Document ID: SEC-2018-0255-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Investors Exchange, LLC
Posted Date: 2018-02-12T05:00Z

[Federal Register Volume 83, Number 29 (Monday, February 12, 2018)]
[Notices]
[Pages 6059-6069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02720]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82636; File No. SR-IEX-2018-02]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt an 
IEX Enhanced Market Maker (``IEMM'') Program

February 6, 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 February 1, 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\ 
Investors Exchange LLC (``IEX'' or ``Exchange'') is filing with the 
Securities and Exchange Commission (``Commission'') proposed changes to 
adopt an IEX Enhanced Market Maker (``IEMM'') program under Exchange 
Rule 11.170 (Market Quality Incentive Programs) (currently reserved), 
which is designed to enable Members \6\ to qualify for transaction fee 
\7\ reductions for providing meaningful and consistent support to 
market quality and price discovery by extensive quoting at and/or near 
the national best bid (``NBB'') and/or the national best offer 
(``NBO'') (collectively, the ``NBBO'').
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ See IEX Rule 1.160(s).
    \7\ See IEX Rules 15.110(a) and (c) (``Fee Schedule''). See also 
the Investors Exchange Fee Schedule, available on the Exchange 
public website.
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    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.

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 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 is proposing to adopt an IEX Enhanced Market Maker 
(``IEMM'') program under Exchange Rule 11.170 (Market Quality Incentive 
Programs) (currently reserved), which is designed to enable Members to 
qualify for transaction fee reductions for providing meaningful and 
consistent support to market quality and price discovery by extensive 
quoting at and/or near the NBBO.
Background
    In an effort to incentivize Members to submit displayed orders to 
the Exchange, the Exchange currently

[[Page 6060]]

charges a relatively low fee of $0.0003 to Members for executions on 
IEX that provide or take resting interest with displayed priority \8\ 
(i.e., an order or portion of a reserve order that is booked and ranked 
with display priority on the Order Book either as the IEX best bid or 
best offer (``BBO''), or at a less aggressive price).\9\
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    \8\ This pricing is referred to by the Exchange as ``Displayed 
Match Fee'' with a Fee Code of `L' provided by the Exchange on 
execution reports. See the Investors Exchange Fee Schedule, 
available on the Exchange public website.
    \9\ The Displayed Match Fee is less than the Exchange's Non-
Displayed Match Fee and substantially lower than the fee to add 
displayed liquidity on an exchange with a ``taker-maker'' fee 
structure (i.e., that charges liquidity providers) and to take 
displayed liquidity on an exchange with a ``maker-taker'' fee 
structure (i.e., that charges liquidity takers). For example, the 
New York Stock Exchange (``NYSE'') trading fee schedule on its 
public website reflects fees to ``take'' liquidity ranging from 
$0.0024-$0.0030 depending on the type of market participant, order 
and execution. Additionally, NYSE fees to ``add'' liquidity range 
from $0.0018-$0.0030 per share for shares executed in continuous 
trading. The Nasdaq Stock Market (``Nasdaq'') trading fee schedule 
on its public website reflects fees to ``remove'' liquidity ranging 
from $0.0025-$0.0030 per share for shares executed in continuous 
trading at or above $1.00 or 0.30% of total dollar volume for shares 
executed below $1.00. Additionally, Nasdaq fees for ``adding'' 
liquidity range from $0.0001-$0.00305 per share for shares executed 
in continuous trading. The Cboe BZX Exchange (``Cboe BZX'') trading 
fee schedule on its public website reflects fees for ``removing'' 
liquidity ranging from $0.0025-$0.0030, for shares executed in 
continuous trading at or above $1.00 or 0.30% of total dollar volume 
for shares executed below $1.00. Additionally, Cboe BZX fees for 
``adding'' liquidity ranging from $0.0020-$0.0045 per share for 
shares executed in continuous trading.
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    Furthermore, the Exchange currently charges $0.0009 per share (or 
0.30% of the total dollar value of the transaction for securities 
priced below $1.00) to Members for executions on IEX that provide or 
take resting interest with non-displayed priority (i.e., an order or 
portion of a reserve order that is booked and ranked with non-display 
priority on the Order Book either at the NBBO midpoint or at a less 
aggressive price).\10\ The Exchange does not charge any fee to Members 
for executions on IEX when the adding and removing order originated 
from the same Exchange Member.\11\
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    \10\ This pricing is referred to by the Exchange as ``Non-
Displayed Match Fee'' with a Fee Code of `I' provided by the 
Exchange on execution reports. See the Investors Exchange Fee 
Schedule, available on the Exchange public website.
    \11\ This pricing is referred to by the Exchange as 
``Internalization Fee'' with a Fee Code of `S' provided by the 
Exchange on execution reports. Orders from different market 
participant identifiers of the same broker dealer, with the same 
Central Registration Depository registration number, are treated as 
originating from the same Exchange Member. See the Investors 
Exchange Fee Schedule, available on the Exchange public website.
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    In addition to the pricing model above, and in contrast to its 
competitors, IEX has chosen to lower the cost barrier for Member firms 
to trade on the Exchange by not charging fees for membership, 
connectivity, or market data.\12\ Moreover, IEX has made a conscious 
choice to not pay rebates to brokers in exchange for order flow, and 
instead has focused on earning order flow from market participants by 
designing a market that provides greater execution quality. The 
Exchange believes that, as a result of these priorities, it has created 
quantitatively superior trading outcomes for Members that choose to 
efficiently access the Exchange, as measured by various market quality 
metrics including effective spread, and opportunity for price 
improvement.\13\ However, the Exchange believes that the financial 
incentives for brokers to route displayed orders to venues that pay 
rebates for such order flow has caused a stratification of displayed 
liquidity across the U.S. equities markets based on exchange pricing 
models. Specifically, maker-taker exchanges \14\ dominate the U.S. 
equities trading landscape in market share, and displayed market share 
specifically.\15\
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    \12\ See the Investors Exchange Fee Schedule, available on the 
Exchange public website.
    \13\ See e.g., IEX's recent 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)).
    \14\ In the maker-taker pricing model, the liquidity provider 
(i.e., maker) receives a rebate when its order eventually executes, 
and the taker that trades against the resting order pays an access 
fee to the exchange.
    \15\ See IEX's recent white paper that utilized publicly 
available quote and trade data to compare market quality across U.S. 
stock exchanges, which found that time at the inside (i.e., when an 
exchange is on either the NBB or the NBO, or both) appears to be 
strongly correlated with rebates for liquidity provision, as the 
exchanges at the inside more often are not only the largest but also 
those that employ a maker-taker pricing model. A Comparison of 
Execution Quality across U.S. Stock Exchanges, Elaine Wah, Stan 
Feldman, Francis Chung, Allison Bishop, and Daniel Aisen, Investors 
Exchange (2017).
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    To compete with incumbent maker-taker exchanges for order flow 
without directly paying Members for such orders, the Exchange is 
proposing to offer an alternative fee-based incentive to Members that 
engage in trading activity that further improves market quality and 
price discovery on the Exchange. Importantly, the Exchange is not 
proposing to offer a rebate,\16\ in that the Exchange is not paying one 
side of each transaction (i.e., the maker or taker). In fact, the 
Exchange is not making any direct payments to IEMMs, because, as 
discussed below, the proposed fee reductions will not be greater than 
the fees charged for executions on the Exchange (i.e., no single 
execution would result in a net credit from the Exchange to the 
Member). Moreover, the proposed fee reductions would not be provided 
based on a direct one-to-one relationship with a Member's displayed 
liquidity providing executions, but instead are available to reduce the 
per-share cost of a Members displayed and non-displayed executions on 
the Exchange in return for meaningful and consistent support to market 
quality and price discovery by extensive quoting at and/or near the 
NBBO in IEX-listed securities.
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    \16\ See the SEC's Division of Trading and Markets' October 20, 
2015 memorandum to the SEC's Market Structure Advisory Committee at 
2, which states ``. . . the maker-taker fee model is a pricing 
structure in which a market generally pays its members a per share 
rebate to provide ( i.e., ``make'') liquidity in securities and 
assesses on them a fee to remove (i.e., ``take'') liquidity.'' 
(emphasis added).
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IEMM Program
    As proposed, a Member qualifying for designation as an IEMM 
reflects a commitment to provide meaningful and consistent support to 
market quality and price discovery by extensive quoting at and/or near 
the NBBO in IEX-listed securities for a significant portion of the day. 
The IEMM Program is designed to attract liquidity provision from both 
traditional market making firms, as well as from other market 
participants that are willing and able to act in a market making 
capacity and commit capital to support liquidity at and/or near the 
NBBO. In return for their contributions, such Members qualify for a 
lower per-share rate charged for both displayed and non-displayed 
executions subject to either the Displayed Match Fee or Non-Displayed 
Match Fee on the Exchange in securities priced at or above $1.00. The 
IEMM Program is designed to deepen IEX's liquidity pool at prices at 
and/or near the NBBO, which may narrow the bid-ask spread, dampen the 
market impact of shocks from liquidity demand, and support the quality 
of

