not 

unfairly discriminatory because it is 

narrowly tailored to charge a fee only on 

trading activity that is indicative of a 

trading strategy that may adversely 

affect execution quality on IEX and is 

reasonably related to the purpose of 

encouraging liquidity providing orders 

on IEX without the use of rebates. 

In particular, the Exchange believes 

that the data from April, May, and June 

2018 supports the position that the 

proposed CQRF Threshold is narrowly 

tailored to charge the CQRF based on 

objective criteria indicating that 

execution of the orders in question 

reasonably appear to be part of a 

deliberate trading strategy that targets 

resting liquidity during periods of quote 

instability. A pro forma analysis of June 

2018 data evidences that had the CQRF 

been calculated under the proposed 

threshold per session per MPID, the 

order entry profile of sessions that 

would have been subject to the fee is 

materially different than sessions that 

would not have been subject to the fee 

with respect to orders entered when the 

CQI was on. For the 286 sessions above 

the CQRF Threshold, 19.0% of orders 

were received while the CQI was on 

(21.9% for the 135 sessions that would 

have been subject to more than $500 in 

fees), while for sessions below the 

proposed CQRF Threshold this number 

was only 4.7%. The Exchange believes 

that this difference evidences that 

sessions above the proposed CQRF 

Threshold were more likely to be 

engaging in a deliberate strategy to 

target resting orders at soon to be stale 

prices.25

The Exchange also believes that it is 

appropriate, and consistent with the 

Act, to not charge the CQRF to Members 

for executed shares on sessions that do 

not exceed the CQRF Threshold during 

the month in question, as measured on 

a per session per MPID basis. This is 

designed to address limited inadvertent 

liquidity removal by such Members 

when the CQI is on since such order 

flow during such times appears to be 

incidental. 

The Exchange also believes that it is 

consistent with the Act and an equitable 

allocation of reasonable dues, fees and 

other charges among its Members and 

other persons using its facilities to 

measure whether the CQRF Threshold is 

reached on per session per MPID basis. 

As discussed above, the CQRF 

Threshold is designed to narrowly focus 

on executions that appear to be part of 

a deliberate trading strategy that targets 

resting liquidity during periods of quote 

instability. The Exchange believes that 

Members that utilize multiple sessions 

generally use different sessions for 

different trading strategies or customers. 

Therefore, the Exchange believes that 

measuring by session-MPID 

combination is a more precise manner 

of assessing whether a Member’s trading 

strategy (or that of a customer) is part of 

a deliberate trading strategy that targets 

resting liquidity during periods of quote 

instability. Further, applying the CQRF 

Threshold on a per session per MPID 

basis is designed to address potential 

circumvention of the CQRF as described 

in the Purpose section. 

Accordingly, the Exchange submits 

that the proposed CQRF Threshold is 

narrowly tailored to address particular 

trading strategies (rather than particular 

classes of Members) that may operate to 

disincentivize the entry of resting orders 

by other market participants. 

Specifically, and as discussed above, to 

the extent the proposed CQRF is 

successful in further reducing such 

trading strategies on IEX, it may result 

in market quality improvements which 

could benefit multiple classes of market 

participants. 

