Document ID: SEC-2019-0943-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; ProposedRule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2019-07-03T04:00Z

[Federal Register Volume 84, Number 128 (Wednesday, July 3, 2019)]
[Notices]
[Pages 31951-31956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14159]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No 34-86213; File No. SR-CboeBZX-2019-058]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Related to 
Fees for Use on Cboe BZX Exchange, Inc.

June 27, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 14, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the fee schedule applicable to its 
equities trading platform (``BZX Equities'') to replace the rebates 
applicable to Lead Market Makers (``LMMs'') in BZX-listed securities 
with daily incentives that are directly tied to meeting market quality 
metrics without regard to transactions executed.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend the fee schedule applicable to its 
equities trading platform (``BZX Equities'') to replace the rebates 
applicable to Lead Market Makers (``LMMs'') in BZX-listed securities 
with daily incentives that are directly tied to meeting market quality 
metrics without regard to transactions executed. The Exchange believes 
that these changes would encourage LMMs to maintain better market 
quality in BZX-listed securities, and, in particular, in lower volume 
securities where transaction-based compensation (i.e., rebates) may not 
be sufficient.
    The Exchange currently offers an LMM Incentive Program in which it 
provides LMMs in securities for which the LMM is a Qualified LMM \3\ 
(``Qualified ETPs'') with enhanced rebates,\4\ reduced fees,\5\ and 
free transactions in closing auctions \6\ in its Qualified ETPs. In 
addition, the

[[Page 31952]]

Exchange offers LMM Credit Tiers in which it provides LMMs that have at 
least 25 Qualified ETPs with enhanced rebates for all transactions in 
which the LMM adds liquidity to the Exchange. Such rebates gradually 
increase as the LMM's number of Qualified ETPs increases.\7\ Both of 
these programs offer incentives to LMMs only on a transaction by 
transaction basis. The Exchange is proposing to eliminate both the LMM 
Incentive Program and the LMM Credit Tiers, although the Exchange notes 
that it is not proposing to eliminate free transactions in closing 
auctions to LMMs in each of their respective Qualified ETPs.
---------------------------------------------------------------------------

    \3\ As defined in the fee schedule, the term ``Qualified LMM'' 
means an LMM that meets the Minimum Performance Standards, as 
defined in Rule 11.8(e)(1)(D). As defined in Rule 11.8(e)(1)(D), the 
term ``Minimum Performance Standards'' means a set of standards 
applicable to an LMM that may be determined from time to time by the 
Exchange. Such standards will vary between LMM Securities depending 
on the price, liquidity, and volatility of the LMM Security in which 
the LMM is registered. The performance measurements will include: 
(A) Percent of time at the NBBO; (B) percent of executions better 
than the NBBO; (C) average displayed size; and (D) average quoted 
spread. The Exchange will share the details of the Minimum 
Performance Standards with the Commission prior to implementation of 
the amendments proposed herein and further will provide the 
Commission with updates as any of the Minimum Performance Standards 
are changed.
    \4\ Currently, the Exchange's fee schedule provides that, unless 
an LMM otherwise qualifies for a higher rebate, they will receive 
the following rebates for securities in which they are a Qualified 
LMM, based on the ETP's consolidated average daily volume 
(``CADV''): where the CADV is less than 1 million, $0.0045 per 
share; where the CADV is 1 million to 5 million, $0.0040 per share; 
and where the CADV is greater than 5 million, $0.0035 per share.
    \5\ Currently, the Exchange's fee schedule provides that LMMs 
will pay $0.0025 per share to remove liquidity in securities for 
which they are a Qualified LMM.
    \6\ Currently, the Exchange's fee schedule provides that LMMs 
will receive free transactions in closing auctions in ETPs for which 
they are a Qualified LMM.
    \7\ Currently, LMMs in BZX-listed securities will receive the 
following additional rebates per share when adding displayed 
liquidity for adding liquidity, based on the Member's number of 
Qualified ETPs, capped at a total of $100,000 per month and not 
applied to the rebates set forth in the LMM Incentive Program:

