Document ID: SEC-2012-1985-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2012-12-04T05:00Z

[Federal Register Volume 77, Number 233 (Tuesday, December 4, 2012)]
[Notices]
[Pages 71860-71864]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29239]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68310; File No. SR-EDGX-2012-47]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
EDGX Rule 15.1(a) and (c)

November 28, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 71861]]

``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 26, 2012 the EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its fees and rebates applicable to 
Members \3\ of the Exchange pursuant to EDGX Rule 15.1(a) and (c). All 
of the changes described herein are applicable to EDGX Members. The 
text of the proposed rule change is available on the Exchange's 
Internet Web site at www.directedge.com, at the Exchange's principal 
office, and at the Public Reference Room of the Commission.
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    \3\ As defined in Exchange Rule 1.5(n).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    The Exchange proposes to introduce new flags ZA and ZR for Members 
that utilize Retail Orders. Flag ZA is proposed to be yielded for those 
Members that use Retail Orders that add liquidity to EDGX and is 
proposed to be assigned a rebate of $0.0032 per share. Flag ZR is 
proposed to be yielded for those Members that use Retail Orders that 
remove liquidity from EDGX and is proposed to be assigned a charge of 
$0.0030 per share. Footnote 4, in turn, is proposed to be amended to 
define a ``Retail Order'' as an agency order that originates from a 
natural person and is submitted to the Exchange by a Member, provided 
that no change is made to the terms of the order (e.g., price or side 
of market), and the order does not originate from a trading algorithm 
or any other computerized methodology. The Exchange proposes to append 
Footnote 4 to its default, non-tiered rebate of $0.0023 per share at 
the top of its fee schedule to signify a rate change if the conditions 
in Footnote 4 are met.\4\ For additional transparency, the Exchange 
also proposes to append Footnote 4 to the default, non-tiered removal 
rate of $0.0030 per share, even though a rate change is not signified.
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    \4\ Currently, the Exchange offers Members a default rate rebate 
of $0.0023 per share for
    orders in securities at or above $1.00 that add liquidity to the 
Exchange, where ``default''
    refers to the standard rebate offered by the Exchange to Members 
absent Members
    qualifying for additional volume tiered pricing.
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    The Exchange notes that Members will only be able to designate 
their orders as ``Retail Orders'' that add/remove liquidity using the 
FIX order entry protocol (FIX) but not the HP-API order entry protocol 
(HP-API). The Exchange also notes that Members using HP-API only who 
would like to take advantage of the new ``Retail Order'' flags can 
subscribe to FIX logical ports with the first five logical ports being 
provided free of charge while $500.00/month is charged for each 
additional logical port.
    The Exchange also proposes to specify in Footnote 4 that to the 
extent Members qualify for a rebate higher than $0.0032 per share 
through other volume tiers, such as the Mega Tier ($0.0035 per share) 
or Market Depth Tier ($0.0033 per share), Members will earn the higher 
rebate on Flag ZA instead of its assigned rate. In addition, to the 
extent Members qualify for a removal rate lower than $0.0030 per share 
through any other tier, such as the Mega Tier ($0.0029 per share) or 
Step-up Take Tier ($0.0028 per share), then Members will earn [sic] the 
lower removal rate on Flag ZR instead of its assigned rate.
    A Member would be required to attest, in a form and/or manner 
prescribed by the Exchange, that they have implemented policies and 
procedures that are reasonably designed to ensure that every order 
designated by the Member as a ``Retail Order'' complies with the 
Exchange's definition of a Retail Order, as described above. The 
proposed use of Flags ZA and ZR to identify Retail Orders would be 
optional for Members. Accordingly, a Member that does not opt to 
identify qualified orders as Retail Orders would choose not to make an 
attestation to the Exchange and thereby, not receive the rates 
associated with Flags ZA or ZR.
    Additionally, a Member would be required to have written policies 
and procedures reasonably designed to assure that it will only 
designate orders as Retail Orders if all requirements of a Retail Order 
are met. Such written policies and procedures must require the Member 
to (i) exercise due diligence before entering a Retail Order to assure 
that entry as a Retail Order is in compliance with the requirements 
specified by the Exchange, and (ii) monitor whether orders entered as 
Retail Orders meet the applicable requirements. If the Member 
represents Retail Orders from another broker-dealer customer, the 
Member's supervisory procedures must be reasonably designed to assure 
that the orders it receives from such broker-dealer customer that it 
designates as Retail Orders meet the definition of a Retail Order. The 
Member must (i) obtain an annual written representation, in a form 
acceptable to the Exchange, from each broker-dealer customer that sends 
it orders to be designated as Retail Orders that entry of such orders 
as Retail Orders will be in compliance with the requirements specified 
by the Exchange, and (ii) monitor whether its broker-dealer customer's 
Retail Order flow continues to meet the applicable requirements.\5\
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    \5\ The Financial Industry Regulatory Authority, Inc., on behalf 
of the Exchange, will review a Member's compliance with these 
requirements through an exam-based review of the Member's internal 
controls.
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    The Exchange further proposes that it may disqualify a Member from 
qualifying for Flags ZA and ZR if the Exchange determines, in its sole 
discretion, that a Member has failed to abide by the requirements 
proposed herein, including, for example, if a Member designates orders 
submitted to the Exchange as Retail Orders but those orders fail to 
meet any of the requirements of Retail Orders. Tiered or non-tiered 
default rates would apply based on the Member's qualifying levels for a 
Member that is disqualified from qualifying for Flags ZA and ZR.
    The Exchange also proposes to amend the text of the first paragraph 
of Footnote 1 to include Flag ZR as part of the list of ``removal 
flags,'' where Flag ZR removes liquidity from the EDGX Book \6\ and 
qualifies for the removal rate of $0.0029 per share in connection with 
satisfying the criteria for the Mega Tier rebate.
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    \6\ As defined in Exchange Rule 1.5(d).
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    The Exchange also proposes to amend the text of Footnote 2 to 
include Flag ZR as part of the ``remove liquidity'' flags

