[Federal Register Volume 87, Number 92 (Thursday, May 12, 2022)]
[Notices]
[Pages 29193-29197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10152]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94866; File No. SR-MEMX-2021-10]


Self-Regulatory Organizations; MEMX LLC; Order Disapproving a 
Proposed Rule Change, as Modified by Amendment No. 1, To Establish a 
Retail Midpoint Liquidity Program

May 6, 2022.

I. Introduction

    On August 18, 2021, MEMX LLC (``MEMX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to establish a Retail Midpoint Liquidity Program (``Program''). 
The proposed rule change was published for comment in the Federal 
Register on September 8, 2021.\3\ On October 19, 2021, the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\4\ On 
December 7, 2021, the Commission instituted proceedings under Section 
19(b)(2)(B) of the Act \5\ to determine whether to approve or 
disapprove the proposed rule change.\6\ On January 27, 2022, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
supersedes the original filing in its entirety, and on February 14, 
2022, the Commission published for comment Amendment No. 1 and 
designated a longer period for Commission action on the proposed rule 
change.\7\ The Commission received comments on the proposed rule 
change,\8\ and the Exchange submitted a response to comments at the 
time it filed Amendment No. 1.\9\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92844 (September 1, 
2021), 86 FR 50411 (September 8, 2021).
    \4\ See Securities Exchange Act Release No. 93383 (October 19, 
2021), 86 FR 58964 (October 25, 2021).
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ See Securities Exchange Act Release No. 93727 (December 7, 
2021), 86 FR 70874 (December 13, 2021) (``Order Instituting 
Proceedings'').
    \7\ See Securities Exchange Act Release No. 94189 (February 8, 
2022), 87 FR 8305 (February 14, 2022).
    \8\ All comments received by the Commission on the proposed rule 
change are available on the Commission's website at: https://www.sec.gov/comments/sr-memx-2021-10/srmemx202110.htm.
    \9\ See Letter from Adrian Griffiths, Head of Market Structure, 
MEMX, dated January 27, 2022 (``MEMX Letter'').
---------------------------------------------------------------------------

    This order disapproves the proposed rule change, as modified by 
Amendment No. 1, because, as discussed below, the Exchange has not met 
its burden under the Act and the Commission's Rules of Practice to 
demonstrate that its proposal is consistent with the requirements of 
the Act, including, in particular, the requirements in Section 6(b)(5) 
of the Act that the rules of a national securities exchange be designed 
to promote just and equitable principles of trade and to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers \10\ and 
the objectives in Section 11A of the Exchange Act, including the 
maintenance of fair and orderly markets.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to establish a Retail Midpoint Liquidity 
Program to provide retail investors with price improvement 
opportunities at or better than the midpoint of the national best bid 
and offer (``Midpoint Price''). Specifically, the Exchange proposes to 
allow Retail Member Organizations (``RMOs'') \12\ to submit a new type 
of order on behalf of retail investors that is designed to execute at 
the Midpoint Price or better (a ``Retail Midpoint Order'').\13\ Contra-
side liquidity would be provided by (i) a new non-displayed Midpoint 
Peg order that would be restricted to interacting only with incoming 
Retail Midpoint Orders through the proposed Program (``Retail Midpoint 
Liquidity Order'' or ``RML Order'') \14\ as well as (ii) resting 
liquidity on the Exchange's order book that would offer greater price 
improvement than the Midpoint Price,\15\ and (iii) regular non-
restricted Midpoint Peg orders that users designate as also eligible to 
interact with Retail Midpoint Orders (``Eligible Midpoint Peg 
Orders'').\16\
---------------------------------------------------------------------------