    Qualified Tape A Tape B Tape C
    ETPs
    25 $0.0001 $0.0002 $0.0001
    50 $0.0002 $0.0004 $0.0002
    75 $0.0003 $0.0006 $0.0003
    125 $0.0004 $0.0008 $0.0004
    The Exchange is now proposing to implement daily incentives for 
LMMs that are not dependent on the number of transactions in a 
particular security, but rather based on whether the LMM meets the 
Minimum Performance Standards. Specifically, the Exchange is 
proposing to provide each LMM with a daily incentive based on how 
many Qualified ETPs the LMM has and the average aggregate daily 
auction volume in the BZX-listed securities for which the Member is 
the LMM (the ``LMM Securities''). The Exchange is proposing to 
provide such incentives as follows:

----------------------------------------------------------------------------------------------------------------
                                              Average aggregate daily auction volume in LMM securities
                                   -----------------------------------------------------------------------------
                                                   10,001-      100,001-     500,001-    1,000,001-   3,000,001
                                      0-10,000     100,000      500,000     1,000,000    3,000,000    or greater
----------------------------------------------------------------------------------------------------------------
Daily Incentive for each Qualified          $10          $25          $40          $50         $150         $200
 ETP 1-5..........................
Daily Incentive for each Qualified           10           25           25           30          100          150
 ETP 6-25.........................
Daily Incentive for each Qualified           10           10           20           25           75          100
 ETP 26-50........................
Daily Incentive for each Qualified           10           10           15           20           50           75
 ETP 51-100.......................
Daily Incentive for each Qualified           10           10           15           15           25           50
 ETP Greater Than 100.............
----------------------------------------------------------------------------------------------------------------

    As described in the chart above, the Exchange is proposing to 
provide LMMs with a daily incentive per Qualified ETP which increases 
along with the average aggregate daily auction volume in the LMM's LMM 
Securities. For instance, if an LMM has 30 LMM Securities, each of 
which is a Qualified ETP, 10 of which each have an average daily 
auction volume of 5,000 shares (combined between the opening and 
closing auction), 10 of which each have an average daily auction volume 
of 50,000 shares (combined between the opening and closing auction), 
and 10 of which each have an average daily auction volume of 200,000 
shares (combined between the opening and closing auction), then the LMM 
would fall into the fifth column (10 * 5,000 + 10 * 50,000 + 10 * 
200,000 = 2,550,000 average aggregate daily auction volume). As such, 
the LMM would receive $150 each for five Qualified ETPs, $100 each for 
Qualified ETPs 6-25, and $75 each for Qualified ETPs 26-30. This would 
result in a daily payment of ($150 * 5) + ($100 * 20) + ($75 * 5) = 
$3,125 to the LMM.
    The Exchange is also proposing to provide an additional daily 
incentive for LMMs based on the number of Qualified ETPs for which the 
LMM meets a more stringent set of Minimum Performance Standards 
(``Enhanced ETPs'') and the average aggregate daily auction volume in 
LMM Securities. The Exchange is proposing to provide such incentives as 
follows:

----------------------------------------------------------------------------------------------------------------
                                              Average aggregate daily auction volume in LMM securities
                                   -----------------------------------------------------------------------------
                                                   10,001-      100,001-     500,001-    1,000,001-   3,000,001
                                     0- 10,000     100,000      500,000     1,000,000    3,000,000    or greater
----------------------------------------------------------------------------------------------------------------
Daily Incentive for each Enhanced         $2.50        $6.25          $10       $12.50       $37.50          $50
 ETP 1-5..........................
Daily Incentive for each Enhanced          2.50         6.25         6.25         7.50           25        37.50
 ETP 6-25.........................
Daily Incentive for each Enhanced          2.50         2.50            5         6.25        18.75           25
 ETP 26-50........................
Daily Incentive for each Enhanced          2.50         2.50         3.75            5        12.50        18.75
 ETP 51-100.......................
Daily Incentive for each Enhanced          2.50         2.50         3.75         3.75         6.25        12.50
 ETP Greater Than 100.............
----------------------------------------------------------------------------------------------------------------