[[Page 71862]]

listed therein that qualify for the Step-Up Take Tier reduced charge of 
$0.0028 per share for the removal flags.\7\
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    \7\ The Exchange notes that where Members that have Retail 
Orders that add liquidity to EDGX and also qualify for the Step-Up 
Take Tier, the Exchange would provide such Members the more 
favorable rebate of $0.0032 per share. This is made clear in the
    language in the second paragraph of proposed Footnote 4, as 
described above.
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    The Exchange proposes to amend the text of Footnote 13, sections 
(i) and (ii), to include Flags ZA and ZR as qualifying ``added flags'' 
and ``removal flags,'' respectively, for the Investor Tier.
    The Exchange proposes to implement these amendments to its fee 
schedule on December 1, 2012.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\8\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act,\9\ in particular, because it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among its Members, issuers and other persons using its 
facilities and does not unfairly discriminate between customers, 
issuers, brokers or dealers.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed rule change is reasonable, 
equitable and not unfairly discriminatory because it would encourage 
Members to send additional Retail Orders that add liquidity to the 
Exchange for execution in order to qualify for an incrementally higher 
credit for such executions that add liquidity on the Exchange.\10\ 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.
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    \10\ The Exchanges notes that the removal fee through Flag ZR is 
the same as the default, non-tiered removal rate. Thus, the Exchange 
believes that there would be a neutral effect on removers of 
liquidity as the Exchange is neither incenting nor disincentivizing 
the use of Flag ZR.
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    The Exchange notes that a significant percentage of the orders of 
individual investors are executed over-the-counter.\11\ The Exchange 
believes that it is thus appropriate to create a financial incentive to 
bring more retail order flow to a public market, such as the Exchange 
over off-exchange venues. The Exchange believes that investor 
protection and transparency is promoted by rewarding displayed 
liquidity on exchanges over off-exchange executions. By offering a 
proposed rebate of $0.0032 per share for Flag ZA, the Exchange believes 
it will encourage use of Retail Orders, while maintaining consistency 
with the Exchange's overall pricing philosophy of encouraging displayed 
liquidity. The Exchange places a higher value on displayed liquidity 
because the Exchange believes that displayed liquidity is a public good 
that benefits investors and traders generally by providing greater 
price transparency and enhancing public price discovery, which 
ultimately lead to substantial reductions in transaction costs.
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    \11\ See Concept Release on Equity Market Structure, Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (noting that dark pools and internalizing broker-
dealers executed approximately 25.4% of share volume in September 
2009). See also Mary L. Schapiro, Strengthening Our Equity Market 
Structure (Speech at the Economic Club of New York, Sept. 7, 2010) 
(available on the Commission's Web site). In her speech, Chairman 
Schapiro noted that nearly 30 percent of volume in U.S.-listed 
equities was executed in venues that do not display their liquidity 
or make it generally available to the public and the percentage was 
increasing nearly every month.
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    The Exchange also notes that the Commission recently approved a 
similar proposal by the New York Stock Exchange, Inc. (``NYSE'') and 
NYSE MKT LLC (``NYSE MKT'').\12\ Accordingly, the proposal generally 
encourages competition between exchange venues for retail order flow 
and encourages additional retail order flow.