[[Page 6061]]

price discovery on IEX to the benefit of long term investors, and 
issuers.
    The proposed IEMM Program provides two tiers, each of which would 
significantly contribute to market quality by providing liquidity at or 
near the NBBO in IEX-listed securities for a significant portion of the 
day. Members are eligible to qualify as an IEMM under one or both IEMM 
Tiers. Specifically, as proposed, any IEX Member that registers as an 
IEX Market Maker pursuant to Rule 11.150 in all securities listed on 
IEX (except pursuant to Supplementary Material .01, as discussed 
below),\17\ and satisfies the quoting criteria for one or more of the 
following tiers in each security listed on IEX over the course of the 
month that the security is listed on IEX,\18\ may be designated as an 
IEMM:
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    \17\ See proposed Rule 11.170(a)(1)(B).
    \18\ See proposed Rule 11.170(a)(1)(C).
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     Inside Tier IEMM:
    [cir] One or more of its MPIDs has a displayed order entered in a 
principal capacity of at least one round lot resting on the Exchange at 
the NBB and/or the NBO for an average of at least 20% of Regular Market 
Hours (the ``NBBO Quoting Percentage''); \19\ and/or
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    \19\ See proposed Rule 11.170(a)(1)(A)(i).
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     Depth Tier IEMM:
    [cir] One or more of its MPIDs has a displayed order entered in a 
principal capacity of at least one round lot resting on the Exchange at 
the greater of 1 minimum price variation (``MPV'') or 0.03% (i.e., 3 
basis points) away from the NBBO (or more aggressive) for an average of 
at least 75% of Regular Market Hours (the ``Depth Quoting 
Percentage'').\20\
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    \20\ See proposed Rule 11.170(a)(1)(A)(ii).
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    The Exchange proposes to calculate the NBBO Quoting Percentage by 
determining the average percent of time the Member is at the NBB or the 
NBO, or both the NBB and NBO, in each IEX-listed security during 
Regular Market Hours over the course of the month. On a monthly basis, 
IEX would determine whether a Member satisfied the NBBO Quoting 
Percentage for each IEX-listed security by calculating the following:
     The ``NBB Quoting Time'' is calculated by determining the 
aggregate amount of time that one or more of a Member's MPIDs has a 
displayed order entered in a principal capacity of at least one round 
lot in each IEX-listed security resting at the NBB during Regular 
Market Hours of each trading day for a calendar month that such 
security is listed on IEX;
     The ``NBO Quoting Time'' is calculated by determining the 
aggregate amount of time that one or more of a Member's MPIDs has a 
displayed order entered in a principal capacity of at least one round 
lot in each IEX-listed security resting at the NBO during Regular 
Market Hours of each trading day for a calendar month that such 
security is listed on IEX; and
     The ``NBBO Quoting Percentage'' is calculated for each 
IEX-listed security by adding the security's NBB Quoting Time to the 
NBO Quoting Time and dividing the resulting sum by two (2), and then 
dividing the resulting quotient by the total amount of time during the 
Regular Market Session that the IEX-listed security was listed on IEX 
and not subject to a halt or pause in trading pursuant to IEX Rule 
11.280 over the course of the calendar month.
    The Exchange proposes to calculate the Depth Quoting Percentage by 
determining the average percent of time the Member is at the defined 
percentage away from the NBBO (or more aggressive) in each IEX-listed 
security during Regular Market Hours over the course of the month. On a 
monthly basis, IEX would determine whether the Member satisfied the 
Depth Quoting Percentage for each IEX-listed security by calculating 
the following:
     The ``Bid Depth Quoting Time'' is calculated by 
determining the aggregate amount of time that one or more of a Member's 
MPIDs has a displayed order entered in a principal capacity of at least 
one round lot in each IEX-listed security resting at the greater of 1 
MPV or 0.03% away from the NBB (or more aggressive) during Regular 
Market Hours of each trading day for a calendar month that such 
security is listed on IEX;
     The ``Offer Depth Quoting Time'' is calculated by 
determining the aggregate amount of time that one or more of a Member's 
MPIDs has a displayed order entered in a principal capacity of at least 
one round lot in each IEX-listed security resting at the greater of 1 
MPV or 0.03% away from the NBO during Regular Market Hours of each 
trading day of a calendar month that such security is listed on IEX; 
and
     The ``Depth Quoting Percentage'' is calculated for each 
IEX-listed security by adding the security's Bid Depth Quoting Time to 
the Offer Depth Quoting Time and dividing the resulting sum by two (2), 
and then dividing the resulting quotient by the total amount of time 
during the Regular Market Session that the IEX-listed security was 
listed on IEX and not subject to a halt or pause in trading pursuant to 
IEX Rule 11.280 over the course of the calendar month.\21\
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    \21\ The Exchange notes that the proposed NBBO Quoting 
Percentage calculation and the proposed Depth Quoting Percentage 
calculation are substantially similar to the calculations used by 
the New York Stock Exchange LLC (``NYSE'') for purposes of 
calculating the quoting requirements of Supplemental Liquidity 
Providers pursuant to NYSE Rule 107B(g) (Calculation of Quoting 
Requirement).
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    Proposed Supplemental Material .01 provides a limited exception to 
the requirement that a Member must be a registered IEX Market Maker 
pursuant to Rule 11.150 in all securities listed on IEX. Specifically, 
a Member that is not a registered IEX Market Maker pursuant to Rule 
11.150 in all securities listed on IEX (as required by subparagraph 
(a)(1)(B)) may still be designated as an IEMM if (i) a Member does not 
act as a market maker in one or more IEX-listed securities on any other 
national securities exchange, and (ii) the Market Maker provides 
documentation, satisfactory to IEX Regulation, substantiating that such 
Member is unable to act as a market maker in one or more particular 
securities listed on IEX (a) in order to comply with specified legal or 
regulatory requirements, or (b) operational restrictions not exceeding 
90 calendar days from the date the security first lists on the 
Exchange. The documentation must specify the length of time such legal, 
regulatory requirement(s), or operational restriction is anticipated to 
persist. The proposed exception is designed to provide Members 
flexibility to address any legal or regulatory requirements, or 
temporary operational restrictions associated with their registration 
and acting as a Market Maker in a security listed on IEX, without 
eliminating the financial incentives that such Member may otherwise 
qualify for under the IEMM Program as a result of their quoting 
activity in other listed securities.\22\
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    \22\ The Exchange notes that the proposed exception in 
Supplemental Material .01 would be inapplicable for the first IEX-
listed security (whether the security is transferring from another 
primary listing market to IEX, or conducting an initial public 
offering on IEX), because a Member could not have otherwise 
qualified to be designated as an IEMM without having been a 
registered Market Maker in all other IEX-listed securities since 
there would be no other IEX-listed securities.
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    For example, if a Member was to come into possession of material 
non-public information regarding an IEX-listed security, and on advice 
of counsel suspended all trading in the security until the conflict was 
remediated, and but for the suspension of trading in the IEX-listed 
security, one or more of the Member's MPIDs order activity would have 
qualified the Member for designation as an IEMM under one or more of 
the proposed IEMM Tiers, such Member could request a legal exemption 
under Supplemental Material .01 by providing documentation, 
satisfactory to