    Using the same example as above, where the LMM has 30 LMM 
Securities, 10 of which are Enhanced ETPs, which have 2,550,000 shares 
of average aggregate daily auction volume in LMM Securities, the issuer 
would fall into the fifth column. As such, the LMM would receive an 
additional $37.50 for each of its first five Enhanced ETPs and an 
additional $25 each for Enhanced ETPs 6-10. This would result in an 
additional daily payment of ($37.50 * 5) + ($25 * 5) = $312.50 to the 
LMM.
    The Exchange is also proposing to provide LMMs with free 
transactions in closing auctions in ETPs for which they are the LMM 
instead of only those securities for which they are a Qualified LMM. 
This will eliminate the current disincentive for LMMs to provide 
liquidity in the closing auction for LMM Securities where they have not 
met the Minimum Performance Standards.
Policy Discussion
    The Exchange submits this proposal because it believes that the LMM 
Liquidity Provision Rates will enhance market quality on all Exchange-
listed ETPs by incentivizing LMMs to meet the Minimum Performance 
Standards across all of their LMM Securities instead of only those with 
higher trading volume. The proposal will accomplish this by: (i) 
Compensating LMMs for meeting Minimum Performance Standards instead of 
on a transaction by transaction basis; (ii) providing LMMs with a more 
predictable and reliable model for anticipating revenue and costs 
associated with meeting the Minimum Performance Standards; (iii) 
allowing the Exchange to increase the Minimum Performance Standards; 
and (iv) generally encouraging all

[[Page 31953]]