    \12\ See MEMX Rule 11.21(a)(1).
    \13\ A Retail Midpoint Order would have a Midpoint Peg 
instruction (i.e., to re-price to the Midpoint Price in response to 
changes in the national best bid and offer). As proposed, a Retail 
Midpoint Order must have a time-in-force instruction of Immediate-
or-Cancel. See MEMX Rule 11.6(o)(1) (defining Immediate-or-Cancel). 
See also MEMX Rules 11.6(h)(2) (defining Midpoint Peg) and 11.21(a) 
(defining Retail Order).
    \14\ See proposed MEMX Rule 11.22(a)(2).
    \15\ See infra note 24.
    \16\ The Exchange proposes to revise MEMX Rule 11.6(h)(2)'s 
definition of Midpoint Peg to provide that a Midpoint Peg order 
(other than a RML Order) would generally not be eligible to execute 
against a Retail Midpoint Order, provided, however, that a user 
submitting a Midpoint Peg order would be able to include an 
instruction that such order is eligible to execute against a Retail 
Midpoint Order through the execution process described in proposed 
MEMX Rule 11.22(c).
---------------------------------------------------------------------------

    MEMX would disseminate a Retail Liquidity Identifier through its 
proprietary market data feeds, MEMOIR Depth \17\ and MEMOIR Top,\18\ 
and the appropriate securities information processor (``SIP'') when RML 
Order interest aggregates to form at least one round lot for a 
particular security, provided that such interest is resting at the 
Midpoint Price \19\ and is priced at

[[Page 29194]]

least $0.001 better than the national best bid (``NBB'') or national 
best offer (``NBO'').\20\ The Retail Liquidity Identifier would reflect 
the symbol and the side (buy and/or sell) of the RML Order interest but 
would not include the price or size of that interest.\21\
---------------------------------------------------------------------------

    \17\ See MEMX Rule 13.8(a).
    \18\ See MEMX Rule 13.8(b).
    \19\ The Exchange explains that a RML Order could have a limit 
price that is less aggressive than the Midpoint Price, in which case 
it would not be eligible to trade with an incoming Retail Midpoint 
Order and therefore would not be included for purposes of Retail 
Liquidity Identifier dissemination since it would not reflect 
interest available to trade with Retail Midpoint Orders. See 
Amendment No. 1, supra note 7, at 8308.
    \20\ The Exchange explains that because RML Orders are proposed 
to be only Midpoint Peg orders, they would always represent at least 
$0.001 price improvement over the NBB or NBO, with two exceptions: 
(1) In a locked or crossed market; and (2) a sub-dollar security 
when the security's spread is less than $0.002. See id. The Exchange 
would only disseminate the Retail Liquidity Identifier for sub-
dollar securities if the spread in the security is greater than or 
equal to $0.002, meaning the Midpoint Price represents at least 
$0.001 price improvement over the NBB or NBO. See id.
    \21\ The Exchange would remove the Retail Liquidity Identifier 
when remaining RML Order interest no longer aggregates to form at 
least one round lot, or in situations where there is no actionable 
RML Order interest (such as when the market is locked or crossed). 
See id. at 8308-09. A limited exception for some exchange retail 
liquidity programs from the Quote Rule has been granted to allow 
those exchanges to disseminate identifiers including symbol and 
side, but not price or size, to attract retail interest and provide 
them with price improvement over displayed prices. See, e.g., 
Securities Exchange Act Release No. 93217 (September 30, 2021) 
(Order Granting Application of Investors Exchange LLC for a Limited 
Exemption from Rule 602 of Regulation NMS for its Retail Price 
Improvement Program).
---------------------------------------------------------------------------

Priority and Order Execution

    Proposed MEMX Rule 11.22(c) sets forth the execution priority rules 
for the Program. First, an incoming Retail Midpoint Order would execute 
against resting liquidity priced more aggressively than the Midpoint 
Price. Specifically, proposed MEMX Rule 11.22(c)(2) provides that if 
there is: (1) A Limit Order \22\ of Odd Lot \23\ size that is displayed 
by the MEMX system (``Displayed Odd Lot Order'') and that is priced 
more aggressively than the Midpoint Price and/or (2) an order that is 
not displayed by the MEMX system (``Non-Displayed Order'') and that is 
priced more aggressively than the Midpoint Price, resting on the MEMX 
Book,\24\ an incoming Retail Midpoint Order would first execute against 
any such orders pursuant to the Exchange's standard price/time priority 
in accordance with MEMX Rules 11.9 and 11.10 before executing against 
resting RML Orders.\25\
---------------------------------------------------------------------------

