Document ID: SEC-2013-0489-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: EDGX Exchange, Inc.
Posted Date: 2013-03-13T04:00Z

[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 16003-16006]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05742]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69067; File No. SR-EDGX-2013-11]

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

March 7, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 1, 2013, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, 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 currently offers Members a rebate of $0.0005 per share 
for Members' orders that route to Nasdaq OMX BX, Inc. (``BX'') and 
remove liquidity, yielding Flag C, in securities priced at or above 
$1.00. The Exchange proposes to decrease the rebate from $0.0005 per 
share to $0.0004 per share in response to BX's fee filing that was 
effective February 1, 2013.\4\ Direct Edge ECN LLC (d/b/a DE Route) 
(``DE Route''), the Exchange's affiliated routing broker-dealer, does 
not qualify for any of BX's volume tiered rebates.\5\ DE Route passes 
through BX's default rebate to the Exchange and the Exchange, in turn, 
passes through the

[[Page 16004]]

rebate to its Members. The Exchange notes that its proposal does not 
modify the current rate of 0.10% of the dollar value of the transaction 
that it charges Members for Flag C in securities priced below $1.00 
that route to BX and remove liquidity.
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    \4\ See Securities Exchange Act Release No. 68909 (February 12, 
2013), 78 FR 11935 (February 20, 2013) (SR-BX-2013-011).
    \5\ The Exchange notes that to the extent DE Route does achieve 
any volume tiered rebates on BX, its rates for Flag C will not 
change.
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    In SR-EDGX-2012-47,\6\ the Exchange introduced new Flags ZA and ZR 
for Members that utilize Retail Orders. Flag ZA is yielded for those 
Members that use Retail Orders that add liquidity to EDGX and is 
assigned a rebate of $0.0032 per share. Flag ZR is yielded for those 
Members that use Retail Orders that remove liquidity from EDGX and is 
assigned a charge of $0.0030 per share. Footnote 4 on the Exchange's 
current fee schedule defines a ``Retail Order'' as an (i) agency order 
that originates from a natural person; (ii) is submitted to EDGX by a 
Member, provided that no change is made to the terms of the order; and 
(iii) the order does not originate from a trading algorithm or any 
other computerized methodology.
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    \6\ See Securities Exchange Act Release No. 68310 (November 28, 
2012), 77 FR 71860 (December 4, 2012) (SR-EDGX-2012-47).
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    In this filing, the Exchange proposes to introduce a new ``Retail 
Order Tier'' that would provide that Members that add an average daily 
volume (``ADV'') of Retail Orders (Flag ZA) that is 0.25% or more of 
the Total Consolidated Volume (``TCV'') on a daily basis, measured 
monthly would receive a rebate on Flag ZA that is $0.0034 per share 
instead of the rate of $0.0032 per share currently assigned to Flag ZA. 
The Exchange notes that the rebate for Flag ZA in securities priced 
below $1.00 is not impacted by this proposal.
    The Exchange also currently specifies, in part, 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. The Exchange 
proposes to make a conforming amendment to this language to include the 
$0.0034 per share rebate. Therefore, the amended language would now 
read: ``The Exchange notes that to the extent Members qualify for a 
rebate higher than $0.0032 per share (for Flag ZA executions that do 
not qualify for the above tier) or $0.0034 per share (for Flag ZA 
executions qualifying for the above tier) through other volume tiers, 
such as the Mega Tier or Market Depth Tier, they will earn the higher 
rebate on Flag ZA instead of its assigned rate.''
    The Exchange proposes to implement these amendments to its fee 
schedule on March 1, 2013.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\7\ in general, and 
furthers the objectives of Section 6(b)(4),\8\ in particular, as it is 
designed to provide for the equitable allocation of reasonable dues, 
fees and other charges among its Members and other persons using its 
facilities.
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    \7\ 15 U.S.C. 78f.
    \8\ 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 
rebate for such executions that add liquidity on the Exchange if 
Members satisfy the conditions of the Retail Order Tier. 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.
    The potential for increased volume from Retail Orders increases 
potential revenue to the Exchange, and allows the Exchange to spread 
its administrative and infrastructure costs over a greater number of 
shares, leading to lower per share costs. These lower per share costs 
in turn would allow the Exchange to pass on the savings to Members in 
the form of lower fees. The increased liquidity benefits all investors 
by deepening EDGX's liquidity pool, offering additional flexibility for 
all investors to enjoy cost savings, supporting the quality of price 
discovery, promoting market transparency and improving investor 
protection. Volume-based rebates such as the one proposed herein have 
been widely adopted in the cash equities markets, and are equitable 
because they are open to all Members on an equal basis and provide 
discounts that are reasonably related to the value to an exchange's 
market quality associated with higher levels of market activity, such 
as higher levels of liquidity provision and introduction of higher 
volumes of orders into the price and volume discovery processes.
    The Exchange believes the $0.0034 rebate proposed for the Retail 
Order Tier is reasonable because it is directly related to a Member's 
level of Retail Order executions during the month. The Exchange also 
believes the proposed rebate of $0.0034 per share is reasonable because 
it is consistent with certain other rebates, such as the those found in 
tiers in Footnote 1 of its fee schedule (i.e., Market Depth Tier, Mega 
Tier rebate of $0.0032 per share, Ultra Tier), that is available to 
Members that satisfy certain criteria that is related to the Member's 
level of trading activity on the Exchange.
    The Exchange believes that requiring a Member to submit an ADV of 
Retail Orders during a month of 0.25% or more of TCV is reasonable, 
equitable and not unfairly discriminatory because this percentage is 
within a range that the Exchange believes would incentivize Members to 
submit Retail Orders to the Exchange in order to qualify for the 
applicable rebate of $0.0034 per share. The Exchange notes that certain 
other existing pricing tiers within its fee schedule make rebates 
available to Members that are also based on the Member's level of 
activity as a percentage of TCV. These existing percentage thresholds, 
depending on other related factors and the level of the corresponding 
rebates, are both higher and lower than the 0.25% proposed herein.\9\ 
Moreover, like existing pricing on the Exchange that is tied to 
Member's volume levels as a percentage of TCV, the proposed Retail 
Order is equitable and not unfairly discriminatory because it is 
available to all Members on an equal and non-discriminatory basis.
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    \9\ See for example, the Market Depth Tier Rebate ($0.0033 per 
share rebate), Mega Tier rebate ($0.0032 per share), Ultra Tier 
rebate ($0.0031 per share rebate), and Super Tier rebate ($0.0031 
per share rebate) that are all tied to a percentage of TCV.
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    The Exchange notes that a significant percentage of the orders of 
individual investors are executed over-the-counter.\10\ The Exchange 
believes that it is thus appropriate to create a financial incentive to 
bring more retail order flow