participants to act as an LMM in Exchange-listed ETPs.
    First, the proposal will allow the Exchange to compensate LMMs for 
providing enhanced market quality in ETPs listed on the Exchange 
instead of on a transaction by transaction basis. Historically, both on 
the Exchange and elsewhere LMMs have been compensated on a transaction 
by transaction basis as long as they meet the Minimum Performance 
Standards for that particular security. While rebates are an important 
tool used to incentivize liquidity provision, the proposed market 
quality incentives would allow the Exchange to provide more meaningful 
incentives in ETPs with lower trading volumes.
    Further, for newly listed and other lower volume ETPs, the cost to 
a firm of making a market as an LMM, such as holding inventory in the 
security, is often not fully offset by the revenue provided through 
enhanced LMM rebates that it receives from the Exchange. In such cases, 
LMMs often take on the role as LMM despite the negative economics based 
on the hope, without guarantee, that the costs for acting as an LMM 
will eventually be reduced to a level lower than the enhanced LMM 
rebates. Without an LMM taking this risk to make markets in these new 
ETPs, the products would likely be significantly less liquid, to the 
detriment of investors.
    Other LMMs may opt to operate at a loss in new and other lower 
volume ETPs in order to maintain relationships with issuers and hope 
that such losses are offset by the compensation for ETPs with higher 
trading volume. Even where an LMM may choose to provide enhanced market 
quality in a lower volume security, the current LMM rebate structure 
creates stronger financial incentives to be an LMM in higher trading 
volume securities than in lower trading volume securities. In reality, 
the ETPs that need an LMM creating a tight and deep market are the 
lower volume securities and higher volume securities generally already 
have tight spreads and inside depth.
    As proposed, LMMs would be compensated on a per-ETP basis where 
they meet certain market quality metrics, regardless of the trading 
volume in the associated ETP. While the amount of compensation is 
dependent on average aggregate daily auction volume in the LMM's LMM 
Securities (which generally corresponds to the trading volume in a 
security), the payments are made on a security by security basis, so an 
LMM is incentivized to meet the Minimum Performance Standards across 
all ETPs for which they are an LMM and not just in those ETPs that have 
higher trading volume. As such, the economic benefits to LMMs that 
previously accrued almost exclusively to those products with greater 
trading volume will immediately be spread among all of the LMM's LMM 
Securities and the proposed liquidity provision payments would 
immediately eliminate the potential disincentives for LMMs to meet the 
Minimum Performance Standards for lower volume ETPs.
    The Exchange also believes that the proposal will provide LMMs with 
a more predictable and reliable model for anticipating revenue and 
expenses associated with acting as an LMM and meeting the Minimum 
Performance Standards, which will both encourage existing LMMs to take 
on additional ETPs and encourage other market participants to register 
with the Exchange as an LMM. As described above, LMMs often take on LMM 
Securities based on the hope, without guarantee, that the costs for 
acting as an LMM will eventually be reduced to a level lower than the 
enhanced LMM rebates. By providing predictable revenue for each LMM 
Security for which an LMM meets the Minimum Performance Standards, both 
existing and new LMMs will be certain that they will receive a much 
more predictable payment for acting as an LMM and meeting the Minimum 
Performance Standards (as opposed to hoping that there is enough 
trading volume in the LMM Security to sufficiently offset costs). 
Further, the more LMM Securities that an LMM accumulates, the more 
auction volume they will have in their LMM Securities, providing the 
LMM with additional revenue potential. As such, the proposal will 
encourage firms to newly register with the Exchange as an LMM and 
existing LMMs to take on more LMM Securities on the Exchange. This will 
benefit all investors by both increasing competition among LMMs and 
encouraging greater market quality in securities listed on the 
Exchange.
    The proposal will also allow the Exchange to increase the market 
quality requirements necessary to receive the daily payment. As noted 
above, the economics associated with acting as an LMM in new and lower 
volume ETPs can disincentivize LMMs from meeting the Minimum 
Performance Standards. By providing payouts on a per-product basis, the 
Exchange is able to increase the Minimum Performance Standards and LMMs 
are able to commit to providing better market quality in all LMM 
Securities. The Exchange believes that this will result in better 
market quality across all of its listed ETPs and enhanced competition 
among both LMMs and ETP issuers to the benefit of investors.
    Simply stated, for new ETPs and other low volume ETPs, providing 
consistent payments based on LMMs meeting the Minimum Performance 
Standards will allow LMMs to more reliably anticipate their revenue for 
acting as an LMM and will both incentivize LMMs to meet the Minimum 
Performance Standards for their LMM Securities and encourage other 
market participants to participate in the Exchange's LMM program. 
Further, it will allow the Exchange to increase the Minimum Performance 
Standards and LMMs will be able to commit to providing better market 
quality in all LMM Securities. Because the Exchange makes the majority 
of its revenue from ETP listings based on the auction volume in its 
listed ETPs, basing these payments on the average aggregate daily 
auction volume in the LMM's LMM Securities will allow the Exchange to 
offer incentives to LMMs to meet the Minimum Performance Standards 
commensurate with the Exchange's revenue in a particular LMM's LMM 
Securities and provides a strong incentive for LMMs to meet the Minimum 
Performance Standards in all of their respective LMM Securities instead 
of only those with higher trading volume. While there will be a range 
of outcomes for LMMs, the Exchange generally expects that most LMMs 
will receive payments comparable to what they currently receive, with 
the potential for additional upside where they take on additional new 
ETPs and/or existing ETPs that transfer to the Exchange.
Tier Discussion
    The daily payment amounts are based specifically on the Exchange's 
revenue model. For ETPs with greater auction volume, the Exchange 
generally makes more money and, thus, is able to offer LMMs with LMM 
Securities that have higher average aggregate daily auction volume 
higher payments. As designed, the Exchange has created six separate 
buckets based on auction volume and five buckets based on how many 
Qualified ETPs an LMM has. The buckets and payments are modeled based 
both on current revenue and product distribution among LMMs as well as 
expected revenue and product distribution in the future including 
organic growth among existing products, ETPs transferring to the 
Exchange, and additional participants in the LMM Program. The Exchange 
believes that it is fair and reasonable to offer different pricing 
between the

