Document ID: SEC-2020-1357-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe EDGX Exchange, Inc.
Posted Date: 2020-08-24T04:00Z

[Federal Register Volume 85, Number 164 (Monday, August 24, 2020)]
[Notices]
[Pages 52171-52173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18469]

[[Page 52171]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89597; File No. SR-CboeEDGX-2020-041]

Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Amend its Fees Schedule

August 18, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on August 10, 2020, Cboe EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to amend the fee schedule. The text of the proposed rule 
change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its fee schedule applicable to its 
options trading platform (``EDGX Options'') to adopt another fee for 
the equity leg of a stock-option order, which orders would yield fee 
code ``EP'', effective August 10, 2020. The Exchange also proposes to 
amend the description of the existing fee for the equity leg of a 
stock-option order, which yields fee code ``EQ'', and to establish a 
maximum fee per execution applicable to fee code EQ.
    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 17% of the market share.\3\ 
Thus, in such a low-concentrated and highly competitive market, no 
single options exchange possesses significant pricing power in the 
execution of option order flow. The Exchange believes that the ever-
shifting market share among the exchanges from month to month 
demonstrates that market participants can shift order flow, or 
discontinue to reduce use of certain categories of products, in 
response to fee changes. Accordingly, competitive forces constrain the 
Exchange's transaction fees, and market participants can readily trade 
on competing venues if they deem pricing levels at those other venues 
to be more favorable. In response to competitive pricing, the Exchange, 
like other options exchanges, offers rebates and assesses fees for 
certain order types executed on or routed through the Exchange.
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    \3\ See Cboe Global Markets U.S. Options Market Volume Summary 
(August 7, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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    Pursuant to rule filing SR-2019-CboeEDGX-039 [sic],\4\ the Exchange 
implemented stock-option order functionality on August 16, 2019. Stock-
option orders are complex instruments that constitute the purchase or 
sale of a stated number of units of an underlying stock or a security 
convertible into the underlying stock coupled with the purchase or sale 
of an option contract(s) on the opposite side of the market and execute 
in the same manner as complex orders. Through this functionality, the 
stock portions of stock-option strategy orders are electronically 
communicated by the Exchange to a designated broker-dealer (i.e., 
Cowen), who then manages the execution of such stock portions. In 
connection with the functionality, the Exchange adopted a stock 
handling fee of $0.0010 per share for the processing and routing by the 
Exchange of the stock portion of stock-option strategy orders executed 
through those mechanisms.\5\ The purpose of the stock handling fee is 
to cover the fees charges by the outside venue that prints the trade, 
as well as assist in covering the Exchange's costs in matching these 
stock-option orders against other stock option orders on the complex 
book. Additionally, the Exchange also largely passes through to Members 
the fees assessed to the Exchange by the designated broker (i.e., 
Cowen) that manages the execution of these stock portions of stock-
option strategy orders.
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    \4\ See Securities Exchange Act Release No. 86353 (July 11, 
2019), 84 FR 34230 (July 17, 2019) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Add Stock-Option Order 
Functionality and Complex Qualified Contingent Cross (``QCC'') Order 
With Stock Functionality, and To Make Other Changes to its Rules) 
(SR-CboeEDGX-2019-039).
    \5\ See Securities Exchange Act Release No. 86743 (August 23, 
2019) 84 FR 45606 (August 29, 2020) [sic] (SR-CboeEDGX-2019-052).
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    Now, the Exchange proposes to amend its fee schedule to reflect the 
option of an additional designated broker-dealer, Penserra, to manage 
the execution of the stock portion of a stock-option order. 
Specifically, the Exchange proposes to adopt fee code EP, which would 
be applicable to equity leg orders whose executions are managed by 
Penserra. Unlike Cowen, Penserra will not assess the Exchange fees for 
managing the stock-portion of a stock-option order, but rather will 
assess and bill its customers directly. Therefore, the Exchange does 
not wish to assess the current stock handling fee which was adopted in 
part to recoup the fees assessed to the Exchange by the Exchange's 
current designated broker-dealer, Cowen. As such, stock-portions of 
stock-option strategy orders managed by Penserra and yielding fee code 
EP will be free.
    The Exchange also proposes to modify existing fee code EQ to 
specify that it is applicable to equity leg orders whose executions are 
managed by Cowen. Additionally, the Exchange proposes to establish a 
maximum fee of $50.00 per execution under fee code EQ. The Exchange 
notes that Cowen currently applies the $50 cap on a per execution