    \22\ See MEMX Rule 11.8(b).
    \23\ See MEMX Rule 11.6(q)(2).
    \24\ The Exchange states that Displayed Odd Lot Orders and Non-
Displayed Orders are the only types of orders that could rest on the 
MEMX Book at a price that is more aggressive than the Midpoint 
Price, as any displayed buy (sell) order that is at least one round 
lot in size would be eligible to form the NBB (NBO). See Amendment 
No. 1, supra note 7, at 8309 n.41.
    \25\ MEMX initially proposed that execution of a Retail Midpoint 
Order against such Displayed Odd Lot Orders and Non-Displayed Orders 
would have executed at the Midpoint Price irrespective of the prices 
at which such orders were ranked. Thus, any additional price 
improvement over the Midpoint Price would not have accrued to the 
retail investor's Retail Midpoint Order, but rather would have 
accrued to the Displayed Odd Lot Order or Non-Displayed Order. The 
Exchange subsequently revised its proposal to accrue any price 
improvement to the incoming Retail Midpoint Order. See also MEMX 
Letter at 4.
---------------------------------------------------------------------------

    Second, after executing against resting liquidity priced more 
aggressively than the Midpoint Price, proposed MEMX Rule 11.22(c)(3) 
states that any unfilled portion of a Retail Midpoint Order would next 
execute against RML Orders at the Midpoint Price in time priority.
    Third, proposed MEMX Rule 11.22(c)(4) states that after executing 
against all liquidity that is priced more aggressively than the 
Midpoint Price and all RML Orders, Retail Midpoint Orders would execute 
against Eligible Midpoint Peg Orders at the Midpoint Price in time 
priority.\26\
---------------------------------------------------------------------------

    \26\ MEMX initially proposed to execute Retail Midpoint Orders 
only against RML Orders, to the exclusion of any other available 
Midpoint Peg order. Two commenters objected to that treatment and 
were critical of those aspects of the proposal that would have 
limited the ability of retail orders to access all available 
midpoint interest and the extent to which that could have harmed 
retail investors. See Letter from Joseph Saluzzi and Sal Arnuk, 
Themis Trading LLC, dated December 20, 2021, and Letter from Sean 
Paylor, Acadian Asset Management LLC, dated January 10, 2022. MEMX 
subsequently submitted Amendment No. 1 to its proposal to allow 
Eligible Midpoint Peg Orders to participate in the Program. Another 
commenter expressed concern about a lack of transparency in the 
rebate and fee tiering structure behind the proposed Program. See 
Letter from Reginald Neumann Maximillian Smythers, dated April 1, 
2022. The Exchange has not yet filed an accompanying filing to 
propose a fee schedule in connection with this proposal.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Act,\27\ the Commission shall 
approve a proposed rule change of a self-regulatory organization 
(``SRO'') if it finds that such proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
that are applicable to such organization.\28\ The Commission shall 
disapprove a proposed rule change if it does not make such a 
finding.\29\ The Commission's Rules of Practice, under Rule 700(b)(3), 
state that the ``burden to demonstrate that a proposed rule change is 
consistent with the [Exchange] Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements . . . is not sufficient.'' 
\30\
---------------------------------------------------------------------------

    \27\ See 15 U.S.C. 78s(b)(2)(C).
    \28\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \29\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 
201.700(b)(3).
    \30\ See 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\31\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Act and the applicable rules and 
regulations.\32\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\33\
---------------------------------------------------------------------------

    \31\ See id.
    \32\ See id.
    \33\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------

    For the reasons discussed below, the Commission is disapproving the 
proposed rule change, as modified by Amendment No. 1, because the 
information before the Commission is insufficient to support a finding 
that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.
    In summary, MEMX has an existing Midpoint Peg order type and is 
proposing a new Midpoint Peg order type (i.e., RML Orders) as part of 
the proposed Program. From the perspective of an incoming Retail 
Midpoint Order, the current and proposed Midpoint-priced order types 
are indistinguishable because, under the proposed Program, both would 
result in a midpoint execution for the Retail Midpoint Order. From the 
perspective of market participants posting each order type, however, 
MEMX proposes to treat them differently by providing RML Orders with 
execution priority over Eligible Midpoint Peg Orders. This proposed 
disparate treatment raises concerns about whether the proposed Program 
is consistent with the Act.
    As part of its filing, MEMX bears the burden to provide a 
sufficient legal analysis to demonstrate how its proposed rules are 
consistent with the Act, which requires, among other

