Document ID: SEC-2013-0756-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2013-04-19T04:00Z

[Federal Register Volume 78, Number 76 (Friday, April 19, 2013)]
[Notices]
[Pages 23617-23620]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09192]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69378; File No. SR-EDGX-2013-13]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Footnote 4 of the Exchange's Fee Schedule Regarding Retail Orders

April 15, 2013.
    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 5, 2013, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II, 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\ 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 [sic] Footnote 4 of the Exchange's fee 
schedule regarding Retail Orders. 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 www.directedge.com, at 
the Exchange's principal office, and at the Public Reference Room of 
the Commission.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In SR-EDGX-2012-47,\3\ the Exchange introduced new Flags ZA (Retail 
Order, adds liquidity) and ZR (Retail Order, removes liquidity) and 
appended to each flag Footnote 4 to the Exchange's fee schedule. 
Footnote 4 defined a ``Retail Order,'' provided an attestation 
requirement for Members \4\ to comply with when sending Retail Orders 
to the Exchange, and noted that Members may designate orders as Retail 
Orders on an order-by-order basis. In SR-EDGX-2012-48,\5\ the Exchange 
subsequently expanded Members' ability to send the Exchange Retail 
Orders by designating certain of their FIX ports at the Exchange as 
``Retail Order Ports.'' The attestation requirement, as described in 
SR-EDGX-2012-47,\6\ will continue to apply to all Members who submit 
Retail Orders, whether on an order-by-order basis or via Retail Order 
Ports.
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    \3\ See Securities Exchange Act Release No. 68310 (November 28, 
2012), 77 FR 71860 (December 4, 2012) (SR-EDGX-2012-47).
    \4\ As defined in Exchange Rule 1.5(n).
    \5\ See Securities Exchange Act Release No. 68554 (December 31, 
2012), 78 FR 966 (January 7, 2013) (SR-EDGX-2012-48).
    \6\ See Securities Exchange Act Release No. 68310 (November 28, 
2012), 77 FR 71860 (December 4, 2012) (SR-EDGX-2012-47).
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Proposed Amendment to Definition of ``Retail Order''
    Footnote 4 on the Exchange's fee schedule currently defines a 
Retail Order as: ``(i) an agency order that originates from a natural 
person; (ii) is submitted to EDGX by a Member, provided that no change 
is made to the terms of the order; and (iii) the order does not 
originate from a trading algorithm or any other computerized

[[Page 23618]]

methodology.'' \7\ The Exchange believes that its definition of a 
``Retail Order'' is unnecessarily restrictive compared to that of other 
exchanges in that the Exchange does not include ``riskless principal 
orders'' in its definition.\8\ The Exchange believes that its 
comparatively narrow definition may create confusion among the 
Exchange's Members, preventing Members from submitting Retail Orders 
and benefiting from the enhanced rebate and transparency of such 
orders. In addition, the Exchange believes that the restrictiveness of 
the Exchange's definition may inadvertently put the Exchange at a 
competitive disadvantage in relation to other exchanges that provide a 
less restrictive definition of a ``Retail Order.''
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    \7\ See EDGX Fee Schedule, http://www.directedge.com/Membership/FeeSchedule/EDGXFeeSchedule.aspx.
    \8\ The Exchange notes that other market centers include 
``riskless principal orders'' as part of their definitions of 
``Retail Orders.'' See, e.g., Securities Exchange Act Release No. 
68937 (February 15, 2013), 78 FR 12397 (February 22, 2013) (SR-
NASDAQ-2012-129); Securities Exchange Act Release No. 69103 (March 
11, 2013), 78 FR 16547 (March 15, 2013) (SR-NYSE-2013-20); 
Securities Exchange Release No. 69104 (March 11, 2013), 78 FR 16556 
(March 15, 2013) (SR-NYSEMKT-2013-22).
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    Accordingly, the Exchange proposes to amend the definition of a 
``Retail Order'' in Footnote 4 to add riskless principal orders to the 
types of orders that may qualify as Retail Orders.\9\ The Exchange 
proposes to amend Footnote 4 to state ``[w]here a Retail Order is 
defined as (i) an agency order or riskless principal order that 
satisfies the criteria of FINRA Rule 5320.03 that originates from a 
natural person; (ii) is submitted to EDGX by a Member, provided that no 
change is made to the terms of the order; and (iii) the order does not 
originate from a trading algorithm or any other computerized 
methodology.'' (emphasis added).\10\
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    \9\ The Exchange notes that in order to qualify as a ``Retail 
Order,'' a ``riskless principal'' order must satisfy the criteria 
set forth in FINRA Rule 5320.03.
    \10\ The Exchange notes that it will amend its attestation form 
for Members designating Retail Orders to conform with these new 
requirements.
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    The Exchange believes that, for purposes of determining whether an 
order should qualify as a Retail Order, there is no difference between 
a riskless principal order that meets the requirements of FINRA Rule 
5320.03 and an agency order. A riskless principal transaction is a 
transaction in which a Member, after having received an order to buy 
(sell) a security, purchases (sells) the security as principal and, 
contemporaneously, satisfies the original order by selling (buying) as 
principal at the same price. Generally, a riskless principal 
transaction involves two orders, the execution of one being dependent 
upon the receipt or execution of the other; thus, there is no ``risk'' 
in the interdependent transactions when completed. Unlike a riskless 
principal transaction, an agency order is entered directly in the 
System \11\ by a Member on behalf of a customer. Ultimately, however, 
the results of a riskless principal transaction and an agency order are 
the same: the customer receives an execution while the involved Member 
acts as an intermediary to effect the transaction.\12\
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    \11\ As defined in Exchange Rule 1.5(cc).
    \12\ A principal transaction differs from both a riskless 
principal transaction and an agency order in that it is an order for 
the principal account of the entering Member.
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    The Exchange believes that the requirement that the entry of such 
riskless principal orders satisfy FINRA Rule 5320.03 provides 
sufficient protection against Members submitting orders for their own 
account to the Exchange. A Member entering a riskless principal 
transaction will have to, contemporaneously with the execution of the 
customer's order, submit a report identifying the trade as riskless 
principal to FINRA. Additionally, the Member will need to have written 
policies and procedures to ensure that riskless principal transactions 
comply with applicable FINRA rules. The policies and procedures, at a 
minimum, must require that the customer order be received prior to the 
offsetting principal transaction, and that the offsetting principal 
transaction is at the same price as the customer order exclusive of any 
markup or markdown, commission equivalent, or other fee, and is 
allocated to a riskless principal or customer account in a consistent 
manner and within 60 seconds of execution. Additionally, the Member 
must have supervisory systems in place that produce records that enable 
the Member and FINRA to reconstruct accurately, readily, and in a time-
sequenced manner all Retail Orders that are entered on a riskless 
principal basis.
    The Exchange believes that the Member must also ensure that non-
Retail Orders from customers are not included with the Retail Orders as 
part of a riskless principal transaction. The above requirements ensure 
that despite the procedural differences between the execution of a 
riskless principal transaction and an agency order, the only difference 
will be the procedure in which the transactions are effected and not 
the result.
    The Exchange further believes that clarifying that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 are 
able to be submitted as Retail Orders on the same basis as agency 
orders will enable Members, and in turn, their retail customers, to 
benefit from the enhanced rebate (Flag ZA) and transparency offered by 
the Exchange.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\14\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change promotes just 
and equitable principles of trade because it will ensure that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 will 
have the same opportunity to be submitted as Retail Orders as agency 
orders. As discussed above, there is no functional distinction for 
purposes of Retail Orders between an order entered by a Member on an 
agency basis and one entered on a riskless principal basis. The 
Exchange believes that the proposed change would tend to reduce any 
potential discrimination between similarly situated customers or 
brokers by ensuring that the ability of retail customers to benefit 
from the use of Retail Orders does not depend on a distinction in 
capacity that is not meaningful for purposes of submitting Retail 
Orders. As a result of the change, a retail customer would be able to 
benefit from the rebate (Flag ZA) for utilizing Retail Orders without 
regards to whether the Member enters the order on a riskless principal 
or agency basis.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it will clarify that riskless 
principal orders that meet the requirements of FINRA Rule 5320.03 are 
eligible to be submitted as Retail Orders on the same basis as agency 
orders. By allowing all orders that are functionally equivalent to 
agency orders to be submitted as Retail Orders, the proposed change 
would potentially stimulate further competition for retail order flow.

