Document ID: SEC-2011-0687-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2011-05-13T04:00Z

[Federal Register Volume 76, Number 93 (Friday, May 13, 2011)]
[Notices]
[Pages 28110-28113]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11763]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64452; File No. SR-EDGX-2011-13]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Amendments to the EDGX Exchange, Inc. Fee Schedule

May 10, 2011.
    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 April 29, 2011, the EDGX Exchange, Inc. (the ``Exchange'' or 
the ``EDGX'') filed with the Securities and Exchange Commission 
(``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

[[Page 28111]]

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

    The Exchange proposes to amend its fees and rebates applicable to 
Members \3\ of the Exchange pursuant to EDGX Rule 15.1(a) and (c). All 
of the changes described herein are applicable to EDGX Members. The 
text of the proposed rule change is available on the Exchange's 
Internet Web site at http://www.directedge.com.
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    \3\ A Member is any registered broker or dealer, or any person 
associated with a registered broker or dealer, that has been 
admitted to membership in the Exchange.
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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 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 statements 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    For customer internalization (i.e., same MPID),\4\ currently there 
is no charge nor rebate. This was because when the Exchange launched in 
July 2010 the rebate for adding liquidity ($0.0029 per share) was 
offset by the fee for removing liquidity ($0.0029 per share). This 
situation yields Flag ``E.'' During the Pre-Opening and Post-Closing 
sessions, there are also no charges nor rebates, but this situation 
yields Flag ``5'' per side of an execution (adding liquidity/removing 
liquidity). The Exchange is now proposing to charge $0.0001 per share 
per side of an execution (for adding liquidity and for removing 
liquidity) for Flags E and 5 instead of the standard or tiered rebate/
removal rates. Therefore, Members would incur a total transaction cost 
of $0.0002 per share for both sides of an execution for customer 
internalization.
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    \4\ This occurs when two orders presented to the Exchange from 
the same Member (i.e., MPID) are presented separately and not in a 
paired manner, but nonetheless inadvertently match with one another. 
Members are advised to consult Rule 12.2 respecting fictitious 
trading.
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    Currently, orders that add liquidity to Midpoint Match (``MPM'') 
\5\, a fee of $0.0010 per share is charged and a flag ``MM'' is 
yielded. For orders that remove liquidity from MPM, a fee of $0.0010 
per share is charged for removing liquidity from MPM and yield flag 
``MT.'' In both cases, the Exchange is proposing to increase these fees 
to $0.0012 per share.
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    \5\ As defined in EDGX Rule 11.5(c)(7).
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    Currently, Members can qualify for the Mega Tier rebate of $0.0033 
per share for all liquidity posted on EDGX if they add or route at 
least 5,000,000 shares of average daily volume prior to 9:30 a.m. or 
after 4 p.m. (includes all flags except 6) AND add a minimum of 
25,000,000 shares of average daily volume on EDGX in total, including 
during both market hours and pre and post-trading hours. In addition, 
for meeting the aforementioned criteria, Members will pay a reduced 
rate for removing liquidity of $0.0029 for Flags N, W, and 6.
    The Exchange is proposing to amend the above Mega Tier rebate by 
increasing the rebate to $0.0034 per share, decreasing the amount 
needed to add or route to 4,000,000 shares of average daily volume 
during the pre and post markets from 5,000,000 shares, and increasing 
from 25,000,000 to 38,000,000 the number of shares of average daily 
volume (``ADV'') on EDGX required to be added during both market hours 
and pre and post-trading hours. The amended rebate would thus read as 
follows: Members can qualify for the Mega Tier and be provided a rebate 
of $0.0034 per share for all liquidity posted on EDGX if they add or 
route at least 4,000,000 shares of average daily volume prior to 9:30 
a.m. or after 4 p.m. (includes all flags except 6) AND add a minimum of 
38,000,000 shares of average daily volume on EDGX in total, including 
during both market hours and pre and post-trading hours. In addition, 
for meeting the aforementioned criteria, Members will pay a reduced 
rate for removing liquidity of $0.0029 for Flags N, W, and 6.
    Finally, the Exchange is proposing to make a technical correction 
to the fee schedule to replace the term ``order type'' with ``routing 
strategy'' throughout the fee schedule in order to conform to language 
in Rule 11.9(b)(3). These amendments will appear in the text for Flags 
K, L, Q, T, Z, 2, 8, 9, BY, CL, SW, and footnote 8.
    EDGX Exchange proposes to implement these amendments to the 
Exchange fee schedule on May 1, 2011.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\6\ in general, and 
furthers the objectives of Section 6(b)(4),\7\ in particular, as 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.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the increased fee for customer 
internalization of $0.0001 per share per side of an execution for both 
Flags E (regular trading session) and 5 (pre and post market) 
represents an equitable allocation of reasonable dues, fees, and other 
charges as it is designed to introduce a nominal and reasonable fee for 
members who inadvertently match with one another, thereby discouraging 
potential wash sales. The increased fee also allows the Exchange to 
offset its administrative, clearing, and other operating costs incurred 
in executing such trades. Finally, the fee is equitable in that it is 
in line with the EDGX fee structure which currently has a maker/taker 
spread of $0.0007 per share (the standard rebate to add liquidity on 
EDGX is $0.0023 per share, while the standard fee to remove liquidity 
is $0.0030 per share). EDGX also has a variety of tiered rebates 
ranging from $0.0023-$0.0034 per share (as proposed), which makes its 
maker/taker spreads range from $.0007 (standard add-standard removal 
rate), $0 (standard removal rate-Super Tier rebate), -$0.0001, 
(standard removal rate-Ultra Tier rebate) -$0.0002 (standard removal 
rate-Mega Tier rebate of $0.0032), and -$.0004 (standard removal rate-
proposed Mega Tier rebate of $0.0034 per share). As a result of the 
customer internalization charge, Members who internalized would be 
charged $0.0001 per share per side of an execution (total of $0.0002 
per share) instead of capturing the maker/taker spreads resulting from 
achieving the tiered rebates, as described above.
    As mentioned above, when the Exchange launched in July 2010, the 
maker/taker spread was zero (0). This increased fee per side of an 
execution ($.0001 per side instead of free), yielding a total cost of 
$0.0002, thus brings the internalization fee in line with the current 
maker/taker spreads.\8\ The Exchange believes that the