[[Page 31954]]

different auction volume tiers because those tiers and possible 
payments are specifically tailored to the Exchange's expected revenue 
from that auction volume.
    Specifically, the proposed payment per Qualified ETP (and thus the 
total payment to an LMM) generally goes up as the CADV moves from left 
to right because as the average aggregate daily auction volume in LMM 
Securities increases, the Exchange will generate additional revenue and 
can thus support increased payments to LMMs. Similarly, the proposed 
payments per Qualified ETP generally go down as the number of Qualified 
ETPs goes up in order to ensure that the daily incentive payments do 
not exceed the Exchange's revenue for that LMM's LMM Securities while 
still providing incentives for LMMs to take on additional ETPs. The 
Exchange has designed this program to be sustainable over the long-term 
and generally expects that its expenditures under the proposed LMM 
Liquidity Provision Rates will be very similar to what it currently 
provides LMMs under existing LMM Pricing.
Implementation Date
    The Exchange proposes to implement these amendments to its fee 
schedule on August 1, 2019.
2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with the objectives of Section 6 of the Act,\8\ in general, and 
furthers the objectives of Section 6(b)(4) and 6(b)(5),\9\ in 
particular, as it is designed to provide for the equitable allocation 
of reasonable dues, fees and other charges among its Members and other 
persons using its facilities. The Exchange also notes that its ETP 
listing business operates in a highly-competitive market in which 
market participants, which includes both ETP issuers and LMMs, can 
readily transfer their listings or opt not to participate, 
respectively, if they deem fee levels, liquidity provision incentive 
programs, or any other factor at a particular venue to be insufficient 
or excessive. The proposed rule changes reflect a competitive pricing 
structure designed to incentivize issuers to list new products and 
transfer existing products to the Exchange and market participants to 
enroll and participate as LMMs on the Exchange, which the Exchange 
believes will enhance market quality in all ETPs listed on the 
Exchange.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

The Proposed Incentives Are Reasonable
    The Exchange believes that the proposal to adopt market quality 
based incentives under the LMM Liquidity Provision Rates is a 
reasonable means to incentivize liquidity provision in ETPs listed on 
the Exchange. The marketplace for listings is extremely competitive and 
there are several other national securities exchanges that offer ETP 
listings. Transfers between listing venues occur frequently \10\ for 
numerous reasons, including market quality. This proposal is intended 
to help the Exchange compete as an ETP listing venue. Further, the 
Exchange notes that the proposed incentives are not transaction fees, 
nor are they fees paid by participants to access the Exchange. Rather, 
the proposed payments are based on achieving certain objective market 
quality metrics. As stated above, providing consistent payments based 
on LMMs meeting the Minimum Performance Standards will allow LMMs to 
more reliably anticipate their revenue for acting as an LMM and will 
both incentivize LMMs to meet the Minimum Performance Standards for 
their LMM Securities and encourage other market participants to 
participate in the Exchange's LMM program. The Exchange expects the 
Minimum Performance Standards to include: (i) Registration as a market 
maker in good standing with the Exchange; (ii) time at the inside 
requirements (generally between 3% and 15% of Regular Trading Hours for 
Qualified ETPs and between 5% to 50% for Enhanced ETPs, depending on 
the average daily volume of the applicable LMM Security); (iii) auction 
participation requirements (generally requiring that the auction price 
is between 3% and 5% of the last Reference Price, as defined in Rule 
11.23(a)(19), for a Qualified ETP and 1%-3% for an Enhanced ETP); (iv) 
market-wide NBB and NBO spread and size requirements (generally 
requiring between 200 and 750 shares at both the NBB and NBO for both 
Qualified ETPs and Enhanced ETPs with an NBBO spread between 1% and 10% 
for a Qualified ETP and .25% to 4% for Enhanced ETPs, depending on 
price of the ETP and underlying asset class); and (v) depth of book 
requirements (generally requiring between $25,000 and $250,000 of 
displayed posted liquidity for both Qualified ETPs and Enhanced ETPs 
within 1% to 10% of both the NBB and NBO for Qualified ETPs and 0.25% 
and 5% for Enhanced ETPs, depending on price of the ETP and underlying 
asset class). Before diverging significantly from the ranges described 
above, the Exchange will submit a rule filing to the Commission 
describing such proposed changes.
---------------------------------------------------------------------------