[[Page 29195]]

things, that MEMX's rules be designed to promote just and equitable 
principles of trade and to protect investors and the public interest, 
and not permit unfair discrimination between customers, issuers, 
brokers, or dealers.\34\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    To demonstrate how providing RML Orders with execution priority 
over Eligible Midpoint Peg Orders is consistent with the Act, MEMX 
asserts the following: (1) Because RML Orders will contribute to the 
Retail Liquidity Identifier, which is designed to attract retail orders 
to the Exchange, RML Orders deserve the same priority advantage that 
MEMX provides to displayed orders to reward displayed orders for 
contributing to price discovery; (2) because the Retail Liquidity 
Identifier would signal the presence of a buyer or seller at the 
Midpoint Price, awarding higher priority to RML Orders would balance 
the risks and incentives associated with entering RML Orders; and (3) 
market participants that post Midpoint Peg orders can avoid losing 
priority to RML Orders when trading with Retail Midpoint Orders by 
switching to RML Orders.
    The Commission is disapproving this proposed rule change, as 
modified by Amendment No. 1, because, as discussed in detail below, 
MEMX has not met its burden under the Act and the Commission's Rules of 
Practice to demonstrate how its proposal to provide RML Orders with 
execution priority over Eligible Midpoint Peg Orders is consistent with 
the requirements of the Act, including, in particular, the requirements 
in Section 6(b)(5) of the Act that a national securities exchange's 
rules be designed to promote just and equitable principles of trade and 
to protect investors and the public interest, and not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, and the objectives in Section 11A of the Exchange Act, 
including the maintenance of fair and orderly markets.

1. Price-Time Priority

    The rules of a national securities exchange specify the priority of 
orders for execution in its matching engine. When exchange rules award 
higher execution priority to one type of order over another, they must 
do so in a manner that is consistent with the Act. One reason to 
provide execution priority to one liquidity-providing order type over 
another may be that the favored order is more aggressive and takes more 
risk in a way that provides benefits to the market and liquidity 
seekers. An exchange may seek to attract those types of orders because 
they directly improve the exchange's market quality and increase 
trading volume. Offering a priority advantage to the more aggressive 
order is an incentive to attract those types of orders to the exchange 
and may be justified as promoting just and equitable principles of 
trade, avoiding unfair discrimination between broker-dealers and 
between their customers, and contributing to the maintenance of fair 
and orderly markets to the extent the priority advantage rewards those 
liquidity providers for the risks they take and benefits they provide 
to the market when they are the first to provide the most aggressive 
widely-available best prices to the broadest population of liquidity 
seekers.
    MEMX Rule 11.9 establishes the priority of orders and describes how 
MEMX uses ``price-time'' priority to rank orders for execution 
priority. Under its price-time priority rule, MEMX affords priority to 
the highest-priced order to buy (or lowest-priced order to sell) over 
orders with less aggressive prices.\35\ For equally priced orders, 
MEMX's rules specify that it will rank them in time priority (i.e., 
with the first order entered into the MEMX system having priority over 
later-arriving orders) \36\ and it also generally awards priority to 
displayed orders over non-displayed orders.\37\
---------------------------------------------------------------------------

    \35\ See MEMX Rule 11.9(a)(1).
    \36\ See MEMX Rule 11.9(a)(2)(A) (``Where orders to buy (sell) 
are entered into the System at the same price, the order clearly 
established as the first entered into the System at such particular 
price shall have precedence at that price, up to the number of 
shares of stock specified in the order.'').
    \37\ See, e.g., MEMX Rule 11.9(a)(2)(A)(i) and (ii).
---------------------------------------------------------------------------