[[Page 28112]]

proposed rate is non-discriminatory in that it applies uniformly to all 
Members.
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    \8\ The Exchange will work promptly to ensure that the 
internalization fee is no more favorable than each prevailing maker/
taker spread.
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    The Exchange believes that the proposed increased fees from $0.0010 
per share to $0.0012 per share for the ``MT'' flag for removing 
liquidity from MPM and to the ``MM'' flag for adding liquidity to MPM 
represent an equitable allocation of reasonable dues, fees, and other 
charges as such increased fees offset the Exchange's administrative and 
other operational costs.
    The $0.0012 per share rate for the MT flag is a modest rate 
increase for an already low cost order type (MPM) within EDGX. Such 
rate is competitive and superior to comparable exchange standard 
removal rates of $0.0030 per share (Nasdaq), $0.0030 per share (NYSE 
Arca), $0.0023 per share (NYSE), and $0.0028 per share (BATS BZX). The 
fee is also equitable as it is competitive with other fees assessed for 
routing strategies that access low cost destinations, such as ROUZ, as 
defined in Rule 11.9(b)(3)(c)(v) (yields Flag Z, $0.0010 per share) and 
ROUD/ROUE, as defined in Rules 11.9(b)(3)(b) and 11.9(b)(3)(c)(i) (Flag 
T, $0.0012 per share).
    The increased fee for the ``MM'' flag of $0.0012 per share also 
represents a modest increase to an already low cost order type within 
EDGX. The EDGX MPM liquidity providers (``MM flag'') will pay a premium 
of $0.0012 per share to interact with liquidity seekers (``MT flag'') 
looking to access low cost liquidity in MPM, who in turn will pay a fee 
of $0.0012 per share. Finally, the rate is reasonable when compared to 
similar fees assessed by EDGA Exchange to add hidden liquidity (non-
displayed orders) ($0.0010 per share provided certain volume thresholds 
are met). The rate is also reasonable when compared to rebates on 
Nasdaq for adding liquidity using non-displayed orders, of $0.0010 or 
$0.0015, depending on if a tier is met. The Exchange believes that the 
proposed rates are non-discriminatory in that they apply uniformly to 
all Members.
    The proposed Mega tier rebate proposed ($0.0034 per share for all 
liquidity posted on EDGX if Members add or route at least 4,000,000 
shares of average daily volume prior to 9:30 AM or after 4:00 PM AND 
add a minimum of 38,000,000 shares of average daily volume on EDGX in 
total, including during both market hours and pre and post-trading 
hours) represents an equitable allocation of reasonable dues, fees, and 
other charges since higher rebates are directly correlated with more 
stringent criteria.
    The proposed Mega Tier rebate of $0.0034 (currently $0.0033 per 
share) and the alternative current Mega Tier rebate of $0.0032 per 
share have the most stringent criteria associated with them, and are 
$0.0003/$0.0001 greater than the Ultra Tier rebate ($0.0031 per share) 
and $0.0004/$0.0002 greater than the Super Tier rebate ($0.0030 per 
share).
    For example, based on average TCV for March 2011 (8.0 billion), in 
order for a Member to qualify for the proposed Mega Tier rebate of 
$0.0034, the Member would have to add or route at least 4,000,000 
shares of average daily volume during pre and post-trading hours and 
add a minimum of 38,000,000 shares of average daily volume on EDGX in 
total, including during both market hours and pre and post-trading 
hours. The criteria for this tier is the most stringent as fewer 
Members generally trade during pre and post-trading hours because of 
the limited time parameters associated with these trading sessions. The 
Exchange believes that this higher rebate awarded to Members would 
incent liquidity during these trading sessions. Such increased volume 
increases potential revenue to the Exchange, and would allow the 
Exchange to spread its administrative and infrastructure costs over a 