[[Page 16005]]

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 $0.0034 per share for the 
Retail Order Tier, 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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    \10\ 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 Retail Order Tier is reasonable in 
that NYSE Arca offers a comparable Retail Order Tier (with an analogous 
Retail Order definition) that provides a rebate of $0.0032 per share 
for the NYSE Arca's ETP Holders that execute an average daily volume of 
Retail Orders that is 0.40% or more of the TCV.\11\
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    \11\ See Securities Exchange Act Release No. 67540 (July 30, 
2012), 77 FR 46539 (August 3, 2012) (SR-NYSEArca-2012-77). See also, 
https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees_2_26_13.pdf.
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    The Exchange believes that its proposal to pass through BX's rebate 
of $0.0004 per share for orders that route to BX and remove liquidity 
(Flag C) represents an equitable allocation of reasonable dues, fees 
and other charges among its Members and other persons using its 
facilities because the Exchange does not levy additional fees or offer 
additional rebates for orders that it routes to BX through DE Route. 
Currently, BX offers a rebate to DE Route for orders that route to BX 
and remove liquidity, and DE Route passes through that rebate to the 
Exchange and the Exchange passes through that rebate to its Members. 
Effective February 1, 2012, BX rebates DE Route $0.0004 per share for 
orders that route to BX and remove liquidity. The Exchange's proposal 
will enable DE Route to pass through the $0.0004 per share rebate to 
the Exchange and the Exchange, in turn, to pass it through to its 
Members. The Exchange believes its proposal is equitable and reasonable 
because it allows the Exchange to continue to pass through BX's rebate 
to its Members. The Exchange notes that routing through DE Route is 
voluntary. Lastly, the Exchange also believes that this proposed 
amendment is non-discriminatory because it applies uniformly to all 
Members.
    The Exchange also notes that it operates in a highly-competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive. The proposed rule change reflects a competitive pricing 
structure designed to incent market participants to direct their order 
flow to the Exchange. The Exchange believes that the proposed rates are 
equitable and non-discriminatory in that they apply uniformly to all 
Members. The Exchange believes the fees and credits remain competitive 
with those charged by other venues and therefore continue to be 
reasonable and equitably allocated to Members.

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

    These proposed rule changes do not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. The Exchange does not believe these changes represent a 
significant departure from previous pricing offered by the Exchange or 
pricing offered by the Exchange's competitors. Additionally, Members 
may opt to disfavor EDGX's pricing if they believe that alternatives 
offer them better value. Accordingly, EDGX does not believe that the 
proposed changes will impair the ability of Members or competing venues 
to maintain their competitive standing in the financial markets.
    Regarding the Retail Order Tier, the Exchange believes that its 
proposal to offer a rebate of $0.0034 per share provided the Member 
satisfies the Retail Order Tier's conditions will increase competition 
for Retail Orders because it is comparable to the rates charged by NYSE 
Arca for its retail order tier. The Exchange believes its proposal will 
not burden intramarket competition given that the Exchange's rates 
apply uniformly to all Members that place orders.
    Regarding Flag C's proposed reduction in rebate, the Exchange 
believes that its proposal to pass through BX's lower rebate of $0.0004 
per share for securities priced at or above $1.00 that route to BX and 
remove liquidity will increase competition because it is comparable to 
the rates charged by BX for removing liquidity. The Exchange believes 
its proposal will not burden intramarket competition given that the 
Exchange's rates apply uniformly to all Members that place orders. The 
Exchange believes that its proposal will increase competition for 
routing services because the market for order execution is competitive 
and the Exchange's proposal provides customers with another alternative 
to route their orders. The Exchange notes that routing through DE Route 
is voluntary.

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 \12\ and Rule 19b-4(f)(2) \13\ 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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-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-2013-11 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-EDGX-2013-11. 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

[[Page 16006]]

submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2013-11 and should be 
submitted on or before April 3, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05742 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P