The Exchange further believes that 

charging the CQRF only to the liquidity 

remover is equitable and not unfairly 

discriminatory because it is designed to 

incentivize order flow that enhances the 

quality of trading on the Exchange and 

disincentivize trading that does not. As 

discussed above, IEX believes that there 

are precedents for exchanges to charge 

different fees based upon meeting (or 

not meeting) particular criteria, as well 

as maker-taker and taker-maker pricing 

structures whereby the liquidity adder 

and remover to a trade are subject to 

differing fees and rebates, to incentivize 

certain types of trading activity. Fees 

and rebates based on maker-taker and 

taker-maker pricing as well as on 

volume-based tiers have been widely 

adopted by equities exchanges. And in 

some cases, maker-taker or taker-maker 

pricing has been combined with 

volume-based tiers that result in 

differential fees and rebates for different 

exchange members. These fee structures 

have been permitted by the 

Commission. For example, Cboe EDGA 

Exchange, Inc. (‘‘EDGA’’) previously 

offered a rebate contingent upon adding 

specified amounts of liquidity to 

EDGA.26 Notwithstanding that certain 

classes of exchange members (e.g., 

exchange routing brokers) do not 

typically add liquidity on competing 

exchanges, this fee structure was 

justified by EDGA on the basis that, 

generally, it encourages growth in 

liquidity on EDGA and applies equally 

to all members.27 Similarly, while the 

proposed IEX fee structure will result in 

the CQRF being imposed only on 

Members using specific trading 

strategies, it is also designed to attract 

liquidity to IEX and applies equally to 

all Members. 

The Exchange also notes that there is 

precedent to charge a different fee (or 

pay a different rebate) based on the 

execution price of an order. The Cboe 

BZX Exchange, Inc. (‘‘BZX’’) pays a 

rebate of $0.0015 to a non-displayed 

order that adds liquidity, while if such 

an order receives price improvement it 

does not receive a rebate or pay a fee.28

Thus, maker-taker, taker-maker, and 

volume tier based fee structures 

(separately or in combination) have 

been adopted by other exchanges on the 

basis that they may discriminate in 

favor of certain types of members but 

not in an unfairly discriminatory 

manner in violation of the Act. As with 

such fee structures, the Exchange 

believes that the proposed fee change is 

equitable and not unfairly 

discriminatory because it is narrowly 

tailored to disincentive to all Members 

from deploying trading strategies 

designed to chase short-term price 

momentum during periods when the 

CQI is on and thus potentially adversely 

impact liquidity providing orders. IEX 

believes that, to the extent it is 

successful in this regard, the proposed 

fee structure may lead to increased 

liquidity providing orders on IEX which 

could benefit multiple classes of market 

participants through increased trading 

opportunities and execution quality. 

Further, the Exchange notes that the 

Nasdaq Stock Market (‘‘Nasdaq’’) 

charges excess order fees (ranging from 

$0.005 to $0.01 per excess weighted 

order) on certain members that have a 

relatively high ratio of orders entered 


amozie on DSK3GDR082PROD with NOTICES1
40370 Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 

29See Nasdaq Rule 7018(a)(3)(m) [sic]. 30See, Securities Exchange Act Release No. 66951 

(May 9, 2012), 77 FR 28647 (May 15, 2012) (File No. 

SR–NASDAQ–2012–055). 31 Id. 32See note 14 [sic] supra. 33 17 CFR 242.610(c)(1). 

34See e.g., IEX’s white paper that utilized 

publicly available quote and trade data to compare 

market quality across U.S. stock exchanges, which 

empirically found, inter alia, that on average IEX 

has the lowest effective spread, and the greatest 

opportunity for price improvement amongst all 

exchanges. A Comparison of Execution Quality 

across U.S. Stock Exchanges, Elaine Wah, Stan 

Feldman, Francis Chung, Allison Bishop, and 

Daniel Aisen, Investors Exchange (2017). Effective 

spread is commonly defined by market structure 

academics and market participants as twice the 

absolute difference between the trade price and 

prevailing NBBO midpoint at the time of a trade, 

and is generally meant to measure the cost paid 

when an incoming order executes against a resting 

order, and unlike quoted spread captures other 

features of a market center, such as hidden and 

midpoint liquidity as well as market depth. Price 

improvement is in reference to the situation where 

an aggressive order is filled at a price strictly better 

than the inside quote (i.e., in the case of an 

aggressive buy (sell) order, receiving a fill at a price 

lower (higher) than the NBO (NBB)). See also, Hu, 

Edwin, Intentional Access Delays, Market Quality, 

and Price Discovery: Evidence from IEX Becoming 

an Exchange (February 7, 2018). Available at SSRN: 

https://ssrn.com/abstract=3195001. 