[[Page 6062]]

IEX Regulation, substantiating that it is unable to act as a market 
maker in the IEX-listed security (e.g., producing a letter from counsel 
advising to suspend trading).
    Proposed Supplemental Material .02 provides that if a Member 
satisfies the requirement of registering as a Market Maker pursuant to 
Rule 11.150 in all securities listed on IEX after the first trading day 
of the calendar month, and remains registered for the remainder of the 
month, such Member is eligible for designation as an IEMM if the Member 
otherwise satisfies the applicable quoting requirements for the entire 
month to qualify for designation under one or more of the proposed IEMM 
Tiers. Proposed Supplemental Material .02 is designed to provide 
Members clarity regarding their eligibility for designation as an IEMM 
when their order activity over the course of a month satisfies the 
requirements of one of the applicable IEMM Tiers, but the Member is not 
a registered Market Maker in all securities listed on IEX as of the 
first trading day of the calendar month. The Exchange believes allowing 
Members to qualify for designation as an IEMM under these circumstances 
is appropriate and reasonable, because it avoids disparate treatment of 
Members that were not registered Market Makers as of the start of a 
calendar month, but otherwise provided meaningful and consistent 
support to market quality and price discovery by extensive quoting at 
and/or near the NBBO in IEX-listed securities for a significant portion 
of the day in compliance with the IEMM criteria.
    For example, Member ABCD satisfied the quoting requirements of the 
Inside Tier and the Depth Tier for all securities listed on IEX for 
each day of the 20 trading days during the month of September 2017, 
thereby satisfying the quoting requirements of the Inside Tier and the 
Depth Tier on average, per day, over the course of the month. 
Furthermore, Member ABCD did not satisfy the requirement of being 
registered in all securities listed on IEX until September 8, 2017 (5 
trading days after the first trading day of the month), and remained 
registered in all securities listed on IEX for the remainder of the 
month. In this case, Member ABCD's order activity provided meaningful 
and consistent support to market quality and price discovery by 
extensive quoting at and/or near the NBBO in IEX-listed securities for 
a significant portion of each trading day, and would therefore be 
eligible for designation as an Inside Tier and Depth Tier IEMM.\23\ The 
Exchange notes that Members that attempt to abuse Supplemental Material 
.02 by registering as a market maker in all securities listed on IEX at 
the end of a calendar month, only to terminate registration at the 
beginning of the following calendar month, would be subject to the 20 
business day re-registration penalty under Rule 11.153(a) (Voluntary 
Termination of Registration), and therefore such Member is unlikely to 
be able to repeat this abusive pattern for the following trading 
month.\24\
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    \23\ The Exchange notes that this illustrative example 
contemplates Member ABCD satisfying the quoting requirements of the 
Inside Tier and Depth Tier on each trading day over the course of 
the month; however, it is possible that a Member may begin entering 
orders to satisfy the IEMM quoting requirements on or after the date 
the Member satisfies the requirement of being a registered Market 
Maker in all securities listed on IEX. In such case, the Member 
would need to exceed the quoting obligations for the Inside Tier and 
the Depth Tier on one or more trading days to satisfy the daily 
average requirement of proposed Rule 11.170(a)(1)(C).
    \24\ Furthermore, the Exchange monitors Market Maker security 
registrations and terminations to identify anomalous patterns of 
security registrations and terminations, and would therefore 
identify this abusive pattern in a timely manner.
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    Proposed Supplemental Material .03 provides that for purposes of 
determining the percentage of time during the Regular Market Session 
that a Member satisfied the NBBO Quoting Percentage and Depth Quoting 
Percentage pursuant to subparagraph (a)(1)(A), the Exchange excludes 
the aggregate amount of time that a security is subject to a halt or 
pause in trading pursuant to IEX Rule 11.280. Proposed Supplemental 
Material .03 is designed to provide Members additional clarity 
regarding the Exchange's calculation for determining whether the order 
activity satisfied the applicable NBBO Quoting Percentage and Depth 
Quoting Percentage by accounting for scenarios where continuous trading 
is halted or paused pursuant to Rule 11.280, and therefore the IEMM 
would be unable to enter orders to meet satisfy [sic] the applicable 
requirements. The Exchange believes that not accounting for scenarios 
where continuous trading is halted or paused would be unreasonable, and 
inconsistent with the quoting requirements set forth in the proposed 
IEMM Tiers, because it would make the effective IEMM Tier quoting 
requirements variable, requiring additional order activity to satisfy 
the applicable quoting requirements for securities that are subject to 
a trading halt or pause. The Exchange notes that accounting for 
scenarios where continuous trading is halted or paused is also 
consistent with Rule 11.151(a)(2) regarding the obligations of 
registered Market Makers, which states in relevant part that Market 
Makers quoting obligations are suspended during a trading halt or 
pause.
    For Members that qualify under one of the IEMM Tiers as defined 
above, IEX will reduce the fee charged per share executed on such 
Members':
     Non-displayed executions subject to the Non-Displayed 
Match Fee in securities priced at or above $1.00 by the amount that 
corresponds with the tier(s) under which the Member qualifies as an 
IEMM, subject to any applicable Depth Tier aggregate monthly savings 
cap, as set forth below (the ``Non-Displayed Match Fee Discount''); and
     Displayed executions subject to the Displayed Match Fee in 
securities priced at or above $1.00 by the amount that corresponds with 
the tier(s) under which the Member qualifies as an IEMM, subject to any 
applicable Depth Tier aggregate monthly savings cap, as set forth below 
(the ``Displayed Match Fee Discount''); \25\
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    \25\ See proposed Rule 11.170(a)(3).
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    As proposed, for Inside Tier IEMMs, the Displayed Match Fee 
Discount and the Non-Displayed Match Fee Discount results in a $0.0001 
discount for each execution subject to the Displayed Match Fee and the 
Non-Displayed Match Fee, respectively, with no cap on aggregate monthly 
saving.\26\ Moreover, Depth Tier IEMMs will receive a $0.0001 discount 
for each execution subject to the Displayed Match Fee and the Non-
Displayed Match Fee, up to $20,000.00 in aggregate savings per 
month.\27\
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    \26\ For example, if one or more of Member ABCD's MPIDs 
satisfied the obligations of the Insider Tier, all of Member ABCD's 
executions that are subject to the Non-Displayed Match Fee would be 
charged $0.0008, rather than $0.0009, and executions subject to the 
Displayed Match Fee would be charged $0.0002, rather than $0.0003.
    \27\ For example, if one or more of Member ABCD's MPIDs 
satisfied the obligations of the Depth Tier, all of Member ABCD's 
executions that are subject to the Non-Displayed Match Fee would be 
charged $0.0008, rather than $0.0009, and executions subject to the 
Displayed Match Fee would be charged $0.0002, rather than $0.0003, 
up to $20,000.00 in aggregate savings per month.
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    If a Member qualifies under both the Inside Tier and the Depth 
Tier, any earned Non-Displayed Match Fee Discount and Displayed Match 
Fee Discount will be aggregated and applied to such Members' non-
displayed executions and displayed executions subject to the Displayed 
Match Fee or Non-Displayed Match Fee in securities priced at or above 
$1.00, respectively, subject to the applicable Depth Tier aggregate 
monthly savings cap described