[[Page 52172]]

basis. The Exchange therefore proposes to similarly cap the stock-
option fee on a per execution basis, which will more closely align to 
how Cowen applies the cap. Additionally, the Exchange believes the 
proposed cap ensures that market participants do not pay extremely 
large fees, not more than the capped amount, for the processing and 
routing by the Exchange of the stock portions of stock-option orders. 
The Exchange notes that other exchanges, including its affiliate, Cboe 
Exchange, Inc., have likewise implemented substantially similar fee 
caps in response to their respective implementations of stock-option 
strategy order functionality.\6\
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    \6\ See Securities Exchange Act Release No. 85909 (May 21, 
2019), 84 FR 24587 (May 28, 2019) (SR-EMERALD-2019-21); Securities 
Exchange Act Release No. 83788 (August 7, 2018), 83 FR 40110 (August 
13, 2018) (SR-MIAX-2018-18); and Securities Exchange Act Release No. 
67383 (July 10, 2012), 77 FR 41841 (July 16, 2012) (SR-CBOE-2012-
063).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\7\ in general, and furthers the requirements 
of Section 6(b)(4),\8\ in particular, as it is designed to provide for 
the equitable allocation of reasonable dues, fees and other charges 
among its facilities and does not unfairly discriminate between 
customers, issuers, brokers or dealers. The Exchange also believes that 
the proposed rule change is consistent with the objectives of Section 
6(b)(5) requirements that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, and, particularly, is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposed change to adopt fee code 
EP, which will assess no fee for stock portions of stock-option 
strategy order executions managed by Penserra, is consistent with 
Section 6(b)(4) of the Act in that the proposal is reasonable, 
equitable and not unfairly discriminatory. Specifically, the Exchange 
believes the proposal is reasonable as market participants will not be 
subject to a fee for the execution of the stock-portion of a stock-
option order handled by one of the Exchange's designated broker-
dealers, Penserra. The Exchange believes it's appropriate to not assess 
a fee for orders managed by Penserra as compared to those managed by 
Cowen, as Penserra will directly charge is customers for the stock 
portion of stock-option strategy orders and not charge the Exchange, 
unlike Cowen who does not directly charge market participants, but 
rather charges the Exchange. Further, the Exchange believes the 
proposal is equitable and not unfairly discriminatory because the 
proposed change applies to all TPHs and all TPHs that execute stock-
option orders in the complex book will have the option to utilize 
Penserra to manage the execution of the stock portion of its stock-
option strategy orders.
    Additionally, the Exchange believes that the proposed description 
modification to existing fee code EQ will clarify that such executions 
are managed by Cowen. Furthermore, the Exchange believes its proposed 
change relating to how it caps the stock-option order fee is reasonable 
because the Exchange is capping the transactions the same way Cowen 
caps (and bills the Exchange) for these orders. The Exchange believes 
that its proposal to cap fee code EQ at $50.00 per execution is also 
reasonable because it will limit the amount a market participant will 
be assessed for the routing and processing by the Exchange of the stock 
portion of stock-option strategy orders. As noted above, the proposed 
fee cap is identical to fees assessed by other options exchanges for 
stock legs executed as a part of stock-option strategy orders.\9\ As 
such, stock-option strategy orders are available on other options 
exchanges and participants can readily direct order flow to another 
exchange if they deem other exchanges' fees to be more favorable.
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    \9\ See supra note 6.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Specifically, the Exchange does not believe that 
the proposed change will impose any burden on intramarket competitions 
that is not necessary or appropriate in furtherance of the purposes of 
the Act because the proposed change will apply uniformly to the stock 
portions of all market participants' stock-option strategy orders.
    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. As previously 
discussed, the Exchange operates in a highly competitive market. 
Members have numerous alternative venues that they may participate on 
and direct their order flow, including 15 other options exchanges. 
Based on publicly available information, no single options exchange has 
more than 17% of the market share.\10\ Therefore, no exchange possesses 
significant pricing power in the execution of option order flow. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges and to attract order flow to 
the Exchange. The proposed cap to fee code EQ is substantially similar 
to fee caps offered by the Exchange's affiliate, Cboe Options, and 
other competing exchanges,\11\ therefore, the Exchange believes that 
the proposed rule change appropriately reflects this competitive 
environment. Indeed, participants can readily choose to send their 
orders to other exchange, and, additionally off-exchange venues, if 
they deem fee levels at those other venues to be more favorable. 
Moreover, the Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. Specifically, in 
Regulation NMS, the Commission highlighted the importance of market 
forces in determining prices and SRO revenues and, also, recognized 
that current regulation of the market system ``has been remarkably 
successful in promoting market competition in its broader forms that 
are most important to investors and listed companies.'' \12\ The fact 
that this market is competitive has also long been recognized by the 
courts. In NetCoalition v. Securities and Exchange Commission, the D.C. 
Circuit stated as follows: ``[n]o one disputes that competition for 
order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S. 
national market system, buyers and sellers of securities, and the 
broker-dealers that act as their order-routing

[[Page 52173]]

agents, have a wide range of choices of where to route orders for 
execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers' . . .''.\13\ Accordingly, the Exchange does not believe its 
proposed fee change imposes any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \10\ See supra note 5.
    \11\ See supra note 6.
    \12\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \13\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and paragraph (f) of Rule 19b-4 \15\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f).
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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 rule-comments@sec.gov. Please 
include File Number SR-CboeEDGX-2020-041 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-CboeEDGX-2020-041. 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-CboeEDGX-2020-
041 and should be submitted on or before September 14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18469 Filed 8-21-20; 8:45 am]
BILLING CODE 8011-01-P