    However, for its proposed Program, MEMX would deviate from its 
price-time priority rule by always awarding priority to the RML Orders 
(i.e., Midpoint Peg orders that can only trade against Retail Midpoint 
Orders) over Eligible Midpoint Peg Orders (i.e., Midpoint Peg orders 
that will trade with any counterparty, including Retail Midpoint 
Orders), even though both orders are equally priced at the Midpoint 
Price and would otherwise execute in time priority outside the proposed 
Program.\38\ For the reasons further explained below, the Commission 
finds that MEMX has not met its burden to support a finding that 
providing RML Orders with execution priority over Eligible Midpoint Peg 
Orders under the circumstances MEMX proposes is consistent with the 
Act.
---------------------------------------------------------------------------

    \38\ See MEMX Rule 11.9(a)(2)(A)(iv). As proposed, if MEMX has a 
90 share Eligible Midpoint Peg Order resting on its order book and 
later receives a 90 share RML Order, it would execute an incoming 20 
share Retail Midpoint Order against the later-arriving RML Order 
even though the Eligible Midpoint Peg Order arrived first in time 
(and even though the 90 share RML Order was not of sufficient size 
to trigger the Retail Liquidity Identifier).
---------------------------------------------------------------------------

a. Analogizing Non-Displayed Orders to Displayed Orders
    MEMX analogizes RML Orders to fully displayed orders (e.g., a limit 
order whose price and size is published by the Exchange) because they 
would contribute to the Retail Liquidity Identifier. Specifically, MEMX 
states that ``it is appropriate to execute RML Orders, which contribute 
to the dissemination of the Retail Liquidity Identifier, ahead of 
Eligible Midpoint Peg Orders, which do not contribute to the 
dissemination of the Retail Liquidity Identifier and are not displayed 
on the MEMX Book.'' \39\ MEMX asserts that such treatment is 
``consistent with general principles of order priority on the Exchange 
. . . [where] orders that contribute to price discovery receive 
priority ahead of non-displayed orders that do not contribute to market 
transparency.'' \40\ ``As such,'' the Exchange continues, it ``does not 
believe that the proposed order priority under the RML Program raises 
any novel issues for the Commission to consider.'' \41\
---------------------------------------------------------------------------

    \39\ See Amendment No. 1, supra note 7, at 8309.
    \40\ See id. at 8310.
    \41\ See id.
---------------------------------------------------------------------------

    MEMX's proposal does present a novel issue because MEMX seeks to 
award execution priority to a new type of Midpoint Peg order (i.e., RML 
Orders) over an existing type of Midpoint Peg order (i.e., Eligible 
Midpoint Peg Orders). First, both Eligible Midpoint Peg Orders and RML 
Orders would be classified as pegged orders under MEMX rules and MEMX's 
rules specifically provide that pegged orders cannot be displayed.\42\ 
Second, RML Orders would not contribute to market transparency or price 
discovery in the same way that displayed orders do because RML Orders 
are pegged to the Midpoint Price that solely is derived from displayed 
quotes and does not impact or contribute to those displayed quotes. The 
information conveyed by the Retail Liquidity Identifier (i.e., the 
existence of one round lot of RML Order interest at the Midpoint Price) 
is different than the information on price and size that displayed 
orders provide to inform price discovery. Displayed orders help 
establish the best available

[[Page 29196]]

prices in the market, which broadly benefits investors, serves the 
public interest, and facilitates fair and orderly markets by informing 
not only trading decisions but also security and portfolio valuation, 
prices of derivative securities like listed options, and the 
calculation of market indices. MEMX's comparison of the broad benefits 
that displayed orders contribute to the market to the narrow benefit 
that the Retail Liquidity Identifier would provide to RMOs to justify 
endowing RML Orders with the same exception to its price-time execution 
priority rule that MEMX provides to displayed orders, without more, 
does not sufficiently address how the proposal would promote just and 
equitable principles of trade, be consistent with the maintenance of 
fair and orderly markets, and not permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \42\ See MEMX Rule 11.8(c)(3). Because they are pegged to a 
reference price (the Midpoint Price), RML Orders would be classified 
as Pegged Orders under MEMX rules and MEMX's Pegged Order rule 
specifically provides that ``Pegged Orders are not eligible to 
include a Displayed instruction.'' Id.
---------------------------------------------------------------------------