[[Page 6063]]

above. Therefore, if a Member qualifies under both the Inside Tier and 
the Depth Tier, such Member will earn a combined $0.0002 discount 
across the Displayed Match Fee Discount and the Non-Displayed Match Fee 
Discount, subject to the Depth Tier aggregate monthly savings cap, 
after which the balance of such Member's executions will continue to 
receive the $0.0001 Displayed Match Fee Discount and the Non-Displayed 
Match Fee Discount with no cap on aggregate monthly savings.\28\ The 
Exchange notes that executions subject to the Crumbling Quote Remove 
Fee \29\ are not eligible for the Displayed Match Fee Discount or the 
Non-Displayed Match Fee Discount. The Exchange further notes that the 
Displayed Match Fee Discount and Non-Displayed Match Fee Discount are 
not applicable to executions subject to the Internalization Fee.
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    \28\ For example, if one or more of Member ABCD's MPIDs 
satisfied the obligations of the Inside Tier and the Depth Tier, all 
of Member ABCD's executions that are subject to the Non-Displayed 
Match Fee would be charged $0.0007, rather than $0.0009, and 
executions that are subject to the Displayed Match Fee would be 
charged $0.0001, rather than $0.0003, up to $20,000 in aggregate 
savings from the Depth Tier Displayed Match Fee Discount, and then 
the balance of Member ABCD's executions subject to the Non-Displayed 
Match Fee and Displayed Match Fee would be charged $0.0008 (rather 
than $0.0009), and $0.0002 (rather than $0.0003), respectively, with 
no cap on aggregate monthly savings.
    \29\ See Fee Code Q (Crumbling Quote Remove Fee Indicator), 
along with the footnote appurtenant thereto in the Investors 
Exchange Fee Schedule, available on the Exchange public website, 
which together describe the applicable fee for executions that take 
liquidity during periods of quote instability as defined in Rule 
11.190(g) that exceed the CQRF Threshold, which is equal to is equal 
to 5% of the sum of a Member's total monthly executions on IEX if at 
least 1,000,000 shares during the calendar month, measured on an 
MPID basis. See also Securities and Exchange Act Release No. 81484 
(August 25, 2017) 82 FR 41446 (August 31, 2017) (SR-IEX-2017-27).

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                                                          Non-displayed match fee        Displayed match fee
        IEMM tier             Quoting requirements                discount                     discount
----------------------------------------------------------------------------------------------------------------
Inside Tier.............  Displayed order resting at    $0.0001....................  $0.0001.
                           either the NBB or the NBO,
                           or both the NBB and NBO,
                           for 20% of the time during
                           Regular Market Hours.
Depth Tier..............  Displayed order resting at    $0.0001 (up to $20,000.00    $0.0001 (up to $20,000.00
                           the greater of 1 MPV or       in aggregate savings, per    in aggregate savings, per
                           0.03% away from the NBBO      month inclusive of           month inclusive of Non-
                           (or more aggressive) for      Displayed Match Fee          Displayed Match Fee
                           75% of the time during        Discount savings).           Discount savings).
                           Regular Market Hours.
----------------------------------------------------------------------------------------------------------------

    The proposed Displayed Match Fee Discount and Non-Displayed Match 
Fee Discount was developed after informal discussions with a variety of 
IEX Members, including traditional electronic market making firms, as 
well as other Members that have expressed interest in serving in a 
market maker capacity that are willing and able to commit capital to 
support extensive price discovery at and/or near the NBBO. The Exchange 
believes that, as a general matter, the practice of making markets 
refers to trading strategies that display bids to purchase and offers 
to sell a security in relatively equal proportion, with an expectation 
of profit by capturing the delta between the two prices (i.e., market 
makers try to capture the spread while avoiding the accumulation of a 
long or short position). However, the potential profits derived by 
market makers from capturing the spread is constrained by, among other 
things, the high likelihood of being adversely selected or ``run-over'' 
in fast-moving markets (i.e., the likelihood of buying (selling) a 
security shortly before the price moves down (up)). In order to 
incentivize market makers to display quotations despite the potential 
for adverse selection, other national securities exchanges offer a 
variety of pricing incentives that are centered on rebates.\30\
---------------------------------------------------------------------------

    \30\ As described by Larry Harris of the U.S.C. Marshall School 
of Business in a 2013 paper regarding the maker-taker pricing model 
and its effects on market quotations, the first system to introduce 
the maker-taker scheme was Island ECN in 1997, which encouraged 
brokers to post customer limit orders in their systems that 
ultimately generated revenues for these brokers when these customer 
orders executed, and encouraged proprietary traders to make markets 
in their trading systems. Because takers paid the high access fee 
when trading with these orders, brokers and proprietary traders 
typically routed their taking orders first to traditional-fee 
exchanges (and off exchange-dealers) when the same prices were 
available at these other trading venues. The standing orders at 
maker-taker exchanges thus usually were the last orders to trade at 
their prices. Although this consequence was disadvantageous to the 
customers, in the absence of regulatory criticism of this obvious 
agency problem, the brokers continued to route customer orders to 
the ECNs to obtain the liquidity rebates. To remain competitive, all 
US equity exchanges ultimately adopted the maker-taker pricing 
model. See Larry Harris, ``Maker-Taker Pricing Effects on Market 
Quotations'' at 5 (Nov. 14, 2013).
---------------------------------------------------------------------------

    The Exchange has several reasons for proposing to offer a discount 
on displayed and non-displayed trading, in contrast to a rebate for 
displayed trading. First, as noted above, the Exchange has made a 
conscious choice not to pay exchange rebates to brokers in exchange for 
order flow, and instead has focused on earning order flow from market 
participants by designing a market that provides greater execution 
quality.
    The Exchange has designed the IEMM Program as an alternative 
financial incentive for Members to display aggressively priced orders 
on the Exchange, avoiding the potential conflicts of interest inherent 
in the maker-taker pricing model. The Exchange believes that rebates 
paid for displayed liquidity, which are typically retained by the 
broker (in the case of agency orders), have the potential to distort 
broker order routing decisions at the expense of their investor 
clients. A similar conflict would exist if brokers acting as agent 
displayed customer order flow on IEX to qualify for designation as an 
IEMM in order to reap the benefits of the proposed Displayed Match Fee 
Discount and Non-Display Match Fee Discount without necessarily passing 
those decreased costs on to their investor clients.\31\ However, this 
conflict only exists for market participants that represent customers 
as agent. Therefore, the Exchange has designed the IEMM Program to 
structurally eliminate this conflict by only considering a Member's 
principal orders when determining if

[[Page 6064]]

such Member's order activity satisfied one or more IEMM Tiers.
---------------------------------------------------------------------------

    \31\ See the SEC's Division of Trading and Markets' October 20, 
2015 memorandum to the SEC's Market Structure Advisory Committee at 
17-18, which states in support that ``the maker-taker pricing model 
presents a potential conflict of interest between brokers and their 
customers that results from the way in which fees and rebates are 
assessed. Broker-dealers that are members of an exchange pay fees to 
and receive rebates from the exchange for each transaction they 
execute on it, but broker-dealers typically do not pass back those 
fees and rebates to their customers. Accordingly, if a broker-dealer 
can earn a rebate for routing its customer's order to a certain 
venue--and keep that rebate for itself--the broker-dealer may have 
an incentive to route to the venue with the highest rebate, rather 
than diligently search out the venue likely to deliver the best 
execution of its customer's order. A similar conflict may exist for 
taker fees, as broker-dealers may seek to minimize their trading 
costs by routing to the execution venue with the lowest fees. Maker-
taker fees, therefore, result in a potential misalignment between 
the broker's own interests and its obligation to seek the best 
execution for its customer's order.''
---------------------------------------------------------------------------