[[Page 23619]]

    The Exchange believes that the proposed change would protect 
investors and the public interest by expanding the access of Members to 
the rebate for Flag ZA and the transparency offered by the Exchange as 
well as the access of the public to an exchange sponsored alternative 
to broker-operated internalization venues. In this regard, the Exchange 
believes that maintaining or increasing the proportion of Retail Orders 
in exchange-listed securities that are executed on a registered 
national securities exchange (rather than relying on certain available 
off-exchange execution methods) would contribute to investors' 
confidence in the fairness of their transactions and would benefit all 
investors by deepening the Exchange's liquidity pool, supporting the 
quality of price discovery, promoting market transparency and improving 
investor protection.

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 believes that the proposed amendment to allow Members 
to submit Retail Orders on a riskless principal basis will not burden 
intramarket competition because the ability to submit Retail Orders on 
a riskless principal basis would be open to all Members that wish to 
send Retail Orders to the Exchange.
    The Exchange believes that the proposed amendment, by increasing 
the eligible orders that qualify as Retail Orders, would reduce burdens 
on competition around retail executions such that Members would receive 
better rebates than they currently do on the Exchange and potentially 
through bilateral internalization arrangements. The Exchange believes 
that the transparency and competitiveness of designating Retail Orders 
on an exchange market would result in better rebates for Members, and 
ultimately benefit retail investors by expanding the capabilities of 
Exchanges to encompass practices currently allowed on non-Exchange 
venues.

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

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

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) 
thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission has waived this requirement in this case.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange has asked the Commission to waive the 
30-day operative delay so that the proposal may become operative 
immediately upon filing. The Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and 
the public interest because such waiver would allow the Exchange to add 
riskless principal orders to the types of orders that may qualify as 
Retail Orders for purposes of the Exchange's fee schedule.\17\ The 
Commission also notes that several other market centers have recently 
added riskless principal orders to its definition of retail orders.\18\ 
Accordingly, the Commission hereby grants the Exchange's request and 
designates the proposal operative upon filing.
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    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \18\ See Securities Exchange Act Release No. 68937 (February 15, 
2013), 78 FR 12397 (February 22, 2013) (SR-NASDAQ-2012-129); 
Securities Exchange Act Release No. 69103 (March 11, 2013), 78 FR 
16547 (March 15, 2013) (SR-NYSE-2013-20); Securities Exchange 
Release No. 69104 (March 11, 2013), 78 FR 16556 (March 15, 2013) 
(SR-NYSEMKT-2013-22).
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    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.

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-EDGX-2013-13 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-2013-13. 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 Web site (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 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 
10:00 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; 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-

[[Page 23620]]

2013-13 and should be submitted on or before May 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09192 Filed 4-18-13; 8:45 am]
BILLING CODE 8011-01-P