    \10\ For example, 16 ETPs transferred their listings to the 
Exchange on May 13, 2019. See http://ir.cboe.com/~/media/Files/C/
CBOE-IR-V2/press-release/2019/cboe-welcomes-16-barclays-etns.pdf.
---------------------------------------------------------------------------

    Further, it will allow the Exchange to increase the Minimum 
Performance Standards and LMMs will be able to commit to providing 
better market quality in all LMM Securities. Because the Exchange makes 
the majority of its revenue from ETP listings based on the auction 
volume in its listed ETPs, basing these payments on the average 
aggregate daily auction volume in the LMM's LMM Securities will allow 
the Exchange to offer incentives to LMMs to meet the Minimum 
Performance Standards commensurate with the Exchange's revenue in a 
particular LMM's LMM Securities and provides a strong incentive for 
LMMs to meet the Minimum Performance Standards in all of their 
respective LMM Securities instead of only those with higher trading 
volume. While there will be a range of outcomes for LMMs, the Exchange 
generally expects that most LMMs will receive payments comparable to 
what they currently receive, with the potential for additional upside 
where they take on additional new ETPs and/or existing ETPs that 
transfer to the Exchange.
    The Exchange believes that eliminating the existing LMM Incentive 
Program and LMM Credit Tiers for Tape B is reasonable because the 
Exchange is not required to maintain the program and the Exchange is 
proposing to implement the new LMM Liquidity Provision Rates in its 
place, as discussed above.
    The Exchange believes that offering LMMs free transactions in 
closing auctions in ETPs for which they are the LMM instead of only 
those securities for which they are a Qualified LMM is reasonable 
because it will eliminate the current disincentive for LMMs to provide 
liquidity in the closing auction for LMM Securities where they have not 
met the Minimum Performance Standards.\11\
---------------------------------------------------------------------------

    \11\ The Exchange notes that, pursuant to Rule 11.8(e)(2)(C), 
where an LMM does not meet the Minimum Performance Standards for 
three out of four months, such LMM is subject to forfeiture of LMM 
status for that LMM Security. As such, an LMM generally must meet 
the Minimum Performance Standards with some regularity in order to 
receive such favorable pricing in the closing auction.
---------------------------------------------------------------------------

The Proposed Incentives are an Equitable Allocation of Payments
    The Exchange believes that the proposal represents an equitable

[[Page 31955]]