    In addition, the Exchange believes paying rebates to liquidity 
providers has a measurable impact on execution quality. For example, 
IEX's recent white paper (that utilized publicly available quote and 
trade data to compare market quality across U.S. stock exchanges) 
empirically found that on maker-taker exchanges (which dominate the 
U.S. equities trading landscape in market share) resting orders (i.e., 
the maker) on average experience greater adverse selection, less market 
stability around executions, significantly longer queues at the inside, 
and a lower probability of execution.\32\ Accordingly, the Exchange 
believes the proposed IEMM Program offers an alternative financial 
incentive that avoids paying rebates for liquidity providing orders, 
and instead offers reduced transaction fees by way of the Displayed 
Match Fee Discount and the Non-Displayed Match Fee Discount that is 
designed to avoid the adverse impact to execution quality that the 
Exchange believes flow from the existing maker-taker pricing models, 
while still incentivizing Members to make displayed markets on the 
Exchange.
---------------------------------------------------------------------------

    \32\ See A Comparison of Execution Quality across U.S. Stock 
Exchanges, Elaine Wah, Stan Feldman, Francis Chung, Allison Bishop, 
and Daniel Aisen, Investors Exchange (2017), which studied four 
dimensions of market quality--liquidity, execution costs, price 
discovery, and market stability--and within each category, examined 
the structural mechanics responsible for observed disparities in 
execution quality.
---------------------------------------------------------------------------

    Furthermore, the Exchange believes rebates have the circular effect 
of perpetuating the modern-day exchange practice of charging ever 
increasing prices for low latency connectivity and depth of book market 
data that is required for firms to compete for priority at the 
NBBO.\33\ Independent research has indicated that queue position (which 
is largely a function of relative speed), impacts execution quality. 
Specifically, being at the top of the queue has the potential to 
increase the chance of capturing the spread, reduces the likelihood of 
adverse selection, and reduces the time an order is providing a 
directional signal to the market (which can increase the risk of 
adverse selection).\34\ Furthermore, being at the top of the queue also 
provides more certainty regarding the collection of exchange rebates 
for providing liquidity. However, because exchanges that pay rebates to 
members to add liquidity have the longest queues,\35\ competing for 
queue position on maker-taker exchanges requires members to pay high 
fees for low latency connectivity and depth of book market data, 
because understanding the relative order of displayed quotes on an 
exchanges order book and having the ability to be the first order at a 
price level is critical for successfully establishing queue position. 
As a result, market makers are forced to pay to compete based on speed, 
in addition to competing on price to provide liquidity to the markets.
---------------------------------------------------------------------------

    \33\ For example, according to a recent report published by 
Healthy Markets on U.S. equity market data, a market participant 
that wanted to purchase the fastest connections with the most 
relevant trading information for Cboe BZX Exchange, Inc. (``Cboe 
BZX''), Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX 
Exchange, Inc., the Nasdaq Stock Market LLC (``Nasdaq''), Nasdaq 
PHLX LLC, Nasdaq BX, Inc., NYSE, NYSE American LLC, and NYSE Arca, 
Inc., has seen its costs rise from $72,150 per month on June 1, 2012 
to $182,775 per month on June 1, 2017. See US Equity Market Data--
How Conflicts of Interest Overwhelm an Outdated Regulatory Model & 
Market Participants, Healthy Markets (November 16, 2017). See also a 
comment letter on Securities Exchange Act Release No. 78556 (August 
11, 2016) 81 FR 54877 (August 17, 2016) (SR-NYSE-2016-45) from David 
L. Cavicke, Chief Legal Officer, on behalf of Wolverine Trading LLC, 
Wolverine Execution Services LLC, and Wolverine Trading Technologies 
LLC, opposing NYSE's proposal to increase fees for, among other 
things, connectivity and data feeds, noting that based on an 
analysis of their fee over an 8 year period, NYSE's market data and 
connectivity costs have increased by over 700%, for a total of at 
least $123,750 per month.
    \34\ See KCG Market Insights, The Need For Speed: Its Important, 
Even for VWAP Strategies, Phil Mackintosh.
    \35\ See A Comparison of Execution Quality across U.S. Stock 
Exchanges, Elaine Wah, Stan Feldman, Francis Chung, Allison Bishop, 
and Daniel Aisen, Investors Exchange (2017) at 21.
---------------------------------------------------------------------------

    Secondly, Members that participate as market makers necessarily 
interact with the Exchange using displayed orders, but do not interact 
with the Exchange using displayed orders exclusively. In fact, many 
firms that participate as market makers use non-displayed orders as a 
part of their market making strategies to optimize returns on their 
displayed market making activities (e.g., a firm making a market in 
security XYZ that receives an execution at the NBB may offset that 
position by placing a non-displayed Discretionary Peg order to sell on 
IEX, which is protected from trading at the midpoint of the NBBO when 
IEX perceives the market to be unstable, pursuant to Rule 11.190(g)). 
For instance, during the fourth quarter of 2017, just over seventy-
percent (70%) of the volume traded on IEX by Members that are currently 
registered market makers on the Exchange was subject to the Non-
Displayed Match Fee.\36\ Accordingly, the Exchange is proposing to 
offer both a Displayed Match Fee Discount, as well as a Non-Displayed 
Match Fee Discount. The proposed Displayed Match Fee Discount is 
designed to provide IEMM's relief from the fees incurred as a result of 
their increased displayed order activity. The proposed Non-Displayed 
Match Fee Discount is designed to incentivize Members by reducing the 
firms largest expense of trading on the Exchange (i.e., non-displayed 
executions). Lastly, based on informal discussions with Members that 
have expressed interest in the proposed IEMM Program, the Exchange 
believes that reducing the overall costs of trading on the Exchange for 
Members designated as IEMM's will provide a sufficient financial 
incentive to provide meaningful and consistent support to market 
quality and price discovery by extensive quoting at and/or near the 
NBBO in IEX-listed securities for a significant portion of the day.
---------------------------------------------------------------------------

    \36\ The Exchange notes that because the proposed Non-Displayed 
Match Fee Discount is applied evenly across all of a Member's non-
displayed executions that receive the Non-Displayed Match Fee, the 
benefits flow congruently across the various trading desks and 
clients (as applicable) at the Member firm.
---------------------------------------------------------------------------

    The Exchange currently does not operate a listing market, but is 
preparing to launch a listings business for corporate issuers in 2018. 
Upon launch of the listing business, the Exchange expects to face 
intense competition from NYSE and Nasdaq, which the Exchange believes 
essentially operate as a duopoly in the U.S. listing market. Therefore, 
the Exchange has designed the proposed IEMM Program in part to address 
the significant competitive challenges it will face in establishing 
itself as a competitive listings market. Specifically, requiring IEMMs 
to be a registered IEX Market Makers in each security listed on IEX, 
and to qualify as an IEMM under one of the tiers described above in all 
securities listed on IEX (subject to the limited exception), is 
designed to attract issuers to list on the Exchange by providing 
enhanced liquidity incentives to market participants for IEX-listed 
securities that accrue to the benefit of issuers listed on IEX as well 
as market participants generally.
    Pursuant to Rule 11.151, IEX registered Market Makers are required 
to comply with the two-sided quote and pricing obligations. This 
requirement is substantially identical to the requirements applicable 
to NYSE and Nasdaq market makers.\37\ Based on informal discussions 
with various market participants, including some that act as registered 
market makers on other exchanges, the Exchange understands that the 
obligation for registered market makers to comply with the two-sided 
quote and pricing obligations is perceived to be a systemically 
burdensome obligation that presents

