This PDF is the current document as it appeared on Public Inspection on 03/12/2013 at 08:45 am.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”), and Rule 19b-4 thereunder, 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.
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  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.
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
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. 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. DE Route passes through BX's default rebate to the Exchange and the Exchange, in turn, passes through the Start Printed Page 16004rebate 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.
In SR-EDGX-2012-47, 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.
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, in general, and furthers the objectives of Section 6(b)(4), 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 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. 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.
The Exchange notes that a significant percentage of the orders of individual investors are executed over-the-counter. The Exchange believes that it is thus appropriate to create a financial incentive to bring more retail order flow Start Printed Page 16005to 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.
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.
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  and Rule 19b-4(f)(2)  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.
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:
- Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
- Send an email to firstname.lastname@example.org. Please include File Number SR-EDGX-2013-11 on the subject line.
- 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 Start Printed Page 16006submission, 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.Start Signature
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
3. As defined in Exchange Rule 1.5(n).Back to Citation
4. See Securities Exchange Act Release No. 68909 (February 12, 2013), 78 FR 11935 (February 20, 2013) (SR-BX-2013-011).Back to Citation
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.Back to Citation
6. See Securities Exchange Act Release No. 68310 (November 28, 2012), 77 FR 71860 (December 4, 2012) (SR-EDGX-2012-47).Back to Citation
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.Back to Citation
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.Back to Citation
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.Back to Citation
[FR Doc. 2013-05742 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P