35 15 U.S.C. 78s(b)(3)(A)(ii). 

away from the NBBO to orders executed 

in whole or in part, subject to a carveouts for specified lower volume 

members and certain registered market 

makers.29 In its rule filing adopting the 

fee Nasdaq justified it as designed to 

achieve improvements in the quality of 

displayed liquidity to the benefit of all 

market participants.30 Nasdaq also 

asserted that the fee is reasonable 

because market participants may readily 

avoid the fee by making improvements 

in their order entry practices, noting 

that ‘‘[i]deally, the fee will be applied to 

no one because market participants will 

adjust their behavior to avoid the fee.’’ 31

Similarly, the IEX CQRF, as revised, 

is designed to incentivize the entry of 

liquidity providing orders that can 

enhance the quality of the market and 

disincentivize certain liquidity 

removing orders that can degrade the 

quality of the market. Participants can 

manage their fees by making 

adjustments to their order entry 

practices, to decrease their entry of 

orders designed to target resting 

liquidity during periods of quote 

instability. And, as with the Nasdaq 

excess order fees, ideally, the fee will be 

applied to no one, because participants 

will adjust their trading activity to 

account for the pricing change. Thus, 

the Exchange believes that the fee of 

$0.0030 per share executed at or above 

$1.00 is reasonably related to the trading 

activity IEX is seeking to disincentivize. 

IEX also believes that it is 

appropriate, reasonable and consistent 

with the Act, to charge a fee of $0.0030 

per share executed at or above $1.00 (or 

0.3% of the total dollar value of the 

transaction for securities priced below 

$1.00) that exceed the CQRF Threshold 

described herein because it is within the 

transaction fee range charged by other 

exchanges 32 and consistent with Rule 

610(c) of Regulation NMS.33 Although 

the amount of the CQRF may not be 

adequate to fully disincentivize 

Members from deploying trading 

strategies designed to chase short-term 

price momentum during periods when 

the CQI is on, the Exchange is hopeful 

that it will further reduce such activity 

based on the economic disincentives 

that the CQRF will provide. 

Moreover, IEX believes that the CQRF 

will help 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, because the CQRF is 

designed to reduce the entry of liquidity 

removing orders that can degrade the 

quality of the market and incentivize 

liquidity providing orders that can 

improve the quality of the market, 

thereby promoting greater order 

interaction and inhibiting potentially 

abusive trading practices. 

Finally, and as discussed in the 

Burden on Competition section, the 

Exchange notes that it operates in a 

highly competitive market in which 

Members and market participants can 

readily direct order flow to competing 

venues if they deem fee levels to be 

excessive. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

IEX does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 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. 

To the contrary, the Exchange believes 

that the proposed pricing structure may 

increase competition and hopefully 

draw additional volume to the Exchange 

by enhancing the quality of executions 

across all participants when the CQI is 

on. As discussed in the Statutory Basis 

section, the proposed fee structure is a 

narrowly tailored approach, designed to 

enhance the Exchange’s market quality 

by incentivizing trading activity that the 

Exchange believes enhances the quality 

of its market. The Exchange believes 

that the proposed revisions to the CQRF 

Threshold would contribute to, rather 

than burden, competition, as the CQRF 

is intended to incentivize Members and 

market participants to send increased 

liquidity providing order flow to the 

Exchange, which may increase IEX’s 

liquidity and market quality, thereby 

enhancing the Exchange’s ability to 

compete with other exchanges. Further, 

with the proposed revisions to the 

CQRF Threshold, the CQRF would 

continue to be in line with fees charged 

by other exchanges. 

The Exchange operates in a highly 

competitive market in which market 

participants can readily favor competing 

venues if fee schedules at other venues 

are viewed as more favorable. 

Consequently, the Exchange believes 

that the degree to which IEX fees could 

impose any burden on competition is 

extremely limited, and does not believe 

that such fees would burden 

competition of Members or competing 

venues in a manner that is not necessary 

or appropriate in furtherance of the 

purposes of the Act. 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on intramarket competition 

that is not necessary or appropriate in 

furtherance of the purposes of the Act 

because, while the CQRF, as revised, 

would only be assessed in some 

circumstances, those circumstances are 

not based on the type of Member 

entering the liquidity removing order 

but on the percent of liquidity removing 

volume that the Member executes when 

the CQI is on. Further, the proposed 

revisions to the CQRF Threshold are 

intended to encourage market 

participants to bring increased volume 

to the Exchange, which benefits all 

market participants.34

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective pursuant to Section 

19(b)(3)(A)(ii) 35 of the Act. 