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    \12\ See Securities Exchange Act Release No. 67347 (July 3, 
2012), 77 FR 40673 (July 10,
    2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84) (the ``RLP Approval
    Order'').
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    The Exchange believes that a differential pricing structure for 
Retail Orders is not unfairly discriminatory. As stated in the NYSE RLP 
Approval Order, the ``Commission has previously recognized that the 
markets generally distinguish between individual retail investors, 
whose orders are considered desirable by liquidity providers because 
such retail investors are presumed on average to be less informed about 
short-term price movements, and professional traders, whose orders are 
presumed on average to be more informed.'' \13\ The Exchange's proposed 
differential pricing structure for Retail Orders raises similar policy 
considerations as the rules approved by the Commission in the NYSE RLP 
Approval Order, which account for the difference of assumed information 
and sophistication level between different trading participants by 
providing Retail Orders access to better rebates.
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    \13\ See Securities Exchange Act Release No. 67347 (July 3, 
2012), 77 FR 40673 (July 10,
    2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84) (the ``NYSE RLP 
Approval Order''). In conjunction with the approval of the NYSE 
Retail Liquidity Program, a nearly identical program was proposed 
and approved to operate on NYSE MKT (formerly, the American Stock 
Exchange), at 40679-40680 (citing Concept Release on Equity Market 
Structure and approval of an options exchange program related to 
price improvement for retail orders). Certain options exchanges 
deploy this same rationale today through pricing structures that 
vary for a trading participant based on the capacity of the contra-
side trading participant. See, e.g., Securities Exchange Act Release 
No. 63632 (January 3, 2011), 76 FR 1205 (January 7, 2011) (SR-BATS-
2010-038) (notice of filing and immediate effectiveness of proposal 
to modify fees for BATS Exchange Inc. (``BATS'') Options, including 
liquidity rebates that are variable depending on the capacity of the 
contra-party to the transaction; see also Securities Exchange Act 
Release No. 67171 (June 8, 2012), 77 FR 35732 (June 14, 2012) (SR-
NASDAQ-2012-068) (notice of filing and immediate effectiveness of 
proposal to modify fees for the NASDAQ Options Market, including 
certain fees and rebates that are variable depending on the capacity 
of the contra-party to the transaction).
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    The Exchange understands that Section 6(b)(5) of the Act \14\ 
prohibits an exchange from establishing rules that are designed to 
permit unfair discrimination between market participants. However, 
Section 6(b)(5) of the Act does not prohibit exchange members or other 
broker-dealers from discriminating, so long as their activities are 
otherwise consistent with the federal securities laws. While the 
Exchange believes that markets and price discovery optimally function 
through the interactions of diverse flow types, it also believes that 
growth in internalization has required differentiation of retail order 
flow from other order flow types. The differentiation proposed herein 
by the Exchange is not designed to permit unfair discrimination, but 
instead to promote a competitive process around retail executions such 
that retail investors would receive better rebates than they currently 
do through bilateral internalization arrangements. Additionally, the 
Exchange believes that the proposed Retail Order rate for Flag ZA 
(rebate of $0.0032 per share) will incentivize Members to submit Retail 
Orders that add liquidity to the Exchange. As a result of the 
additional liquidity, the Exchange believes that this would result in 
improved market quality.
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    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes that the proposed rates for Retail 
Orders (Flags

[[Page 71863]]