    Third, Midpoint Peg orders are not eligible to be displayed for a 
number of reasons, including, among others, prohibitions on the display 
of quotes in subpenny increments,\43\ requirements to avoid locking the 
market,\44\ and the impact that a displayed Midpoint Peg order would 
have on the Midpoint Price. Thus, MEMX proposes to reward RML Orders 
for doing something (i.e., contributing to the Retail Liquidity 
Identifier) that Eligible Midpoint Peg Orders simply are not permitted 
to do. Without more, MEMX has not sufficiently explained how providing 
a priority advantage to one type of Midpoint Peg order (RML Orders) 
over another (Eligible Midpoint Peg Orders), based on something that 
Eligible Midpoint Peg Orders are not permitted to do, promotes just and 
equitable principles of trade, is consistent with the maintenance of 
fair and orderly markets, and does not permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \43\ See 17 CFR 242.612.
    \44\ See 17 CFR 242.610(d).
---------------------------------------------------------------------------

b. Balancing the Risks and Incentives Associated With Entering RML 
Orders
    MEMX also states that ``entering RML Orders involves some 
additional risk for those market participants as the Retail Liquidity 
Identifier will signal that there is a buyer or seller that is willing 
to trade with retail investors at the Midpoint Price.'' \45\ ``Thus,'' 
the Exchange states, ``the RML Program seeks to balance the risks and 
incentives associated with entering RML Orders. . . .'' \46\ 
Consequently, MEMX proposes to reward RML Orders with execution 
priority over Eligible Midpoint Peg Orders to the same extent that it 
rewards displayed orders with priority over non-displayed orders.
---------------------------------------------------------------------------

    \45\ See Amendment No. 1, supra note 7, at 8313.
    \46\ See id.
---------------------------------------------------------------------------

    In general, some market participants may be hesitant to display 
regular limit orders on an exchange's order book because of the 
potential for adverse selection when trading against counterparties 
more associated with price movements and the inability to avoid 
interacting with those counterparties. To encourage display of trading 
interest on its order book in light of those risks, an exchange might 
offer displayed orders enhanced execution priority over non-displayed 
orders. Rewarding displayed orders with priority over non-displayed 
orders compensates them for the risks they take in displaying prices 
that are available for any liquidity taker and for the chance of 
adverse selection when trading with certain counterparties.
    However, market participants posting RML Orders would face little 
risk (if any) from the Retail Liquidity Identifier because RML Orders 
are uniquely counterparty-restricted whereas displayed orders are not 
so restricted. In other words, RML Orders would experience 
significantly different risk compared to displayed orders on MEMX's 
order book because MEMX would restrict the counterparties with which an 
RML Order could trade to only permit executions against retail orders 
to the exclusion of all other types of orders and counterparties. 
Market participants placing RML Orders would be specifically seeking to 
interact exclusively with retail customers because they likely regard 
retail customers to be attractive counterparties that submit smaller-
sized orders that typically are less predictive of very short-term 
price movements.\47\
---------------------------------------------------------------------------

    \47\ See, e.g., Amendment No. 1, supra note 7, at 8306 (``[T]he 
Exchange believes that market makers and other sophisticated market 
participants generally value interacting with retail orders because 
they are smaller and not likely to be part of a larger parent order 
that can move a stock price, causing a loss to the market maker.'').
---------------------------------------------------------------------------