allocation of payments because, while the proposed payments apply only 
to LMMs, such LMMs must meet rigorous Minimum Performance Standards in 
order to receive the payments, as outlined above. Where an LMM does not 
meet the Minimum Performance Standards, they will not receive the 
payments. Further, registration as an LMM is available equally to all 
Members and allocation of listed ETPs between LMMs is governed by 
Exchange Rule 11.8(e)(2). If an LMM does not meet the Minimum 
Performance Standards for three out of the past four months, the LMM is 
subject to forfeiture of LMM status for that LMM Security, at the 
Exchange's discretion.
    Further, the daily payment amounts are based specifically on the 
Exchange's revenue model. For ETPs with greater auction volume, the 
Exchange generally makes more money and, thus, is able to offer LMMs 
with LMM Securities that have higher average aggregate daily auction 
volume higher payments. As designed, the Exchange has created six 
separate buckets based on auction volume and five buckets based on how 
many Qualified ETPs an LMM has. The buckets and payments are modeled 
based both on current revenue and product distribution among LMMs as 
well as expected revenue and product distribution in the future 
including organic growth among existing products, ETPs transferring to 
the Exchange, and additional participants in the LMM Program. The 
Exchange believes that it is fair and reasonable to offer different 
pricing between the different auction volume tiers because those tiers 
and possible payments are specifically tailored to the Exchange's 
expected revenue from that auction volume.
    Specifically, the proposed payment per Qualified ETP (and thus the 
total payment to an LMM) generally goes up as the CADV moves from left 
to right because as the average aggregate daily auction volume in LMM 
Securities increases, the Exchange will generate additional revenue and 
can thus support increased payments to LMMs. Similarly, the proposed 
payments per Qualified ETP generally go down as the number of Qualified 
ETPs goes up in order to ensure that the daily incentive payments do 
not exceed the Exchange's revenue for that LMM's LMM Securities while 
still providing incentives for LMMs to take on additional ETPs. The 
Exchange has designed this program to be sustainable over the long-term 
and generally expects that its expenditures under the proposed LMM 
Liquidity Provision Rates will be very similar to what it currently 
provides LMMs under existing LMM Pricing. As such, the Exchange 
believes that the proposal represents an equitable allocation of 
payments.
    The Exchange believes that eliminating the existing LMM Incentive 
Program and LMM Credit Tiers for Tape B is equitable because the 
Exchange is not required to maintain the program and the Exchange is 
eliminating the program for all Members.
    The Exchange believes that offering LMMs free transactions in 
closing auctions in ETPs for which they are the LMM instead of only 
those securities for which they are a Qualified LMM is equitable 
because it will eliminate the current disincentive for LMMs to provide 
liquidity in the closing auction for LMM Securities where they have not 
met the Minimum Performance Standards, which will benefit all 
participants by providing an incentive to enhance liquidity in all 
closing auctions for BZX-listed ETPs.\12\
---------------------------------------------------------------------------

    \12\ As noted above, pursuant to Rule 11.8(e)(2)(C), where an 
LMM does not meet the Minimum Performance Standards for three out of 
four months, such LMM is subject to forfeiture of LMM status for 
that LMM Security. As such, an LMM generally must meet the Minimum 
Performance Standards with some regularity in order to receive such 
favorable pricing in the closing auction.
---------------------------------------------------------------------------

The Proposed Incentives are not Unfairly Discriminatory
    The Exchange believes that the proposal is not unfairly 
discriminatory because, while the proposed payments apply only to LMMs, 
such LMMs must meet rigorous Minimum Performance Standards in order to 
receive the payments, as described above. Where an LMM does not meet 
the Minimum Performance Standards, they will not receive the payments. 
Further, registration as an LMM is available equally to all Members and 
allocation of listed ETPs between LMMs is governed by Exchange Rule 
11.8(e)(2). If an LMM does not meet the Minimum Performance Standards 
for three out of the past four months, the LMM is subject to forfeiture 
of LMM status for that LMM Security, at the Exchange's discretion.
    Further, the daily payment amounts are based specifically on the 
Exchange's revenue model. For ETPs with greater auction volume, the 
Exchange generally makes more money and, thus, is able to offer LMMs 
with LMM Securities that have higher average aggregate daily auction 
volume higher payments. As designed, the Exchange has created six 
separate buckets based on auction volume and five buckets based on how 
many Qualified ETPs an LMM has. The buckets and payments are modeled 
based both on current revenue and product distribution among LMMs as 
well as expected revenue and product distribution in the future 
including organic growth among existing products, ETPs transferring to 
the Exchange, and additional participants in the LMM Program. The 
Exchange believes that it is fair and reasonable to offer different 
pricing between the different auction volume tiers because those tiers 
and possible payments are specifically tailored to the Exchange's 
expected revenue from that auction volume.
    Specifically, the proposed payment per Qualified ETP (and thus the 
total payment to an LMM) generally goes up as the CADV moves from left 
to right because as the average aggregate daily auction volume in LMM 
Securities increases, the Exchange will generate additional revenue and 
can thus support increased payments to LMMs. Similarly, the proposed 
payments per Qualified ETP generally go down as the number of Qualified 
ETPs goes up in order to ensure that the daily incentive payments do 
not exceed the Exchange's revenue for that LMM's LMM Securities while 
still providing incentives for LMMs to take on additional ETPs. The 
Exchange has designed this program to be sustainable over the long-term 
and generally expects that its expenditures under the proposed LMM 
Liquidity Provision Rates will be very similar to what it currently 
provides LMMs under existing LMM Pricing. As such, the Exchange 
believes that the proposal is not unfairly discriminatory.
    The Exchange believes that eliminating the existing LMM Incentive 
Program and LMM Credit Tiers for Tape B is not unreasonably 
discriminatory because the Exchange is not required to maintain the 
program and the Exchange is eliminating the program for all Members.
    The Exchange believes that offering LMMs free transactions in 
closing auctions in ETPs for which they are the LMM instead of only 
those securities for which they are a Qualified LMM is reasonable 
because it will eliminate the current disincentive for LMMs to provide 
liquidity in the closing auction for LMM Securities where they have not 
met the Minimum Performance Standards, which will benefit all 
participants by providing an incentive to enhance liquidity in all 
closing auctions for BZX-listed ETPs.\13\
---------------------------------------------------------------------------

