Document ID: SEC-2018-1268-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange LLC
Posted Date: 2018-08-14T04:00Z

[Federal Register Volume 83, Number 157 (Tuesday, August 14, 2018)]
[Notices]
[Pages 40365-40371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17396]

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    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.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CRF 240.19b-4.
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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\
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    \6\ Executions 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.
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    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,

[[Page 40366]]

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.
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    \7\ Pursuant 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.
    \8\ See, Rule 600(b)(42) under Regulation NMS.
    \9\ See supra note 4 [sic].
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    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.
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    \10\ See Securities Exchange Act Release No. 81484 (August 25, 
2017), 82 FR 41446 (August 31, 2017) (SR-IEX-2017-27).
    \11\ See Rule 11.190(b)(10).
    \12\ See Rule 11.190(b)(8).
    \13\ By 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.
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    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.
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    \14\ The 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.
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    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.
[GRAPHIC] [TIFF OMITTED] TN14AU18.000

[[Page 40367]]

    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.
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    \15\ See IEX Rule 1.160(gg).
    \16\ Comparing 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%.
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    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.
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    \17\ See Securities Exchange Act Release No. 83048 (April 13, 
2018), 83 FR 17467 (April 19, 2018) (SR-IEX-2018-07).
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    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.
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    \18\ Pursuant to the IEX Equities Port Request Form (available 
on IEX's website at https://iextrading.com/docs/IEX%20Connectivity%20Agreements%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.
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    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.
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    \19\ 15 U.S.C. 78f.
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
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    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

[[Page 40368]]

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\
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    \22\ See, 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.
    \23\ See, e.g., Securities Exchange Act Release No. 80034 
(February 14, 2017), 82 FR 11275 (February 21, 2017) (File No. SR-
BatsEDGX-2017-09).
    \24\ See note 15 [sic] supra.
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    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 maker-taker 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

[[Page 40369]]

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\
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    \25\ Thirty-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.
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    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.
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    \26\ See Securities Exchange Act Release No. 80976 (June 20, 
2017), 82 FR 28920 (June 26, 2017) (SR-BatsEDGA-2017-18).
    \27\ See, e.g., Securities Exchange Act Release No. 69066 (March 
7, 2013), 78 FR 16023 (March 13, 2013) (SR-EDGA-2013-10).
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    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\
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    \28\ See Cboe BZX Exchange Fee Schedule, available at: http://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
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    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

[[Page 40370]]

away from the NBBO to orders executed in whole or in part, subject to a 
carve-outs 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\
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    \29\ See Nasdaq Rule 7018(a)(3)(m) [sic].
    \30\ See, Securities Exchange Act Release No. 66951 (May 9, 
2012), 77 FR 28647 (May 15, 2012) (File No. SR-NASDAQ-2012-055).
    \31\ Id.
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    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.
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    \32\ See note 14 [sic] supra.
    \33\ 17 CFR 242.610(c)(1).
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    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\
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    \34\ See 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.
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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.
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    \35\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the

[[Page 40371]]

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.
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    \36\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. 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\
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    \37\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17396 Filed 8-13-18; 8:45 am]
BILLING CODE 8011-01-P