At any time within 60 days of the 

filing of the proposed rule change, the 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 157 / Tuesday, August 14, 2018 / Notices 40371 

36 15 U.S.C. 78s(b)(2)(B). 

37 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A). 

4 17 CFR 240.19b–4(f)(6)(iii). 

5 ‘‘Early Trading Session’’ means the time 

between 7:00 a.m. and 8:00 a.m. ET. See Rule 

1.5(ee). 

6 ‘‘Pre-Opening Session’’ means the time between 

8:00 a.m. and 9:30 a.m. ET. See Rule 1.5(r). 

7 ‘‘Regular Trading Hours’’ means the time 

between 9:30 a.m. and 4:00 p.m. ET. See Rule 

1.5(w). 

8 ‘‘After Hours Trading Session’’ means the time 

between 4:00 p.m. and 5:00 p.m. ET. See Rule 

1.5(c). 

9 ‘‘User’’ means any Member or Sponsored 

Participant who is authorized to obtain access to the 

System pursuant to Rule 11.3. See Rule 1.5(cc). 

10See Rule 11.9(b). 

11See EDGX and EDGA Rule 1.5(r), which both 

define ‘‘Post-Closing Session’’ as the time between 

4:00 p.m. and 8:00 p.m. ET. 

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) 36 of the Act to 

determine whether the proposed rule 

change should be approved or 

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 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

IEX–2018–16 on the subject line. 

Paper Comments 

• 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–IEX–2018–16. 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 

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–IEX–2018–16 and should 

be submitted on or before September 4, 

2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.37

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–17396 Filed 8–13–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83798; File No. SR– 

CboeBYX–2018–013] 

Self-Regulatory Organizations; Cboe 

BYX Exchange, Inc.; Notice of Filing 

and Immediate Effectiveness of a 

Proposed Rule Change To Amend 

Exchange Rule 1.5 Definitions and 

Exchange Rule 14.1 Unlisted Trading 

Privileges 

August 8, 2018. 

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 July 25, 

2018, Cboe BYX Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘BYX’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Exchange has 

designated this proposal as a ‘‘noncontroversial’’ proposed rule change 

pursuant to Section 19(b)(3)(A) of the 

Act 3 and Rule 19b–4(f)(6)(iii) 

thereunder,4 which renders it effective 

upon filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange filed a proposal to 

amend Rule 1.5(c), which defines the 

After Hours Trading Session, to allow 

trading until 8:00 p.m. ET. 

The text of the proposed rule change 

is available at the Exchange’s website at 

www.markets.cboe.com, at the principal 

office of the Exchange, 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 parts 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 offers four distinct 

trading sessions where the Exchange 

accepts orders for potential execution: 

(1) The ‘‘Early Trading Session,’’ which 

begins at 7:00 a.m. Eastern Time (‘‘ET’’) 

and continues until 8:00 a.m. ET,5 (2) 

the ‘‘Pre-Opening Session,’’ which 

begins at 8:00 a.m. ET and continues 

until 9:30 a.m. ET,6 (3) ‘‘Regular Trading 

Hours,’’ which begin at 9:30 a.m. ET and 

continue until 4:00 p.m. ET,7 and (4) the 

‘‘After Hours Trading Session,’’ which 

begins at 4:00 p.m. ET and continues 

until 5:00 p.m. ET.8 Users 9 may 

designate when their orders are eligible 

for execution by selecting their desired 

Time-in-Force instruction.10

The purpose of the proposed rule 

change is to amend Rule 1.5(c), which 

defines the After Hours Trading Session, 

to allow trading until 8:00 p.m. ET, 

consistent with the hours currently 

available on the Exchange’s affiliates 

Cboe EDGX Exchange, Inc. (‘‘EDGX’’) 

and Cboe EDGA Exchange, Inc. 

(‘‘EDGA’’).11 The After Hours Trading 


amozie on DSK3GDR082PROD with NOTICES1