FR 2021-00349

The document reviewed is a notice from the Securities and Exchange Commission regarding a proposed rule change by the Cboe BZX Exchange, Inc., a major platform for trading securities. The rule change involves amending the fee schedule for Lead Market Makers (LMMs) on their equities trading platform. The goal of these amendments is to provide better incentives for LMMs who meet certain performance standards, particularly those managing lower daily auction volumes of securities. This proposal reflects an effort by the Cboe BZX to maintain competitiveness and enhance the quality of the marketplace for exchange-traded products (ETPs) listed on the Exchange.

General Summary

The notice details proposed adjustments to the financial incentives offered to LMMs, who play a crucial role in maintaining liquidity and stability in the stock market. The Cboe BZX Exchange aims to update its fee structure by reducing payments to LMMs handling higher-volume securities while enhancing incentives for those managing securities with lower trading volumes. The changes are intended to encourage broader participation and improve market quality.

Significant Issues and Concerns

The proposed rule changes present several areas of concern:

1. Complex Financial Explanations: The document contains intricate details about the financial incentives which may not be clear to individuals unfamiliar with market-making operations. This complexity might hinder comprehension among stakeholders who are not financial experts.

2. Impact on Higher-Volume LMMs: By reducing payments for LMMs with higher average daily auction volumes, the proposal might appear unfavorable to these entities. The rationale provided—assertions of equitable treatment—could be insufficient to justify the changes to those potentially affected adversely.

3. Justification for Changes: The notice lacks detailed explanations of how exactly these proposed changes will benefit LMMs handling smaller volumes, aside from broad statements about enhancing competitiveness and market quality.

4. Lack of Historical Context: There is no discussion on whether or not there were any previous shortcomings or challenges with the current fee schedule, which could raise questions about the necessity of these adjustments.

5. Alignment with Revenue Model: There is a lack of clarity on how these changes fit within the overall revenue model of the Exchange, leaving ambiguity over potential financial impacts on the Exchange itself.

6. Use of Technical Language: The financial and regulatory terminology within the document is quite technical, which could limit understanding amongst a wider audience, possibly excluding smaller investors or new market participants from fully engaging with the proposal.

7. Absence of Stakeholder Feedback: The document mentions no solicitation or receipt of feedback from stakeholders, resulting in an information gap regarding industry reception and potential concerns from market participants.

Impact on the Public

The general public may not be directly impacted by the changes in fee structure for LMMs, but there could be broader market implications. Improved incentives for LMMs managing lower volume securities might enhance overall market liquidity and stability. The cascading effect of such improvements could potentially benefit investors by providing better price discovery and less volatile market conditions.

Impact on Specific Stakeholders

• LMMs: The changes could positively impact small to medium LMMs by offering more lucrative incentives, encouraging participation, and boosting market activity for lower-volume securities. However, LMMs handling high-volume securities might feel disadvantaged due to reduced payments.

• Issuers of Securities: Issuers might benefit from better market conditions if enhanced incentives for LMMs lead to increased market quality and liquidity.

• Competing Exchanges: The use of competitive incentives may spur similar actions by competing exchanges, potentially enhancing overall market competition.

In conclusion, while the proposal aims to improve market conditions and provide competitive incentives for LMMs, its complexity and potential impacts could leave some stakeholders needing further clarity and justification for these changes. Broader implications on market conditions could ultimately impact both professional and retail investors.

In examining the financial references within the Federal Register document regarding the Cboe BZX Exchange, Inc.'s proposed rule change, several key aspects emerge. These involve changes to the financial incentives offered to Lead Market Makers (LMMs) on their equities trading platform.

Summary of Financial Allocations

The document outlines specific adjustments to the existing fee structure for LMMs. Previously, LMMs could receive payments based on their performance in handling Exchange Traded Products (ETPs). For instance, an LMM could earn $150 for each of the first five qualified ETPs, $100 each for ETPs 6-25, and $75 each for ETPs 26-30, which totals to a daily payment of $3,125. Additionally, LMMs meeting more stringent performance standards could receive enhanced incentives, such as an extra $37.50 for the first five enhanced ETPs and $25 each for ETPs 6-10, increasing the total potential daily payment by $312.50.

The proposed changes adjust these payments. Under the revised structure, payments for daily incentives would be $100 for each of the first five qualified securities, $70 for securities 6-25, and $50 for securities 26-30. This adjustment results in a total decreased payment of $2,150 compared to the prior arrangement for similar performance levels.

Additionally, enhanced rates for lower-volume securities are proposed to increase—$12 each for the first five qualified ETPs, $7.50 for ETPs 6-25, and $6 for ETPs 26-30—resulting in a payment increase to $240 from $200 under the previous rates.

Relationship to Identified Issues

These financial changes tie into several complexities and potential issues identified within the document. One critical area is the perceived shift in incentive structure, which appears to favor LMMs with lower trading volumes. The proposed reduction in payments for those with higher average aggregate daily auction volumes might be seen as unfavorable, impacting those currently performing at higher levels. This raises questions about fairness and whether the reduction aligns with the Exchange's broader strategic and financial goals.

Furthermore, the document does not thoroughly explain the rationale behind why incentivizing smaller volume LMMs could enhance market quality. While the notice asserts that these changes stem from competitive pressures in a dynamic exchange environment, it leaves out detailed justification or evidence showing the benefit to lower-volume performers. The financial references elucidate adjustments in payment but fail to convey a comprehensive understanding of how these align with overall market or financial health objectives of the Exchange.

Lastly, the absence of stakeholder feedback leaves a gap in understanding the industry’s reception to these changes. Without insights from those directly affected, like the LMMs, it is challenging to assess whether these financial adjustments will achieve the desired purpose of enhancing market competitiveness and quality.

In conclusion, while the document outlines specific monetary adjustments to incentivize market makers, it indirectly highlights concerns around equity, competition, and strategic outcomes. Balancing such financial allocations requires careful consideration of both immediate impacts on liquidity providers as well as longer-term market dynamics.