ZA and ZR, respectively) are equitable and not unfairly discriminatory 
because Members could qualify for the same rates (rebate of $0.0032 per 
share and charge of $0.0030 per share, respectively) through other 
volume discounts or through the default, non-tiered removal rate. For 
example, Members could achieve the rebate of $0.0032 per share if they 
satisfy the conditions for the Mega Tier rebate of $0.0032 per share. 
Members could also achieve the removal fee of $0.0030 per share without 
satisfying an additional tier as $0.0030 per share is the default rate 
for removing liquidity on the Exchange's fee schedule. Thus, the 
Exchange believes that there would be a neutral effect on removers of 
liquidity as the Exchange is neither incenting nor disincentivizing the 
use of Flag ZR.
    Moreover, the proposed use of Retail Orders, which are available 
for all Members that utilize FIX, is equitable and not unfairly 
discriminatory because FIX is available for all Members on an equal and 
non-discriminatory basis, as all Members can sign up for new logical 
ports using FIX or HP-API at a cost of $500/month (the first five 
DIRECT logical ports being provided free). The Exchange also notes that 
all Members that it expects will send Retail Orders currently maintain 
logical ports that utilize FIX. The Exchange also notes that the 
Members that only utilize HP-API are generally those that are more 
concerned with latency as they trade for their own accounts where their 
order flow typically would not qualify as retail order flow. Finally, 
all order entry protocols on the Exchange do not necessarily support 
all Exchange functions and are designed differently in order to support 
the Member base most likely to utilize them.
    The Exchange believes its amendments to footnotes 1, 2, and 13 
support the Exchange's efforts to achieve consistent application and 
specificity among the flags on the fee schedule and provide 
transparency for its Members. First, in SR-EDGX-2012-39, the Exchange 
discounted certain ``removal flags'' if a Member satisfied the criteria 
for the Mega Tier rebate in Footnote 1.\15\ Since Flag ZR is a removal 
flag with an assigned rate of $0.0030 per share, the Exchange believes 
it is appropriate to include Flag ZR in its list of removal flags that 
would qualify for a discounted removal rate of $0.0029 per share. The 
Exchange also believes that these proposed amendments are non-
discriminatory because they apply to all Members.
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    \15\ See Securities Exchange Act Release No. 67818 (September 
10, 2012), 77 FR 56890 (September 14, 2012) (SR-EDGX-2012-39).
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    Secondly, in SR-EDGX-2012-46,\16\ the Exchange listed in Footnote 2 
of the fee schedule those removal flags that would qualify for the 
Step-up Take Tier if a Member satisfied the criteria. Since Flag ZR is 
a removal flag with an assigned rate of $0.0030 per share, the Exchange 
believes it is appropriate to include Flag ZR in its list of removal 
flags that would qualify for a discounted removal rate of $0.0028 per 
share.\17\ The Exchange also believes that these proposed amendments 
are non-discriminatory because they apply to all Members.
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    \16\ See Securities Exchange Act Release No. 68166 (November 6, 
2012), 77 FR 67695 (November 13, 2012) (SR-EDGX-2012-46).
    \17\ The Exchange notes that Flag ZA is not yielded with the 
Step-Up Take Tier, like other listed add liquidity flags listed in 
Footnote 2, as the rate provided on the Step-Up Take Tier for adding 
liquidity (rebate of $0.0030 per share) is not as favorable to 
Members as the rate yielded on Flag ZA itself (rebate of $0.0032 per 
share). As a result, Members that have Retail Orders that add 
liquidity to EDGX would receive the rebate of $0.0032 per share in 
the situation where the Member also qualifies for the Step-Up Take 
Tier. This is made clear in the language in the second paragraph of 
proposed Footnote 4, as described above.
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    Finally, in SR-EDGX-2012-12, the Exchange included ``added'' and 
``removal flags'' in its calculation of the ``add liquidity'' to 
``removed liquidity'' ratio to qualify for the Investor Tier.\18\ Since 
Flag ZR is a removal flag and Flag ZA is an add flag, the Exchange 
believes it is appropriate to include the volume from both of these 
flags in its calculation of the ``add liquidity'' to ``removed 
liquidity'' ratio. The Exchange also believes that these proposed 
amendments are non-discriminatory because they apply to all Members.
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    \18\ See Securities Exchange Act Release No. 66762 (April 6, 
2012), 77 FR 22053 (April 12, 2012) (SR-EDGX-2012-12).
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    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues. In 
such an environment, the Exchange must continually review, and consider 
adjusting, its fees and credits to remain competitive with other 
exchanges. For the reasons described above, the Exchange believes that 
the proposed rule change reflects this competitive environment.

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

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

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

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

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(2) \20\ thereunder. At 
any time within 60 days of the filing of such proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 19b-4(f)(2).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please 
include File Number SR-EDGX-2012-47 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-2012-47. 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

[[Page 71864]]

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-2012-47 and should be submitted on or before 
December 26, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29239 Filed 12-3-12; 8:45 am]
BILLING CODE 8011-01-P