    Despite this significant difference, MEMX proposes to confer the 
same execution priority benefit to restricted RML Orders that it grants 
to unrestricted displayed limit orders. However, MEMX's proposal is 
designed to effectively eliminate the risk of adverse selection when 
trading with non-retail counterparties more associated with price 
movements and RML Orders would not be exposed to a level of execution 
risk in the Program that is comparable to what displayed orders face on 
MEMX's order book. The Retail Liquidity Identifier and counter-party 
restriction would be a benefit to RMOs that permit an otherwise non-
displayed order to advertise its presence to the very counterparty with 
which the poster seeks to trade (and is only permitted to trade with by 
the terms of the RML Order). Compounding advantages does not appear to 
balance the risks and incentives of entering RML Orders that MEMX said 
it seeks to balance.
    Accordingly, the Exchange's assertion that the Program ``seeks to 
balance the risks and incentives'' is misplaced because the Retail 
Liquidity Identifier should not generate additional risks to RMOs 
commensurate with the risks experienced by market participants posting 
regular displayed orders on MEMX's order book. Moreover, as stated 
above, market participants placing RML Orders would instead benefit 
from the Retail Liquidity Identifier because it is intended to attract 
the desirable retail counterparties with whom they specifically seek to 
trade and with whom, aside from the proposed Program, they may have 
fewer opportunities to interact.
    Consequently, MEMX is proposing to reward counterparty-restricted 
RML Orders for contributing to a Retail Liquidity Identifier that 
benefits them and MEMX has not sufficiently explained why those 
compounded benefits are consistent with the Act. Further, MEMX has not 
sufficiently explained why that different treatment proposed between 
brokers, dealers, or customers when such brokers, dealers, or customers 
post each different order type is not unfairly discriminatory. Without 
more, MEMX has not carried its burden to sufficiently analyze how its 
proposed disparate treatment in execution priority between two types of 
Midpoint Peg orders promotes just and equitable principles of trade, 
protects investors and the public interest, contributes to the 
maintenance of fair and orderly markets, and is not designed to permit 
unfair discrimination.

2. Choosing Between Two Types of Midpoint Pegs

    MEMX states that its users are free to select which Midpoint Peg 
order type they wish to submit if they want to interact with Retail 
Midpoint Orders, and would do so knowing their advantages and 
disadvantages, thus making its proposal to award RML Orders with 
execution priority over Eligible Midpoint Peg Orders not unfairly 
discriminatory.\48\ As discussed above, MEMX is proposing disparate 
treatment between two Midpoint Peg

[[Page 29197]]

order types by proposing to reward RML Orders with execution priority 
over Eligible Midpoint Peg Orders when interacting with Retail Midpoint 
Orders. MEMX cannot resolve potential unfair discrimination in favor of 
RML Orders over Eligible Midpoint Peg Orders by relying on the fact 
that users can instead use RML Orders; doing so does not convert unfair 
discrimination into fair discrimination. When MEMX chooses to offer two 
Midpoint Peg order types but treats them differently, each order type 
must independently be consistent with the Act and any discriminatory 
treatment must also be consistent with the Act. The consistency of one 
order type with the requirements of the Act is independent of, and 
cannot be contingent on, the existence of a substitute.
---------------------------------------------------------------------------

    \48\ See Amendment No. 1, supra note 7, at 8313.
---------------------------------------------------------------------------

3. MEMX Has Failed To Meet Its Burden

    When assessing this proposed rule change, as modified by Amendment 
No. 1, the Commission must consider its consistency with the Act and 
the applicable rules and regulations issued thereunder. As stated 
above, under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization that proposed the rule change.'' \49\ For 
the foregoing reasons, the Exchange has not met its burden to 
demonstrate that it would be consistent with the Act for the Exchange 
to provide a priority advantage to one type of midpoint peg (RML 
Orders) over another type of midpoint peg (Eligible Midpoint Peg 
Orders). As a result, the Commission does not have sufficient 
information to find that the Exchange's proposal would promote just and 
equitable principles of trade and protect investors and the public 
interest, not permit unfair discrimination between customers, issuers, 
brokers, or dealers, and promote the maintenance of fair and orderly 
markets. Accordingly, the Commission must disapprove the proposal 
because the Exchange has not met its burden to demonstrate that the 
proposal is consistent with the Act, including Section 6(b)(5) and 
Section 11A of the Act.\50\
---------------------------------------------------------------------------

    \49\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \50\ In disapproving this proposed rule change, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Act, that the proposed rule change, 
as modified by Amendment No. 1, is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with Section 6(b)(5) 
of the Act.\51\
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the proposed rule change (SR-MEMX-2021-10), as modified 
by Amendment No. 1, is disapproved.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
---------------------------------------------------------------------------

    \53\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10152 Filed 5-11-22; 8:45 am]
BILLING CODE 8011-01-P