[[Page 6065]]

regulatory risk.\38\ Even firms with highly sophisticated trading 
technology and robust technology controls face unintended system 
outages and disruptions characteristic of complex systems, which may 
ultimately result in some ``gap'' in the market maker's required 
continuous quotations. In response to informal feedback from potential 
market makers, the Exchange recently proposed and the Commission 
approved a Market Maker Peg Order designed to simplify market maker 
compliance with IEX Rule 11.151.\39\ However, notwithstanding the 
availability of the Market Maker Peg Order functionality, a market 
maker remains responsible for entering, monitoring, and resubmitting, 
as applicable, quotations that meet the requirements of Rule 11.151. 
The Exchange believes that incentives for Members to act as Market 
Makers generally, as well as to maintain tighter markets than required 
by IEX Rule 11.151, would enhance displayed liquidity in IEX-listed 
securities. Accordingly, the Exchange has designed the IEMM Program to 
address both goals, and believes the proposed IEMM Program will serve 
as an incentivize for Members to take on the obligations and attendant 
risks of registering as an IEX Market Maker, and to make tighter 
markets by providing the proposed alternative fee incentives to IEX 
Market Makers that also qualify as an IEMM.
---------------------------------------------------------------------------

    \37\ See NYSE Rule 107B(d), and Nasdaq Rule 4600.
    \38\ See, e.g., NYSE Regulation v. IMC Financial Markets, 
Proceeding No. 2016-07-01311 (May 4, 2017); NYSE Regulation v. Virtu 
Financial BD LLC, Proceeding No. 2016-07-01267 (December 20, 2016).
    \39\ See Securities Exchange Act Release No. 81482 (August 25, 
2017), 82 FR 41452 (August 31, 2017) (SR-IEX-2017-22).
---------------------------------------------------------------------------

    Lastly, the Exchange is proposing to make non-substantive changes 
to the Exchange's Fee Schedule to replace and re-organize the 
asterisked footnotes with numbered footnotes, and make minor changes to 
capitalization for defined terms. This change is designed to make the 
Exchange's Fee Schedule clearer, and ensure that footnotes are listed 
in chronological order.
2. Statutory Basis
    IEX believes that the proposed rule change is consistent with the 
provisions of Section 6(b) \40\ of the Act in general, and furthers the 
objectives of Sections 6(b)(4) \41\ 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 fees are 
consistent with the objectives of Section 6(b)(5) \42\ of the Act in 
particular in that they are 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; and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f.
    \41\ 15 U.S.C. 78f(b)(4).
    \42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed IEMM Program takes a narrowly tailored approach, 
designed to encourage Market Makers to provide meaningful and 
consistent support to market quality and price discovery by extensive 
quoting at and/or near the NBBO in IEX-listed securities, which 
benefits all market participants by deepening the Exchange's liquidity 
pool in such securities. IEX believes that to the extent Market Makers 
enter more aggressively priced displayed orders on the Exchange in 
response to the alternative fee based incentives, there will be 
increased liquidity on IEX, thereby contributing to public price 
discovery, consistent with the goal of enhancing market quality. 
Additionally, the Exchange believes that price discovery would be 
enhanced by potentially drawing more natural trading interest to the 
public markets, which would deepen liquidity and dampen the impact of 
shocks from liquidity demand. Further, to the extent price discovery is 
enhanced and more orders are drawn to the public markets, orders 
executed on IEX rather than being internalized on broker-operated 
platforms or executed on other alternative trading venues will have the 
benefit of exchange transparency, regulation, and oversight.
    The Exchange believes that the proposed Displayed Match Fee 
Discount and Non-Displayed Match Fee Discount, which were developed 
after extensive informal discussions with various Members, are 
reasonable because they are designed to incentivize the entry of 
aggressively priced displayed orders by reducing the firms' largest 
expense of trading on the Exchange (i.e., non-displayed 
executions),\43\ as well as accounting for the increased costs for 
displayed execution associated a Members increased displayed order 
activity. As noted in the Purpose section, based on informal 
discussions with Members that have expressed interest in the proposed 
IEMM Program, the Exchange believes that reducing the overall cost of 
trading on the Exchange for Members designated as IEMM's will provide a 
sufficient financial incentive to provide meaningful and consistent 
support to market quality and price discovery by extensive quoting at 
and/or near the NBBO in IEX-listed securities for a significant portion 
of the day.
---------------------------------------------------------------------------

    \43\ As discussed in the Purpose Section above, Members that 
participate as market makers necessarily interact with the Exchange 
using display orders, but do not interact with the Exchange using 
displayed orders exclusively. For instance, during the third quarter 
of 2017, just over seventy-percent (70%) of the volume traded on IEX 
by Members that are currently registered market makers on the 
Exchange was subject to the Non-Displayed Match Fee.
---------------------------------------------------------------------------

    The Exchange believes that applying a benefit to all of an IEMM's 
executions at or above $1.00 that are subject to the Displayed Match 
Fee and Non-Displayed Match Fee is reasonable, and consistent with an 
equitable allocation of fees, because, as noted above in the Purpose 
section, the proposed Displayed Match Fee Discount and Non-Displayed 
Match Fee Discount are applied evenly across all of a Member's 
displayed and non-displayed executions above $1.00 that receive the 
Displayed Match Fee and Non-Displayed Match Fee, thus the benefits flow 
congruently across the various trading desks and clients (as 
applicable) at the Member firm. Moreover, the Exchange believes that 
decisions on whether to act as a Market Maker on IEX are generally made 
at the firm level, and therefore providing a financial incentive to all 
of a Members' displayed and non-displayed trading on IEX is designed to 
incentivize Members to act as Market Makers on IEX. Furthermore, the 
Exchange believes that applying a benefit to all of an IEMM's 
executions that are subject to the Displayed Match Fee and Non-
Displayed Match Fee is reasonable in that it is designed in part to 
compete with the per share rebates that other exchanges currently pay 
for adding liquidity, which the Exchange believes have a significant 
impact on order routing decisions, without directly paying Members for 
order flow. Instead, the Exchange has severed the direct one-to-one 
relationship between the financial incentive and a Members displayed 
liquidity providing executions, by instead offering a per-share 
reduction in the cost of a Members displayed and non-displayed 
executions on the Exchange in return for meaningful and consistent 
support to market quality and price discovery by extensive quoting at 
and/or near the NBBO in IEX-listed securities. What is more, the 
Exchange believes that the applying a benefit to all of an IEMM's 
executions at or above $1.00 that are subject to the Displayed Match 
Fee and Non-Displayed Match Fee is reasonable in that it is also 
designed in part to

[[Page 6066]]

address the significant competitive challenges the Exchange will face 
in launching a listings business by providing a sufficient benefit to 
Members that will act as a market maker in IEX-listed securities.
    Furthermore, the Exchange believes that only a considering a 
Member's principal orders when determining if such Member's order 
activity satisfied one or more IEMM Tiers is reasonable and not 
unfairly discriminatory, because it is designed to avoid the potential 
conflicts of interest inherent in the maker-taker pricing model. As 
discussed in the Purpose section, the Exchange believes that rebates 
paid for displayed liquidity, which are typically retained by the 
broker (in the case of agency orders), have the potential to distort 
broker order routing decisions at the expense of their investor 
clients. A similar conflict would exist if brokers acting as agent 
displayed customer order flow on IEX to qualify for designation as an 
IEMM in order to reap the benefits of the proposed Non-Display Match 
Fee Discount and Display Match Fee Discount without necessarily passing 
those decreased costs on to their investor clients.\44\ However, this 
potential conflict only exists for market participants that represent 
customers as agent. Therefore, the Exchange believes that only a 
considering a Member's principal orders when determining if such 
Member's order activity satisfied one or more IEMM Tiers is reasonable 
and not unfairly discriminatory.
---------------------------------------------------------------------------