    \13\ As noted above, pursuant to Rule 11.8(e)(2)(C), where an 
LMM does not meet the Minimum Performance Standards for three out of 
four months, such LMM is subject to forfeiture of LMM status for 
that LMM Security. As such, an LMM generally must meet the Minimum 
Performance Standards with some regularity in order to receive such 
favorable pricing in the closing auction.

---------------------------------------------------------------------------

[[Page 31956]]

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

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
the proposed change burdens competition, but rather, enhances 
competition as it is intended to increase the competitiveness of BZX 
both among Members by incentivizing Members to become LMMs in BZX-
listed ETPs and as a listing venue by enhancing market quality in BZX-
listed ETPs. The marketplace for listings is extremely competitive and 
there are several other national securities exchanges that offer ETP 
listings. Transfers between listing venues occur frequently \14\ for 
numerous reasons, including market quality. This proposal is intended 
to help the Exchange compete as an ETP listing venue. Accordingly, the 
Exchange does not believe that the proposed change will impair the 
ability of issuers, LMMs, or competing ETP listing venues to maintain 
their competitive standing. The Exchange also notes that the proposed 
change is intended to enhance market quality in BZX-listed ETPs, to the 
benefit of all investors in BZX-listed ETPs. The Exchange does not 
believe the proposed amendment would burden intramarket competition as 
it would be available to all Members uniformly. Registration as an LMM 
is available equally to all Members and allocation of listed ETPs 
between LMMs is governed by Exchange Rule 11.8(e)(2). Further, if an 
LMM does not meet the Minimum Performance Standards for three out of 
the past four months, the LMM is subject to forfeiture of LMM status 
for that LMM Security, at the Exchange's discretion.
---------------------------------------------------------------------------

    \14\ For example, 16 ETPs transferred their listings to the 
Exchange on May 13, 2019. See http://ir.cboe.com/~/media/Files/C/
CBOE-IR-V2/press-release/2019/cboe-welcomes-16-barclays-etns.pdf.
---------------------------------------------------------------------------

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

    No written comments were either solicited or received.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A)(ii) of the Act \15\ and subparagraph (f)(2) of Rule 
19b-4\16\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \16\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings under 
Section 19(b)(2)(B) of the Act \17\ to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-CboeBZX-2019-058 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-CboeBZX-2019-058. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2019-058, and should be 
submitted on or before July 24, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14159 Filed 7-2-19; 8:45 am]
 BILLING CODE 8011-01-P