greater number of shares, leading to lower per share costs. These lower 
per share costs would allow the Exchange to pass on the savings to 
Members in the form of a higher rebate. In addition, the increased 
liquidity also benefits all investors by deepening EDGX's liquidity 
pool, offering additional flexibility for all investors to enjoy cost 
savings, supporting the quality of price discovery, promoting market 
transparency and improving investor protection. Volume-based rebates 
such as the one proposed herein have been widely adopted in the cash 
equities markets, and are non-discriminatory because they are open to 
all members on an equal basis and provide discounts that are reasonably 
related to the value to an exchange's market quality associated with 
higher levels of market activity, such as higher levels of liquidity 
provision and introduction of higher volumes of orders into the price 
and volume discovery processes.
    Another way a Member can qualify for the current Mega Tier (with a 
rebate of $0.0032 per share) would be to post 0.75% of TCV. Based on 
average TCV for March 2011 (8.0 billion), this would be 60 million 
shares on EDGX. A second method to qualify for the rebate of $0.0032 
per share would be to post 15,000,000 shares more than the Member's 
February 2011 average daily volume, provided that the Member's February 
2011 average daily volume equals or exceeds 1,000,000 shares added to 
EDGX.
    In order to qualify for the Ultra Tier, which has less stringent 
criteria than the Mega Tier, the Member would have to post 0.50% of 
TCV. Based on average TCV for March 2011 (8.0 billion shares), this 
would be 40 million shares on EDGX.
    Finally, the Super Tier has the least stringent criteria of the 
tiers mentioned above. In order for a Member to qualify for this rebate 
of $0.0030 per share, the Member would have to post at least 10 million 
shares on EDGX. As stated above, these rebates also result, in part, 
from lower administrative and other costs associated with higher 
volume.
    The Exchange believes that the proposed rebate is non-
discriminatory in that it applies uniformly to all Members.
    The Exchange 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. 
The proposed rule change reflects a competitive pricing structure 
designed to incent market participants to direct their order flow to 
the Exchange. The Exchange believes that the proposed rates are non-
discriminatory in that they apply uniformly to all Members. The 
Exchange believes the fees and credits remain competitive with those 
charged by other venues and therefore continue to be reasonable and 
equitably allocated to Members.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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) of the Act \9\ and Rule 19b-4(f)(2) \10\ thereunder. At any 
time within 60 days

[[Page 28113]]

of the filing of such 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.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 19b-4(f)(2).
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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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-EDGX-2011-13 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGX-2011-13. This file 
number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission,\11\ 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 Web site 
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 a.m. and 3 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; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
EDGX-2011-13 and should be submitted on or before June 3, 2011.
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    \11\ The text of the proposed rule change is available on the 
Exchange's Web site at http://www.directedge.com, on the 
Commission's Web site at http://www.sec.gov, at EDGX, and at the 
Commission's Public Reference Room.
    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-11763 Filed 5-12-11; 8:45 am]
BILLING CODE 8011-01-P