    \44\ See the SEC's Division of Trading and Markets' October 20, 
2015 memorandum to the SEC's Market Structure Advisory Committee at 
17-18, which states in support that ``the maker-taker pricing model 
presents a potential conflict of interest between brokers and their 
customers that results from the way in which fees and rebates are 
assessed. Broker-dealers that are members of an exchange pay fees to 
and receive rebates from the exchange for each transaction they 
execute on it, but broker-dealers typically do not pass back those 
fees and rebates to their customers. Accordingly, if a broker-dealer 
can earn a rebate for routing its customer's order to a certain 
venue--and keep that rebate for itself--the broker-dealer may have 
an incentive to route to the venue with the highest rebate, rather 
than diligently search out the venue likely to deliver the best 
execution of its customer's order. A similar conflict may exist for 
taker fees, as broker-dealers may seek to minimize their trading 
costs by routing to the execution venue with the lowest fees. Maker-
taker fees, therefore, result in a potential misalignment between 
the broker's own interests and its obligation to seek the best 
execution for its customer's order.''
---------------------------------------------------------------------------

    Furthermore, while some Members may face unique financial and 
operational challenges that could pose practical limitations on their 
trading strategies, the Exchange notes that all Members are eligible to 
enter displayed orders in a principal capacity on the Exchange to the 
extent they are willing and able to commit capital to support price 
discovery at and/or near the NBBO. Accordingly, the Exchange believes 
it is reasonable and not unfairly discriminatory to only consider a 
Member's principal orders when determining if such Member's order 
activity satisfied one or more IEMM Tier.
    Furthermore, the Exchange believes the exception from the 
requirement to be registered as a Market Maker in all IEX-listed 
securities as set forth in proposed Supplemental Material .01 is 
reasonable in that it provides Members flexibility to address any legal 
or regulatory requirements, or temporary operational restrictions 
associated with acting as a Market Maker in a security that is listed 
on IEX, without eliminating the financial incentives that such Member 
may otherwise qualify for under the IEMM Program as a result of their 
quoting activity in all other listed securities. The Exchange believes 
it is fair and equitable and not unfairly discriminatory to provide the 
limited exception to qualifying Market Makers because the exception 
provides narrowly tailored relief. IEX and other national securities 
exchange's rules already provide excused withdrawal relief from 
compliance with market maker quoting obligations based on legal or 
regulatory requirements, in recognition that there are circumstances in 
which it would be violative of legal and regulatory requirements for a 
firm to trade in a particular security.\45\ As discussed above, these 
requirements could include, for example, participation in an offering 
of a security, or the possession of material nonpublic information. 
Similarly, IEX and other national securities exchange's rule provide 
excused withdrawal relief from compliance with market maker quoting 
obligations based on systemic equipment problems, in recognition of the 
technical complexities inherent in automated market making. The 
Exchange believes that the same considerations are applicable to 
participation in the IEMM Program, and it would be inappropriate to 
preclude a Market Maker from eligibility for the IEMM incentives based 
on bona fide legal or regulatory requirements or temporary operational 
restrictions. Thus, the Exchange does not believe that the limited 
exception raises any new or novel issues. Further, the exception will 
be granted to all Market Makers on a fair and equitable basis, if the 
Market Maker provides documentation satisfactory to IEX Regulation that 
substantiates the reasons for the requested exception.
---------------------------------------------------------------------------

    \45\ See IEX Rule 11.152. See also NYSE Rule 107B(d), and Nasdaq 
Rule 4600.
---------------------------------------------------------------------------

    The Exchange believes that proposed Supplemental Material .02 is 
reasonable in that it is designed to provide Members clarity regarding 
their eligibility for designation as an IEMM when their order activity 
over the course of a month satisfies the requirements of one of the 
applicable IEMM Tiers, but the Member is not a registered Market Maker 
in all securities listed on IEX as of the first trading day of the 
calendar month. Furthermore, Exchange believes allowing Members to 
qualify for designation as an IEMM under these circumstances is 
appropriate and reasonable, because it avoids disparate treatment of 
Members that were not registered Market Makers as of the start of a 
calendar month, but otherwise provided meaningful and consistent 
support to market quality and price discovery by extensive quoting at 
and/or near the NBBO in IEX-listed securities for a significant portion 
of the day.
    Moreover, the Exchange believes that proposed Supplemental Material 
.03 is reasonable in that it is designed to provide Members additional 
clarity regarding the Exchange's calculation for determining whether 
the order activity satisfied the applicable NBBO Quoting Percentage and 
Depth Quoting Percentage by accounting for scenarios where continuous 
trading is halted or paused pursuant to Rule 11.280, and therefore the 
IEMM would be unable to enter orders to meet satisfy [sic] the 
applicable requirements. The Exchange believes that not accounting for 
scenarios where continuous trading is halted or paused would be 
unreasonable, and inconsistent with the quoting requirements set forth 
in the proposed IEMM Tiers, because it would make the effective IEMM 
Tier quoting requirements variable, requiring additional order activity 
to satisfy the applicable quoting requirements for securities that are 
subject to a trading halt or pause. Furthermore, the Exchange notes 
that accounting for scenarios where continuous trading is halted or 
paused is also consistent with Rule 11.151(a)(2) regarding the 
obligations of registered Market Makers, which states in relevant part 
that Market Makers quoting obligations are suspended during a trading 
halt or pause.
    The Exchange believes that the proposed Displayed Match Fee 
Discount and Non-Displayed Match Fee Discount for Members that qualify 
for designation as an IEMM is reasonable, in that IEX will continue to 
charge relatively low fees for all executed shares, and is in the

[[Page 6067]]

range, or lower than, the fees many other exchanges charge for removing 
(i.e., taking) liquidity on maker-taker venues,\46\ and consistent with 
Rule 610(c) of Regulation NMS.\47\ Furthermore, the Exchange believes 
that the proposed IEMM Program is consistent with the Act's requirement 
that the Exchange provide for an equitable allocation of fees, because 
Members that qualify for designation as an IEMM will provide benefits 
to all market participants by promoting price discovery and increasing 
the depth of liquidity available at and/or near the inside market. Such 
Members also benefit IEX by enhancing its competitiveness as a market 
center that attracts actionable orders. Accordingly, IEX believes that 
it is consistent with an equitable allocation of fees to offer the 
proposed Displayed Match Fee Discount and Non-Displayed Match Fee 
Discount on a Member's displayed and non-displayed executions at or 
above $1.00 in recognition of these benefits to the Exchange and its 
Members.
---------------------------------------------------------------------------

    \46\ For example, the NYSE trading fee schedule on its public 
website reflects fees to ``take'' liquidity ranging from $0.0024-
$0.00275 depending on the type of market participant, order, and 
execution. The Nasdaq trading fee schedule on its public website 
reflects fees to ``remove'' liquidity ranging from $0.0030 per share 
for shares executed at or above $1.00 or 0.30% of total dollar 
volume for shares executed below $1.00. Cboe BZX trading fee 
schedule on its public website reflects fees for ``removing'' 
liquidity ranging from $0.0030 for shares executed at or above $1.00 
or 0.30% of total dollar volume for shares executed below $1.00, 
subject to certain limited exceptions for orders trading in the 
opening, IPO or halt auctions in Cboe BZX-listed securities.
    \47\ 17 CFR 242.610(c)(1).
---------------------------------------------------------------------------

    Moreover, the Exchange believes that not placing a cap on the 
aggregate monthly savings from the Displayed Match Fee Discount and 
Non-Displayed Match Fee Discount for Inside Tier IEMMs, and imposing 
the proposed cap on the aggregate monthly savings from the Displayed 
Match Fee Discount and Non-Displayed Match Fee Discount for the Depth 
Tier IEMMs is reasonable and consistent with an equitable allocation of 
fees, because such cap is designed to maintain congruity between the 
benefits provided by IEMMs to the Exchange and the broader market, and 
the financial incentives provided by the Exchange in return. Market 
Makers that qualify under the Inside Tier will provide enhanced price 
discovery and liquidity at the NBBO. Comparatively, while each proposed 
tier provides substantial benefits to the market, Market Makers that 
meet only the Depth Tier would provide depth of liquidity at prices 
near the NBBO, without necessarily providing enhanced price discovery 
and liquidity at the NBBO. Additionally, the risk associated with a 
potential adverse execution for a Depth Tier IEMM is not as material as 
an Inside Tier IEMM. Thus, the Exchange believes the proposed IEMM 
Tiers and their corresponding fee incentives and caps are commensurate 
with the level of liquidity that the Member provides to the Exchange 
and its Members, and the risk associated with providing such liquidity, 
and are consistent with the Act. The Exchange notes that all Members 
are free to abstain from or discontinue participation in the proposed 
IEMM Program if the proposed fee reductions do not provide a sufficient 
incentive considering such Member's trading activity. Accordingly, the 
Exchange believes the proposed IEMM Tiers and their corresponding fee 
incentives and caps are reasonable and consistent with an equitable 
allocation of fees, and not unreasonably discriminatory.
    The Exchange further believes it is appropriate not to consider 
executions subject to the Crumbling Quote Remove Fee as eligible for 
the Displayed Match Fee Discount or Non-Displayed Match Fee Discount. A 
Member's executions that are subject to the Crumbling Quote Remove Fee 
are necessarily a part of a trading strategy that the Exchange believes 
evidences a form of predatory latency arbitrage that leverages low 
latency proprietary market data feeds and connectivity along with 
predictive models to chase short-term price momentum and successfully 
target resting orders at unstable prices. Furthermore, if the Exchange 
were to apply the Displayed Match Fee Discount and Non-Displayed Match 
Fee Discount to executions that are subject to the Crumbling Quote 
Remove Fee, it would frustrate its fundamental purpose of 
disincentivizing predatory trading strategies to further incentivize 
additional resting liquidity, including displayed liquidity, on IEX. 
Thus, a Member that is able to simultaneously meet an IEMM Tier while 
also executing orders that are subject to the Crumbling Quote Remove 
Fee, should not be afforded the benefit of the Displayed Match Fee 
Discount or Non-Displayed Match Fee Discount on such executions.
    The Exchange further believes it is appropriate not to consider 
executions subject to the Internalization Fee as eligible for the 
Displayed Match Fee Discount or Non-Displayed Match Fee Discount. A 
Member's executions that are subject to the Internalization Fee are 
provided at no cost to the Member. If the Exchange were to apply the 
Displayed Match Fee Discount and Non-Displayed Match Fee Discount to 
executions that are subject to the Internalization Fee, it would 
provide a net credit to the Member (i.e., pay a rebate). As described 
above, the Exchange has made a conscious choice to not pay rebates to 
brokers in exchange for order flow, and instead has focused on earning 
order flow from market participants by designing a market that provides 
greater execution quality.\48\ Thus, the Exchange proposes to not 
further discount an execution which is already provided free of charge.
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    \48\ See supra note 15.
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    The Exchange notes that other market centers offer a diverse range 
of fee based incentives to their members for trading activity that they 
believe improves market quality.\49\ Similarly, the Exchange believes 
the proposed IEMM Program is designed to further improve market quality 
on the Exchange and across the broader market. While the Exchange 
believes the proposed IEMM Program is distinguishable from the fee 
based incentives offered by other market centers in so far as the 
Exchange is not proposing to offer a rebate, the underlying goals and 
policy considerations are substantially similar. Thus, the Exchange 
believes the proposed IEMM Program does not pose any new or novel 
concepts not already considered by the Commission in connection with 
the current fee based market quality incentive programs offered by 
other market centers.
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    \49\ See, e.g., Nasdaq Rule 7014 (Market Quality Incentive 
Programs), which includes a variety of programs that offer fee based 
incentives to Nasdaq members that meet certain trading requirements. 
For example, the Nasdaq Qualified Market Maker (``QMM'') Program 
allows Nasdaq members to qualify as a QMM if they are registered 
Nasdaq market makers, quote at the NBBO for a specified period of 
time in a specified number of securities, and are not assessed any 
``Excess Order Fee'' under Nasdaq Rule 7018. In order to incentivize 
members to qualify as QMM's, Nasdaq offers a series of rebates per 
share executed, which vary depending on the QMM's percentage of 
consolidated volume in the applicable security and which market 
center the security is listed on. Moreover, Nasdaq offers qualified 
QMM's a reduced fee for removing liquidity on Nasdaq, which varies 
depending on what market the security is listed on. See Nasdaq Rule 
7014(d)-(e).
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    The Exchange further believes that the IEMM Program is reasonable 
and consistent with an equitable allocation of fees, and not unfairly 
discriminatory, because the IEMM Program is available to all market 
participants that qualify for designation as an IEMM, regardless of the 
size of the firm or its trading volumes. The Exchange notes that all 
Members that satisfy the applicable requirements are eligible for 
designation as an IEMM on a fair and equal basis. Moreover, the 
Exchange believes that the proposed IEMM Tiers that Members may qualify 
under for designation as an

[[Page 6068]]

IEMM are consistent with an equitable allocation of fees, because, as 
discussed in the purpose section above, the proposed fee reductions and 
the corresponding caps for Depth Tier IEMM's are commensurate with the 
level of liquidity that the Member provides to the Exchange and its 
Members.
    In conclusion, for the reasons discussed above, the Exchange 
believes that the proposed IEMM Program is consistent with Sections 
6(b)(4) and 6(b)(5) of the Act in that it does not permit unfair 
discrimination between customers, issuers, brokers, or dealers, and is 
designed to promote just and equitable principles of trade, 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.
    Lastly, the Exchange believes that the proposed non-substantive 
changes to the Exchange's Fee Schedule to replace and re-organize the 
asterisked footnotes with numbered footnotes, and make minor changes to 
capitalization for defined terms is reasonable, and consistent with the 
protection of investors and the public interest, in that it is designed 
to make the Exchange's Fee Schedule clearer, and ensure that footnotes 
are listed in chronological order.

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 IEMM Program and corresponding fee reductions will increase 
competition and draw additional volume to the Exchange. Furthermore, in 
order to compete with incumbent maker-taker exchanges for order flow 
without directly paying Members for such orders with rebates, the 
Exchange is proposing to offer an alternative fee-based incentive to 
Members that engage in trading activity that enhances market quality 
and price discovery on the Exchange. Importantly, 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.
    Moreover, as noted above, upon launch of the listing business for 
corporate issuers in 2018, the Exchange expects to face intense 
competition from NYSE and Nasdaq, which the Exchange believes 
essentially operate as a duopoly in the U.S. listing market. Therefore, 
the Exchange has designed the proposed IEMM Program in part to address 
the significant competitive challenges it will face in establishing 
itself as a competitive listings market. Specifically, requiring IEMMs 
to be a registered IEX Market Maker in each security listed on IEX, and 
to qualify as an IEMM under one of the tiers described above in all 
securities listed on IEX, is designed to enhance execution quality in 
such securities, which the Exchange believes will also encourage 
issuers to choose to list on IEX. Thus, 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 proposed rule change may 
serve as a catalyst for increasing intermarket competition in the 
highly-concentrated U.S. listings market, which the Exchange believes 
currently operates as a duopoly dominated by NYSE and Nasdaq.
    Furthermore, 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 some Members may face unique financial and operational 
challenges that could pose practical limitations on their trading 
strategies, the proposed fee incentives are available to all Members 
that choose to register as a market maker and adjust their trading 
activity to qualify for designation as an IEMM. Further, as noted 
above, the proposed fee reductions are designed to encourage Members to 
add liquidity at prices that benefit all IEX Members, and thus will not 
impose any burden on intramarket competition that is not 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

    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) \50\ of the Act.
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    \50\ 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 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) \51\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \51\ 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-2018-02 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-2018-02. 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

[[Page 6069]]

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-
2018-02, and should be submitted on or before March 5, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02720 Filed 2-9-18; 8:45 am]
 BILLING CODE 8011-01-P